Close Brothers Group plc
Annual Report 2022
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01
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Strategic Report
03 Financial Highlights
04 Our Businesses
06 Chairman’s Statement
08 Chief Executive’s Statement
10 Business Model
14 Our Stakeholders
20 The Foundations of Our Business
21 Our Purpose
22 Our Culture
24 Our Strategy
32 Strategy and Key Performance Indicators
34 Our Responsibility
35 Sustainability Report
42
Task Force on Climate-related Financial
Disclosures
60 Non-Financial Information Statement
61 Financial Overview
65 Banking
70 Asset Management
72 Securities
74 Risk Report
93 Going Concern Statement
94 Viability Statement
Governance Report
95 Board of Directors
98 Executive Committee
99 Corporate Governance Report
123 Directors’ Remuneration Report
141 Directors’ Report
Financial Statements
144 Independent Auditors’ Report
151 Consolidated Income Statement
152
Consolidated Statement of
Comprehensive Income
153 Consolidated Balance Sheet
154 Consolidated Statement of
155 Consolidated Cash Flow Statement
156 Company Balance Sheet
157 Company Statement of Changes in Equity
158 The Notes
207 Glossary and Denition of Key Terms
211 Investor Relations
211 Cautionary Statement
212 Company Information
Contents
EVERY
STEP OF
THE WAY
A
t
C
lose Brothers, we are here to help the people and businesses
of Britain thrive over the long term
.
Thi
s means support
i
ng our co
ll
eagues, customers an
d
c
li
ents,
a
n
d
t
h
e commun
i
t
i
es an
d
env
i
ronment
i
n w
hi
c
h
t
h
ey operate,
fo
r t
he
be
n
e
t
of
all
ou
r
s
t
akeholde
r
s
.
It means helpin
g
people and businesses unlock their potential and
p
lan for the future with condence, buildin
g
relationships that stand
th
e
t
es
t
o
f tim
e
. It
a
l
so
m
ea
n
s
th
a
t w
e
co
ntin
ue
t
o
be
th
e
r
e
f
o
r th
e
lon
g
term, whatever the economic climate, makin
g
decisions that
a
re r
i
g
h
t
f
or to
d
ay an
d
f
or generat
i
ons to come
.
Book 1.indb 1 27/09/2022 23:45:11
02
Close Brothers Group plc
Annual Report 2022
AGAINST
ABACKDROP
OF MARKET
UNCERTAINTY,
WE HAVE
DELIVERED
ASOLID
PERFORMANCE
Book 1.indb 2 27/09/2022 23:45:11
03
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
2022
2021
2020
2019
2018
£234.8m
£270.7m
£144.0m
£270.5m
£278.6m
2022
2021
2020
2019
2018
111.5p
140.4p
74.5 p
136.7p
140.2p
2022
2021
2020
2019
2018
10.6%
14.5%
8.0%
15.7%
17.0%
2022
2021
2020
2019
2018
66.0p
60.0p
40.0p
66.0p
63.0p
2022
2021
2020
2019
2018
£232.8m
£265.2m
£140.9m
£264.7m
£271.2m
2022
2021
2020
2019
2018
110.4p
134.8p
72.8p
133.5p
136.2p
2022
2021
2020
2019
2018
£165.2m
£202.1m
£109.5m
£201.6m
£202.3m
Financial Highlights
for the year ended 31 July 2022
Adjusted
1
Operating Prot
Adjusted
1
Basic Earnings Per Share
Return on Opening Equity
2
Ordinary Dividend Per Share
3
Operating Prot Before Tax
Basic Earnings Per Share
Prot Attributable to Shareholders
£234.8m
111. 5 p
10.6%
66.0
p
£232.8m
110.4 p
£165.2m
1 Adjusted measures are presented on a basis consistent with prio
r periods and exclude amortisation of intangible assets on acq
uisition, to present the performance of the group’s acquired
businesses consistent with its other businesses, and any exceptional and other adjusting items which do not reect underlying t
rading performance. Please refer to page 62 for further details on
items excluded from the adjusted performance metrics.
2 Adjusted operating prot attributable to shareholders di
vided by opening equity, excluding non-controlling interests.
3 Represents the nal dividend proposed for the respective years together with the interim dividend declared and paid in those
years.
Book 1.indb 3 27/09/2022 23:45:12
04
Close Brothers Group plc
Annual Report 2022
Our Businesses
Close Brothers is a leading UK merchant banking group
providing lending, wealth management services and securities
trading. We employ approximately 4,000 people across
54ofces, predominantly in the UK and Ireland.
1 Includes operating lease assets of £0.5 million (31 July 2021: £1.3 million) which relate to Asset Finance and £239.5 million
(31 July 2021: £221.6 million) to Invoice and Speciality Finance.
2 Typical loan maturities for new business on a contractual basis, except core Invoice Finance which are on a behavioural basis
.
3 Average loan size and typical loan maturity include the Invoice Finance business only.
4
Following the strategic review of Novitas’ products and services, in July 2021 the group decided to cease permanently the appro
val of lending to new customers across all of the products offered by
Novitas, a wholly owned subsidiary of Close Brothers acquired in 2017, and withdraw from the legal services nancing market.
Banking
Commercial Retail Property
Adjusted operating prot
£91.0m
2021: £52.8m
The
Commercial
businesses lend
principally to small and medium-sized
enterprises (“SME”), both through their direct
sales force and via third party distribution
channels. Their highly specialist sales force
operates from ofces throughout the UK,
Ireland and Germany.
The
Asset Finance
business has
over 26,000 customers and provides
commercial asset nancing, hire-purchase
and leasing solutions for a diverse range of
assets and sectors, including the nancing
of commercial vehicles, machine tools,
contractors’ plant, printing equipment,
company car eets, energy production,
and aircraft and marine vessels.
Loan book
1
:
£3.0 billion
Average loan size:
£59,000
Typical loan maturity
2
:
3 to 4 years
The
Invoice and Speciality Finance
business works with c.5,700 small
businesses, providing debt factoring, invoice
discounting and asset-based lending. It also
includes our smaller specialist businesses
such as Novitas Loans (“Novitas”)
4
, a
specialist provider of nance for the legal
sector, Brewery Rentals, which provides
solutions for brewery equipment and
container maintenance, and Vehicle
Hire, which provides heavy goods, light
commercial vehicles and buses on rental
and contract hire terms.
Loan book
1
:
£1.5 billion
Average loan size
3
:
c.£540,000
Typical loan maturity
2,3
:
3 months
Adjusted operating prot
£61.0m
2021: £71.9m
The
Retail
businesses provide loans
to predominantly individuals and small
businesses, through a network of
intermediaries.
The
Motor Finance
business provides
point of sale nance for the acquisition
of predominantly used cars, motorcycles
and light commercial vehicles. It operates
through a network of over 5,000
independent motor dealers and has
approximately 282,000 customers in the
UK, Ireland and the Channel Islands.
Loan book:
£2.1 billion
Average loan size:
£7,200
Typical loan maturity
2
:
4 years
The
Premium Finance
business nances
insurance payments for around three million
companies and individuals, via a network
of c.1,500 insurance brokers, allowing their
customers to spread the cost of insurance
premiums over a number of instalments.
Loan book:
£1.0 billion
Average loan size:
c.£500
Typical loan maturity
2
:
10 months
Operating prot
£75.2m
2021: £87.8m
The
Property
business specialises in
short-term residential development nance
through Property Finance, and also offers
refurbishment and bridging loans through
Commercial Acceptances.
The Property business operates in London,
the South East and selected regional
locations, lending to c.700 professional
property developers with a focus on small to
medium-sized residential developments.
Loan book:
£1.5 billion
Average loan size:
£1.2 million
Typical loan maturity
2
:
6 to 18 months
Book 1.indb 4 27/09/2022 23:45:12
05
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Asset Management Securities
Close Brothers Asset
Management (“CBAM”)
Winterood
Adjusted operating prot
£21.7m
2021: £23.7m
CBAM
is a vertically integrated top 20 UK
wealth manager, providing nancial advice
and investment management services to
private clients in the UK. Our clients range
from mid to high net worth individuals.
Our core capabilities are personal nancial
advice, multi-asset investment management
and custody, which we combine to create
different propositions tailored to client
preference and client wealth.
Our strategic aim is to gather assets into
our investment management and platform
through three main distribution channels:
our own nancial advisers; our private client
investment managers; and via third party
nancial advisers.
We are a national business operating out of
14 locations with 90 advisers, 70 investment
professionals and c.750 employees in total.
Total client assets:
£16.6 billion
Managed assets:
£15.3 billion
Clients:
22,000
households
Operating prot
£14.1m
2021: £60.9m
The
Securities
division comprises
Winterood
, a leading market maker
for retail stockbrokers and institutions.
Winterood deals in over 15,500 instruments
in the UK and overseas, and trades with
over 600 institutional asset managers, retail
stockbrokers, wealth managers, platforms
and other market counterparties, providing
continuous liquidity through its market-
leading execution services, supported by
strong proprietary technology. Its traders
have extensive experience of executing
orders in a range of market conditions,
enabling it to trade successfully and
protably over many years. We also offer
sales trading services to institutional clients
both here in the UK and in the United States.
Our investment trust team provides the
full range of services of corporate nance,
corporate broking, sales and research, as
well as market-making. We act as corporate
broker and adviser to over 50 corporate
clients with a diverse range of conventional
and alternative asset classes.
Average bargains per day:
c.81,000
Winterood Business Services (“WBS”)
has been operating for over 10 years and
provides outsourced dealing and custody
solutions to over 50 corporate clients.
Assets under administration:
£7.2 billion
Book 1.indb 5 27/09/2022 23:45:13
06
Close Brothers Group plc
Annual Report 2022
CLOSE
BROTHERS’
CULTURE IS
ONE OF THE
FOUNDATIONS
OF OUR
LONG-TERM
SUCCESS
As this year comes to a close, we are
transitioning to a post-pandemic world whilst
adapting to a more exible work environment.
At the same time, our customers and
colleagues are facing increasing uncertainty
arising from recent geopolitical events and
the rising cost of living. Against this backdrop,
our disciplined business model and distinctive
culture remain important factors behind the
group’s progress and its ability to navigate
through a difcult environment.
In the 2022 nancial year, our lending
business continued to deliver good loan
book growth and a strong net interest
margin. The Asset Management division
continued to attract client assets and
generated impressive net inows. Following
an exceptional performance in the prior
year, Winterood’s prot was impacted by
reduced trading activity, heightened volatility
and falling markets, particularly in the
second half of the year.
As a result, adjusted operating prot
decreased 13% to £234.8 million (2021:
£270.7 million), with a return on opening
equity of 10.6% (2021: 14.5%). In light
of this year’s solid performance and to
reect the board’s continued condence
in the business model, we are pleased to
recommend a nal dividend of 44.0p per
share. If approved at the Annual General
Meeting, this will take the full-year dividend
to 66.0p per share, a 10% increase on
last year, and would mark a return to our
pre-pandemic dividend level.
Chairman’s Statement
Book 1.indb 6 27/09/2022 23:45:18
07
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Our Commitment to Deliver
Disciplined Growth
I remain condent that we have the right
business model to continue delivering to all of
our stakeholders. As such, it is a key priority
for the board to ensure the model’s continuity
and consistency. Following the evolution of
the group’s strategy to reect its increased
focus on delivering disciplined growth, I am
pleased to see the progress achieved in
identifying both incremental and new growth
opportunities. One such area is the signicant
commercial opportunity presented by the
nancing of green and transition assets as
the UK heads towards a net zero carbon
economy. Other areas are the potential
expansion of our product offering into adjacent
markets that t with our Banking business
model and the continued development of
Winterood Business Services.
The group has a strong capital position,
which supports our ability to nance such
growth opportunities. The board is acutely
aware of its responsibility to monitor the
management and allocation of the group’s
capital resources in the best interest of our
shareholders. We believe that these strategic
growth opportunities, combined with
disciplined loan book growth in the existing
Banking businesses, represent the best
use of our shareholders’ capital. The board
remains committed to paying a progressive
and sustainable dividend while maintaining
a prudent level of dividend cover, in line with
the group’s dividend policy.
Our Most Valuable Asset
Close Brothers’ culture is one of the
foundations of our long-term success. It is
the expertise of our people and a relentless
focus on delivering excellent customer
service that is the cornerstone of our
business model.
We have recently conducted our latest
employee opinion survey (“EOS”) and I was
pleased to see that we have retained high
levels of employee engagement at 86%,
which is close to pre-pandemic levels. We are
committed to fostering a culture that attracts
and retains talent, whilst also growing and
building the expertise of our people. 97% of
colleagues say that they believe they have
the skills and knowledge to do their job well.
We also promote teamwork in a fair and
open environment, where individuals and
their contributions are valued and respected.
Again, 97% of colleagues agree that their
immediate teams work well together to get
the job done. These strong numbers show
the group’s culture and values are deeply
embedded in the organisation. You can read
more about the EOS highlights on page 23 of
this report.
Board Changes
During the year, we were pleased to
welcome Patricia Halliday and Tracey
Graham as independent non-executive
directors with effect from 1 August 2021
and 22 March 2022, respectively.
Patricia has over 30 years’ experience in
risk management across the investment,
corporate and retail banking sectors, both
in the UK and internationally, with a deep
understanding of the regulatory, risk and
governance environment in which the group
operates. On joining the board on 1 August
2021, she was appointed as a member of
the board’s Risk and Audit Committees.
Tracey is an experienced non-executive
director, having served on a number of
listed companies and mutual boards. She
was appointed as a member of the board’s
Remuneration and Risk Committees and
brings signicant commercial, operational and
customer service expertise gained across a
range of sectors, including from executive and
non-executive roles in nancial services and
other customer-facing businesses.
After nine years’ dedicated service on the
board, Lesley Jones and Bridget Macaskill
will retire from the board at the conclusion of
the Annual General Meeting (“AGM”). I would
like to thank both Lesley and Bridget for their
huge contribution to the group over that time.
Patricia will assume the role of chair of the
Risk Committee from the date of the AGM.
The appointments of Patricia and Tracey
further contribute to the strengthening and
diversity of the range of skills, backgrounds
and experience on the board. I am also
very pleased that we comply with the
recommendations of the Parker Review in
terms of the composition of the board.
Making a Lasting Positive Impact,
Both Now and into the Future
During the year, the board and management
team have maintained a strong focus on
the group’s sustainability agenda. I am
particularly pleased with the progress we
have made towards meeting our climate
responsibilities as I rmly believe that we
have an important role to play in supporting
our customers and clients transitioning to a
low-carbon economy.
We have further developed our climate
strategy and signicantly improved
our understanding of our impact on
the environment, covering not just our
operational emissions, but also the
implications across our nanced activities.
As a group we are supportive of the goals
of the Paris Agreement to achieve net zero
by 2050. We have set ourselves ambitious
targets for our operational emissions and are
now setting ourselves a wider and longer-
term ambition to align our operational and
attributable greenhouse gas emissions from
our lending and investment portfolios with
pathways to net zero by 2050. To this end, I
am pleased to report that we have recently
joined as a signatory to the Net Zero Banking
Alliance. You can read more about our
climate disclosures on pages 42 to 57 of this
report.
Our People
Our people are key in driving the long-term
success of this organisation and I would
like to thank them for their commitment and
dedication. Together, I am condent that we
will continue to deliver on our purpose.
Michael N. Biggs
Chairman
27 September 2022
Book 1.indb 7 27/09/2022 23:45:18
08
Close Brothers Group plc
Annual Report 2022
FOCUS ON
MAXIMISING
DISCIPLINED
GROWTH
We have delivered a solid performance this
year. The Banking division has performed
well as we continued to see good demand
across our lending businesses and
strong margins. CBAM was affected by
falling markets but continued to attract
client assets. Winterood faced declining
markets and reduced trading activity, in
sharp contrast to the exceptionally strong
conditions in the prior year.
Although we are aware of the pressures
that the rising ination and interest rates will
have on our customers and colleagues, I
am condent that our proven and resilient
business model, strong nancial position
and deep expertise leave us well positioned
to continue to support them now and into
thefuture.
Financial Performance
The group’s income reduced 2% to £936.1
million (2021: £952.6 million). The Banking
division achieved a 10% increase in income,
reecting a strong net interest margin of
7.8% (2021: 7.7%) and 5.0% year-on-year
loan book growth. In the second half,
we saw loan book growth of 3.0% as
momentum picked up. Income grew 6%
in Asset Management as we continued to
attract client assets despite the impact of
volatile market conditions on wider client
sentiment, with net inows of 5% (2021: 7%).
Winterood saw a 48% reduction in income,
reecting a market-wide slowdown in trading
activity from elevated levels during the
pandemic and a change in the mix of trading
volumes, exacerbated by periods of volatility
in falling markets.
Adjusted operating expenses were broadly
stable as a signicant reduction in variable
costs in Winterood was offset by continued
investment, as well as higher staff costs
primarily reecting the current inationary
environment, across the Banking and Asset
Management divisions.
The bad debt ratio
1
of 1.2% (2021: 1.1%)
remained broadly stable. Excluding Novitas,
the bad debt ratio was 0.5% (2021: 0.2%) and
reected the release of Covid-19 provisions
and the ongoing review of provisions and
coverage across our loan portfolios. Whilst we
are not yet seeing a signicant impact from
1 Bad debt ratio represents impairment losses in the year as a percentage of average net loans and advances to customers and
operating lease assets.
Chief Executive’s
Statement
rising ination and interest rates and their effect
on customers on our credit performance,
we are alert to the highly uncertain
macroeconomic environment and continue to
monitor closely the performance of the book.
As a result, adjusted operating prot was down
13% to £234.8 million (2021: £270.7 million),
and we delivered a return on opening equity of
10.6% (2021: 14.5%), reecting the reduction
in Winterood’s prot and continued growth in
the equity base. The return on average tangible
equity was 12.2% (2021: 16.5%).
Following the group’s solid nancial
performance in the year and strong capital
position, and to reect our continued
condence in the business model, the board
is proposing a nal dividend of 44.0p per
share. This will result in a full-year dividend
per share of 66.0p (2021: 60.0p), returning to
the pre-pandemic level.
The group maintained strong capital, funding
and liquidity positions, with our common
equity tier 1 (“CET1”) capital ratio of 14.6%
(31 July 2021: 15.8%) signicantly above the
applicable minimum regulatory requirements.
Capital Management Framework
The prudent management of the group’s
nancial resources is a core part of our
business model. Our primary objectiveis to
deploy capital to support disciplined loan
book growth in Banking and to make the
most of strategic opportunities.
The board remains committed to the group’s
dividend policy, which aims to provide
sustainable dividend growth year-on-year,
while maintaining a prudent level of dividend
cover. Further capital distributions to
shareholders will be
considered depending
on future opportunities.
We are considering the further optimisation
of our capital structure, including the
issuance of debt capital market securities if
appropriate, targeting a CET1 capital ratio
range of 12% to 13% over the medium
term. In the short term, we would expect to
operate above the 12% to 13% CET1 capital
ratio target range, in light of the heightened
macroeconomic uncertainty and potential
growth opportunities available to us.
Book 1.indb 8 27/09/2022 23:45:30
09
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Protecting Our Business Model and
Maximising Future Income Generation
We continue to deliver against our strategic
priorities to “Protect”, “Grow” and “Sustain”
our business model.
Our multi-year investment programmes are
progressing well and enable us to protect
our business, as well as enhance efciency
and future-proof our income generation
capabilities. We are seeing tangible benets
from these investments. In our Savings
franchise, investment in the customer deposit
platform allowed us to broaden our product
offering and drove signicant growth in our
retail deposits, up more than 50% since the
launch of the platform in December 2018.
The total balance of Fixed Rate ISAs now
stands at c.£350 million, supporting lower
cost of funds and funding diversication.
We continued to invest in our technology
and digital capabilities to make our experts
even more valuable, empowering them with
key data insights and automated processes.
In Motor Finance, our investment in digital
and technology has allowed us to make the
most of opportunities in the second hand
car market. Through our partnership with
AutoTrader, we are providing our dealers with
real-time insights on vehicle demand and
pricing, a unique proposition that has won the
Innovation Award at the Car Finance Awards
2022. We have also developed Application
Programming Interfaces (“APIs”) that enable
us to connect seamlessly into strategic
partners and provide our nance offering
at various points of the customer journey.
In CBAM, we have undertaken a major
re-platforming project to rationalise legacy
systems and improve efciency, while adding
a digital portal to improve functionality and
customer experience. We are also delivering
a new customer portal in Asset Finance and
are automating elements of our processes to
enhance customer experience.
Focus on Maximising Disciplined Growth
We remain focused on maximising
disciplined growth in our existing and
adjacent markets. This year, we have
conducted a further review of potential
growth opportunities and have a strong
pipeline of identied target areas that are
aligned with our business model.
We recognise a signicant opportunity in
broadening our sustainable nance offering
as the UK heads towards a net zero carbon
economy. Our current lending already spans
a diverse array of assets including wind and
solar generation, battery electric vehicles and
grid infrastructure. Over the coming years,
we will continue to build further our expertise
in green and transition assets, cementing
our reputation for specialist knowledge.
We are a through-the-cycle lender and will
continue to support our customers as they
look for nancing of green and transition
assets. In particular, we are seeing growth
across a range of battery electric vehicles,
predominantly through our Commercial
business, as the UK’s economy moves to
electrify all forms of transport. As we develop
our green growth strategy, we have set
ourselves an initial green nance ambition.
We aim to provide £1.0 billion of funding
for battery electric vehicles over the next
veyears.
In addition, we are piloting a specialist
buy-to-let extension to our existing Property
bridging nance customers. We have also
extended our sector coverage in Asset
Finance with the addition of specialist
materials handling and agricultural
equipment teams. In Invoice Finance,
we continue to pursue opportunities
in the Asset-Based Lending (“ABL”)
space, including identifying syndication
opportunities, partnering with other lenders.
Our Asset Management business is well
aligned with the long-term trends in the
wealth management space and we will
continue to invest to support its growth
potential. We remain committed to
building on our excellent track record of
increasing client asse
ts organically, through
the continued selective hiring of wealth
management professionals, as well as
through in-ll acquisitions.
Winterood Business Services (“WBS”)
has delivered another strong performance,
with income up 12% from £9.1 million to
£10.2million and assets under administration
up 16% from £6.2 billion to £7.2 billion. Our
award-winning proprietary technology is
highly scalable and we see signicant growth
potential in this business, with a solid pipeline
of clients expected to increase assets under
administration in excess of £10 billion in the
2023 nancial year.
Our Role in Supporting the Transition to
a Sustainable Future
We have an important role to play in helping
people and businesses transition to a lower
carbon future and this responsibility is at the
forefront of our minds. I am pleased with
the signicant progress we have made in
developing our climate strategy, covering
not just our operational impacts, but also
understanding the implications across our
nanced activities.
This year, we have carried out an
assessment of our indirect Scope 3
emissions across all categories of operational
emissions as well as a rst assessment of
our nanced emissions, initially focused on
our loan book. Initial ndings are available
in our inaugural Task Force on Climate-
related Financial Disclosures (“TCFD”) report
from page42, where we also set out our
progress this year and areas of future focus
with regard to the integration of climate risk
into our governance infrastructure, business
strategy and risk management framework.
Notwithstanding the efforts already made,
we remain at the start of a long journey and
recognise there is more to do to develop our
own transition plans, targets and metrics.
This also includes our ability to address
challenges around data and modelling as
we continue to work across industry and
alongside our customers, to enhance both
understanding and our capabilities.
As a group we are supportive of the goals
of the Paris Agreement to achieve net zero
emissions by 2050. Having previously set
ambitious short-term net zero targets for our
Scope 1 and 2 operational emissions, we are
now setting ourselves a wider and longer-
term ambition to align all of our operational
and attributable greenhouse gas (“GHG”)
emissions from our lending and investment
portfolios on a path to net zero by 2050.
To this end, I am pleased to report that we
have recently joined 116 banks globally as a
signatory to the Net Zero Banking Alliance.
In CBAM, we have mobilised a Sustainability
Programme with dedicated initiatives to
embed the Principles for Responsible
Investment (“PRI”) and stewardship across
all facets of our business, and as part of this,
have recently become a signatory to the UK
Stewardship Code.
Outlook
We have delivered a solid performance
this year and we start the 2023 nancial
year against a highly uncertain external
environment. Although we are alert to the
impact of rising ination and interest rates
on our customers and wider nancial
market conditions, we remain well placed to
continue delivering on our long track record
of protability and disciplined growth.
In Banking, we are focused on maximising
opportunities in the current cycle and
delivering continued growth at strong
margins. We are condent in the long-term
growth prospects of our businesses and will
continue to assess opportunities to deliver
disciplined growth.
In Asset Management, we continue to invest
to support the long-term growth potential of
the business. Whilst the business is sensitive
to nancial market conditions, we remain
committed to driving growth both organically
and through the continued selective hiring
of advisers and investment managers, and
through in-ll acquisitions.
As a daily trading business, Winterood is
highly sensitive to changes in the market
environment, but remains well positioned to
continue trading protably, taking advantage
of returning investor appetite. We see
signicant growth potential in WBS, with a
solid pipeline of clients expected to increase
assets under administration in excess of £10
billion in the 2023 nancial year.
Our proven and resilient model and strong
balance sheet, combined with our deep
experience in navigating a wide range of
economic conditions, leave us well placed
to continue supporting our colleagues,
customers and clients over the long term.
Adrian Sainsbury
Chief Executive
27 September 2022
Book 1.indb 9 27/09/2022 23:45:31
10
Close Brothers Group plc
Annual Report 2022
Business Model
Close Brothers has a proven and resilient business
model, delivering excellent service in sectors we
know and understand.
Disciplined underwriting and
pricing through the cycle
In Banking, our success is supported by our disciplined
pricing and underwriting criteria. We consistently apply
these criteria at all stages of the economic cycle. Our
lending is predominantly secured or structurally protected,
with conservative loan to value ratios, small loan sizes and
short maturities. We do not operate in the undifferentiated,
volume-driven markets which are dominated by the larger
banks, and prioritise pricing and margins over volume.
Prudent management of
nancial resources
We take a prudent approach to managing our nancial
resources. A fundamental part of our business model is
ensuring we have a strong capital position which allows us
to grow, invest and meet all regulatory requirements. We
also take a conservative approach to liquidity management
and funding, as we focus on diversity of funding sources
and a prudent maturity prole. This enables us to protect,
grow and sustain our business model.
Service, expertise and relationships
Our focus on service and personal approach gives us a
deep understanding of the needs of our customers, clients
and partners. It allows us to offer high service levels and
exible solutions across all of our businesses. In Banking,
this leads to fast lending decisions and access to funds
when customers need them most. Close Brothers Asset
Management and Winterood are strong examples of
the expertise of our people in their specialist elds, which
underpins their success in wealth management and trading.
We combine industry expertise and digital capabilities to
support our customer-centric approach.
Distinctive culture
A key asset of Close Brothers is our distinctive culture. It
brings out the very best in our people and our customer-
centric and long-term approach to everything we do is
embedded throughout the organisation. Our people are
engaged in the business and embody the values that
enable us to help our customers thrive. Our culture is key
to the foundations of our successful business model and
in driving our strong nancial performance.
Diversied portfolio of businesses
Our diversied portfolio of businesses is an important
part of our success and resilience over the years. We lend
in a variety of sectors, locations and asset classes, and
also provide wealth management services and securities
trading. Close Brothers Asset Management and Winterood
provide additional income streams and contribute to the
diversication of the group. This diversication supports the
stability of earnings and dividends, particularly in challenging
times, while also allowing us to continue investing to grow
the business through the cycle.
Our distinctive strengths
Supporting our long-term track record of growth
and protability
High net interest margin and low bad
debt ratio in Banking
We do not manage our businesses to a growth target, but instead
prioritise the consistency of our lending criteria and maintaining
strong returns. The consistent application of underwriting discipline
and responsible lending criteria has resulted in a low bad debt ratio
ranging from 0.6% to 2.3% over the last 10 years.
Book 1.indb 10 27/09/2022 23:45:31
11
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Long-term growth
Loan book
1
(£ million)
0
2,500
5,000
7, 5 0 0
10,000
08 09 10 11 12 13 14 15 16 17 19
18 20 21 22
1 Loan book gures include operating lease assets.
Long-term dividend track record
Dividend per share (p)
0
20
40
60
80
08 09 10 11 12 13 14 15 16 17 19
18 20 21 22
Strong returns through the cycle
Return on opening equity (%)
0
5
10
15
20
08 09 10 11 12 13 14 15 16 17 19
18 20 21 22
A key point of difference at Close Brothers is our long-term
approach and the rigorous discipline behind our proven and
resilient business model. This ensures we are well positioned to
deliver for all of our stakeholders and continue our long-term
track record of growth, protability and returns.
Our track record
Each of our distinctive strengths has contributed to our long-term track record, enabling us to deliver loan book growth, prot
ability
and returns to shareholders over many years, with each of our businesses supporting our overall performance as a group.
Strong net inows in CBAM
We have seen strong growth in our Asset Management business
with net inow rates ranging from 5% to 12% over the past ve
years. We continue to work to improve the long-term scale and
protability of the Asset Manageme
nt division, capitalising on our
vertically integrated and multi-channel distribution.
Long-term income generation
in Winterood
Winterood has a long track record of protable trading and good
levels of income generation in a wide range of market conditions.
The business made the most of the volatility and surge in retail
trading seen during Covid-19 and, despite the impact of falling
markets in this nancial year, it remains well placed to navigate
changes in the market environment. Winterood continues to
diversify its revenue streams and we are condent in accelerating the
growth trajectory of WBS, balancing the cyclicality seen in the trading
business.
We have a strong track record of delivering disciplined
growth by maximising the opportunity in existing markets,
as well as continuously exploring new opportunities that
t with our model.
1 Customer satisfaction score (“CSAT”).
2 Property Finance net promoter score (“NPS”) excludes the Commercial
Acceptances business.
3 Motor Finance Dealers net promoter score (“NPS”).
We listen to our customers, putting their needs at the heart of
our business. Our customer-centric approach is reected in
the strong customer satisfaction and net promoter scores we
continue to achieve across our businesses.
While dividend decisions in the 2020 and 2021 nancial years have
reected the unprecedented uncertainty caused by Covid-19, we
aim to return to delivering long-term, progressive and sustainable
dividend growth in the future, in line with our policy.
The disciplined application of our business model and
diversied portfolio of businesses have supported consistently
strong returns at all stages of the nancial cycle.
Strong customer scores
Latest scores
Asset Finance
CSAT
1
+88
Property Finance
NPS
2
+87
Motor Finance
NPS
3
+73
Book 1.indb 11 27/09/2022 23:45:32
12
Close Brothers Group plc
Annual Report 2022
INVESTMENT
IN TECHNOLOGY
R
E
L
A
T
I
O
N
S
H
I
P
S
S
E
R
V
I
C
E
E
X
P
E
R
T
I
S
E
How our investments in technology are
making our experts even more valuable
Our successful business model is built
around the deep expertise of our people,
our personal and exible service, and our
long-standing relationships, which are all
focused on delivering on the needs of our
customers, clients and partners.
Using data insights to enhance our
proposition and respond to changing
customer needs
Adding functionality to improve
the service and experience we can
provide for our customers
Creating efcient and scalable
platforms to support the growth of
our business
We are investing in our technology and
digital capabilities to make our experts even
more valuable. We are empowering them
with unique data insights and automating
processes to optimise their time.
We are combining the deep expertise of our
people with innovative technology to add real
value to our customers, clients and partners.
Combining industry expertise and digital capabilities
to support our customer-centric approach.
Business Model
continued
Book 1.indb 12 27/09/2022 23:45:32
Broadening our proposition for our Motor
Finance dealer partners with real-time
data and market insights, in partnership
with AutoTrader
Providing more routes to customers
and dealers via API links, enabling us to
seamlessly offer our products at various
stages of the customer journey
This unique proposition means we can provide dealers with
real-time insights, both locally and nationally, on vehicle demand,
optimum pricing and time to sell, all based on consumer search
and purchase trends.
Combined with our own data on loan volumes, acceptance
rates and stock funding position, we can provide dealers with
data-backed insights, enabling them to stock their forecourts
effectively and efciently.
This unique and value-adding proposition won the Innovation
Award at the Car Finance Awards 2022.
As customer behaviour changes, with increasing use of digital
channels, we are adapting our Motor Finance model.
We have developed a set of APIs that enable us to connect
seamlessly into strategic partners and provide our nance
offering at various points of the customer journey.
We have partnered with iVendi, AutoTrader and others to enable
dealers to position nance options on their advertising platforms
and websites.
Enhancing customer experience and
improving control in our Asset
Management business
Transforming platforms in Asset Finance
to improve customer service outcomes
and process efciency
Expanding our Savings business by
diversifying our product offering and growing
customer numbers through the Customer
Deposit transformation programme
Our multi-year Asset Management technology transformation
has included the delivery of a customer relationship management
(“CRM”) platform, which provides signicant benets for our
clients and colleagues, whilst supporting our growth ambitions.
We have integrated the platform with our client portal to improve
digital engagement, have delivered a new mobile application and
have redesigned our annual client review pack, all of which have
contributed to a signicant reduction in paper usage.
On an operational level, we have introduced improved automated
anti-money laundering and bank verication checks and have
rolled out consistent onboarding practices. The integration
between our platforms has generated productivity gains and with
signicantly fewer data entry points across the Advice process,
we have reduced risk and improved our control environment.
Our Asset Finance transformation has allowed us to automate
non-value-adding parts of the customer journey, whilst building rich
customer insights, and respond to changing customer behaviour
through our new customer relationship management system.
We are developing a customer portal that will allow customers
to choose the services they receive based on their needs and
improving their user experience.
As a result of our transformation programme, during Covid-19, we
were able to build, test and launch our CBILS portal which included
automated eligibility testing, within 10 days, as we continued to
support our customers during this challenging period.
We are also delivering a “proposal to payout” solution, which
enables integration directly into service providers such as credit
reference agencies, and offers additional functionality such as
e-documents and e-signature.
Launch of new insight tools in Premium
Finance that help our insurance brokers
make better decisions
Foresight is a new model which provides unique point of quote
customer behaviour insights to support personal lines broker
commercial decision making.
Foresight has been built using machine learning models on
our extensive Premium Finance data, supplemented with a
broadermarket insurance policy dataset. The models predict
the likelihood of customers cancelling before the end of their
policy term.
Focus 360 is a new tool available for our commercial brokers,
with real-time nance, credit and operational data summarised
into an interactive dashboard to help them understand how
Premium Finance is performing. Brokers also get access to peer
benchmarking data to understand areas of improvement for
new business opportunities.
The programme involved a replacement of our back ofce systems,
which enhanced our resilience and reduced manual processing,
whilst creating a strong foundation from which to grow our savings
proposition. Since the launch of the platform, we have broadened
our product range, bringing to market new notice account and ISA
product ranges. Our online portal also offers an alternative channel
for our customers to communicate with us, as we adapt to our
customers’ preferences. Providing strong customer service remains
core to the business and we have maintained very high levels of
service, with a customer satisfaction score of 84%.
This investment has supported signicant growth in our retail
deposits, which are up 16% year-on-year, following similarly
strong growth in previous years. This growth is supported by the
online channel, which now has over 50% of customers signed
up for self-service, setting us up for scalability in future years.
13
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Book 1.indb 13 27/09/2022 23:45:32
14
Close Brothers Group plc
Annual Report 2022
At Close Brothers, we have a long-term track record of creating value
and delivering positive outcomes for all of our stakeholders.
We work hard to understand and meet the needs of our different stakeholder groups, engaging with them and adapting our service
and
offering to create value for them. We undertake a comprehensive programme of stakeholder engagement and consider the feedback
provided, embedding this in the decision-making process throughout the group.
Our Stakeholders
Delivering for our stakeholders
Colleagues
With approximately 4,000 employees around the UK, Ireland,
the Channel Islands and Germany, we have a diverse and
motivated workforce which delivers the highest levels of service
to our customers, clients and partners. We are committed
to the development of our colleagues, ensuring they are
supported and engaged.
Key priorities of our colleagues
• A safe working environment
• A fair, supportive, diverse and inclusive culture where
employee feedback is valued
• Being appropriately rewarded for their contributions
• Opportunities for training and development
• Long-term successful performance of the group
Engaging with our colleagues
Engagement with employees helps to attract, build and retain a
high calibre talent pool and ensure that our employees remain
enthusiastic about their work and Close Brothers.
Engagement takes place daily through line managers, with
senior management regularly speaking at Town Halls and
other business-wide forums. Listening to our colleagues and
acting upon their feedback is essential to maintaining employee
engagement, whether this is through undertaking regular
employee opinion surveys or management leading engagement
activities to provide updates on business performance. Training
and mentoring programmes are in place to support the
development of all employees.
Key engagement during the year
We ran our latest Employee Opinion Survey, which closed in March
2022, to gather feedback from our colleagues and provide them
with a platform to anonymously share their views on working at
Close Brothers. We listened closely to this feedback and held a
series of Town Halls and team meetings with our colleagues to
discuss the results and consider any actions to take. We also
donated £2 per survey completed to our staff-nominated charities,
Cancer Research UK and Make-a-Wish.
Ways we have created value
• Established new Gender Balance, Social Mobility, and
Working Parents and Carers Networks as part of our Diversity
and Inclusion initiatives.
• Held events and online workshops on a variety of topics
including International Women’s Day, LGBTQ+ History Month,
Race Equality Week, Time to Talk Day, Black History Month
and National Inclusion Week.
Customers, Clients
and Partners
The needs of our customers, clients and partners are at the
heart of our business and are core to our purpose. Our aim is
to be there for our customers across all market conditions to
help them meet their goals with ease and condence that earns
their loyalty and ensures we build long-lasting customer
relationships.
Key priorities of our customers, clients and partners
• Building and maintaining strong personal relationships based
on trust, understanding and specialist expertise
• Understanding, treating and valuing them as individuals
• Fair and equitable conduct of business
• Receiving consistent, responsive and supportive service
delivered with simplicity, clarity and ease
• Meeting their needs throughout changing economic cycles
• Receiving customer-led propositions that meet their individual needs
Engaging with our customers, clients and partners
The group has customers, clients and partners in the UK, Ireland,
the Channel Islands and Germany. Our long-term success
depends on the strength of our relationships with customers,
clients and partners, our specialist expertise and maintaining high
standards of service.
As such, central to all decision-making is doing the right thing for
customers, clients and partners, by helping them achieve nancial
solutions to meet their needs.
Our specialist, expert teams consistently deliver high quality
service to our customers, clients and partners. We engage with
our customers throughout their end-to-end journey with us and
actively seek their feedback. We proactively review the customer
feedback we receive in our local business unit customer forums
and continuously look at how we can improve our experience and
service, ensuring the service we provide meets their needs and is
aligned with our customer principles. We also use this feedback to
evolve our proposition and offering as we adapt to the changing
needs of our customers, clients and partners.
Key engagement during the year
We have supported our customers, clients and partners
throughout the heightened uncertainty we have experienced
during the year, and maintained close contact as they navigated
rising ination and cost of living pressures, as well as the roll-off
of Covid-related government support. We have discussed our
customer needs with them regularly to help ensure we are
supporting them appropriately.
Ways we have created value
• Continue to rene our products and services based on customer
feedback to deliver positive customer outcomes, underpinned
by high quality service and a great end-to-end experience.
• By deeply understanding customers’ needs and goals and
tailoring new solutions to meet those needs, created an
award-winning and industry-rst solution, providing a forecourt
insights data tool to motor dealers.
clients and partners
Book 1.indb 14 27/09/2022 23:45:32
15
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Suppliers
Our business is supported by a broad range of suppliers,
enabling us to provide high standards of service to our
customers, clients and partners. We are focused on developing
and maintaining transparent and sustainable working
relationships with our suppliers.
Key priorities of our suppliers
• Strong and sustainable relationships with Close Brothers
• Fair and equitable conduct of business
• Appropriate and clear payment procedures
• An understanding of the Close Brothers Group purpose
and strategy
• Robust risk management framework
Engaging with our suppliers
Engagement with our suppliers enables the group to develop
and maintain long-term and sustainable relationships and
ensures our suppliers can better understand and align to our risk
management requirements and operate responsibly.
Our key supplier relationships are owned by relationship managers
and are supported by our central third party management function
who provide specialist expertise and support. Engagement with
suppliers includes regular meetings, with strategic meetings taking
place at least quarterly with our top tier suppliers, as well as an
annual survey to seek feedback on Close Brothers as a client.
Key engagement during the year
Throughout the last year, we have continued to maintain our
frequent contact with our suppliers and conduct regular reviews
of service.
Our annual survey of key suppliers was undertaken in July 2022,
focusing on how Close Brothers performs as a client and how
our suppliers feel about doing business with us.
We continue to share a strategic vision with our suppliers to help
them understand our direction and provide clarity, while ensuring
that we remain considerate of our suppliers.
We are also working in partnership with our key suppliers within
facilities and eet management to directly collaborate and
contribute to the sustainability agenda.
Ways we have created value
• Working with our facilities management partner to invest funds
and expertise to accelerate our carbon reduction plans across
our group property portfolio.
• Continued to rene our third party management framework to
ensure that processes remain efcient, are business enabling
but remain robust from a risk management perspective and
remain aligned to latest regulatory requirements.
Regulators and
Government
We are committed to sustaining high standards of business
conduct across our business and maintain an active dialogue
with government and regulatory bodies.
Key priorities of our regulators and government
• Good customer outcomes
• Compliance with both applicable regulations, including
prudential requirements, and with regulators’ expectations
• Recognition of the importance of resilience and risk
management
• Provision of high quality information and regulatory reporting
• Active consideration of risks relating to sustainability and other
climate matters
• Transparent group tax strategy
Engaging with our regulators and government
The group fosters an open and transparent relationship with all our
regulators, including the Financial Conduct Authority (“FCA”) and
the Prudential Regulation Authority (“PRA”), as well as government
authorities and trade associations. It is important that we maintain
a culture that is focused on high standards in all our business
activities, regulatory compliance and an open relationship with
our regulators. Active engagement with the relevant regulators
and associations helps to ensure the business is aware of and
adapting to the evolving regulatory framework.
We maintain a proactive dialogue with the PRA and the FCA and
have a constructive relationship with HMRC to help ensure we
are aligned with the relevant regulatory frameworks. We regularly
interact with the trade bodies and business associations we are
afliated with to ensure we are engaged with issues impacting
our industry.
Key engagement during the year
We have continued to maintain a close working relationship with
the regulators as we progress through the application process for
moving to use the Internal Ratings Based approach. We submitted
our initial application in December 2020 and, since then, have
moved through a series of reviews and interviews. We received
conrmation from the PRA that our application successfully
transitioned to Phase 2 of the process in March 2022. Phase
2 documentation was submitted in July 2022 and we are well
positioned to support the next set of reviews.
Ways we have created value
• Contributed constructive feedback to trade associations on
a wide range of regulatory developments such as the Debt
Respite Scheme (Breathing Space), Consumer Duty, and
Statutory Debt Repayment Plans (“SDRP”).
• Kept abreast of regulatory developments to better understand
not only changes in regulation but also changes in regulators’
expectations and industry concerns.
Book 1.indb 15 27/09/2022 23:45:33
16
Close Brothers Group plc
Annual Report 2022
Communities and
Environment
Close Brothers is committed to contributing lasting value and
making a positive impact on the society in which we operate
and the environment more broadly. This underpins the growing
range of programmes and initiatives we support that benet our
communities and the environment.
Key priorities of our communities and the environment
• A suitable strategy for approaching sustainability issues
• Support for community initiatives
• Job creation and social mobility
• A long-term focus on addressing the impacts of climate change
Engaging with our communities and the environment
Engaging with local communities helps the board and our
employees develop our understanding of our clients, customers
and partners so that we can support them and help them
to achieve their ambitions, whilst also building employee
engagement. We rmly believe that environmental considerations
should form an integral part of the decisions we make as a
business and employees across the group are actively engaged
on responsible behaviours and environmental issues.
Many of our employees participate in group-wide committees
established to drive forward a range of initiatives around diversity
and inclusion, helping the envi
ronment and charitable and
community activities, with our employee volunteers the driving
force behind our successful community and charitable events. We
have a range of partnerships with leading organisations dedicated
to creating positive impact via diversity, inclusion and social
mobility schemes, while our regular interactions with industry
bodies and third party consultants help inform our strategy
towards climate change and the environment.
Key engagement during the year
In recognition of the Queen’s Platinum Jubilee, we donated a
tree for every colleague to support the Queen’s Green Canopy
scheme. This will help to enhance our environment and create
a legacy that will benet future generations, which is something
that is deep-rooted in our purpose and our responsibility. The
donated trees will be planted in deprived urban areas and in
and around schools, where they will improve the quality of life in
these communities by giving access to green spaces and all the
benets these bring.
Ways we have created value
• Became a signatory to the Net Zero Banking Alliance.
• Established a new relationship with The Wildlife Trusts and
donated £50,000 to support the charity’s work.
initiatives
Investors
Close Brothers has a proven and resilient business model and
is focused on generating long-term, sustainable value for its
investors, while also maintaining a strong balance sheet.
Key priorities of our investors
• Strong returns and nancial resilience through the cycle
• Capital generation and distributions
• Sustainable and consistent business model
• Appropriate governance practices and regard to
environmental and social responsibility
Engaging with our investors
Our investors are the providers of capital to our business so it
is important that we engage actively with them and listen and
respond to their feedback.
We have an established programme of engagement for
shareholders, debt capital providers and other market
participants through our investor relations team, which
includes regular dialogue with the executive team and
chairman. We proactively collate feedback from our investors
and relay this to senior management, the board and to our
employees in the appropriate forums such as Town Halls.
Key engagement during the year
We maintained our programme of communication with the
investment community throughout the year, including through
our regular market updates and analyst presentations.
We undertook investor roadshows covering the UK, North
America and Europe and completed a series of meetings
with sell-side analysts and sales desks, as well as with xed
income holders. In addition, our chairman held a corporate
governance roadshow with top shareholders.
Ways we have created value
• Enhanced our disclosures on Environment, Social and
Governance (“ESG”) in line with the recommendations of
theTCFD.
• Comprehensive programme of engagement over the year with
existing and prospective shareholders and analysts, covering
over 70 institutions across the UK, Europe and North America.
Our Stakeholders
continued
Delivering for our stakeholders
Book 1.indb 16 27/09/2022 23:45:33
17
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Section 172 Statement and Statement of Engagement with
Employees and Other Stakeholders
Section 172(1) of the Companies Act 2006 requires the directors of a
company to act in a way that they consider, in good faith, would be
most likely to promote the success of the company for the benet of
its members as a whole, and in doing so have regard (amongst other
factors) to various other considerations and stakeholder interests:
• the likely consequences of any decision in the long term;
• the interests of the company’s employees;
•
the need to foster the company’s business relationships with
suppliers, customers and others;
•
the impact of the company’s operations on the community
and the environment;
•
the desirability of the company maintaining a reputation for high
standards of business conduct; and
• the need to act fairly as between members of the company.
The board is responsible for establishing and overseeing the
company’s values, strategy and purpose, all of which centre around the
interests of key stakeholders and other factors set out in section 172(1).
The directors are conscious that their decisions and actions have an
impact on stakeholders, including employees, customers, suppliers,
communities and investors, and they have had regard to stakeholder
considerations and other factors in section 172(1) during the year.
Regular engagement with stakeholders, both directly and indirectly
via management, has continued to be an important focus for the
board and has ensured that the directors are aware of and have
effective regard to the matters set out in section 172(1). Throughout
the year, the board received and discussed stakeholder insight and
feedback and it ensured that stakeholder considerations were taken
into account in the board’s deliberations and decision-making.
Whilst the board acknowledges that, sometimes, it may have to take
decisions that affect one or more stakeholder groups differently, it
seeks to treat impacted groups fairly and with regard to its duty to
act in a way that it considers would be most likely to promote the
success of the company for the benet of its members as a whole,
having regard to the balance of factors set out in section 172(1).
Considerations relating to the factors in section 172(1) are an
important part of governance processes and decision-making both
at board and executive level, and more widely throughout the group.
For example, the Schedule of Matters Reserved to the Board and the
terms of reference for each of the board’s committees emphasise the
importance of decision-making with regard to relevant factors under
section 172(1) and broader stakeholder considerations.
Necessarily in a large and regulated group, some decisions are taken
by management or the directors of subsidiary companies. These
decisions are taken within parameters set by the board and there
is a robust framework that ensures ongoing oversight, monitoring
and challenge by the board and its committees (including certain
decisions and activities that are always reserved to the board or
its committees). The board has regard to relevant factors set out in
section 172(1) in its activities in these areas, including considerations
relating to the potential impact of delegated decisions on the long-
term success of the group as a whole, the group’s reputation for
high standards of business conduct and the consequences of local
decisions on the group’s stakeholders.
Detail on the board’s engagement with, and consideration of, the
company’s stakeholders can be found on pages 99 to 122 of the
Corporate Governance Report.
Book 1.indb 17 27/09/2022 23:45:33
THE MOST
SUCCESSFUL
RELATIONSHIPS
18
Close Brothers Group plc
Annual Report 2022
Book 1.indb 18 27/09/2022 23:45:37
19
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
WORK
BEAUTIFULLY
ON BOTH SIDES
Case Study
Ellers Farm Distillery wanted a nancier
who shared their ethos and commitment
to sustainability.
The Challen
ge
Starting up in September 2020, Ellers Farm Distillery has
grown steadily and ethically. Based on an old North
Y
orkshire farmstead, it includes a barn-based distiller
y
and
a
n orchard to sustain vodka making. Opening in the
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ld
-
r
enowned distiller and head of sustainabilit
y
in
p
lace, it
was vital the
y
found a like-minded funder to su
pp
ort them
in acquiring and installing the equipment they needed.
The
S
olutio
n
Ell
ers
F
arm spo
k
e to severa
l
organ
i
sat
i
ons
b
ut were
p
articularl
y
im
p
ressed with Close Brothers. We showed
a
n un
d
erstan
di
ng o
f
t
h
e
i
r et
h
os an
d
comm
i
tments to t
h
e
env
i
ronment, as we
ll
as governance an
d
f
un
di
ng costs.
Our industr
y
s
p
ecialists develo
p
ed a nance solution
t
h
at
f
un
d
e
d
t
h
e
i
r new
di
st
ill
ery p
l
ant, cons
i
st
i
ng o
f
st
ill
s,
b
ott
li
ng an
d
f
ermentat
i
on equ
i
pment, a
b
o
il
er an
d
a
water treatment
pl
ant.
T
o
d
a
y
, t
h
e
y
are success
f
u
lly
supp
l
y
i
ng supermar
k
ets,
hi
g
h
-en
d
restaurants, an
d
di
rect
ly
to t
h
e consumer
.
As we’re an ethical business that’s
doing things a little bit differently,
patience is key. Close Brothers
were brilliant to work with. We put
our partners and suppliers under
scrutiny to check that they meet
our values, and we’re condent we
chose the right funder.
Andy Braithwaite, Managing Director
Ellers Farm Distillery
Book 1.indb 19 27/09/2022 23:45:38
20
Close Brothers Group plc
Annual Report 2022
Our Responsibility
To help address the
social, economic and
environmental challenges
facing our business,
employees and clients,
now and into the future.
Our Culture
Combines expertise,
service and relationships
with teamwork, integrity
and prudence.
Our Purpose
To help the people and
businesses of Britain thrive
over the long term.
Our Strategy
To provide exceptional
service to our customers
and clients across lending,
savings, trading and
wealth management.
The Foundations of Our Business
Our culture, our strategy and our responsibility
underpin the foundations of our success, enabling
us to deliver on our purpose:
to help the people
and businesses of Britain thrive over the long term.
We believe in putting our customers and
clients rst. Our cultural attributes bring
out the very best of our people, skills and
strong reputation that we have built with our
stakeholders over many years. A combination
of expertise, service and relationships with
teamwork, integrity and prudence underpins
our approach and gives us the tools to help
our customers thrive over the long term.
Our long-term strategic approach places
exceptional service at the heart of everything
we do. Each of our diverse, specialist
businesses all have a deep industry
knowledge, so they can understand the
challenges and opportunities that our
customers and clients face. We support the
unique needs of our customers and clients
to enable them to thrive, rather than simply
survive, whatever the market conditions.
And we recognise that to help the people
and businesses of Britain thrive, we also
have a responsibility to help address
the social, economic and environmental
challenges facing our business, employees
and clients, now and into the future.
These guiding principles are the foundations
of our success and enable us to continue
delivering for our stakeholders.
Book 1.indb 20 27/09/2022 23:45:38
Governance Report
Financial
S
tatement
s
Strategic Report
21
Close Brothers Group plc
Annual Report 2022
Our purpose is at the heart of our business
and guides every decision we make. We take a
long-term approach to managing our business.
This means supporting our colleagues,
customers and clients, and the communities
and environment in which they operate,
for the benet of all our stakeholders. It
means helping people and businesses
unlock their potential and plan for the future
with condence, building relationships that
stand the test of time. It also means that
we continue to be there for the long term,
whatever the economic climate, making
decisions that are right for today and for
generations to come.
Our customers are the people and
businesses of Britain and we recognise that
putting their needs and interests at the heart
of our business is central to our success.
OUR PURPOSE
IS TO HELP THE
PEOPLE AND
BUSINESSES
OF BRITAIN
THRIVE OVER
THE LONG TERM
Our Purpose
Book 1.indb 21 27/09/2022 23:45:38
22
Close Brothers Group plc
Annual Report 2022
OUR DISTINCTIVE
CULTURE AND
LONG-TERM
APPROACH ARE
EMBEDDED
THROUGHOUT THE
ORGANISATION
Our Culture
Book 1.indb 22 27/09/2022 23:45:38
23
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Service
We pride ourselves on our
excellent level of service and
thinking that is both entrepreneurial
and disciplined.
92%
2021: 93%
see colleagues
go the extra mile
to meet the needs of customers
and clients
Teamwork
We promote teamwork in a fair
and open environment, where
individuals and their contributions
are valued and respected.
97%
2021: 96%
of colleagues believe their
immediate team works well
together
to get the job done
Expertise
We are committed to fostering a
culture that attracts and retains
talent, whilst also growing and
building the expertise of our people.
97%
2021: 97%
of colleagues believe they have
the
skills and knowledge
to do
their job well
Integrity
We insist on trustworthy behaviour
and always acting with integrity –
“doing the right thing”, internally
and externally.
96%
2021: 97%
of colleagues believe our
culture
encourages them to
treat customers
and clients fairly
Relationships
We take the time to understand
and build strong long-term
relationships with our customers
and clients.
High customer satisfaction
and strong levels of repeat
business across the group
Prudence
We always take a prudent, robust
and transparent approach to risk
management.
95%
2021: 94%
of colleagues believe we are
committed to
prudent risk
management
Our distinctive culture and long-
term approach are embedded
throughout the organisation.
It combines our values of service, expertise and relationships with
our ways of working: teamwork, integrity and prudence. These
values ensure we continue to provide excellent service for our
customers and clients over the long term, bringing out the best in
our people and supporting our strong reputation.
All scores are taken from Close Brothers’ Employee Opinion Survey, with the survey closing in March 2022.
Book 1.indb 23 27/09/2022 23:45:39
24
Close Brothers Group plc
Annual Report 2022
Protect
Keeping
it safe
Maintaining and
enhancing the
key
strengths
of our
business model
Grow
Delivering
disciplined
growth
Maximising opportunities
in existing and new
markets; loan book growth
remains an output of the
business model
Sustain
Doing it
responsibly
Securing the
long-term
future
of our business,
customers and the world
we operate in
TO PROTECT, GROW
AND SUSTAIN OUR
PROVEN AND RESILIENT
BUSINESS MODEL SO
THAT IT CONTINUES
TO DELIVER IN THE
LONG TERM
Our Strategy
Book 1.indb 24 27/09/2022 23:45:39
Protecting our business:
operational and cyber resilience
We continue to invest in the operational and
cyber resilience of our business, to protect
our customers whilst maintaining and
enhancing our key strengths as a business.
In line with UK regulatory developments,
we have identied our important business
services, assessed their resilience,
and are aligning our capital investment
roadmap with these services to enable
enhancements to their resilience over time.
This is enabling us to test and demonstrate
how our most important services can be
sustained through severe but plausible
disruptions, and to target enhancements to
address any vulnerabilities identied.
Further, we continue to invest in people,
systems and processes through a multi-
year strategic cyber resilience programme.
Our focus on cyber resilience includes
evolving our in-house cyber security
expertise, augmented by input from
strategic supplier partnerships, whilst
maintaining Security by Design as a
core tenet of technology and operational
changes. Utilising an industry-standard
control framework, we maintain an
ongoing assessment of our risk and
control prole, targeting investments
to effectively prevent compromise of
information assets. Acknowledging the
nature of cyber risks, we recognise there is
a risk that prevention may not be absolute
and we therefore simultaneously maintain
our investment in capabilities to detect,
respond to, and recover from any cyber
events which may occur.
to risk can be found on
pages 74
to92
Maintaining and enhancing the key
strengths of our business model
Our key strengths differentiate our proven and
resilient business model and have contributed
to our long-term track record, enabling us
to deliver growth, protability and returns to
shareholders over many years.
Our high levels of personal service and
specialism are key points of differentiation.
Our people have deep knowledge of the
industry sectors and asset classes we cover,
leading to lending decisions informed by
experts and faster access to funds when our
customers need them most.
We run our business prudently, maintaining
a strong funding, liquidity and capital
position. Our loan book is predominantly
secured or structurally protected, with a
focus on maintaining strong credit quality.
We adopt a consistent and disciplined
approach, as we maintain prudent
underwriting and pricing in our lending.
Whilst our focus on the strict management
of costs remains unchanged, it is essential
that we continue to invest in protecting the
key attributes of our model and maintain
regulatory compliance and enhance our
operational and cyber resilience. Our
investments and cost base support the
generation of our strong margins, enabling
our operational and nancial resilience,
while also supporting our ability to maximise
opportunities as they arise.
Protect
Keeping it safe
25
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Book 1.indb 25 27/09/2022 23:45:39
26
Close Brothers Group plc
Annual Report 2022
Long-term
growth
prospects
Conservative
funding
prole
Strong
margin
Cultural
t
Strong
track record
Diversied
business
Expert,
relationship
based,
specialist
Prudent
underwriting
and secured
lending
Maximising opportunities in
existing and new markets
Our focus on delivering disciplined growth
is critical in enabling us to protect the
model, whilst still maximising opportunities
and taking the business forward. It allows
us to prioritise consistent and prudent
underwriting criteria and maintain strong
returns across our businesses. We do not
manage the group to a growth target, with
loan book growth remaining an output of the
business model.
Whilst we remain operationally and
strategically well positioned to continue
supporting our customers and delivering
for our shareholders, we continually assess
existing and new markets for growth
opportunities that t with our model.
We have a long history of delivering
disciplined growth and to support us in
building on this track record, we developed
our “Model Fit Assessment Framework”.
This framework supports our review of
opportunities, assessing their t with our
model, culture and responsible way of doing
business, alongside their suitability from a
strategic perspective.
Grow
Delivering
disciplined growth
Ensuring the right t
These eight criteria are all factors that we consider when assessing
growth opportunities. They capture the key strengths of our model
and so by taking these into account, it ensures we are following a
disciplined approach to growth and preserving the attributes that
generate value for our shareholders.
Our Strategy
continued
Book 1.indb 26 27/09/2022 23:45:39
Growing our business: commercial
opportunities in the green lending space
Growing our business:
Close Brothers Brewery Rentals
Delivering disciplined growth
The UK government’s Net Zero Strategy
report estimates up to £90 billion of private
investment in the green industrial revolution
by 2030
1
.
The existing markets and assets that
we have deep expertise in nancing are
transitioning towards become greener,
aided by government policies and
corporate commitments, as the UK aligns
towards a net zero economy.
We currently nance a wide array of green
assets, as well as transitioning assets where
new green technology is still developing:
• Our Asset Finance business has been
nancing wind farms, solar parks and
hydro schemes since 2014 and also
nances transition assets such as gas
peaking plants. We also support battery
electric vehicle deployments through the
Wholesale Fleet business
• In our Motor Finance business, we
nance hybrid and electric vehicles
and support our dealer partners with
guidance and thought leadership on the
market, features of the technology and
considerations specic to alternative fuel
vehicle ownership
• In our Property business, all of our new
developments have an EPC rating of A
or B and we have signicant expertise
in nancing sustainably focused
developments
Financing a battery energy
storage system
We have recently provided a development
loan to Pacic Green Technologies Group
for the construction phase of one of
the UK’s largest battery energy storage
systems (“BESS”), a 99.98 MW battery
energy storage system at Richborough
Energy Park in Kent.
Given the sizeable market opportunity
in supporting the transition to a net zero
economy, we are continually looking for
opportunities for disciplined growth in this
arena, whether that be through increasing
our appetite for lending to green asset
classes or expanding our offering into new
green propositions and technologies.
We continue to build our expertise in
green and transition assets, cementing
our reputation for specialist knowledge
and nancing.
£90bn
Estimated potential investment in the UK
green industrial revolution by 2030
clarity on stock positions, improve eet
efciency and inform management
decisions.
The self-collection element of our
EkegPlus service also supports the
reduction of CO
2
emissions.
We use ultra-high pressure (“UHP”)
water jetting for the internal cleaning of
containers, an innovative method that
means we can process units quickly and
to a high standard. There are no chemicals
used in the UHP process, reducing our
impact on the environment.
During Covid-19, we were able to help
brewers with lockdown waste by providing
a solution to safely empty the expiring
contents of kegs and casks in an eco-
friendly manner. Over 130 million pints
of beer, cider and ale were either sold
to farmers for fertiliser or used as a pH
balancer for anaerobic digestion processes.
2.3m
Our eet of kegs and casks
Delivering disciplined growth
The Brewery Rentals business was
established in 2007 and, since then, has
grown from strength to strength. We
work with brewers and distillers, offering
tailored solutions for keg and cask rentals,
container maintenance services and
equipment nance solutions.
We operate from four sites around the UK
and, with a eet of over 2.3 million, are the
UK’s biggest owner of kegs and casks.
We have grown the business organically,
delivering a record performance in the 2022
nancial year.
We are continually evolving our offering
and expanding into complementary
products, utilising our specialist expertise
and knowledge to offer exible solutions
to meet the needs of our customers. This
demonstrates the Close Brothers model
perfectly – specialist knowledge in action
to support our customers and a focus
on expanding into niche and adjacent
markets to deliver disciplined growth.
EkegPlus
EkegPlus is a container rental pooling
service, offering an outsourced keg and
cask solution to allow brewers to pay only for
the time they are using the containers.
Each container is embedded with
Radio Frequency Identication (“RFID”)
technology so it is uniquely identiable,
enabling customers to track containers
directly and giving them greater visibility
over usage and costs.
We developed the product in response to
requests from customers for a direct to
retail outlet short-term rental solution. It has
enabled us to operate in a market segment
previously unavailable to us.
EkegPlus has seen strong customer demand
this year, increasing to 90 customers since
launch, with more in the pipeline.
Innovative and sustainable focus
As a business, we are constantly developing
new technology as we broaden our offering
and provide greater benets for our customers.
Our award-winning container RFID tracking
technology allows customers to monitor
an array of data points that can provide
1 HM Government (2021), “Net Zero Strategy: Build Back Greener”, page 10. Contains public sector information licenced under the
Open Government Licence v3.0
(https://www.nationalarchives.gov.uk/doc/open-government-licence/version/3/).
27
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Book 1.indb 27 27/09/2022 23:45:39
SECURING THE
LONG-TERM
FUTURE OF
OUR BUSINESS,
CUSTOMERS
AND THE
WORLD WE
OPERATE IN
Our long-term approach is embedded
throughout our organisation and guides all of
our decisions, so it is important that we evolve
our business to sustain it for the long term.
For our customers, this involves recognising
and responding to changes in their
behaviour, adapting our business accordingly
and improving our digital capabilities and
the customer journey to enhance their
user experience. We continue to value the
importance of long-standing relationships
with our customers, providing them with
exceptional service and the deep industry
knowledge and expertise of our people.
For our people, this means maintaining our
focus on employee engagement to support the
wellbeing and needs of our colleagues. We will
continue to enable the ongoing development
of our people, as we look to retain talent and
support our succession planning, whilst also
nurturing an inclusive culture where our people
feel valued and respected.
We are also focused on our impact. We
create value in our local communities by
understanding the needs of SMEs and
helping them achieve their ambitions, and
by creating equal opportunities for all,
regardless of background. We maintain
our focus on reducing our environmental
impact and responding to the risks and
opportunities brought by climate change.
Sustain
Doing it
responsibly
Our Strategy
continued
28
Close Brothers Group plc
Annual Report 2022
Book 1.indb 28 27/09/2022 23:45:39
29
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Sustaining our business: supporting the
opportunities brought by climate change
Offshore wind farm support vessels
Offshore wind is a signicant contributor
of renewable energy in the UK, with
the government recently announcing
its ambition to reach 50GW of installed
capacity by 2030, supporting 90,000 jobs
1
.
Our Commercial Marine nance team is
an active funder to businesses performing
mission-critical services to the UK offshore
wind farm sector, where innovative crew
transfer vessels such as the HST Harri
(pictured) operated by High Speed Transfers
Limited, are engaged to deploy engineering
and maintenance crews safely to offshore
wind farms in the North Sea, in often
challenging weather conditions. With the
ability to transfer up to 26 personnel and
equipment at a time, these modern vessels,
which were developed in cooperation
with the offshore wind industry, provide
an efcient and timely service to ensure
that offshore wind farms can remain online
and reliably provide a major, low-carbon
contribution to the UK grid.
1 HM Government (2022), “British energy security strategy”. Contains public sector information licenced under the Open Governme
nt Licence v3.0
(https://www.nationalarchives.gov.uk/doc/open-government-licence/version/3/).
Book 1.indb 29 27/09/2022 23:45:40
30
Close Brothers Group plc
Annual Report 2022
SHARED
PERSPECTIVES
Book 1.indb 30 27/09/2022 23:45:43
31
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
MAKING IT
HAPPEN
Case Study
Gold Property Developments has been building
family homes in semi-rural locations across the
South East of England for more than 20 years.
Finance
S
olutio
n
G
old Property Developments sought nance for its
Fairbrook
G
rove development – now an award-winning
i
nnovat
i
ve commun
i
t
y
o
f
14
P
ass
i
ve
H
ouse
h
omes, t
h
e
UK’
s
rst
p
r
i
vate
d
eve
l
o
p
ment o
f
i
ts
ki
n
d
.
Wi
t
h
a s
h
are
d
phil
oso
phy
on susta
i
na
bl
e
d
eve
l
o
p
ment,
we un
d
erstoo
d
t
h
e c
h
a
ll
en
g
es an
d
were a
bl
e to
p
rov
id
e t
h
e
nance re
q
u
i
re
d
.
I
n turn, t
hi
s
f
ree
d
u
p
t
h
e
c
a
p
ital for Gold Pro
p
ert
y
Develo
p
ments to use on othe
r
susta
i
na
bl
e
d
eve
l
opment pro
j
ects
.
Th
e
R
esu
lt
S
ince working with us,
G
old Property Developments
h
as t
h
r
i
ve
d
as a
b
us
i
ness,
d
emonstrat
i
ng awar
d
w
i
nn
i
ng susta
i
na
bili
ty cre
d
ent
i
a
l
s, an
d
go
i
ng
f
rom
strengt
h
to strengt
h
.
It has been important to us and very
helpful that Close Brothers has a
similar philosophy to sustainable
development and supported us
to proceed with these sorts of
developments.
We have gone from strength to
strength since doing so, we have
really thrived as a business.
Bradley Gold,
Chairman
Gold Property Developments
Book 1.indb 31 27/09/2022 23:45:44
32
Close Brothers Group plc
Annual Report 2022
Our long-term strategic approach focuses on ways to protect,
grow and sustain our model, enabling us to continue delivering
excellent stakeholder outcomes.
Strategy and Key Performance Indicators
How we are achieving this The progress we are making Future priorities
Protect
Keeping it safe
• Maintaining a strong capital, funding
and liquidity position
• Consistently applying our prudent
business model through our
disciplined approach to underwriting
and pricing
• Balancing investment needs and cost
discipline
• Maintaining regulatory compliance,
whilst enhancing operational and
cyber resilience
• Strengthened our funding base with a
securitisation of our Motor Finance book
and growth of our deposit base
• Continued to lend through the cycle,
adhering to our disciplined approach
to underwriting and pricing, whilst
maintaining a strong margin
• Maintained our strict focus on costs whilst
investing in strategic programmes that
protect the business model
• IRB application successfully transitioned
to Phase 2
• Further enhanced our operational and
cyber resilience, whilst undertaking a
continuous cycle of improvements
• Retaining our strong capital, funding and
liquidity position
• Continuing focus on pricing and prudent
underwriting whilst lending through the cycle
• Strict management of costs whilst
investing in strategic programmes that
protect key attributes of our model
• Ongoing preparations for a transition to
the IRB approach, although the timetable
remains under the direction of the PRA
• Continuing preparations for implementation
of the FCA’s Consumer Duty
• Compliance with regulatory changes,
whilst further strengthening our
operational and cyber resilience
• Monitor and mitigate external threats,
including from heightened uncertainty
in the economic and geopolitical
environment and competition from both
established and emerging players
Grow
Delivering
disciplined growth
• Maximising opportunities available to
us in the current environment
• Capitalising on cyclical opportunities
in each business
• Extending our product offering and
launching new initiatives
• Assessing opportunities for
disciplined growth in new and
existing markets
• Over £400 million of loan book growth and
a strong margin, as we make the most of
demand across our lending businesses
• Recruited new teams to extend our
offering in agriculture and specialist
materials handling
• Digital investments have enabled us to
broaden our proposition, with Motor
Finance entering strategic partnerships
with AutoTrader and iVendi
• Piloting a buy-to-let offering in our Property
bridging nance business
• Grown our ISA balances to c.£350 million
following the expansion of our Retail
Savings product range
• Investing in new hires in CBAM in line with
our growth strategy
• Continued strong growth of Winterood
Business Services, with assets under
administration increasing to £7.2 billion
• Continue to capitalise on cyclical and
structural growth opportunities in each of
our businesses
• Assess opportunities in new and existing
markets, in line with the “Model Fit
Assessment Framework”
• Broadening our sustainability offering to
capture demand within the green lending
space
• Further growth of CBAM through hiring
and selective acquisitions
• Continued growth of Winterood Business
Services, with a solid pipeline of clients
expected to support assets under
administration in excess of £10 billion in
the 2023 nancial year
• Aiming to provide £1.0 billion of funding
for battery electric vehicles in the next
veyears
Sustain
Doing it
responsibly
• Promoting an inclusive culture and
supporting new ways of working and
social mobility
• Reducing our impact on the
environment and responding to the
threats and opportunities of climate
change
• Promoting nancial inclusion, helping
borrowers that might be overlooked
and enabling savers and investors to
access nancial markets and advice
to plan for their future
• Supporting our customers, clients
and partners in the transition towards
more sustainable practices
• Remain on track to achieve our target
of 36% of female senior managers and
14% ethnically diverse managers by 2025
• Established new Gender Balance, Social
Mobility, and Working Parents and Carers
Networks as part of our Diversity and
Inclusion initiatives
• Supporting the wellbeing of our employees
in the hybrid working environment with
exible working arrangements and events
and initiatives from internal networks, virtual
workshops and online tness classes
• Continued to support social mobility
programmes, with six students joining us
through our partnership with UpReach
• Offering employees access to our nancial
education website provided by Close
Brothers Asset Management
• Enhancing our climate disclosures in line
with the recommendations of the TCFD
• Became a signatory to the Net Zero
Banking Alliance
• Focus on supporting our customers
and partners in the current uncertain
environment
• Retain and attract talent and maximise
productivity by engaging, training and
developing our people, nurturing an
inclusive and diverse culture and investing
in tools and technology
• Expand our expertise in green and
transition assets and broaden our
sustainability offering as we support the
transition to a net zero carbon economy
• Achieve a net zero company car eet by
2025 and become operationally net zero
through our Scope 1 and 2 emissions
by 2030
• Continue to adapt to the evolving needs
of our customers and clients and take into
account the feedback they provide
Book 1.indb 32 27/09/2022 23:45:45
33
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Key performance indicators Creating long-term shareholder value
2022
2021
2020
14.6
15.8
14.1
Common equity tier 1 capital ratio
Per cent
2022
2021
2020
7.8
7.7
7. 5
Net interest margin
Per cent
2022
2021
2020
52
52
52
Banking expense/income ratio
Per cent
2022
2021
2020
127
128
131
Total funding as a percentage
of loan book
1
Per cent
2022
2021
2020
1.2
1.1
2.3
Bad debt ratio
Per cent
2021
2022
2020
14.5
10.6
8.0
Group return on opening equity
Per cent
2022
2021
2020
5
11
0
Loan book growth
2
Per cent
2022
2021
2020
5
7
9
Net inows
Per cent of opening AUM
2022
2021
2020
111.5
140.4
74.5
A
djusted basic earnings per share
Pence
2022
2021
2020
86
91
86
Employee engagement
Per cent
2022
2021
2020
2,438
2,542
3,484
Total Scope 1 and 2 emissions
(market based)
Tonnes CO
2
e
Savings online CSAT
Property Finance NPS
A
sset Finance CSAT
Motor Finance
(dealer) NPS
+86
+87
+88
+73
Customer scores
3
2022
2022
2021
2020
66.0
60.0
40.0
Dividend per share
Pence
1 Total funding as a % of loan book includes operating lease assets. 2021 and 2020 metrics have been re-presented to include
operating lease assets. Revised denition is total funding as a % of loan book including operating lease assets.
2 Loan book includes operating lease assets. 2021 and 2020 loan books have been re-presented to include operating lease assets.
3 CSAT represents customer satisfaction score. NPS represents net promoter score. Property Finance NPS score excludes
Commercial Acceptances. July 2021 customer scores: Savings
online CSAT +82, Property Finance NPS +87, Asset Finance
CSAT+81, Motor Finance (dealer) NPS +70.
Book 1.indb 33 27/09/2022 23:45:45
34
Close Brothers Group plc
Annual Report 2022
Our Responsibility
OUR RESPONSIBILITY IS
TO HELP ADDRESS THE
SOCIAL, ECONOMIC
AND ENVIRONMENTAL
CHALLENGES FACING
OUR BUSINESS,
EMPLOYEES,
CUSTOMERS AND
CLIENTS, NOW AND
INTO THE FUTURE
We see this responsibility as a core part of
our business and central to our success. It
encourages us to look at how we operate
our business more broadly, as we focus
on achieving the best outcomes for our
stakeholders and making a positive impact
on the society and the environment we
operate in. We believe this will enable
us to make a greater difference for our
employees, customers and clients, both
now and into the future.
Our values encourage and support diversity
and inclusion at all levels of our organisation,
helping the communities we operate in.
We consistently strive to act responsibly,
ethically and with integrity, and this
commitment to sustainable behaviours is
embedded within our corporate culture
and supported by a wide range of policies
and procedures.
Book 1.indb 34 27/09/2022 23:45:46
Governance Report
Financial Statements
Strategic Report
Our Sustainability Objectives
We are known for our core strengths of a trusted client
approach, disciplined lending and adaptability. These
position us well to support our customers as they navigate
a changing world. We have demonstrated we take our
responsibilities to our employees and our community
seriously, acting ethically and responsibly.
This is reected in our sustainability objectives we have set
as a business:
• Supporting our customers, clients and partners in the
transition towards more sustainable practices
• Promoting an inclusive culture in everything we do
• Reducing our impact on the environment and responding
to the threats and opportunities of climate change
• Promoting nancial inclusion, helping borrowers that might
be overlooked by larger nance providers and enabling
savers and investors to access nancial markets and
advice to plan for their future
In the following pages, we provide updates on our progress
this year across all aspects of our ESG strategy. New for this
year’s annual report, and following the TCFD requirements, we
demonstrate the signicant progress we have made in developing
our climate strategy, covering not just our operational impacts, but
understanding the implications across our nanced activities and
evaluating the important role we will play in supporting businesses
and individuals to transition to a low carbon economy.
During the year we have maintained a strong focus on progressing
with our wide-ranging sustainability agenda, driving forward
with programmes and initiatives that address key priorities such
as inclusion, social mobility, supporting customer needs and
responding to the impacts of climate change.
Sustainability Report
We are committed to
supporting the transition to a
low-carbon economy and will
continue to work with all of our
stakeholders on the journey
to a net zero future.
Adrian Sainsbury,
Chief Executive
35
Close Brothers Group plc
Annual Report 2022
At Close Brothers, behaving
responsibly is integral to our
actions and decision-making and
this is reected across our
sustainability objectives we set
ourselves.
Sustainability Report
Book 1.indb 35 27/09/2022 23:45:49
36
Close Brothers Group plc
Annual Report 2022
Sustainability Report
continued
Our Sustainability Pillars
Society
Ensuring we are a diverse and inclusive employer. Serving the needs of our customers
Our Targets
•
36% female senior managers by 2025
•
14% of our managers to be from an ethnic
minority background by 2025
•
Aim to maintain or improve customer
satisfaction scores across our businesses
Our Progress
•
33% female senior managers at 31 July
2022
•
10% of our managers were from an ethnic
minority background at 31 July 2022
•
Customer satisfaction scores
•
Property nance NPS +87
•
Asset nance CSAT +88
•
Savings online CSAT +86
Alignment to SDGs
1
For our people
Social responsibility
Helping our customers
Governance
Setting high standards of corporate governance to ethically and transparently achieve long-term success for stakeholders
Our Targets
•
Maintain high standards of governance, with
appropriate board level oversight
•
Aim to maintain or improve our external ESG
ratings
Our Progress
•
50% of board members were female at 31 July
2022
•
CBAM became a signatory of the UK
Stewardship Code
•
Received strong ratings of B- from CDP, AAA
from MSCI and CIS-1 ESG Credit Impact Score
from Moody’s
Corporate governance
Climate risk governance
Our people
Valuing Our Colleagues
Creating an inclusive culture where all
colleagues are supported to thrive is
fundamental to the continued success of
our business. We value the expertise of
our people in delivering excellent service
and building long-lasting relationships with
our customers, clients and partners based
on trust and integrity.
We celebrate diversity and are committed
to creating an inclusive culture where all of
our employees can feel proud to work for
us, regardless of their gender, age, ethnicity,
disability, sexual orientation or background.
We want our colleagues to feel as though
Close Brothers is a great place to work and
are proud that 94% of colleagues feel included
and 93% feel they can be themselves at work.
We are signatories to a wide range of charters
and commitments across a broad spectrum
of inclusion themes and social enterprises,
including the Race at Work Charter, the
Social Mobility Pledge, the Women in Finance
Charter and the Valuable 500. We partner
with leading diversity organisations, including
Stonewall and the Business Disability Forum,
to help inform our thinking and subsequent
actions. We continue to run inclusive
leadership training sessions for our managers,
senior managers and group executives,
highlighting how actions and behaviours can
shape our inclusive culture.
All hiring managers are required to complete
a collection of training modules developed
to provide a consistent and best practice
approach for talent acquisition. They ensure
a focus on inclusion and unconscious bias
and equip line managers with the skills
and knowledge to make effective and fair
recruitment decisions.
We are also committed to inclusive recruitment
practices; using gender decoders to avoid the
use of gender bias wording in adverts and job
descriptions, and seeking balanced shortlists
and diverse interview panels to alleviate bias
in the process. We strive to achieve a 50:50
gender split for our entry level and formal
training programmes including our Aspire
school leaver programme, our graduate
schemes and our summer internships.
This year, we have established new
employee networks for Accessibility, Social
Mobility, and Working Parents and Carers.
We now have networks focused on each
of our diversity and inclusion pillars. Each
are chaired by an executive sponsor and
take responsibility for driving our inclusion
initiatives across the organisation.
Employee Engagement
Listening to the views of our colleagues
remains key to retaining a highly engaged
workforce; ensuring our culture is one where
our colleagues feel motivated, proud to work
for us and can thrive.
Our latest Employee Opinion Survey closed
in March 2022.
Environment
Reducing our impact on the environment and tackling climate change
For our TCFD report
Our Targets
•
Becoming operationally net zero by 2030
through our scope 1 and 2 emissions
•
Achieve a net zero company car eet by
2025
•
To align all operational and attributable
emissions from our lending and
investment portfolios with pathways to net
zero by 2050
•
Aim to provide over £1.0 billion of
lending for zero emission battery
electric vehicles over the next 5 years
Our Progress
•
44.8% reduction in scope 1 and 2
emissions since 2019 (market based)
•
A further reduction of 43% in average eet
vehicle CO
2
emissions vs 2021 nancial
year
•
Completed initial assessment across all
categories of scope 3emissions including
assessment of nanced emissions in our
loan book
•
Published our inaugural TCFD report
•
Became a signatory to the Net Zero
Banking Alliance
•
35% of new cars nanced in the last
nancial year were battery electric
Alignment to SDGs
1
1 We have identied above specic United Nations Sustainable Deve
lopment Goals (“SDGs”) which align with aspects of our sustain
ability strategy detailed in our report following.
Book 1.indb 36 27/09/2022 23:45:50
Governance Report
Financial Statements
Strategic Report
37
Close Brothers Group plc
Annual Report 2022
Ensuring we are
a diverse and
inclusive employer.
Female senior managers:
1
33%
as at 31 July 2022
Future target:
36%
by 2025
94%
of our employees feel included by their
colleagues.
93%
of colleagues feel they can be themselves
atwork.
We retained high levels of engagement at
86%, which is close to pre-pandemic levels.
Our response rate also remained strong
at 86%, enabling us to draw meaningful
insight from our results. Our scores remained
broadly aligned to last year, retaining many
high scores from our 2021 survey, particularly
around teamwork, expertise, acting with
integrity and treating customers and clients
fairly. Our organisational culture was shown
to be particularly strong when compared to
other nancial services rms with high scoring
questions against the Financial Services
Culture Board benchmarks. Feedback
showed a strong sense of belonging with
94% of colleagues feeling included and
that they are treated with respect.
Racial Equality
As signatories to the Race at Work Charter,
we demonstrate our commitment to
their seven key actions to help improve
representation of ethnic minorities across
all levels of the organisation. As part of
this commitment, we continue to monitor
ethnicity disclosure levels. Our disclosure
has increased from 75% at the end of the
2021 nancial year to 83% at 31 July 2022,
which allows us to more accurately measure
our ethnic balance to inform our thinking and
future actions.
Our target to have at least 14% of our
managers to identify from an ethnic minority
background by 2025, forms part of our
Long-Term Incentive Plan objectives and
demonstrates our commitment towards
improving representation of all colleagues
with an ethnic minority background.
This year we extended our partnership
with the 10,000 Black Interns programme
to provide 6-week paid internships to 30
students across the group. This programme
provides greater opportunities for us to
support the career progression of our
ethnically diverse colleagues. The board
continues to support the recommendations
of the Parker Review and the composition
of the board is in line with the advice to have
at least one director of colour. The board
will continue to take opportunities to further
strengthen the diversity of backgrounds and
experience among its directors as part of
future board-level recruitment searches.
Our Ethnic Diversity employee network,
sponsored by our chief credit risk ofcer,
has established itself with core strategic
aims to create a safe space for colleagues
from ethnic minority groups to share
personal experiences and seek counsel. The
network has been a key driver in promoting
a multitude of key celebrations whilst also
raising awareness through speaker events
available to all colleagues. The work they
continue to drive complements and supports
our overall Diversity and Inclusion agenda.
Gender Diversity
At Close Brothers, we are passionate about
creating an environment where all our
colleagues feel they belong and can thrive.
As part of our commitment to building an
inclusive culture, we remain focused on
reducing our gender pay gap. The gender
pay gap shows the difference in average
pay between women and men, which is an
important differentiation to pay equality. We
remain condent that women and men are
paid equally for performing equivalent roles
across our business. Reducing our gender
pay gap is one way in which we review our
progress on improving gender balance
across our organisation.
Our 2022 gender pay gap report shows
our mean group-wide gender pay gap was
38.7% at 5 April 2021. At Close Brothers, the
gap is mainly driven by a higher proportion
of male incumbents in both senior and front
ofce roles, and a higher number of females
who work part-time. We are committed to
improving gender balance across all levels
of the organisation and have a number of
initiatives in place to support this.
Further details of our gender pay gap can be
found on our website.
At Close Brothers, we recognise that gender
identity is broader than male and female
and we want to afrm that we welcome
colleagues of all gender identities. In
recognition of this, one of the steps we have
taken this year is to update our family-friendly
policies to ensure they use gender neutral
language and are inclusive for all.
As signatories of the Women in Finance
Charter, we remain condent that we are on
track to achieve 36% of senior manager roles
being held by a female by 2025. At the end of
the nancial year 50% of our board members
were female, exceeding the government’s
target of 33%, and we remain broadly in line
with FTSE Women Leaders gender targets
for executives and their direct reports.
Our gender balance network, sponsored
by our Winterood chief executive ofcer,
continues to thrive. This year, the network has
successfully:
• hosted a number of events including
speed networking, providing colleagues
with the opportunity to speak with senior
members of the rm
• run events focusing on topics of interest
such as parental leave and imposter
syndrome
• launched a quarterly newsletter to
spotlight the career paths of women within
the rm, and
• continued to look for opportunities to
engage with colleagues to progress our
gender balance initiatives.
1
Senior managers are dened as those manage
rs with line management responsibility for a line manager, in accordance with the
representation identied in our gender pay gap report. They are generally heads of departments, functions or larger teams.
Book 1.indb 37 27/09/2022 23:45:51
38
Close Brothers Group plc
Annual Report 2022
Sustainability Report
continued
We also have a number of external
partnerships in place to support and promote
diversity and gender balance at all levels of
the organisation. We continue to partner with
the 30% Club through which we provide
cross-business mentoring, as part of Gender
Equity, for our talented females. Almost half
of mentees who have participated in the
scheme over the years have had a promotion,
secondment or internal move.
We are proud to have co-sponsored the
latest UK Automotive 30% Club’s “Inspiring
Automotive Women Awards” and are delighted
that one of our colleagues in our Motor Finance
business was declared a winner.
Our workforce remains diverse, with 44%
female employees, and we have a broad
age range of employees, with 22% of our
employees being under 30 years old and
20%over 50.
Developing Our People
We provide a full range of training and
development for our people irrespective of
where they are in their careers. We work
with our colleagues from induction and
technical training to
management, leadership
and talent development programmes. We
promote a range of mentoring schemes and
opportunities to broaden external networks
as well as sponsoring qualications to further
support professional development.
All staff continue to have access to our
learning portal offering a wide variety of
practical tools and e-learning on a number
of topics. The average number of training
hours across the group was 13 per employee
during the year. We require all employees to
complete relevant regulatory training on an
annual basis with further training offered when
required. This year, we maintained a 100%
completion rate of mandatory training by the
last working day of the nancial year.
We continue to support our talent through
mentoring programmes including the
cross-company schemes Mission Include
(supporting those who identify as being
from an ethnic minority background) and
Gender Equity (with a focus on supporting
females in progressing to senior roles). To
support inclusivity, we opened up application
processes for these schemes, and this
year, we were awarded “most dynamic
organisation of the year” for the Mission
Include programme.
We run several tailored junior training
programmes across the business which are
aimed at growing high-potential individuals
to progress into senior roles. Similar to our
mentoring schemes, these programmes are
open to everyone by means of an application
process to promote inclusivity at all levels.
Our Sales Academy programme within
our commercial business has resulted in
nine colleagues graduating this year and
commencing Area Sales Manager roles
across the business.
To support our high potential colleagues,
we have launched our emerging leaders
programme with 20 individuals across the
group taking part. We continue to support our
entry level programmes through our school
leaver programme, Aspire, where we have
three new students joining us in September
2022. In addition, we have hired a new
graduate scheme cohort for the 2023 nancial
year with 22graduates ready to full roles
across the rm.
To support our inclusive culture through
further embedding our code of conduct,
we continue to ensure all our new starters
receive our “Close Brothers Way” e-learning
module, focusing on our cultural attributes
and expected behaviours. We have also
worked with members of our employee
inclusion networks to update the content for
all colleagues to receive in January 2023.
Supporting Our People
This year, we have focused on supporting
colleagues as many embarked on new
ways of working after the pandemic. As
part of this, we have partnered with our UK
benets provider BUPA to run 16 virtual
workshops for colleagues on a number of
wellbeing topics including managing stress
and uncertainty and work-life balance. All
colleagues are offered company-funded
private healthcare with high take-up rates
across the group. As part of the UK offering,
BUPA provides a wealth of health and
wellbeing support as well as dedicated
mental health support.
Maintaining the positive mental wellbeing of
our colleagues is of great importance to us
and we now have over 50 trained Mental
Health First Aiders across the group as well as
an employee assistance programme offering
a range of condential support. Our recent
Employee Opinion Survey results showed
89% of colleagues feel Close Brothers is
genuinely concerned for the wellbeing of
employees, which is above the external
benchmark.
It is important to us that we reward our staff
fairly and openly, and we therefore strive to
ensure that clear and transparent objectives
link directly to remuneration across the group.
We are condent that our enhanced benet
package remains t for purpose and satises
the expectations of our colleagues.
The group continues to pay all staff at or
above the national living wage.
We offer both a Save As You Earn scheme
as well as a Buy As You Earn share incentive
plan, which allows employees to acquire
shares on a monthly basis out of pre-tax
earnings. Participation rates in our long-term
ownership schemes remain strong at 47% of
eligible employees.
For members of the group’s pension plans,
we contribute between 6%-10% towards
colleagues’ pensions, which is above
required levels.
Supporting Social Mobility
We are proud to be an inclusive organisation
that supports social mobility and creates
equal opportunities for all, regardless of
background. Social mobility is one of our
inclusion pillars, with our working group
recently transitioned to become a new
employee network with executive sponsorship
from our commercial chief executive ofcer.
We continue our partnership with upReach,
a charity committed to transforming social
mobility. This year’s summer internship
programme offered six-week placements
for six university students from lower
socioeconomic backgrounds. The proven
success of these internships has supported
us to broaden our talent pool for entry
level roles, with some interns successfully
obtaining permanent roles within the rm.
To extend our commitment to social mobility,
we offer a number of mentoring opportunities
to our current colleagues. We partner with
“The Girl’s Network” through supporting
mentoring to inspire and empower girls from
lower socioeconomic backgrounds to identify
with female role models. In addition, through
our partnership with upReach, we support 10
individuals to volunteer and train to become
mentors each year.
Gender Diversity
31 July 2022
Male Female
Number of board directors
1
66
Number of directors of subsidiaries
2
48 7
Number of senior managers, other than board directors
3
192 107
Number of employees, other than board directors and
senior employees 1,934 1,590
2,180 1,710
1
Includes non-executive directors, excluded from group headcount calculations.
2
Includes subsidiary directors who are excluded from group headcount calculations.
3
Senior managers dened as those managers
with line management responsibility for
a line manager, in accordance with the
representation identied in our gender pay gap report. They are generally heads of departments, functions or larger teams. This
gure excludes 42 male and eight female employees wh
o are reported under directors or subsidiary directors.
Book 1.indb 38 27/09/2022 23:45:51
39
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Our Employees in the Community
We are committed to creating a positive
impact in our communities and recognise
that employee volunteers are often the
driving force behind many community and
charity activities.
As part of the relationships we have with
our charity partners, we look to encourage
employee engagement through involvement
in volunteering initiatives. For every hour of
voluntary time, we donate £8 directly to the
charity under our Matched Giving Scheme,
and we also encourage people to take
advantage of one paid volunteering day each
year through our Employee Volunteering Policy.
Volunteering has been a key part of our
newer charity relationships. Teams from
across Close Brothers have donated their
time to Smart Works to take part in corporate
wardrobe days, helping marginalised women
build their condence and nd employment.
A group of colleagues also provided close
support to Stop Hate UK to improve their
marketing and strategic operations activities,
enabling them to reach out to help more
communities affected by hate crime.
We continue to partner closely with the
children’s literacy charity Bookmark. This
academic year, Close Brothers’ volunteers
have delivered over 300 one-to-one reading
sessions to children. This is the equivalent of
ve weeks of back-to-back reading support
during school hours which has never been
achieved by another Bookmark corporate
partner. In addition, teams have given their
time to build school libraries and help with
the charity’s work to support Ukrainian child
refugees.
We are supportive of our colleagues giving
their time and expertise to full trustee roles
for various charities. In return, employees
gain board-level experience to support their
personal development and career progression.
Charitable Activities
Our two main corporate charity partners
are chosen by our colleagues as part of our
employee opinion survey and these remain
Make-A-Wish Foundation, who grant wishes
for children with life-threatening illnesses,
and Cancer Research UK, which we have
now supported for ten consecutive years.
To date, we are proud to have raised over
£550,000 for Cancer Research UK and we
are repeatedly nominated for Corporate
Fundraising Team of the Year by the charity.
Over the last three years, we have raised
£176,000 for Make-A-Wish Foundation,
enabling them to grant 71 wishes.
This year, a group of colleagues successfully
took part in Make-A-Wish’s rst ever wish
challenge volunteering day which resulted
in a wish being granted for a critically ill little
boy. Close Brothers’ support and feedback
has helped develop this challenge into a
successful team building exercise which is
now delivered globally by Make-A-Wish.
We have a dedicated committee for
charitable and community activities chaired
by our group head of human resources
and supported by employees from across
the group. This committee meets regularly
to discuss and propose new initiatives
with input from our control functions
when required. We also have several local
committees which plan and run initiatives to
raise funds for local charities.
We match 50% of funds that our colleagues
raise for charities under the Close Brothers
Matched Giving Scheme. We also encourage
our employees to collaborate on raising
money for causes that are most meaningful to
them by matching funds raised through locally
organised fundraising events and activities.
This year, we have expanded the reach
of our charitable giving to donate a total
of £150,000 to support three additional
charities that align with our ESG goals.
Our donations:
• helped Stop Hate UK establish a new
helpline based in the London borough
of Merton
• are helping support The Wildlife Trusts
with their vital work in restoring and
protecting nature
• are supporting Smart Works to help more
women get back into employment
To further our relationship with Bookmark, we
made a donation of £40,000 this year, which
accompanies the signicant contribution
our employees make to the charity through
volunteering. In response to the crisis in
Ukraine, we have donated £50,000 to date.
This includes a donation to the Refugees at
Home charity and matching 100% colleague
donations to the British Red Cross in support
of their Ukraine Crisis Appeal.
Our Payroll Giving Scheme matches
charitable contributions while allowing
employee donations to be made directly
from pre-tax salary. Approximately 12% of
employees across the group were signed up
to Payroll Giving at 31 July 2022, achieving
us a twelfth consecutive year of the Payroll
Giving Quality Mark Gold Award and ensuring
that we have met our target of maintaining this
standard.
Helping our
customers thrive
There have been multiple factors contributing
to the current environment of changing
customer, partner and client needs.
Considerations include the acceleration of
the use of digital channels coming out of the
pandemic, as well as rising ination and cost
of living. At Close Brothers, being there for our
customers, clients and partners and lending
through the cycle remain an important part of
our business model.
Furthermore, to continue supporting
customers, clients, and partners we believe
in maintaining high standards of service,
delivering specialist expertise and building
long-lasting relationships. These priorities
continue to guide the end-to-end experience
we aim to consistently deliver to customers
whilst also ensuring we continue to adapt
as needed to meet emerging needs against
a backdrop of a constantly changing
environment.
Supporting our Vulnerable Customers
In continuing to rene and deliver the desired
experience for different customer groups, we
have also made various vulnerable customer
experience journey improvements. Motor
Finance conducted research into vulnerable
customers generating in
sight which assisted
the creation of an appropriate governance
model across Retail to ensure improvement
in identication, oversight and outcome
monitoring. Conduct risk dashboards are
being developed for each of the businesses
to track and measure vulnerability and the
various outcomes customers receive. Finally,
many of our businesses use their customer
forums and executive committees to monitor,
discuss and rene their approaches towards
vulnerable customers. We proactively identify
vulnerability and provide necessary support,
tailoring our service and customer journey to
vulnerable customer needs.
In the Retail business, for example, we
work with one of our partners to provide
additional support to vulnerable customers
in the management of collections, recoveries
and arrears whilst ensuring Close Brothers
retains robust governance, control and
management oversight including dealing with
more challenging and complex vulnerable
customer cases.
We are focused on continuing to support
vulnerable customers. Most recently,
we established a group-wide vulnerable
customer working group to share best
practice and improve the consistency of
delivery across the group. Furthermore,
we are in the process of undertaking a
maturity assessment across key vulnerability
capabilities to identify further opportunities
to evolve our approach to meet customers’
emerging needs as the operating
environment changes.
Leading Through Purpose
Our purpose of helping the people and
businesses of Britain thrive over the long-
term is a fundamental commitment to our
customers that we will be there for them in
both the good times and the bad. Our purpose
is underpinned by our group-wide customer
principles, which guide how we deliver the
end-to-end experience to our customers,
clients and partners throughout their journey
with Close Brothers and also helps us measure
how effectively we are performing across the
key principles. (You can read more about our
delivery against these principles on page 36).
Book 1.indb 39 27/09/2022 23:45:51
40
Close Brothers Group plc
Annual Report 2022
Motor
Dealer
NPS
2022
2021
Motor
Customer
Net Ease
Savings
Online
CSAT
+86
+82
Property
NPS
+87
+87
Asset
Finance
CSAT
+88
+81
+73
+70
+81
+81
Note: All scores as at June each year.
Customer Satisfaction Scores
Sustainability Report
continued
Listening to Our Customers and
Improving Experience
We collect a broad range of customer metrics
that we use to help inform day-to-day changes
as well as longer-term strategic decisions
to improve customer experience. We listen,
analyse and act on customer insight and
strive to improve our ability to meet customer
needs. We are rening our customer operating
framework to provide better experience
visibility as well as improved governance of
the end-to-end customer journey with clear
accountability and ownership of different
journey stages. We consistently apply our
journey model of the 5E framework (Entice,
Enter, Engage, Extend and End) to understand
the key experience stages with Close Brothers
across our various business and customer,
client and partner groups. It is important
that we constantly walk in the shoes of
our customers and make the voice of our
customers visible to colleagues to prioritise
experience improvements and to engage
with customers in line with their preferences.
We have created journey dashboards in
the Banking division which reect journey
and experience performance. We measure
holistic brand metrics as well as specic
journey stage metrics, including sentiment,
operational and insight data.
We continue to achieve strong hero metric
performance and our scores perform well
against available external benchmarks. This
evidences the strength of our relationships
and the faith our customers place in us as
their provider of choice.
Looking Ahead
We continue to evolve our customer
capability and conducted a customer
experience maturity assessment across our
businesses in the spring to calibrate and
benchmark against external best practice.
From this, we have identied some key
opportunities to further accelerate and
embed customer centricity which builds on
existing programmes in the business.
Our Customer Principles - Success Stories
Our customer principles serve as a strong reection of the experience
we strive to deliver. Here are some examples of how we have delivered
value to our customers, clients and partners in the past year:
We do the right thing for customers, clients and partners
The pandemic accelerated an industry paradigm shift with the focus on
short-term commitment, self-service and pay for use. Brewery Rentals
responded with a new product (EKegPlus) which is a short-term rental
product using technology to track assets and provide a daily hire charging
model. The team automated the repetitive backend processes, freeing up
internal resource to focus on customer experience. The product is
designed to partner with customers to provide low-level commitment from
the customer. The results are that there is clarity and transparency as fees
are highlighted early on for customers to make informed decisions.
Customers are in control of their own cost to serve with the ability to reduce
fees by doing more themselves.
We are exible, responsive and execute with speed
It is critical to remain abreast with customer, client and partner needs. In
Premium Finance, we utilised a regulatory requirement change to
improve compliance and enhance our customer journey by providing a
new channel for customers to make arrears payments. The team
implemented the ability for customers to make arrears payments using
a QR code in customer communication for ease and speed, taking
them through to a secure platform. The result was an optimised journey
and a reduction in arrears calls. The solution aids the ecosystem as the
support is also available to our broker partners as they can share the
link directly with their customer to make a payment. The solution is
scalable and may be deployed in other business lines.
We make decisions informed by our specialist expertise
To remain constantly aware of how we can continue to help our
customers and partners thrive in an ever-evolving landscape and to
identify areas of improvement, we rely on our Voice of Customer
programme to provide actionable insights across the group. The Invoice
Finance business has been working hard to ensure we are capturing
feedback from customers and acting upon it, with valuable
improvement delivered as a result, including platform migration to a
better tolling system for customers, communication to customers to
remind them about cybercrime and what to look out for and optimised
call routing so customers can get through for support easier and
quicker.
We build relationships based on quality and trust
Solid and lasting relationships are of utmost importance to us at Close
Brothers. In Property Finance the focus has been on retaining great
existing relationships whilst looking to build new ones. The team has
been driving events in person to bring together skills to host and foster
conversations for the next generation developer. Attendees of the
events are provided with practical advice from industry experts, start to
build a relationship with a market leading property nance specialist and
join a network of long-standing clients and professionals who will share
their challenges and experience with the next generation of developers.
Book 1.indb 40 27/09/2022 23:45:51
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Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
We are in the process of adding customer
specic objectives to journey stage owners’
KPIs with tailored objectives and explicit clarity
on what behaviours need to be demonstrated
to deliver on our customer, client and partner
ambition.
Engaging Our Suppliers
We engage with our most important suppliers
on a regular basis to ensure that both
parties are attaining optimum value from
the relationship. Our annual survey of key
suppliers who represent our most critical and
strategic services was last conducted in July
2022 and remains anonymous to ensure we
gather honest and candid feedback.
Similar to previous years, the 2022 survey
focused upon how Close Brothers performs
as a client and how our suppliers feel about
doing business with us. Overall, feedback
remains positive throughout and we are
seeing further improvements across key areas
following action undertaken as a result of the
2021 survey.
We were pleased that the majority of our
suppliers would continue to recommend us as
a client, scoring 8 out of 10 for this measure.
Previous results indicated suppliers wanted
greater transparency of our strategy and
priorities. Having enhanced our engagement
with suppliers on this topic, we are pleased
to see in this year’s survey that responses
received indicate improved transparency on
growing collaboration to reach shared goals.
As such 77% of suppliers feel positive about
how we treat them as a valued partner and
rate this good or excellent, an improvement
from 71% in 2021.
We have also seen a continued improvement
in how our suppliers rate our approach to
transparency and fairness, with 83% rating
it as good or excellent compared to 78% in
2021. Suppliers continue to rate us on average
at 7.6 out of 10 for ease of doing business with
us.
We also engage our suppliers on their
approach to sustainability, covering suppliers’
environmental and social governance, to help
better inform our views of the progress each
party is making towards improvements. We
use the output of this to inform our internal
strategy and specic initiatives to further
contribute to the sustainability agenda. Some
examples are:
Gaining greater transparency of our scope
3 emissions and identify targeted areas of
focus. Collaborating with our facilities partner
to closely analyse data across our national
portfolio, report accurately and monitor against
specic sustainability KPIs.
Working closely with Lex Autolease and car
manufacturers on a Road to Zero transmission
initiative by 2025 in relation to our company
car eet.
We recognise that our suppliers form a
key part of the service we provide and are
committed to treating them fairly. We are
therefore pleased to have maintained our
Corporate Certication for Ethical Procurement
from the Chartered Institute of Procurement
and Supply (“CIPS”).
Our policies
We are committed to acting responsibly
throughout all our activities, and have
a number of group-wide policies and
regulations in place to ensure we continue
to operate in a socially responsible and
compliant manner, including:
Dignity at Work Policy
Our Dignity at Work Policy outlines the type
of behaviour that the company considers to
be unacceptable and explains what solutions
there are if any employee has experienced or
believes someone else has experienced any
discrimination, harassment or bullying at work.
We ensure equal opportunities for all,
including having a commitment as part
of our Dignity at Work Policy to ensure no
employee is subject to discrimination. This
applies to all work contexts, as well as all
employee lifecycle events, for example in
recruitment, training, promotion and exible
working requests.
As part of our Dignity at Work Policy, our
colleagues with disabilities are encouraged
to share their condition with us, to ensure
any reasonable adjustments can be made.
We are also members of the Business
Disability Forum to support the hiring,
retention, training, career development and
promotion of employees with disabilities.
Whistleblowing Policy
We provide a simple, transparent and
secure environment for our employees,
shareholders and other stakeholders to raise
concerns about any potential wrongdoing
within the company.
We encourage our employees to report
any activity that may constitute a violation
of laws, regulations or internal policy, and
reporting channels are provided to staff
for this purpose within the framework of a
Whistleblowing Policy.
Employee Health and Safety Policy
Our Health and Safety Policy demonstrates
our commitment to ensuring our employees
and visitors are safe and sets the framework
for our safety culture. We continue to provide
a safe and healthy working environment for
our employees and visitors in accordance
with The Management of Health and Safety
at Work Regulations 1999.
The Health and Safety Committee continues
to meet on a quarterly basis and we are proud
of the ongoing progress in successfully raising
the prole of health and safety across the
business. This year we recorded 83 incidents
across all of our sites. Of these, nine were
reportable and all arising from Covid-19 within
the workplace reportable requirements. We
continue to use an online risk assessment tool
to manage site-specic risks as appropriate
and our Display Screen Equipment risk
assessment programme.
Privacy Policy
Our Privacy Policy codies our approach to
protecting personal information, in line with
the General Data Protection Regulation and
UK Data Protection Act 2018. It sets out our
core principles for what personal information
we collect and process, and the controls to
which the data is subject through its lifecycle.
We have a nominated Data Protection
Ofcer who is accountable for the rm’s
approach to privacy management, a Chief
Information Security Ofcer accountable
for our approach to cyber security, and a
broader operating model in which the privacy
and security requirements are embedded in
operations throughout the organisation.
Financial Crime Policy
Our policies and standards are intended to
prevent the group, employees, clients and any
other associations or representatives from
being used for the purposes of nancial crime,
including, but not limited to, money laundering,
terrorist nancing, facilitation of tax evasion
and circumvention of nancial sanctions.
We are committed to carrying out business
fairly, honestly and openly, operating a
zero-tolerance approach to bribery and
corruption. We are dedicated to ensuring
full compliance with all applicable anti-
bribery and corruption laws and regulations,
including the UK Bribery Act 2010.
Human Rights and Modern Slavery Act
The board gives due regard to human
rights considerations, as dened under the
European Convention on Human Rights
and the UK Human Rights Act 1998. We are
aware of our responsibilities and obligations
under the Modern Slavery Act, with the
appropriate policies and training in place to
enable compliance across the organisation.
The Banking division has also committed to
the CIPS Ethical Code of Conduct, which
supports our commitment to preventing
modern slavery from existing within our supply
chain. Further details of our compliance with
the Modern Slavery Act can be found on our
group website.
Tax Strategy
We are committed to complying with our
tax obligations and doing so in a manner
consistent with the spirit as well as the letter
of tax laws. This includes a transparent
and cooperative relationship with the tax
authorities. Our tax obligations arise mainly in
the UK where our operations and customers
are predominantly based. Our straightforward
business model reduces the complexity
of our tax affairs and helps us maintain a
lower risk tax prole. Further details of our
approach to tax can be found on our website.
Book 1.indb 41 27/09/2022 23:45:51
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Close Brothers Group plc
Annual Report 2022
42
Close Brothers Group plc
Annual Report 2022
Introduction
Welcome to our inaugural Task Force
on Climate-related Financial Disclosures
(“TCFD”) report. We recognise the
importance of addressing the threat of
climate change and are pleased to present
our progress in addressing climate-related
risks and opportunities.
We take our responsibility towards the
environment seriously and are committed to
meeting the goals of the Paris Agreement to
achieve net zero by 2050. We are conscious
that the emissions impact of the assets and
sectors that we nance can contribute to
climate change, and as a nancial services
provider we recognise the role we have to
play in supporting the transition to a more
sustainable future. This includes supporting
our customers and partners with their own
transition journeys. Our efforts to reduce the
impact of our operations on the environment
continue at pace, and we strive to take
actions that make a positive contribution to
the world around us.
Careful consideration of environmental
factors and potential risks now plays an
integral role in the actions we take, alongside
thoughtful evaluation of where opportunities
may arise for us to make a meaningful
difference through our business decisions.
The effects of climate change
are already evident. Financial
institutions such as Close Brothers
need to play their part. In this, our
rst TCFD report, we have outlined
our current approach, considering
both risks and opportunities, with
our disclosures aligned to TCFD
recommendations.
Robert Sack,
Group Chief Risk Ofcer
Sustainability Report
continued
Task Force on Climate-related Financial Disclosures
Progress to Date
We believe in enhanced climate disclosure
in line with TCFD recommendations and
support the organisation’s aims of market
transparency and stability. We are committed
to providing transparent disclosures that help
our stakeholders understand the progress
we are making in managing our climate-
related risks and opportunities, and support
them in their efforts to do the same.
In this, our initial TCFD report, we have
highlighted our progress, as well as areas of
future focus, with regard to the integration of
climate risk into our governance infrastructure,
business strategy and risk management
framework. To date we have made good
progress embedding climate risk into our
ways of working, ensuring we consider the
impact of climate change in the decisions we
take. To support our efforts, we continue to
build capabilities across the group. This has
included the roll-out of climate risk training,
updates to our governance approach,
evolution of our risk management framework
to improve our analytical capabilities, and
undertaking our rst climate risk long horizon
scenario analysis exercise. Notwithstanding
the efforts already made, we remain at the
start of a long journey and recognise there
is more to do to develop our own transition
plans, targets and metrics. An important
enabler for this will be our ability to address
challenges around data and modelling. This
represents a key focus area and we continue
to work across industry and alongside our
customers, to evolve both understanding and
capabilities.
In preparing our TCFD disclosures, we have
sought to provide sufcient granularity,
proportionate to the materiality of the climate
risks identied across the group. An extensive
analysis of risks presented by climate change
has been completed, identifying impacts
across our risk universe. Analysis indicates we
are not materially exposed to loss or disruption
from climate-related considerations over the
short to medium term. Over the longer term,
increased risk has been identied, primarily
driven by potential transitional impacts such as
changes to regulation, technological change
and the evolution of consumer preferences,
and in respect of physical risk, we consider
severe impacts are only likely to present in
the long-term although we do recognise that
acute physical events are already happening.
These risks are largely mitigated through our
resilient business model which benets from a
short average tenor of 17 months, a customer
base that is predominantly UK and Republic
of Ireland based with strategic management
actions being executed to support our
customers and strategic partners on their own
transition pathways.
Our disclosures are consistent with the June
2017 report entitled Recommendations of
the Task Force on Climate-related Financial
Disclosures and we have also considered
the additional guidance published in the 2017
and 2021 TCFD Annexes where practical to
do so. The structure of the report that follows
provides a summary of our alignment with the
TCFD recommendations and the key focus
areas within our plan to mature our climate
risk framework. Further detail is provided on
pages 44-57.
Book 1.indb 42 27/09/2022 23:45:59
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Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
TCFD Recommendations
Our Progress Future Focus
Governance
Describe the board’s oversight of climate-
related risks and opportunities.
Describe management’s role in assessing
and managing climate-related risks and
opportunities.
• Board monitoring of climate-related risks and
opportunities enabled through clear roles
and responsibilities for the board and board
committees.
• Supported by increased regular management
updates covering climate strategy, risk
management capabilities and investment
needs (i.e. to build skills, data and tooling).
• ESG and climate-specic training delivered to
board with climate-specic training rolled out
to all group employees.
• Group chief risk ofcer accountable under the
Senior Managers and Certication Regime for
identifying and managing the nancial risks
associated with climate change.
• Executive and senior management teams/
committee structures support via collaboration,
escalation and control oversight.
• Climate Risk Steering Committee responsible
for overseeing evolution of climate risk
framework, supported by various subsidiary
working groups covering credit risk, scenario
analysis and disclosures.
• Board to oversee continued evolution of
climate strategy and ambition, including
underlying transition plan and supporting
metrics and targets.
• Continue to build knowledge at board
and senior management level to support
development of climate strategy and
related risk appetite.
• Further embed the climate risk framework
and supporting operating models and
processes to support management of
both risks and opportunities.
• Develop plans to address key challenges
on data, models and tooling.
• Continue to build climate awareness and
competency across our staff and key
stakeholders.
• Continued enhancement of disclosures
highlighting the breadth and depth of the
climate governance framework including
specic details on the frequency and
topics monitored by committees.
Strategy
Describe the climate-related risks and
opportunities the organisation has identied
over the short, medium and long-term.
Describe the impact of climate risks and
opportunities on the organisation’s business
strategy and planning.
Describe the resilience of the organisation’s
strategy taking into consideration different
climate-related scenarios, including a 2ºC or
lower scenario.
• Initial climate-related risks and opportunities
identied with management actions agreed
for strategic focus areas.
• Climate risks and opportunities considered
within nancial and strategic planning
processes, using the rm’s standard one to
three-year time horizon.
• Long-term horizon scenario analysis capabilities
developed utilising the Network for Greening the
Financial System (“NGFS”)-aligned scenarios.
• Signatory of Partnership for Carbon
Accounting Financials (“PCAF”) using
methodologies to conduct rst estimates of
nanced carbon emissions.
• Identication of climate related lending growth
opportunities have been developed including
an initial ve year ambition for funding battery
electric vehicles.
• Further develop climate strategy and
ambitions, including design of transition
plan, decarbonisation actions and other
risk and opportunity measurements.
• Continue to enhance scenario data and
modelling capabilities to enhance strategic
and nancial planning.
• Continue to address key challenges
related to the availability of granular
customer data, including the use of
customer outreach.
• Respond to evolving regulatory
requirements and developments in the
broader industry, including the emergence
of best practice.
Risk management
Describe the organisation’s processes for
identifying and assessing climate-related risks.
Describe the organisation’s processes for
managing climate-related risks.
Describe how processes for identifying,
assessing and managing climate-related risks
are integrated into the organisation’s overall
risk management.
• Development of climate risk framework, and
embedment within the group’s Enterprise Risk
Management Framework (“ERMF”).
• Climate risk classied as a cross-cutting
risk, impacting multiple principal risks. Also
identied as an emerging risk
• Identication and analysis across the group of
the various risks presented by climate change,
identifying impacts across various existing
principal and key risks
• Qualitative and, where practical, quantitative
assessment of potential impacts of physical
and transitional risks completed, including via
inaugural long-term horizon scenario analysis
• Initial credit risk sensitivity methodology
implemented to support identication and
monitoring of potential climate risk within our
loan book.
• Enhanced third party risk due diligence
climate and ESG questionnaire deployed.
• Potential impacts on customers, people
and infrastructure considered through
crisis management and business continuity
planning exercises.
• Continue to integrate climate risk
considerations within business processes
to further mature risk management and
decision-making.
• Commence implementation of more
sophisticated climate credit risk assessment
methodology, including development of
associated reporting and MI.
• Progress multi-year programme of work
to both improve data quality and analysis
capabilities and further evolve risk
appetite setting.
• Continue to work with customers, key
partners and suppliers to better understand
potential impacts to their businesses.
• Continue to be transparent within our
disclosures on both our progress and the
challenges we face.
• Continue to mature climate stress testing
and scenario analysis, including within
existing ICAAP and operational risk
processes.
Climate-related Disclosures Overview
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44
Close Brothers Group plc
Annual Report 2022
Sustainability Report
continued
Task Force on Climate-related Financial Disclosures
TCFD Recommendations
Our Progress Future Focus
Metrics and targets
Disclose the metrics used by the organisation
to assess climate-related risk and
opportunities in line with its strategy and risk
management process.
Disclose Scope 1 and 2 and, if appropriate,
Scope 3 greenhouse gas emissions and the
related risks.
Describe the targets used by the organisation
to manage climate related risks and
opportunities and performance against
targets.
• Continued progress to enhance our
capabilities in relation to measuring our carbon
footprint for our own operations including
measurement across all Scope 3 operational
emission categories.
• Initial assessment of Scope 3 nanced
emissions (across our loan book) using PCAF
methodologies.
• Broadening of our climate strategy and
targets to cover both net zero scope 1, 2
operational targets, as well as specic targets
relating to our nanced emissions.
• An overarching commitment to net zero
through our recent joining of the Net Zero
Banking Alliance.
• Setting of interim 2030 targets across the
most carbon intensive sectors within our
portfolios.
• Continue to enhance data quality
across our portfolios to improve quality
of nanced emissions reporting, risk
assessment and business strategy.
• Set additional targets across our lending
and investment activities (adding to our
new battery electric vehicles ambition) and
supporting our transition pathway plans.
Risk Management
•
Climate risk integration across
risk
management framework
–
Risk identication, considering
both physical and transitional
impacts across Close Brothers’
risk universe
–
Risk assessment, evaluation
and measurement, utilising
stress testing/scenario
analysis as appropriate
–
Mitigation and control via
individual risk frameworks
e.g. policies/standards
–
Monitoring and reporting across
risk governance framework
(incl. board); includes alignment
with strategy and appetite
(see Governance)
• Enhanced ICAAP risk assessment
•
Consideration as part of strategic
acquisitions and new products/services
Scenario Analysis
•
Use of short and long-term analysis to inform strategic
planning and risk assessment/measurement
–
Separate exercise to consider long-term impacts
under a range of transitional paths
•
Evolution of quantitative modelling capacity in line with
data/model suite maturity
Governance
•
Clear roles and responsibilities across 3LOD,
including committee terms of reference and SMF
assignment
•
Integration within risk appetite statements with
consideration to both long and short time horizons
• Performance and incentive management integration
•
Appropriate training/awareness for relevant
individuals
•
Board-level oversight and understanding with
consideration as part of overall business strategy
Disclosures
• Enhanced group climate risk disclosures
• Regulatory compliant product and entity-level disclosures
• Evolution of other external disclosures in line with broader group sustainability strategy
Data
Resource
Systems & Models
People & Premises Risk
Third Party Risk
Traded Market Risk
Funding & Liquidity Risk
Conduct Risk
Regulatory Risk
Business/Strategic Risk
Credit Risk
Group Climate Risk Strategy
• Alignment with the broader group sustainability agenda
Our Climate Risk Framework
Embedding Climate Risk: Risks and
Opportunities
We have sought to address climate risk and
opportunity management by integrating
climate-related considerations into our
core ways of working, ensuring appropriate
consideration of potential impacts. In doing
so, the group has developed a nascent
Climate Risk Framework that aligns with our
long-standing approach to enterprise risk
management (as detailed above).
Book 1.indb 44 27/09/2022 23:46:00
45
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Governance
Strategy
Disclosures
Close Brothers board
Audit Committee
Sustainability
Committee
Scenarios
Working Group
Disclosures
Working Group
Scope 3
Working Group
Climate
Risk Steering
Committee
Credit Risk
Working Group
Risk Management
ESG and Climate Committee Governance Framework
Nomination &
Governance
Committee
3
Group Executive
Committee
Local Executive
Committees
Local Risk and
Compliance
Committees
1
Group Risk &
Compliance
Committee
Credit Risk
Management
Committee
2
Board Risk
Committee
Programme
1 Operates on delegated GRCC authority, however credit risk climate reporting feeds into CRMC in rst instance.
2 Operates on delegated GRCC authority, however feedback loop into programme governance via Credit Risk Working Group.
3 Oversight and monitoring only, decisioning via group board.
Key:
Board Executive Programme Direct Indirect
Integrating Climate Considerations into
Our Governance and Decision-Making
Since 2020, the corporate governance
framework has been subject to continuous
review and renement to ensure effective
oversight of risk framework implementation
and manage the interconnect with the rm’s
climate strategy.
Oversight of climate-related risks and
opportunities has been supported by
the establishment of clear roles and
responsibilities, extending across board and
executive committees, and the three lines of
defence more generally. Integral to this has
been the provision of regular framework status
updates to appropriate committees and fora,
the renement of Terms of References and the
integration of climate-related considerations
within both the group’s policy framework and
new product approval process.
Enriched reporting and management
information (“MI”) are also now being provided
to relevant committees, providing important
insights that are in turn enabling climate
considerations to be embedded within
both strategic planning and the setting of
group-level risk appetites. A link has also
been established between the delivery of
the rm’s climate strategy and executive
remuneration through the inclusion of climate/
ESG objectives within both the executive
committee’s scorecard and Long-Term
Incentive Plan.
Further details on the roles and responsibilities
of both the board and management with
regard to climate risk management are outlined
from page 46.
Book 1.indb 45 27/09/2022 23:46:00
46
Close Brothers Group plc
Annual Report 2022
Sustainability Report
continued
Task Force on Climate-related Financial Disclosures
Board Oversight
Board
The board is responsible for the long-term
success of the group and the delivery of
sustainable value to its shareholders and
wider stakeholders. It discharges some of its
responsibilities directly and others through its
subsidiary committees.
In ensuring the long-term sustainability of
the group, the board is also responsible
for the overall delivery of the rm’s climate
and ESG strategy. It reviews and approves
the strategy and receives regular updates
on its execution from relevant members
of the executive team. The board is also
responsible for approving the group’s risk
appetite statements, including risk appetites
associated with climate risk.
Board Risk Committee
Operating on authority delegated by the
board, the Board Risk Committee (the
“BRC”) oversees the management of
risk across the group, including the risks
presented by climate change.
The BRC provides oversight of the measures
taken to manage climate risk and receives
regular updates on the development and
subsequent embedding of the rm’s climate
risk framework. This includes the ongoing
review of emerging portfolio MI, monitoring
the evolution of associated risk appetites and
the consideration of climate-related risks and
opportunities assessed through the completion
of long-term scenario analysis exercises.
Audit Committee
Operating on authority delegated by the
board, the audit committee oversees the
management of nancial and regulatory
reporting across the group, as well as
the rm’s internal nancial controls. The
committee is responsible for ensuring the
clarity and completeness of environmental
and sustainability disclosures included within
the group’s annual report and accounts.
Nomination and Governance Committee
The Nomination and Governance
Committee monitors environmental, social
and governance (“ESG”) and sustainability
developments relevant to the group
(including developments relating to climate
change).
The role of management
The chief executive has ultimate
responsibility for climate-related issues
affecting the group and its customers and
overall accountability to the board and
shareholders for ensuring sustainable
and responsible practices, including
those associated with the environment.
Accountability for the group’s climate and
ESG strategy similarly rests with the chief
executive, albeit with various responsibilities
delegated to members of the executive team
as appropriate to ensure strategic delivery
and embedment within ways of working.
Within the Banking division, and in line with
expectations under the Senior Managers
Regime, the group chief risk ofcer (“GCRO”)
is specically responsible for climate risk
management. This includes:
• embedding climate change risks within
business planning and risk appetite
statements;
• conducting scenario analysis over different
time horizons;
• ensuring sufcient board-level
visibility and a clear allocation of roles/
responsibilities; and
• considering risk materiality as part of
the annual Internal Capital Adequacy
Assessment Process (“ICAAP”).
The GCRO is supported by the board and
the executive who collectively oversee
delivery of the rm’s climate risk objectives
and are also responsible for challenging and
approving the rm’s broader climate and
ESG strategy.
Group Risk and Compliance Committee
At an executive-level, climate risk
management is primarily overseen by the
Group Risk and Compliance Committee
(“GRCC”), which is responsible for reviewing
and challenging the risk framework
employed to manage the nancial risks from
climate change. To support this, regular
framework updates are presented to the
committee with relevant climate risk MI also
embedded within its long-established risk
reporting mechanisms.
To support practical day-to-day oversight,
responsibility is delegated to a Climate Risk
Steering Committee which is chaired by the
GCRO and tasked with overseeing climate
risk framework design and delivery.
Executive Committee (and local
Executive Committees)
The Executive Committee considers and
implements initiatives to ensure a sustainable
business model that takes into account all
risks, including ESG.
Climate Risk Steering Committee
The Climate Risk Steering Committee
coordinates programme governance and
oversees the design and implementation
of the rm’s regulatory compliant climate
risk framework, ensuring alignment with
group strategy. It also ensures that regular
updates are provided to the GRCC and
BRC, enabling them to stay informed on
framework delivery and opine on/review key
strategic deliverables.
The steering committee is supported by
focused subsidiary working groups covering
credit risk, scenario analysis, Scope 3 and
disclosures, and also works closely with the
group’s Sustainability Committee, which is
responsible for day-to-day management of
the rm’s climate and ESG strategies.
Credit Risk Management Committee
The Credit Risk Management Committee
(“CRMC”) is specically responsible for
monitoring the group’s credit risk prole.
Accordingly, it is responsible for overseeing
the management of climate-related credit
risk considerations.
Over the last year it has received regular
updates on the development and
subsequent implementation of the Banking
division’s inaugural credit risk assessment
framework, as well as the initial MI reporting
stemming from this, designed to illustrate the
potential climate risk sensitivity of different
sectors and asset classes.
The committee has also reviewed and
approved the integration of climate
considerations within credit risk policies
and standards, most notably to reect
new requirements introduced to support
the management of associated credit risk
impacts.
Business Risk and Compliance
Committees
Business risk and compliance committees
are responsible for overseeing risk
prole, alignment to risk appetite and the
effectiveness of the risk management and
compliance framework at a local level.
With regards to climate risk, these
committees are responsible for overseeing
key risks and opportunities on an ongoing
basis. This includes monitoring of the
evolving regulatory and industry landscape
as relevant to each business, the review of
regular risk MI, and oversight of local actions
to align with group-wide change initiatives.
Sustainability Committee
The Sustainability Committee oversees the
development of the group’s sustainability
strategy including the advancement of
climate and ESG ambitions, and associated
operational and nancing activities, targets
and metrics, supporting the chief executive
and Executive Committee to recommend to
the board for approval.
Training and competency
Both the board and executive team are
committed to building and embedding a
requisite skill set across climate and ESG
competencies. The regular updates provided
to the board and management committees
over the course of the last year have played a
key role in this regard, helping to educate key
populations on the risks and opportunities
that climate change presents, as well as the
rm’s progress in addressing these.
These updates have been supplemented
by a number of externally facilitated training
sessions, tailored to focus on the complexities
associated with the topic – for example, the
evolving regulatory landscape, specic board
and management responsi
bilities and general
trends in industry practice.
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To support awareness more broadly
across the organisation, a new mandatory
training module was issued to all UK-based
staff across the group during the year to
support the development of a core level of
understanding of climate risk considerations.
Tailored updates and presentations were
also delivered to relevant business and
function-specic forums while further
job-specic training is planned over the
course of the next nancial year to augment
understanding and awareness among
those likely to be most impacted. This will
be delivered in line with planned future
business operating model changes (see Risk
Management). Going forward, additional
capability and expertise will be enabled
through further training of our people,
including the undertaking of accredited
climate qualications where relevant, as well
as the augmentation of new capabilities
via recruitment and/or the use of external
specialist expertise.
Strategy
We are committed to meeting the
goals of the Paris Agreement to
achieve net zero by 2050
Supporting our customers, clients, and
partners in the transition towards more
sustainable practices
Overview
Across the organisation we recognise the
importance of addressing the threat of
climate change, and the urgency needed
in tackling the environmental, economic
and social impacts that it brings, noting that
these extend across all sections of society,
affecting all key stakeholder groups.
Our ongoing work to identify the risks and
opportunities climate change poses to
our business model remains a key area of
strategic focus for the board and senior
management. We take our responsibility
towards the environment seriously and, as a
group, are committed to meeting the goals
of the Paris Agreement to achieve net zero
by 2050.
As a nancial services provider we recognise
the specic role we can play in supporting
the climate agenda, aligning our lending
and investment portfolios with the transition
pathways of our clients. We provide expert
nancing solutions for UK SMEs and medium-
sized businesses. As these businesses
evolve and, over time, deliver their own
transition plans to adopt clean technologies,
greener assets, and new business models,
we are ready to support them by providing
appropriate nancing solutions; in doing so,
facilitating change and supporting the wider
transition of the economy.
It is also important we meet our own
emissions reduction targets across our
operations, through the deployment of energy
efciency, green transport and renewable
energy supplies. This will include coordination
with our suppliers to ensure the impacts of all
of our business processes are minimised.
Adapting in response to market, technological,
regulatory and geopolitical developments that
affect the shape and timing of the transition to
a low-carbon economy is also critical. We will
keep our policies, targets and progress under
continual review, reecting the rapidly changing
external environment and the need to support
our customers and societal ambitions.
We are currently working on formulating
our detailed net zero strategy, the
decarbonisation pathways necessary to
support it and the associated targets which
we will aim to disclose within 18 months. To
date, our approach has focused on those
areas across our businesses where we
believe Close Brothers can have the greatest
impact, breaking these down into three core
pillar objectives (see chart on page 49).
In assessing climate-related risks and
opportunities, there are two primary
channels from which impacts occur, namely
transitional and physical risks.
Transitional risks
Arising from the process of adjustment
towards a low-carbon economy. A range of
factors inuence this adjustment, including
climate-related developments in policy and
regulation, the emergence of disruptive
technology or business models, or shifting
sentiment and societal preferences.
These could similarly impair the value
of nanced assets or impact the
creditworthiness of our customers should
they fail to adapt effectively.
Physical risks
Arising from a number of factors including
specic weather events (such as heatwaves,
oods, wildres and storms) and long-
term shifts in climate (such as changes in
precipitation, extreme weather variability, sea
level rises and rising mean temperatures).
These could result in physical damage
to the group’s own properties, impair the
value of nanced assets or impact the
creditworthiness of our customers.
We also consider potential impact across
different time horizons. These take into
account the long-term nature of some
climate change impacts, while also ensuring
alignment with the group’s broader business
strategy and nancial planning cycles. The
rm’s approach to time horizons is likely
to develop further over the coming years,
both to align with the advancement of our
targets and measures as well as the broader
evolution of our climate risk framework.
As outlined in the sections that follow, no
material impact is anticipated over the short
to medium term.
Key Climate-Related Risks
As outlined on page 50, the group has
undertaken an extensive analysis of the various
risks presented by climate change, identifying
impacts across various existing principal and
key risks. Our analysis to date indicates that we
are not immediately (over the short to medium
term) exposed to potential material losses or
disruption.
Over the longer term however, increased
risk has been identied, primarily driven by
transitional impacts such as changes to
regulation, technological change and the
evolution of consumer preferences. With
regard to physical factors, we recognise that
acute physical events are already happening,
although more severe impacts are only likely
to present in the long-term.
The core climate-related risks facing the
group can be summarised as follows:
• Efforts and ambitions of governments and
businesses to accelerate the transition
to a low-carbon economy may result in
rapid adoption of policy and regulatory
intervention, presenting transition risk for
ourselves and our customers (e.g. more
aggressive energy efciency requirements
for buildings, acceleration of planned bans
on new petrol/diesel cars).
• Increased global warming may lead to
extreme variability in weather patterns,
increasing incidence and severity of
physical risks, which in turn could lead
to our customers being disrupted and
experiencing nancial loss.
• The same extreme variability could also
impact our own operations, either as
a result of damage to ofces or data
centres, or through disruption to key
suppliers (who may also be impacted by
transitional factors).
• Risk associated with the group’s own
transition to a low-carbon economy – for
example, a potential increase in costs
associated with meeting key targets or a
strategic failure to deliver in line with our
transition plan.
The group has already taken steps to
mitigate each of these core risks through
the implementation of targeted measures
within existing risk-specic frameworks.
These include enhancements to business
continuity plans and changes to our third
party management process with further
renement planned over the years to come.
Our primary focus area is on potential
credit risk impacts given the nature of the
services we provide particularly within the
Banking division. Importantly, the group has
minimal appetite for coal and other fossil
fuel extraction with enhanced due diligence
required on individual case assessments. We
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continued
Task Force on Climate-related Financial Disclosures
and incentivise our customers and colleagues
to reduce their environmental impact.
Looking ahead, advancement across the
sector in data capabilities, particularly
to support carbon accounting and the
knowledge of individuals and SME
businesses with regard to climate and
ESG credentials, will facilitate greater
management insights and inform ongoing
disclosure transparency.
Scenario analysis pilot exercise
During the last year, we have continued to
deploy scenario analysis to enhance our
ability to identify climate-related risks and
opportunities, and assess the resilience of
our business model.
Since 2019, all divisions have been asked
to consider potential climate scenarios as
part of short to medium-term (1-3 years)
scenario analysis run as part of the annual
ICAAP framework. While no specic climate
scenarios have yet been adopted for the
group-wide scenarios deployed for Pillar 2b
purposes (again using the rm’s standard
1–3 year time horizon), climate impacts and
possible climate-led scenarios continue to be
discussed and debated as part of the scenario
design process. Ultimately however, due to the
short-dated tenor of our lending book, climate
risk is not deemed to be a signicant risk in the
short to medium term.
This assessment was re-afrmed in the last
year through the completion of an inaugural
long-term scenario analysis exercise designed
to explore potential climate risk impacts over an
extended (30-year) time horizon. This was the
rst time the rm had undertaken an exercise
beyond our typical strategic planning cycle and
a proportionate approach was subsequently
taken to planning and implementation. This
prioritised scope coverage of our motor and
asset nance businesses–capturing c.£5
billion/60% of our loan book.
Recognising the complexities and challenges
posed by such an exercise, the rm engaged
the support of a third party to aid scenario
development. Ultimately, we elected to use
three Network for Greening the Financial
System (“NGFS”)-aligned scenarios, each
reecting contrasting transition paths:
i) Early action: Transition to a low-carbon
economy starts early, increase in global
temperatures stays below 2°C (global
climate goal);
ii) Late action: Global climate goal is met,
however the transition is delayed and is more
severe to compensate for the late start; and
iii) No additional action: No additional policy
actions beyond those already announced,
Global climate goal not met.
Each scenario was assessed on two
different bases:
i) No management actions – testing static
nancial year 2019 balance sheet (pre-
pandemic) at different points in the scenario
to determine resulting nancial impact; and
ii) With management actions – allowing for
changes in business strategy at each ve-year
interval i.e. changes in loan book composition,
additional risk mitigation measures and
pursuit of new commercial opportunities.
Given data and modelling limitations, a
broadly qualitative approach was adopted.
Assumptions were primarily expert-judgement
driven, with business modelling underpinned
by quantitative industry data inputs and
projections, and emerging trends for key
sectors including transport/energy provided
by a third party. Analysis was completed at
ve-year intervals out to 2050 with modelling
run at a portfolio level. High level business
assumptions were applied to key nancial
parameters (i.e. impairment and loan book
movements), with outputs intended to be
directional only given known limitations.
As part of this work, workshops were held with
business senior management, sector experts
and risk specialists to explore and assess
climate-related vulnerabilities and opportunities,
and identify proportionate and timeous
mitigation strategies. The exercise proved
extremely valuable, prompting genuine and
thought-provoking consideration of real-world
impacts while generating signicant interest
from both rst and second line stakeholders,
including at an executive and board level.
Within the portfolios across our motor and
asset nance businesses we can already
see that technology advancements and
customer demand are accelerating the
transition to battery electric vehicles and
we anticipate this trend will continue to
accelerate. Additionally, the renewables
sector together with the necessary
Our Business Planning Time Horizons
Short term (0-1 year)
Time horizon for annual budgeting and capital
assessment.
Medium term (1-3 years)
Time horizon for business strategy and nancial
planning. Also aligns with typical ICAAP scenario
analysis horizon.
Long term (more than 3 years)
Time horizon beyond typical nancial planning cycle.
Impacts primarily assessed through the use of long-
term scenario analysis noting most material climate
risks will crystallise in this horizon.
do provide funding to some higher emission
sectors and assets as detailed on page 49
and will continue to monitor concentrations
across all sectors and asset classes.
Sector analysis from our loan book
While the rm is exposed to potential credit
impacts, we consider any climate impact, in
the short to medium term, to be substantially
mitigated. Physical risk is reduced by our
geographic location, with 99% of our loan
portfolio based in either the UK or the
Republic of Ireland, where the risk prole
is lower. Regardless, across our property
portfolio (100% UK), we still undertake
analysis to consider the potential ood risk
associated with every transaction, with
only 2% of our existing portfolio currently in
locations categorised as very high or high
climate sensitivity, with appropriate mitigants
put in place for each to ensure any potential
risk is reduced.
Similarly, transitional risk is greatly reduced by
our short loan book tenor (average residual
tenor of 17 months with only 2% greater
than 5 years) which enables us to quickly
adapt our lending strategy to respond to any
changes in asset or sectoral risk proles.
Rigorous underwriting and lending policies
are also deployed, with any decrease in
asset valuations mitigated by conservative
structuring of the funding provided.
As outlined on page 47, progress has also
been made to integrate climate risk within the
broader credit risk management framework,
supporting top-down oversight and in turn
enhancing our risk management capabilities.
Key climate-related opportunities
As a signicant provider of asset lending
across the UK and the Republic of Ireland we
believe there are also signicant commercial
opportunities to support our customers
and clients as they transition to cleaner
technologies.
The key opportunities identied to date
relate to our lending portfolios, particularly
within the energy sector and our wholesale
nance business. We are already supporting
the energy sector through renewables and
reserve power, while within our transport
business we are seeing signicant growth
with key partners in providing lending
products for electric vehicles. We have set
our inaugural green growth target this year,
with the ambition to provide over £1 billion
of lending for zero emission battery electric
vehicles, over the next ve years.
Other opportunities are still being explored
with deep dive analysis recently launched
through our annual strategic planning cycle.
Whilst we are yet to engage our customers
in a structured approach to improve their
climate and ESG credentials, planning on the
approach is well advanced to engage, partner
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supporting infrastructure has been
recognised as key opportunity areas within
our analysis and we anticipate that new
technologies emerging across our sectors
will continue to offer further opportunities.
Our initial scenario analysis proved its
real value through the identication and
consideration of potential management
actions over a range of transition pathways
that could serve to mitigate any material
impact and in addition supported
the embedding of climate risk impact
consideration within longer-term strategic
planning. While risks over a longer time
horizon were identied, our business model
continued to demonstrate its strength and
robustness, providing the tools and capacity
to largely mitigate these over the short to
medium term. We will continue to evolve
our strategy and capabilities to ensure
we can continue to support and fund our
customers as they transition to the use of
new technology and lower carbon assets.
In the next year, we intend to further advance
our use of long-term scenario analysis,
expanding coverage to include our property
business while also completing initial
counterparty-specic assessment across
sectors likely to be most impacted. In doing
so, we will seek to leverage enhanced data
capabilities, both internally and externally,
with a view to taking a more quantitative
approach. The availability of comparable
portfolio-relevant data remains a challenge,
particularly across retail and SME markets,
meaning the evolution of our approach is
likely to be gradual.
Climate strategy
We recognise the need to continually assess
and monitor the threats and opportunities
associated with climate change. As our
data capabilities improve, providing more
powerful insights, strategy across each of
our three core pillars will evolve.
1. Achieving net zero operations
We continue to focus on the initiatives in our
direct control to decrease our operational
footprint. We have previously set ourselves
challenging net zero aligned targets for our
direct operational emissions and continue to
make good progress towards our ambitions
to achieve a net zero position for our car eet
by 2025 and for all of our Scope 1 and 2
emissions across our operations by 2030.
We have recently expanded our carbon
accounting to cover all categories of our
Scope 3 emissions, providing us with initial
visibility across both our direct and indirect
operational emissions. This will enable us
to develop our emission reduction plans for
all our operational impacts, working with
our suppliers and partners in areas such
as facilities management and IT services.
This year, we have continued to broaden
our engagement with our supply chain on
environmental matters, while working with
those who share our ambitions to efciently
use resources and combat the adverse
effects of climate change. We have extended
the emissions data we collect from our
suppliers and continue to explore ways in
which we can incorporate carbon impact
criteria into our choice of suppliers.
Reducing the impact our operations have on
the environment continues through a number
of initiatives and improvement programmes,
to continue lowering our emissions,
reducing our energy use and enhancing our
energy efciency. This year we continued
momentum with additional energy savings,
energy efciencies and water use reductions.
We have set our facilities management
contractor the task of evaluating the current
estate of buildings and their building
services, to develop a further inventory of
energy efciency measures. Furthermore,
having already adopted renewable electricity
supplies for our ofces, we have recently
added green gas supplies to reduce further
the impacts of the energy we do use.
Post pandemic, we continue to benet from
reduced commuting in the year with staff
continuing use of exible and hybrid working
practices, with associated environmental
benets. We encourage our employees to
make positive change by leasing low emission
cars and participating in the cycle to work
scheme. To support their own switch to an
electric car, we offer our employees a salary
sacrice scheme as a route to make the shift.
We have continued to reduce the impacts of
our company car eet by only now offering
battery operated fully electric cars onto the
eet, with the aim to meet our zero emission
car eet by 2025.
Waste recycling is encouraged in all our
ofces and 100% of the waste contractors
we use across our ofces send zero waste
to landll. Our progress in Scope 1, 2 and 3
emissions is detailed in page 54.
2. Reducing our nanced emissions
This year, we have signicantly advanced
our carbon accounting and reporting. This
includes our results from our Scope 3
assessment which covers emissions across
all 15 categories of Scope 3, including our
initial assessment of nanced emissions
across our loan book.
We have adopted the Partnerships for
Carbon Accounting Financials (“PCAF”)
methodologies to calculate our nanced
emissions. As signatories to PCAF, we
will engage with our peers and share best
practice frameworks to advance accounting
for nanced emissions and improve the
resolution of our analysis.
Guided by our commitment to align to the
Paris Agreement’s net zero ambition by
mid-century, we will dene our targets for
sustainable nance opportunities across
both our existing established nance markets
as well as new market and technologies
sectors that best t with our established
lending criteria and technical capabilities.
In the coming year we will enhance our
customer data across our nancing activities,
which will provide us with the insights
needed to be in a position to set credible
longer-term targets that will:
• validate our support for the Paris
Agreement;
• demonstrate the role we will play in
supporting our customers transition, and
• complement our established net zero
operational targets.
Acknowledging our previous support of the
goals of the Paris Agreement to achieve net
zero by 2050, and as we further develop our
understanding of the impacts of our nanced
emissions, we will progress forward in
evaluating wider goals for our business and
its impacts. Demonstrating this progress
we have recently become a signatory of the
Net Zero Banking Alliance, committing to
setting robust, ambitious and science-based
targets.
3. Financing the transition
We have been an active provider of green
and sustainable nance across a number of
sectors for several years.
We recognise supporting UK businesses in
their transition through the adoption of green
technologies offers a signicant growth
opportunity for the Banking division building
Achieving net
zero operations
Achieving net zero
operations and reducing
supply chain emissions,
working with our partners
and suppliers to minimise
operational impacts
Reducing our
nanced
emissions
Supporting the goals of the
Paris Agreement through
re-alignment of our
nancing and by assisting
our customers in meeting
their transitional targets
Financing the
transition
Enabling the deployment of
cleaner technologies and
business model adaption
through our green growth
lending strategy, leveraging
our expertise and ensuring
alignment with agreed
riskappetite
The Three Pillars of our Climate Strategy
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continued
Task Force on Climate-related Financial Disclosures
on this recent track record, our strategy in
this area is underpinned by our signicant
expertise in the asset and sectors we fund,
rigorous underwriting, monitoring and control
processes to assess credit and climate-
related risk and our commitment to build
capabilities in emerging technologies. We
will continue to adapt lending policies and
grow existing green portfolios to t evolving
economic and industry landscapes.
To further our commitment, we aim
to broaden our support for renewable
technologies such as solar and wind power,
expand our funding of cleaner transport
solutions such as zero emission electric
vehicles, and expand our green nancing
into new technologies and markets including
charging infrastructure, battery storage
and energy efciency (across buildings and
industrial processes). We will continue to
provide customers with the support, nance
and expertise they need to grow and ourish
and realise their own transitions.
As we develop our decarbonisation transition
plan over the next 12-18 months we will
closely monitor projected sector transition
pathways and aim for the emissions of our
lending activity to at least align with sector-
wide reductions in the medium to longer
term.
One example of a green growth opportunity is
in zero emission vehicles. Being a signicant
funder of both goods vehicles and passenger
vehicles, transport is a specialist sector for us.
We support our clients to bring new, cleaner
vehicles to their eets.
Transport is the highest-emitting sector in
the UK economy and so the electrication
of surface transport (supported by
modern grid infrastructure and signicant
deployment of renewable electricity)
represents a key transition for our business
and consumer customers.
We are a leading provider of nance for the
adoption of zero emission electric vehicles,
deploying nance for new innovative vehicles
into sectors such as logistics and delivery,
supporting electrication of car eets, and
enabling innovative nancing packages for
consumer adoption of electric cars.
Battery electric cars represents over a third
(35.3%) of all new cars we funded in our
commercial business in the last year, more
than double the proportion across new car
sales in the UK (15.3%).
We believe the battery powered vehicle
sector offers a signicant growth opportunity.
Our assessment of this market potential is
based on transport policy drivers and an
appetite from our customers, including our
corporate customers, looking to meet their
own carbon reduction targets.
We have set ourselves an ambition of
providing over £1.0billion of lending for zero
emission battery electric vehicles over the
next ve years from 2023 to 2027.
Risk management
Integrating Climate Risk into Risk
Management
As outlined in our Risk Report (see pages 74
to 92), the group employs an Enterprise Risk
Management Framework to effectively manage
the risks it faces on a day-to-day basis. In
addition to detailing the core risk management
components and structures used across
the rm, the framework denes a consistent
and measurable approach to identifying,
assessing, controlling and mitigating, reviewing
and monitoring, and reporting risk – the risk
process lifecycle. It also outlines each of the
rm’s principal risks, setting the foundation for
the individual risk frameworks put in place to
manage and mitigate each.
Consistent with our approach to risk
management, the group considers climate
risk to be a cross-cutting risk, noting the
potential for impacts arising from climate
change to affect several of our existing
principal risks. We recognise that these may
be both physical and transitional in nature.
Noting the longer horizon over which some
climate impacts will ultimately crystallise,
and the propensity for emerging policy and
regulatory developments on the topic, the
group also continues to track climate risk as
one of its core emerging risks (see page 91).
Substantive progress has already been made
in embedding climate risk considerations
within our existing risk frameworks, with
further renement and enhancements
planned over the months and years to come.
The completeness of this journey is critical.
Over time, our expectation is that climate risk
will be considered within every component
of our risk framework, ensuring full coverage
through our risk lifecycle.
Integration within key parts of our group
policy framework, risk appetite statements
and group stress testing framework
has been an important rst step on this
journey, and over time, the extent to which
climate risk consideration becomes further
embedded within business-as-usual risk
assessment and decisioning will be an
important benchmark of our success.
How we identify, assess and manage
climate-related risks
Recognising the potential for climate change
to present both disruptive physical and
transitional impacts, the group coordinated an
initial risk identication exercise in 2019 with a
view to identifying the most material risks to
the group. This covered all business areas as
well as relevant group central functions and,
using a pre-agreed questionnaire format, was
successful in identifying potential climate-
related impacts across several existing
principal or key risks, most notably:
• Credit risk (counterparty and
collateral impacts)
• Operational risk (premises and people,
and third party impacts)
• Traded market risk
• Regulatory risk
• Conduct risk
• Business and strategic risk
• Funding and liquidity risk
The group has subsequently sought to
review and consider all identied risk areas,
with consideration given to each aspect
of the risk lifecycle, namely (1) Identify; (2)
assess; (3) control and mitigate; (4) review
and monitor; and (5) report.
For each, businesses and group central
functions have developed, or are developing,
processes and reporting to support the
effective management of potential climate
impacts going forward, as well as the
embedding of clear accountabilities and
responsibilities.
To date, our focus has primarily centred
on credit and operational risk impacts
consistent with our view that these areas
carry the highest level of potential risk.
Whilst we accept that we are exposed to
degrees of both transitional and physical risk,
current risk exposure is not considered to be
material.
However, we accept that developments over
the longer term (particularly those with a
transitional impact) could impact the business
without the implementation of appropriate
management actions and the evolution of our
business operating model.
To date our analysis of each risk area has
remained broadly qualitative with industry
best practice still not established and data
needs and capabilities (both internally
and externally) still evolving. Over time,
developments both within the group and
across the industry will facilitate a more
quantitative assessment of potential
impacts. Some quantitative analysis, such
the completion of our inaugural long-term
horizon scenario analysis exercise outlined
on page 48, has been performed, greatly
supporting our ability to understand and
assess potential risk exposure.
Credit risk
Our primary focus has undoubtedly been on
credit risk given its materiality to the Banking
division and the wider group, but more so its
sensitivity to possible climate impacts, noting
that both physical and transitional drivers
have the potential to affect both counterparty
and collateral risk.
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To enable a standardised assessment of
current loan book exposures to physical
and transitional risks, we have developed
and implemented a rst-generation climate
sensitivity methodology. This utilises a
standardised impact classication approach
with exposures categorised from “Low” to
“Very High” based on the potential sensitivity
at both a counterparty (driven by sector)
and asset level. The methodology relies on
existing data sources and applies a set of
qualitative, expert judgement assumptions to
assign exposures into different classications.
Presently the methodology is deployed across
c.£7 billion of the Banking division’s loan book
(77%) and has proved useful in identifying
those exposures deemed as having the most
potential sensitivity to climate change, namely:
• Carbon asset funding within our Motor/
Asset Finance businesses
• Non-renewable energy and carbon asset
funding
• Receivables funding in potentially
impacted sectors within our Invoice
Finance business
• Residential/commercial property funding
(particularly in high ood risk locations) in
our Property business
Importantly, the current methodology does
not account for time horizons over which
climate impacts are expected to crystallise,
meaning that the segmentations it produces
are not necessarily representative of our
current portfolio risk. As outlined on page42,
we believe the short average tenor of the
portfolio signicantly mitigates the risk
associated with our existing book.
Nonetheless, outputs from the methodology
have provided important insights into potential
future risk with resulting sensitivity dashboard
extracts incorporated into regular reporting
to key risk committees since October 2021.
These include divisional risk and compliance
committees (“RCCs”), CRMC, GRCC and the
board risk committee.
Addressing data and future
enhancements
Data quality remains a key challenge and
we are committed to developing enriched
climate credit risk data that will support more
accurate measurement and monitoring that
can in turn support not just effective risk
mitigation but also strategic alignment.
To support us in this endeavour, we have
now commenced the development of a
second-generation climate assessment
methodology that will incorporate a more
sophisticated approach utilising both
qualitative and quantitative inputs. This will:
• facilitate customer and asset assessment
scorecards for each exposure as relevant;
• leverage a wider range of data attributes
(both customer and asset); and
• incorporate customer outreach at
onboarding to better understand
counterparty-specic climate and
ESG sensitivities.
Our transition to this enhanced methodology
forms an integral part of our plan for
enhancing climate risk management
capabilities. It will also require us to address
various existing data gaps which will be
facilitated by the gathering of more customer
data as well as the leveraging of industry wide
data sources where relevant and available.
Whilst we envisage it will take time to
implement, the enhanced methodology
will ultimately move functionality beyond
simple reporting enhancements, initiating
parallel changes to operating models, credit
sanctioning processes, core systems and,
in time, our credit modelling approach. The
enhanced reporting and MI it will provide will
also facilitate more decision useful insights
that will in turn support the evolution of the
rm’s longer-term strategy for managing risks
and opportunities and the development of
more tailored credit risk appetites based on
sectoral transition risk assessments.
Operational risk
Premises and people
Recognising the potential for climate change
to impact both our buildings and service
provision capabilities, particularly in the event
of a sustained increase in temperatures over
the longer term, the group has conducted
a review of its existing business continuity
plans as well as its broader approach to
crisis management to ensure it is adequately
prepared. Where necessary, appropriate
updates have been made to ensure sufcient
consideration of potential impact although
the location of the group’s properties and
service centres (primarily UK and Ireland-
based) reduces our exposure to the most
immediate physical risks.
Potential climate impacts on our people,
customers and infrastructure are also now
considered in crisis management simulations
conducted across the group. These span
from disruption to data centres as a result
of extreme weather events, to operational
impacts resulting from the failure of key third
parties, right through to signicant changes
in customer preferences.
Relevant operational risk standards have
also been updated to recognise the risks
presented by climate change while work
continues to incorporate climate risk
considerations within our assessment of
operational resilience for critical services and
change management risk assessments. Over
time, we also plan to gather further physical
risk data on our premises, including key
data centres, with a view to supporting our
assessment of future risk. More immediately,
consideration of a bespoke climate-based
Pillar 2a operational risk scenario is underway
as part of our next ICAAP cycle.
Third party risk
The group also recognises the potential for
key third parties and suppliers to be impacted
by climate change (due either to physical or
transitional factors), causing disruption to
day-to-day business operations. Enhanced
supplier due diligence questionnaires have
now been introduced to gather climate and
ESG data for all of our Tier 1 and Tier 2
suppliers while our tendering process has
been updated to consider environmental
and climate considerations alongside
sustainability innovation.
Where practical, measurable performance
indicators are also now included within
agreements with performance against these
monitored on an ongoing basis. Whilst we
have not yet set climate-specic third-party risk
appetites, we continue to work collaboratively
with our suppliers to support them with their
climate and ESG agendas. Over the next
year we plan to further enhance the group’s
third-party management framework to keep
pace with the evolving regulatory landscape,
adapting our risk assessment processes and
controls as appropriate.
Other risks
Work to integrate consideration of climate
risk across other identied risk areas is also
progressing at pace. Climate change, and the
group’s response to it, now forms an integral
part of our business strategy. This includes
continued assessment of the resilience of our
model, to ensure we are sufciently prepared
to manage the risks posed by it. As outlined
on page 45 (Governance section), strong
oversight of strategic delivery is maintained
through our committee framework, with
consideration of climate risks now embedded
within our strategic planning and new product
approval processes.
Funding and liquidity impacts have also been
reviewed and are now subject to ongoing re-
assessment with regular updates provided to
relevant Treasury committees. Primary focus
areas include implications for debt capital
markets, potential behavioural changes in
our investor base, and possible direct and
indirect reputational impacts, including those
related to evolving disclosure requirements.
We also continue to assess traded market
risk implications for Winterood, although the
business’ role as a market maker means we
do not take long-term positions, mitigating
potential risk exposure.
The rapidly evolving regulatory landscape
also presents risk and we recognise our
responsibility to comply with new and
emerging requirements. Horizon scanning
capabilities have been enhanced in response,
with new developments initially identied via
the group’s Regulatory Oversight Group and
subsequently assigned to relevant functions
and business areas as appropriate.
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Sustainability Report
continued
Task Force on Climate-related Financial Disclosures
Work is also underway to consider conduct
risk implications. In particular, we recognise
the need for transparency across all levels of
disclosure. This includes compliance with any
new product-specic disclosure requirements
as they come into effect. Linked to this, we
also note the increased potential for litigation
risk should we fail in this regard.
Our asset management business has
integrated responsible investment practices in
our investment process to aid us in creating
long-term value for clients and beneciaries,
in turn leading to sustainable benets for the
economy, the environment and society. This
approach is underpinned by our focus on
stewardship, where we have set ourselves
high standards of integrity and excellence to
deliver consistent value for our people and
clients. We also continue to grow our product
offering for clients who wish to further align
their investments to their values; we offer
ethical screening, Sustainable Funds and
our Socially Responsible Investment Service
and are actively looking at ways in which
we can align our portfolios with positive
environmental, social and governance factors.
To do this, we are continually educating our
people and clients on industry best practice,
and are signatories of the Principles for
Responsible Investment (“PRI”).
Looking ahead to 2023 and beyond, we
have mobilised a Sustainability Programme
with dedicated initiatives to embed the
principles of responsible investment and
stewardship across all facets of our business
including becoming a signatory of the UK
Stewardship Code. We believe that to
manage our Asset Ma
nagement clients’
capital responsibly, we must be acutely
aware of, and respond to, the material
risks and opportunities presented by
climate change. We also believe the asset
management industry can play a huge role
in facilitating the transition to a lower carbon
economy, while being mindful of the impacts
to society. To drive this forwards, our asset
management business will be making a
commitment to actively contribute towards
the UK government’s net zero climate goals,
through the Net Zero Asset Managers
initiative, in addition to maintaining a prudent
approach to ESG risk management.
Risk appetite
During the last year, work has continued to
integrate consideration of climate risk within
the group’s risk appetite statements. This
has included the ongoing renement of
existing qualitative statements as well as the
development of quantitative risk measures
for relevant principal and key risks.
While quantitative measures are, in the main,
currently included for monitoring purposes,
we are continuing to develop more tailored,
formal risk appetites, particularly for credit
risk. We expect these to be based on
sectoral transition risk assessments, aligned
to our ambition to meet the goal of the Paris
Agreement to reach net zero by 2050.
Metrics will be further enhanced as data and
capabilities evolve, and over time we expect
these to also leverage scenario analysis
and our enhanced credit risk reporting
methodology to enable the setting of risk
appetite across different time horizons.
During the last year, we have made progress
in developing further our climate strategy
and our understanding of our broader
emissions including our full operational
emissions (including Scope 3) and early
assessment of our nanced emissions in
our loan book. Our footprinting activities in
the year have broadened our boundary to
include our full Scope 1, 2 and 3 operational
emissions across the group as well as an
initial evaluation of our Scope 3 nanced
emissions (initially focused on our lending
book).
We recognise the importance of addressing
the threat of climate change and also
appreciate the vital role we can play in
supporting our customers on the transition
to a low-carbon economy. Having previously
set ambitious short-term net zero targets for
our Scope 1 and 2 operational emissions,
we are now setting ourselves a wider and
longer-term ambition to align all of our
operational and attributable GHG emissions
from our lending and investment portfolios to
align with pathways to net zero by 2050.
To this end, we have recently joined 116 other
banks globally, as a signatory to the Net Zero
Banking Alliance. This sets us on a clear
trajectory to further develop our understanding
of our full value chain emissions (including
our nanced emissions) and to set short-term
and long-term targets aligning our operational
and nanced greenhouse gas emissions with
pathways to net zero by mid-century.
Our climate strategy is formed around
three pillars:
• Achieving net zero operations across our
buildings and eet (covering our Scope
1 and 2 emissions), as well as our wider
operational impacts in our supply chain
emissions (Scope 3)
• Measuring and reducing our nanced
emissions across our lending and
investment portfolios to support our
customers to meet their own goals and
aligning our pathway to net zero by mid-
century
• Developing our green nancing activities,
growing existing green markets (such
as our current work supporting our
customers’ transition to battery electric
vehicles), as well as opening new green
asset categories where they align to our
lending expertise and appetite.
Reducing our operational emissions
Having previously made good progress
across our building and eet emissions
(including setting of ambitious net zero
targets for our Scope 1 and 2 emissions by
2030 as well as a net zero eet by 2025), we
have expanded further our assessment of
operational impacts this year.
As can be seen in the tables on pages 54
and 56, we have now carried out our rst
evaluation of our full operational footprint,
covering Scope 1 and 2 as well as all
relevant Scope 3 categories.
We gather our environmental data and
compile our greenhouse gas emissions with
the support of an independent third-party
analytics and reporting consultancy.
Further to meeting all of the mandatory
reporting requirements under the
Streamlined Energy and Carbon Reporting
(“SECR”) standards, we are now providing
enhanced disclosure across our wider
operational impacts.
Our methodology for calculating and
disclosing our GHG emissions and energy
use is in accordance with the requirements
of the World Resources Institute GHG
Protocol Corporate Standard, GHG Protocol
Corporate Value Chain Accounting and the
SECR standards. We report on all material
Scope 1 and 2 emissions associated with
our operations. Scope 1 includes fuel
emissions from buildings and company
vehicles and Scope 2 includes our emissions
from electricity. We have also reported our
indirect Scope 3 operational emissions
across all relevant categories.
In the 2022 nancial year, our total location-
based GHG emissions were 2,679 tonnes of
carbon dioxide equivalent (tCO
2
e), equating
to 0.70 tCO
2
e per employee, up 2% overall
but down by 1% per employee from 2021.
Though we saw signicant reductions
in emissions from our buildings in 2022,
we saw a similar sized increase in eet
emissions as our relationship managers
got back on the road following the quieter
Covid-19period.
Our ofces and Brewery Rentals
Operations
As can be seen in the chart on page 55, a
growing proportion of the energy we use
across our ofces as well as use in our
Brewery Rentals sites (primarily to clean the
kegs) is coming from renewable sources.
We have extensive deployment of renewable
electricity across our sites and primarily
use wood pellets to raise heat for our
barrel cleaning processes. This year, these
existing sources of renewable energy have
been complemented with our use of green
gas (supplied to us with Renewable Gas
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Close Brothers Group plc
Annual Report 2022
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Financial Statements
Strategic Report
Guarantee of Origin (“RGGO”) certicates).
This gives us complete traceability and
assurance that our gas comes from
authentic biogas sources. Our gas supplier
is a registered supplier with the Green Gas
Certication Scheme (“GGCS”).
Our ongoing approach across our
operations of energy efciency and sourcing
of renewable energy continues to drive
down our Scope 1 and 2 emissions. We
have now achieved a reduction of 44.8% in
our Scope 1 and 2 emissions since 2019
under a market-based approach, which
demonstrates good progress towards
becoming operationally net zero by 2030.
During the past year, our energy efciency
programme across our ofce estate has
implemented a number of energy-saving
initiatives, including:
• Boiler demand strategy: reviewing the
boiler usage at one of our sites has saved
an estimated 10% gas consumption
since it was implemented. Based on this
success, we are now looking to roll out
this initiative across other ofce sites.
• Decommissioning staircase heating:
a planned change to how we heat the
staircases and other communal space at
our Head Ofce has saved an estimated
5% gas consumption at this site since
implementation.
• Continuation of our LED lighting upgrades:
lighting across a further three ofce sites
has been upgraded to efcient LED
lighting saving 5.2 MWh of electricity this
year.
Electrifying our car eet
Our drive towards having a fully electric
car eet and a net zero eet by 2025 has
continued this year. We are proud of our
leading strategy, allowing us to demonstrate
to our customers how progress in
decarbonising eets can be achieved – an
area we can support them to nance.
Since January 2022 we have only offered
fully electric, battery electric vehicles (“BEVs”)
options on our car scheme (other than in
exceptional circumstances).
Our eet of 639 cars is now almost wholly
battery electric or hybrid (as can be seen in
the diagram on page 55) and we anticipate
the majority of the vehicles to be BEVs by the
end of the 2022 calendar year.
Our efforts to transition our eet (and to
progress towards our net zero target by
2025) has driven our eet average emissions
down further this year (and a long way ahead
of the UK average for new vehicles).
The average CO
2
emissions have now fallen
to 32.9 gCO
2
/km (2021: 57.3 gCO
2
/km).
Metrics and targets
Our Climate Strategy
Achieving net zero
operations
Achieving net zero operations
and reducing supply chain
emissions.
Working with our partners and
suppliers to minimise our
operational impact.
As a signatory to the Net Zero Banking Alliance
We commit to transition all operational and attributable GHG emissions from our lending
and investment portfolios to align with pathways to net zero by mid-century, or sooner,
including CO
2
emissions reaching net zero at the latest by 2050, consistent with a maximum
temperature rise of 1.5ºC above pre-industrial levels by 2100.
Reducing our nancial
emissions
Supporting the goals of the
Paris Agreement to achieve
net zero by 2050, aligning
our nancing over time to
support the necessary
reductions and timelines,
enabling our customers to
meet their targets.
Helping to nance the
transition
Enabling the deployment of
clean technology and business
models through our green
growth lending strategy.
Growing existing green asset
markets and unlocking new
sectors that align with our
lending expertise and appetite.
Financed emissions
Operational emissions
Become operationally net
zero through our Scope 1 and
2 emissions by 2030.
To reach net zero emissions by
2050 across our operational
and attributable GHG
emissions from our lending
and investment portfolios.
Provide over £1 billion of
lending for zero emission
battery electric vehicles over
the next ve years (2023-
2027).
In development:
Interim (2030) nanced emissions targets supporting our path to
net zero.
Further green asset lending targets across specic technologies
or markets
Achieve a net zero company
car eet by 2025.
Our Climate Ambitions
Book 1.indb 53 27/09/2022 23:46:02
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Close Brothers Group plc
Annual Report 2022
Sustainability Report
continued
Task Force on Climate-related Financial Disclosures
Greenhouse gas emissions
1, 2
Emissions source
Location based
Market based
2022
tCO
2
e
2021
3
tCO
2
e
2022
tCO
2
e
2021
3
tCO
2
e
Scope 1 Buildings - fuel
379
712
355
712 Owned vehicles - fuel
1,015
345
1,015
345 Total Scope 1
1,394
1,057
1,370
1,057
- Of which UK Total Scope 1
1,358
1,057
1,334
1,057
Scope 2 Buildings - electricity
1,123
1,511
906
1,428
Owned vehicles - electricity
162
57
162
57
Total Scope 2
1,285
1,568
1,068
1,485- Of which UK Total Scope 2
1,242
1,446
941
1,306
Total Scope 1 and 2 (Operational)
2,679
2,625
2,438
2,542
- Of which UK Total Scope 1 and 2
2,600
2,503
2,275
2,363
Scope 3 (Operational) Category 1 - Purchased goods and services
44,219
141
Category 2 - Capital goods
19,291
Category 3 - Fuel and energy-related emissions
712
129
Category 4 - Upstream transportation and distribution
86
Category 5 - Waste generated in operations
206
44
Category 6 - Business travel
1,110
130
Category 7 - Employee commuting
4,212
Category 9 - Downstream transport and distribution
408
Total Scope 3 (Operational)
70,244
444
Total Scope 1, 2 and 3 (Operational)
72,923
3,069
2022
GWh
2021
GWh
Energy Use
Total energy use
18.47
16.70
- Of which UK Total energy use
18.06
16.44
Emission Intensity
tCO
2
e per
employee
tCO
2
e per
employee
2022
2021
20222021
Operational Scope 1 and 2 emissions intensity 0.70 0.71 0.64 0.69
Operational Scope 1, 2 and 3 emissions intensity 19.14
- Calculated using: Average number of employees in year 3,810
3,709
3,810
3,709
1 We have reported on all emission sources required under the Companies (Directors’ Report) and Limited Liability Partnerships
(Energy and Carbon Report) Regulations 2018. Our reporting year runs
from August 2021 to July 2022. The emissions reporting boundary is
dened as all entities and fa
cilities either owned or under
our operational control.
2 Emissions have been calculated using the Greenhouse Gas Protocol Corporate Standard and covers all greenhouse gases (converte
d to TCO
2
e). We have used emissions factors published by the UK
government’s Department for Business, Energy & Industrial Strategy, and the International Energy Agency.
3 During year end carbon accounting we identied a small adjustment to the 2021 nancial scope 2 emissions. The 2021 scope 2 fo
otprint has been restated - increasing slightly by 9 tonnes under
location based and 12 tonnes under market based accounting.
Our Operational Impacts
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Strategic Report
Recognising our progress
We continue to participate in the CDP, which
allows us to disclose our greenhouse gas
emissions and our approach to managing
climate-related impact on a voluntary basis.
We were pleased to be awarded a B- in the
latest CDP scores in December 2021, in
recognition of the positive ongoing progress
we are making. This year, we were also
proud to be included again, for its second
year, in the Financial Times’ list of European
Climate Leaders, recognising our position as
one of the top 300 European companies at
reducing Scope 1 and 2 emissions.
Understanding our nanced emissions
We recognise the need for holistic action
on climate change. We are addressing the
impact of our own operations through our
existing targets of net zero Scope 1 and 2
operational emissions by 2030 and a net
zero eet by 2025.
This year we have begun our journey to
evaluate the wider impacts of our business,
by including our nanced emissions in our
carbon accounting.
To assess these emissions we have used the
PCAF approaches, applying the guidance
included in their Global GHG Accounting
and Reporting Standard for the Financial
Industry, drawing on three of their developed
methodologies, business loans, project
nancing and motor vehicle loans. On
review, 87% of our loan book is in scope of
GHG assessment under the current PCAF
standard. Of this, 59% has been assessed
under the business loans methodology,
accounting for an apportioned amount of
emissions from these businesses, in line with
the value we nance. A further 5% of our
total loan book has been assessed under the
project nance methodology. Here, we have
accounted for the apportioned emissions of
the project due to our contribution. A nal
23% of our loan book has been assessed
using the motor vehicle loans methodology,
accounting for the annual in-use emissions
of the vehicles that we nance.
Due to limited availability of data, we have,
leveraged robust datasets from the UK
government, the OECD and others, in line
with PCAF recommendations, within our
assessment. This is our starting point and
is based on current best available data.
We have a strategy to move forward on
progressing the availability, granularity
and accuracy of the data utilised to further
improve the quality of this reporting.
However, as recommended by PCAF, we
are choosing to not allow low data availability
to deter us from beginning our journey to
assess our nanced emissions. We report
now as it sets our intention as a business to
align our loan portfolio with the Paris Climate
Agreement and move towards not just
Our Own Car Fleet
Hybrid
Battery Electric
Diesel
Petrol
639
cars
improved accuracy in our reported emissions
but also to drive greater decarbonisation
across the activities we nance.
In the table on page 56, we have set out
the initial emissions calculations for this
proportion of our loan book against each
category, as well as the impacts of our
operating lease business which we have
included under Scope 3 category 13–
downstream leased assets. We have also
included estimates of emissions impacts of
any assets we dispose of under category 11
(Use of sold products– for their remaining
life), and category 12(Endof life treatment of
sold products).
Proportion of Renewable Energy used Across our Ofces and Brewery Rental Sites
2020
2021
2022
Our ofces
Keg cleaning
and handling
2020
2021
2022
0% 40%20% 60% 80% 100%
Renewables Total energy used
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Annual Report 2022
Sustainability Report
continued
Task Force on Climate-related Financial Disclosures
Green Growth
We recognise the signicant growth
opportunities for green asset lending across
several of our existing asset classes, as well
as new ones. As a specialist, adaptable
lender, with deep understanding of our
customers’ needs, we can support them in
their transition to new cleaner technologies
to meet their own sustainability targets.
As an existing lender across a range of vehicle
markets (both passenger and commercial),
we are already seeing growth in battery
electric vehicles, as our eet customers seek
to reduce their emissions. In our wholesale
nance business, we are seeing a major move
to fully battery electric cars, an example being
our support for the launch of a new personal
Our Financed Impacts
2
2022
Greenhouse gas emissions Emissions source
tCO
2
e
Scope 3 (Financed) Category 11 - Use of sold products 196,526
Category 12 - End of life treatment of sold products 100
Category 13 - Downstream leased assets 535,989
Category 15 - Investments
1
(loan book only) 707,421
Of which:
- Motor vehicle loans 394,493
- Business loans 218,985
- Project nance 93,943
Scope 3 (nanced)
1,440,036
tCO
2
e per £M
loan book
Emission intensity
2022
Financed emissions intensity (Category 15 - Investments only
2
)88.8
- Calculated using: loan book related to activities currently included in the footprint £8.0 billion
1 Partnerships for Carbon Accounting Financials (“PCAF”) methodology selected as the most appropriate approach to calculating
nanced emissions.
2 Our initial assessment of nanced emissions covers our banking
loan book only and excludes our asset management activities.
New UK cars
nanced by our
commercial
business
The whole UK
new car
market
15.3
%
35.3
%
Proportion of New Cars that were
Battery Electric in the Past Year
car hire offering by Octopus Electric Vehicles
(see case study right).
Demonstrating our leadership in providing
support for the deployment of zero emission
vehicles, in the past year, 35.3% of new
cars nanced by our commercial business
have been battery electric. This is more
than double the proportion that were seen
across the whole UK market in the same
period.
Building on this early success in supporting
the electrication of surface transport, as
an initial green growth ambition, we have
set ourselves the ambition to provide
funding for at least £1.0 billion of battery
electric vehicles in the next ve years
(2023-2027).
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Our Sustainability Alliances
Net Zero Banking Alliance
Close Brothers has recently signed up to
the Net Zero Banking Alliance (“NZBA”),
aglobal coalition of banks convened by
the UN.
As a signatory to the NZBA, we commit
to transition our lending and investment
porfolios to align with net-zero pathways
by 2050.
Partnership for Carbon Accounting
Financials
This year, we joined Partnership for
Carbon Accounting Financials (“PCAF”)
to support our progress in measuring our
nanced emissions.
PCAF is a collaboration of over 290
nancial institutions worldwide with the
aim of harmonising the assessment
and disclosure of greenhouse gas
(GHG) emissions associated with their
loans and investments.
CDP
CDP is a global not-for-prot organisation
that runs the world’s environmental
disclosure system for investors,
companies, cities, states and regions to
manage their environmental impacts.
For the seventh year in a row, in 2022, we
disclosed through CDP. In reporting our
environmental data through CDP, we are
able to benchmark our greenhouse gas
emissions reporting and our approach to
managing our climate-related impacts.
In December 2021, we were pleased to
be awarded a B- in the CDP scoring,
in recognition of the positive ongoing
progress we are making in addressing the
threat of climate change.
Our wholesale nance business has been
working with Octopus Electric Vehicles for
the last 3 years. We were the rst funder
to support their own book offering which
allowed them to take to market their fully
electric salary sacrice product. Since
launch, the product has grown exponentially
and Octopus Electric Vehicles are now one
of the fastest growing leasing companies in
the UK.
Building on this success, we have
continued to work with Octopus Electric
Vehicles to support them bringing new
innovative products to the market. In July
2022 we were pleased to be named as sole
funder for the launch phase of their exciting
new consumer offering: “the ultimate
EV package”. This offers consumers a
complete EV solution, combining a new
electric car with Octopus exible EV
domestic energy tariffs and a smart home
charger, installed for free. This combination
allows the customer to take advantage of
cheaper and greener ‘time of use’ energy
tariffs to charge their car.
New Personal Contract Hire package launched to
consumers with Octopus Electric Vehicles
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Sustainability Report
continued
Task Force on Climate Related Financial Disclosures
DEDICATED
SERVICE
58
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Close Brothers Group plc
Annual Report 2022
FOR DEEPER
RELATIONSHIPS
Case Study
Staveley Mill Yard, a four-acre “green” business
park in the Lake District National Park comprising
over 40 retail and industrial units. From engineers,
woodturners, cafes, a brewery and the biggest
bicycle shop in the UK, Staveley Mill Yard is a
unique and vibrant working community.
Finance
S
olution
R
enewa
bl
e energy
h
as a
l
ways
b
een
i
n t
h
e m
ill’
s
DNA
.
With lots of roof s
p
ace available, the decision was
ma
d
e to
i
nsta
ll
a
l
ar
g
e, state-o
f
-t
h
e-art p
h
otovo
l
ta
i
c
(
“PV”) system. We were able to fund this installation
t
hrou
g
h a
C
oronavirus Business Interruption Loan
Scheme loan agreement.
Th
e
R
esu
l
t
T
he 1,533 roof-mounted solar panels, and nine Tesla
Powerwall Batteries, installed b
y
G
ent, su
pp
l
y
around
5
93
MWh
o
f
power annua
ll
y to t
h
e
b
us
i
ness par
k’
s
t
enants, helpin
g
make it more sustainable while also
sav
i
ng s
i
gn
i
cant cost.
Th
e
d
a
il
y surp
l
us energy
i
s
e
xported to the
g
rid and also used in the local villa
g
e.
It goes a long way to reducing
the carbon footprint of all the
businesses on site and adds to
the 14,000 deciduous hardwood
trees we planted in the village.
Close Brothers were very
professional and exible when
accommodating our requirements.
David Brockbank, Owner
Staveley Mill Yard
Book 1.indb 59 27/09/2022 23:46:12
60
Close Brothers Group plc
Annual Report 2022
Non-Financial Information Statement
In line with the non-nancial reporting requirements
contained in sections 414CA and 414CB of the
Companies Act 2006, the table below contains
references to non-nancial information intended to help
our stakeholders understand the impact of our policies
and activities.
Reporting Requirement Policies and Standards
Information Necessary to Understand
our Impact and Outcomes
Environmental Matters
• Bank Credit Policy Underwriting
Standards
• Environmental Policy
• Our Responsibility, page 34
• Sustainability Report, pages 42 to 57
• Our stakeholders, page 16
Employees
• Health and Safety Policy
• Whistleblowing Policy
• Key Customer Principles
• Equal Opportunity and Dignity at Work
Policy
• Business Model, page 10
• The Foundations of our Business, page 20
• Our Culture, pages 22 and 23
• Our Responsibility, page 34
• Our stakeholders, page 14
• Sustainability Report, pages 35 to 39 and
41
• Corporate Governance Report, page 99
Social Matters
• Key Customer Principles
• Bank Credit Policy Underwriting
Standards
• Our Responsibility, page 34
• Sustainability Report, pages 35 to 57
• Our stakeholders, page 16
Respect for Human Rights
• Human Rights and Modern Slavery Act
• Privacy and Data Protection Policy
• Cyber Security Policy
• Sustainability Report, page 41
Anti-Corruption and
Anti-Bribery
• Anti-Money Laundering Policy
• Anti-Bribery and Corruption Policy
• Cyber Security Policy
• Sustainability Report, page 41
Description of the Business
Model
• Business Model, pages 10 to 13
• The Foundations of our Business, page 20
• Our Purpose, page 21
• Our Culture, pages 22 and 23
• Our Strategy, pages 24 to 32
Description of Principal
Risks and Impact of
Business Activity
• Principal Risks, pages 78 to 89
• Emerging Risks and Uncertainties,
pages 90 to 92
• Risk Committee Report, pages 117 to 119
Non-Financial Key
Performance Indicators
• Strategy and Key Performance Indicators,
pages 32 and 33
• Sustainability Report, pages 36 and 53
Book 1.indb 60 27/09/2022 23:46:12
61
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Financial Overview
Summary Group Income Statement
1
2022
£million
2021
£million
Change
%
Operating income
936.1
952.6 (2)
Adjusted operating expenses
(598.0)
(592.1) 1
Impairment losses on nancial assets
(103.3)
(89.8) 15
Adjusted operating prot 234.8
270.7 (13)
Banking
227.2
212.5 7
Commercial
91.0
52.8 72
Retail
61.0
71.9 (15)
Property
75.2
87.8 (14)
Asset Management
21.7
23.7 (8)
Winterood
14.1
60.9 (77)
Group
(28.2)
(26.4) 7
Amortisation and impairment of intangible assets on
acquisition
(2.0)
(14.2) (86)
Goodwill impairment
–
(12.1) n/a
Exceptional item: HMRC VAT refund
–
20.8 n/a
Operating prot before tax 232.8
265.2 (12)
Tax
(67.6)
(63.1) 7
Prot after tax 165.2
202.1 (18)
Prot attributable to shareholders 165.2
202.1 (18)
Adjusted basic earnings per share
2
111.5p
140.4p (21)
Basic earnings per share
2
110.4p
134.8p (18)
Ordinary dividend per share
66.0p
60.0p 10
Return on opening equity
10.6%
14.5%
Return on average tangible equity
12.2%
16.5%
1 Adjusted measures are presented on a basis consistent with pr
ior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group’s acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reect underlying trading performance. Further detail on the reconciliation
between operating and adjusted measures can be found in note 3.
2 Refer to note 8 for the calculation of basic and adjusted earnings per share.
Basis of Presentation
Results are presented both on a
statutory and an adjusted basis to aid
comparability between periods. Adjusted
measures are presented on a basis
consistent with prior periods and exclude
amortisation of intangible assets on
acquisition, to present the performance
of the group’s acquired businesses
consistent with its other businesses; and
any exceptional and other adjusting items
which do not reect underlying trading
performance. Please refer to page 62 for
further details on items excluded from the
adjusted performance metrics. The loan
book gure has been re-presented to
incorporate closing loans and advances
to customers and operating lease assets,
previously shown separately.
Adjusted Operating Prot and Returns
Adjusted operating prot reduced 13%
to £234.8 million (2021: £270.7 million),
primarily reecting a reduction in income in
Winterood and an increase in impairment
charges. After adjusting items, statutory
operating prot before tax decreased by 12%
to £232.8 million (2021: £265.2 million). The
group delivered a return on opening equity of
10.6% (2021: 14.5%), reecting the reduction
in Winterood’s prot and continued growth
in the equity base, and return on average
tangible equity of 12.2% (2021: 16.5%).
Adjusted operating prot in the Banking
division increased by 7% to £227.2 million
(2021: £212.5 million), reecting strong
income growth, partially offset by higher
costs and impairment charges. In the
Asset Management division, adjusted
operating prot declined 8% to £21.7 million
(2021: £23.7 million) as growth in income
was more than offset by increased staff
costs. Winterood saw reduced trading
opportunities in higher margin sectors and
periods of volatility in falling markets. Following
the exceptionally strong trading performance
and elevated market activity experienced in
the prior year, operating prot was down 77%
to £14.1 million (2021: £60.9million). Group net
expenses, which include the central functions
such as nance, legal and compliance, risk
and human resources, increased 7% on the
prior year to £28.2 million (2021: £26.4million),
mainly reecting third party spend in relation
to the assessment of potential growth
opportunities.
Operating Income
Operating income reduced 2% to
£936.1million (2021: £952.6 million), with
growth in Banking and Asset Management
offset by a reduction in trading income in
Winterood. Income in the Banking division
increased by 10%, reecting good loan book
growth and a strong net interest margin of
7.8% (2021: 7.7%). Although income in the
Asset Management division was up 6%,
with continued net inows and positive
market performance in the rst half of the
year, income was more subdued in the
second half of the year due to falling markets
and their impact on wider client sentiment.
Income in Winterood reduced by 48%,
driven by a market-wide slowdown in trading
activity from elevated levels during the
pandemic and a change in the mix of trading
volumes, exacerbated by falling markets.
Adjusted Operating Expenses
Adjusted operating expenses were broadly
stable at £598.0 million (2021: £592.1million),
reecting a signicant reduction in variable
costs in Winterood, offset by higher
investment spend and salary increases
in Banking and higher staff costs in Asset
Management. In the Banking division, costs
were up 10%, as we continued to invest in our
key strategic programmes and incurred higher
business-as-usual (“BAU”) spend following
salary increases to reect ination and
performance-driven compensation. Expenses
increased 9% in the Asset Management
division, mainly driven by higher staff costs in
the current inationary environment and new
hires, as we continue to invest to grow the
business. Winterood’s operating expenses
decreased 33%, reecting lower variable
compensation and settlement costs. Overall,
the group’s expense/income ratio increased
on the prior year period to 64% (2021:
62%), whilst the group’s compensation ratio
decreased to 37% (2021: 38%). Statutory
operating expenses increased to £600.0
million (2021: £597.6 million).
Impairment Charges and IFRS 9
Provisioning
Impairment charges increased to £103.3million
(2021: £89.8 million), corresponding to a bad
debt ratio of 1.2% (2021: 1.1%). This included
the impact of updated assumptions for the
Novitas loan book, informed by experience of
credit performance, which resulted in £60.7
million (2021: £73.2 million) of impairment
charges related to this business.
Excluding Novitas, the bad debt ratio was
0.5% (2021: 0.2%), reecting the release of
Covid-19 provisions, partially offset by the
ongoing review of provisions and coverage
across our loan portfolios, including certain
individual exposures in the Commercial
business, as well as higher IFRS 9 provisions
to take into account the outlook for the
external environment.
Book 1.indb 61 27/09/2022 23:46:13
62
Close Brothers Group plc
Annual Report 2022
Financial Overview
continued
Dividend per share
66.0p
2021: 60.0p
Return on average tangible equity
12.2%
2021: 16.5%
Adjusted operating prot
£234.8m
2021: £270.7m
There was a marginal decrease in provision
coverage to 3.1% (31 July 2021: 3.2%).
Excluding provisions related to the Novitas
loan book, the coverage ratio reduced to
1.9% (31 July 2021: 2.3%), primarily reecting
provision releases, mainly driven by reduced
Covid-19 forborne balances. This coverage
level appropriately reects the elevated
uncertainty in the external environment in the
range of modelled outcomes.
Economic forecasts have evolved over the
course of the 2022 nancial year. At 31 July
2021, the scenario weightings reected
the continued economic challenges and
uncertainty associated with the pandemic,
with 40% allocated to the baseline scenario,
20% to the upside scenario and 40% across
the three downside scenarios. The level of
economic uncertainty associated with the
pandemic reduced up to 31 January 2022
and 10% weight was moved from the three
downside scenarios to the upside scenario.
In the second half of 2022, 7.5% weight has
moved from the baseline scenario to the
three downside scenarios, resulting in nal
weights that are considered consistent with
the economic uncertainty at 31 July 2022 as
follows: 30% strong upside, 32.5% baseline,
20% mild downside, 10.5% moderate
downside and 7% severe downside.
Whilst we are not yet seeing a signicant
impact from rising ination and interest
rates and their effect on customers on
our credit performance, we are alert to
the highly uncertain macroeconomic
environment and continue to monitor closely
the performance of the book. We remain
condent in the quality of our loan book,
which is predominantly secured, prudently
underwritten and diverse. Approximately
99% of our loan book exposure is to the UK,
Republic of Ireland and Channel Islands,
with the remaining exposure to Western
European countries.
Exceptional and Other Adjusting Items
Amortisation and impairment of intangible
assets on acquisition was down signicantly
to £2.0 million (2021: £14.2 million). The
prior year charge included a £10.1 million
impairment of intangible assets recognised
on acquisition in relation to Novitas, following
the decision to cease permanently the
approval of lending to new customers across
all of the products offered by this business.
Following this decision, we also recognised
an adjusting item in relation to the full write
down of goodwill allocated to Novitas in the
prior year of £12.1 million.
There were no exceptional items recorded in
the 2022 nancial year (2021: £20.8 million).
In 2021, we recognised an exceptional gain
of £20.8 million, reecting a VAT refund
from HMRC in relation to hire purchase
agreements in the Motor Finance and Asset
Finance businesses.
Tax Expense
The tax expense was £67.6 million (2021:
£63.1 million), which corresponds to an
effective tax rate of 29.0% (2021: 23.8%).
The increase in the effective tax rate
primarily reected a write-down in the
group’s deferred tax assets as a result
of the legislated reduction in the rate of
banking surcharge from 8% to 3% which
was due to apply from April 2023, and the
non-recurrence of the prior year write-up
in the group’s deferred tax assets as a
result of legislation that year increasing the
mainstream corporate tax rate from 19% to
25% (also due to apply from April 2023).
The group’s underlying effective tax rate
for the year ended 31 July 2022, excluding
the impact of the deferred tax asset write-
down, would be 25.7%, reecting the UK
corporate tax rate of 19% and headline
banking surcharge of 8% (which applied to a
proportion of the group’s prots, resulting in
c.6% banking surcharge).
On 23 September 2022, the Chancellor of
the Exchequer announced as part of his
Growth Plan that the corporation tax rate
increase from 19% to 25% from April 2023
will be cancelled, and that the banking
surcharge rate will remain at 8%. The
relevant legislation is expected to be enacted
in the year ending 31 July 2023 and is a
non-adjusting post balance sheet event. Had
this change been enacted before 31 July
2022, the group’s deferred tax asset balance
at 31 July 2022 would have decreased
by approximately £1.5 million, with a
corresponding tax charge recognised in the
income statement, net of a smaller credit to
other comprehensive income.
Earnings per Share
Prot attributable to shareholders reduced
18% on the prior year to £165.2 million
(2021: £202.1 million), reecting a reduction
in adjusted operating prot and the impact
from revaluations of deferred tax assets on
the effective tax rate in the 2022 and 2021
nancial years. As a result, adjusted basic
earnings per share (“EPS”) was 111.5p (2021:
140.4p) and basic EPS was 110.4p (2021:
134.8p).
Book 1.indb 62 27/09/2022 23:46:13
63
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Group Capital
1
31 July 2022
1
£million
31 July 2021
£million
Common equity tier 1 capital
1,396.7
1,439.3
Total capital
1,596.7
1,662.7
Risk weighted assets
9,591.3
9,105.3
Common equity tier 1 capital ratio (transitional)
14.6%
15.8%
Tier 1 capital ratio (transitional)
14.6%
15.8%
Total capital ratio (transitional)
16.6%
18.3%
Leverage ratio
2
12.0%
11. 8%
1 In line with CRR, effective on 1 January 2022, the CET1, tier 1 and total capital ratios no longer include the benet related
to
software assets which were previously exempt from the
deduction requirement for intangible assets from CET1.
2 The leverage ratio is calculated as tier 1 capital as a percentage of total balance sheet assets excluding central bank claim
s,
adjusting for certain capital deductions, incl
uding intangible assets, and off-balance sheet exposures, in line with the UK lev
erage
framework under CRR. At 31 July 2021, the leverage ratio was calculated under the EU CRR and included central bank claims.
Dividend
The board is proposing a nal dividend
of 44.0p per share, resulting in a full-year
dividend per share of 66.0p (2021: 60.0p),
up 10% on the prior year. This reects
the group’s solid performance in the year
and strong capital position, as well as our
continued condence in the business model.
We remain committed to our dividend policy,
which aims to provide sustainable dividend
growth year-on-year, while maintaining a
prudent level of dividend cover.
Subject to approval at the Annual General
Meeting, the nal dividend will be paid on
22 November 2022 to shareholders on the
register at 14 October 2022.
Summary Group Balance Sheet
The group maintained a strong balance
sheet and a prudent approach to managing
nancial resources. The fundamental
structure of the balance sheet remains
unchanged, with most of the assets and
liabilities relating to our Banking activities.
Loans and advances make up the majority
of assets. Other items on the balance sheet
include treasury assets held for liquidity
purposes, and settlement balances in
Winterood. Intangibles, property, plant and
equipment, and prepayments are included
as other assets. Liabilities are predominantly
made up of customer deposits and both
secured and unsecured borrowings to fund
the loan book.
Total assets increased 5% to £12.7 billion
(31 July 2021: £12.0 billion), mainly reecting
growth in the loan book, an increase in non-
trading debt securities and higher market-
making assets. Total liabilities were up 5%
to £11.0 billion (31 July 2021: £10.5 billion),
driven primarily by higher customer deposits
and an increase in secured borrowings.
Both market-making assets and liabilities,
related to trading activity at Winterood,
were up year-on-year due to an increase in
value traded at the end of the period when
settlement balances are calculated.
Total equity increased 6% to £1.7 billion
(31 July 2021: £1.6 billion), primarily reecting
the prot in the year, partially offset by
dividend payments of £95.5 million (2021:
£86.6 million). The group’s return on assets
marginally decreased to 1.3% (2021: 1.7%).
Movements in Capital and Other
Regulatory Metrics
The CET1 capital ratio reduced from 15.8%
to 14.6%, mainly driven by a change in the
regulatory treatment of software assets
(c.45bps), the impact of the transitional IFRS
9 add-back (c.30bps) and an increase in risk
weighted assets (“RWAs”) (c.80bps), partly
offset by retained earnings (c.75bps).
CET1 capital decreased 3% to
£1,396.7million (31 July 2021:
£1,439.3million), reecting the regulatory
change in the treatment of software assets,
which increased the intangible assets
deducted from CET1 capital by £50.2million,
a decrease in the transitional IFRS 9 add-
back to capital of £34.8 million and the
regulatory deduction of dividends paid and
foreseen of £98.4 million. This was partially
offset by the capital generation through prot
of £165.2million.
Total capital decreased 4% to £1,596.7million
(31 July 2021: £1,662.7million), also reecting
the regulatory change in the treatment of
software assets and a small repayment of our
subordinated debt.
RWAs increased 5% to £9.6 billion (31 July
2021: £9.1 billion), mainly driven by an
increase in the loan book and risk weighted
assets related to derivatives held for hedging
purposes, partly offset by the regulatory
change in treatment of software assets.
As a result, CET1, tier 1 and total capital
ratios were 14.6% (31 July 2021: 15.8%),
14.6% (31 July 2021: 15.8%) and 16.6%
(31 July 2021: 18.3%), respectively.
Summary Group Balance Sheet
31 July 2022
£million
31 July 2021
1
£million
Loans and advances to customers and operating lease assets
2
9,098.9
8,667.4
Treasur y assets
3
1,855.1
1,788.2
Market-making assets
4
887.2
801.6
Other assets
837.1
777.3
Total assets 12,678.3
12,034.5
Deposits by customers
6,770.4
6,634.8
Borrowings
2,870.1
2,600.9
Market-making liabilities
4
796.1
690.6
Other liabilities
584.2
538.9
Total liabilities 11,020.8
10,465.2
Equity 1,657.5
1,569.3
Total liabilities and equity 12,678.3
12,034.5
1 Loans and advances to customers has been re-presented for 31 July 2021 to include £222.9 million of operating lease assets,
with a corresponding reduction to other assets.
2 Includes operating lease assets of £0.5 million (31 July 2021: £1.3 million) that relate to Asset Finance and £239.5 million
(31 July
2021: £221.6 million) to Invoice and Speciality Finance.
3 Treasury assets comprise cash and balances at central bank
s and debt securities held to support the Banking division.
4 Market-making assets and liabilities comprise settlement bala
nces, long and short trading positions and loans to or from
money brokers.
At 31 July 2022, the applicable minimum
CET1, tier 1 and total capital ratio
requirements, excluding any applicable
Prudential Regulation Authority (“PRA”) buffer,
were 7.6%, 9.3% and 11.5%, respectively.
Accordingly, we continue to have headroom
signicantly above the applicable minimum
regulatory requirements of 700bps in the
CET1 capital ratio, 530bps in the tier 1 capital
ratio and 510bps in the total capital ratio.
The group applies IFRS 9 regulatory
transitional arrangements which allows banks
to add back to their capital base a proportion
of the IFRS 9 impairment charges during
the transitional period. Our capital ratios are
presented on a transitional basis after the
application of these arrangements. On a fully
loaded basis, without their application, the
CET1, tier 1 and total capital ratios would be
13.8%, 13.8% and 15.9%, respectively.
The leverage ratio, which is a transparent
measure of capital strength not affected by
risk weightings, remains strong at 12.0%
(31 July 2021: 11.8%). The ratio at 31 July
Book 1.indb 63 27/09/2022 23:46:13
64
Close Brothers Group plc
Annual Report 2022
Savings proposition. Balances in our Fixed
Rate Cash Individual Savings Accounts
(“ISAs”) have grown to c.£350 million (31 July
2021: £160 million) since their launch in
December 2020. We remain focused on
continuing to extend the deposit product
range, which will support us in growing
and diversifying our retail deposit base and
further optimise our cost of funding and
maturity prole.
Secured funding increased 20% to
£1.6billion (31 July 2021: £1.3 billion) as we
completed our fourth public Motor Finance
securitisation in April 2022 and increased
our current drawings under the Term
Funding Scheme for Small and Medium-
sized Enterprises (“TFSME”) to £600million
(31 July 2021: £490 million).
Unsecured funding, which includes senior
unsecured and subordinated bonds and
undrawn committed revolving facilities,
remained stable at £1.5 billion (31 July 2021:
£1.5 billion).
We have maintained a prudent maturity
prole. The average maturity of funding
allocated to the loan book remained ahead of
the loan book at 21 months (31 July 2021: 24
months), with the average loan book maturity
at 17 months (31 July 2021: 17 months), in line
with our “borrow long, lend short” principle.
Our strong credit ratings remain unchanged,
with Moody’s Investors Services (“Moody’s”)
reafrming their rating for Close Brothers
Group as “A2/P1” and Close Brothers Limited
as “Aa3/P1” with a “negative” outlook for
both in July 2022, and Fitch Ratings (“Fitch”)
reafrming their rating for both Close Brothers
Group and Close Brothers Limited as
“A-/F2”, with a “stable” outlook in May 2022.
This reects the group’s protability, capital
position, diversied business model and
consistent risk appetite.
Group Liquidity
The group continues to adopt a conservative
stance on liquidity, ensuring it is comfortably
ahead of both internal risk appetite and
regulatory requirements.
We continued to maintain higher liquidity
relative to the pre-Covid-19 position to
provide additional exibility given the
uncertain UK economic outlook, whilst
enabling us to maximise any opportunities
available. Over the year, treasury assets
increased 4% to £1.9 billion (31 July 2021:
£1.8 billion) and were predominantly held on
deposit with the Bank of England.
We regularly assess and stress test the
group’s liquidity requirements and continue
to comfortably meet the liquidity coverage
ratio (“LCR”) regulatory requirements, with
a 12-month average to 31 July 2022 LCR of
924% (2021: 1,003%). In addition to internal
measures, we monitor funding risk based
on the CRR rules for the net stable funding
ratio (“NSFR”) which became effective on
1 January 2022. The NSFR at 31 July 2022
was 118.3% (31 January 2022: 117.3%).
Financial Overview
continued
Group Funding
1
31 July 2022
£million
31 July 2021
£million
Customer deposits
6,770.4
6,634.8
Secured funding
1,598.7
1,333.7
Unsecured funding
2
1,544.3
1,539.5
Equity
1,657.5
1,569.3
Total available funding 11,570.9
11,077.3
Total funding as % of loan book
3
127%
128%
Average maturity of funding allocated to loan book
4
21 months
24 months
1 Numbers relate to core funding and exclude work
ing capital facilities at the business level.
2 Unsecured funding excludes £22.1 million (31 July 2021: £22.7 million) of non-facility overdrafts included in borrowings and
includes £295.0 million (31 July 2021: £295.0 million) of undrawn facilities.
3 Total funding as a % of loan book has been re-presented to include £240.0 million (31 July 2021: £222.9 million) of operating
lease assets in the loan book gure. The revised denition is total funding as a % of loan book including operating lease asset
s.
4 Average maturity of total funding excluding equity and funding held for liquidity purposes.
2022 reects a change in calculation under
the UK leverage framework to exclude
central bank reserves.
We continue to make good progress on
our preparations for a transition to the IRB
approach. Following the submission of our
initial application to the PRA in December
2020, we have received conrmation that our
application has successfully transitioned to
Phase 2. The next phase of formal review will
commence in October 2022 and we are well
positioned to respond promptly, although
the timetable remains under the direction
of the PRA. Our Motor Finance, Property
Finance and Energy portfolios, where the
use of models is most mature, have been
submitted with our initial application, with
other businesses to follow in future years.
Capital Management Framework
The prudent management of the group’s
nancial resources is a core part of our
business model. Our primary objectiveis
to deploy capital to support disciplined
loan book growth in Banking and to make
the most of strategic opportunities. These
include strategic initiatives and small
acquisitions in existing or adjacent markets
that t with our business model.
The board remains committed to the group’s
dividend policy, which aims to provide
sustainable dividend growth year-on-year,
while maintaining a prudent level of dividend
cover. Further capital distributions to
shareholders will be
considered depending
on future opportunities.
We are considering the further optimisation
of our capital structure, including the
issuance of debt capital market securities if
appropriate, targeting a CET1 capital ratio
range of 12% to 13% over the medium term.
This would allow the group to maintain a
buffer to minimum regulatory requirements
while alsoretaining the exibility for growth.
In the short term, we would expect to
operate above the 12% to 13% CET1 capital
ratio target range, in light of the heightened
macroeconomic uncertainty and potential
growth opportunities available to us.
Group Funding
The primary purpose of our Treasury and
Savings business is to manage funding and
liquidity to support the Banking businesses
and manage interest rate risk. Our conservative
approach to funding is based on the principle
of “borrow long, lend short”, with a spread of
maturities over the medium and longer term,
comfortably ahead of a shorter average loan
book maturity. It is also diverse, drawing on a
wide range of wholesale and deposit markets
including several public debt securities at both
group and operating company level, as well as
a number of securitisations.
We increased total funding in the year by 4%
to £11.6 billion (31 July 2021: £11.1 billion)
which accounted for 127% (31 July 2021:
128%) of the loan book at the balance sheet
date. The average cost of funding reduced to
1.3% (2021: 1.4%), an increase from 1.1% in
the rst half of the 2022 nancial year due to
the increased cost of customer deposits.
Customer deposits increased 2% to £6.8
billion (31 July 2021: £6.6 billion) with non-
retail deposits reducing by 7% to £3.7 billion
(31 July 2021: £3.9 billion) and retail deposits
increasing by 16% to £3.1 billion (31 July
2021: £2.7 billion).
The previous investment in our customer
deposit platform continues to generate
benets and has enabled us to enhance our
Group Liquidity
31 July 2022
£million
31 July 2021
£million
Cash and balances at central banks
1,254.7
1,331.0
Sovereign and central bank debt
1
415.4
192.5
Certicates of deposit
185.0
264.7
Treasury assets 1,855.1
1,788.2
1 Included in sovereign and central bank debt is £216.9 million encumbered UK Government debt (31 July 2021: £90.2 million).
Book 1.indb 64 27/09/2022 23:46:13
65
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Banking
Key Financials
1
2022
£million
2021
£million
Change
%
Operating income
693.1
631.7 10
Adjusted operating expenses
2
(362.6)
(329.1) 10
Impairment losses on nancial assets
(103.3)
(90.1) 15
Adjusted operating prot 227.2
212.5 7
Net interest margin
7.8%
7.7%
Expense/income ratio
52%
52%
Bad debt ratio
1.2%
1.1%
Return on net loan book
2.6%
2.6%
Return on opening equity
12.5%
13.7%
Closing loan book and operating lease assets
3
9,098.9
8,667.4 5
1 Adjusted measures are presented on a basis consistent with pr
ior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group’s acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reect underl
ying trading performance. Further detail on the reconciliation
between operating and adjusted measures can be found in note 3.
2 Related ongoing costs resulting from investment projects are recategorised from investment costs to BAU costs after one year.
For comparison purposes, £5.2million has been recategorised from investment costs to BAU costs in the 2021 nancial year to
adjust for investment projects’ ongoing costs that commenced prior to the 2022 nancial year.
3 Commercial, Asset Finance and Invoice and Speciality Finance loan books have been re-presented for 31 July 2021 to include
£222.9million of operating lease assets (£1.3million in Asset Finance and £221.6million in Invoice and Speciality Finance).
Good Loan Book Growth and Strong
Margins
Banking adjusted operating prot increased
7% to £227.2million (2021: £212.5million),
reecting good loan book growth and
a strong net interest margin. Statutory
operating prot increased to £227.1million
(2021: £207.2million).
The loan book grew 5.0% over the year
to £9.1billion (31 July 2021: £8.7billion)
driven by healthy new business volumes
in our Commercial businesses and high
demand in Motor Finance, partly offset by
a contraction in the Premium Finance and
Property loan books. Momentum picked up
over the course of the year, as the 1.9% loan
book growth in the rst half of the year was
supplemented by 3.0% growth in the second
half of the year. The return on net loan book
remained stable on the prior year at 2.6%
(2021: 2.6%).
The net interest margin of 7.8% increased
marginally on the 2021 nancial year (2021:
7.7%), primarily driven by lower cost of funds.
We continue to adopt a disciplined approach
to pricing and our specialist, relationship-
driven model positions us well to maintain
a strong net interest margin, although the
trajectory will depend upon our ability to pass
on further rate increases onto our customers.
As a result, operating income increased
10% to £693.1million (2021: £631.7million),
reecting the good loan book growth and a
strong net interest margin.
Adjusted operating expenses increased 10%
to £362.6million (2021: £329.1million) as we
progressed our key investment programmes
and continued to exercise rigorous control
of our costs, whilst recognising the current
inationary environment. BAU costs
increased by 7% to £278.8million (2021:
£260.3million), primarily driven by higher
staff costs reecting salary increases
in the current inationary environment
and increased performance-driven
compensation.
Investment costs rose 22% to £83.8million
(2021: £68.8million), reecting spend on our
multi-year strategic investment projects and
related depreciation charges.
Our investment projects align with our
strategic priorities of protecting, growing
and sustaining the business and continue to
deliver tangible benets. Our IRB spend has
driven enhancements in our risk management
framework, whilst investment in our customer
deposit platform has enabled the expansion
of the Savings product offering, supporting
a lower cost of funds. In Asset Finance,
investment in our systems has added new
functionality and improved customer insights.
Our Retail businesses are beneting from
digital investment, with Motor Finance utilising
API links to connect to strategic partners
and offer our nance at various points of the
customer journey and Premium Finance have
launched insight tools to support brokers.
Whilst we remain mindful of inationary
pressures, we continue to exercise cost
discipline. We expect costs related to
existing investment programmes to stabilise
over the next nancial years, although
depreciation charges related to these
programmes will continue to increase.
The compensation ratio was at on the prior
year at 29% (2021: 29%) and the expense/
income ratio also remained stable at 52%
(2021: 52%).
Impairment charges increased to
£103.3million (2021: £90.1million),
corresponding to a bad debt ratio of 1.2%
(2021: 1.1%). Excluding Novitas, the bad
debt ratio was 0.5% (2021: 0.2%), reecting
the release of Covid-19 provisions, partially
offset by the ongoing review of provisions
and coverage across our loan portfolios,
including certain individual exposures in the
Commercial business, as well as higher IFRS
9 provisions to take into account the outlook
for the external environment.
Overall, there was a marginal decrease in
provision coverage to 3.1% (31 July 2021:
3.2%). Excluding provisions related to the
Novitas loan book, the coverage ratio reduced
slightly to 1.9% (31 July 2021: 2.3%), primarily
reecting provision releases, mainly driven by
reduced Covid-19 forborne balances.
Whilst we are not yet seeing a signicant
impact from rising ination and interest
rates and their effect on customers on
our credit performance, we are alert to
the highly uncertain macroeconomic
environment and continue to closely monitor
the performance of the book. We remain
condent in the quality of our loan book,
which is predominantly secured, prudently
underwritten, diverse, and supported by the
deep expertise of our people.
Book 1.indb 65 27/09/2022 23:46:14
66
Close Brothers Group plc
Annual Report 2022
Banking
continued
Net interest margin
7. 8 %
2021: 7.7%
Banking adjusted operating prot
£227.2m
2021: £212.5m
We continued to
see good demand
across our lending
businesses and
strong margins.
The Republic of Ireland makes up
approximately 7% of our total loan book
(31 July 2021: 8%), with an offering from both
our Commercial and Retail businesses.
The Republic of Ireland Motor Finance
business accounted for 18% of the Motor
Finance loan book (31 July 2021: 21%) and
4% of the Banking loan book (31 July 2021:
5%). As previously announced, from 30 June
2022, we ceased writing new business
under our previous partnership in the
Republic of Ireland. We remain committed
to the Irish market and are considering our
long-term options.
Well Positioned to Deliver Disciplined
Growth
Loan book growth continues to be an
output of our business model, as we focus
on delivering disciplined growth whilst
continuing to prioritise our margins and credit
quality. As outlined at the Investor Event in
June 2021, we continue to actively work to
identify incremental and new opportunities in
both our existing and adjacent markets.
Across our businesses, we recognise a
signicant opportunity in broadening our
nancing of green and transition assets, as
the UK aligns towards a net zero economy.
Our current lending already spans a diverse
array of green assets including wind and
solar generation, battery electric vehicles and
grid infrastructure, including battery electric
storage systems.
We have seen strong growth in battery
electric vehicles in our Commercial business.
Our Wholesale Fleet division provides
nance for company car eets and over
one third of its loan book is now fully battery
electric. As an initial green nance ambition,
we have set ourselves the aim to provide
funding for £1.0 billion of battery electric
vehicles in the next ve years.
Over the coming years, we will continue
to build further our expertise in green and
transition assets, cementing our reputation
for specialist knowledge, nancing and
Return on opening equity in the Banking
division reduced to 12.5% (2021: 13.7%).
The loan book increased 5.0% year-on-year
to £9.1billion (31 July 2021: £8.7billion),
reecting strong growth in our Commercial
and Motor Finance businesses, partly offset
by a contraction in the Premium Finance
and Property businesses. Momentum
picked up over the course of the year, as the
1.9% loan book growth in the rst half of the
year was supplemented by 3.0% growth in
the second half of the year.
The Commercial loan book increased 9%
to £4.6billion (31 July 2021: £4.2billion),
driven by 7% growth in Asset Finance,
reecting strong new business volumes in
the Transport, Broker, Contract Hire and
Energy businesses in particular, as we saw
good demand from customers. Invoice and
Speciality Finance grew 14%, reecting
strong sales volumes and increased
utilisation. The core Invoice Finance loan
book increased 29% as we grew SME
customer numbers.
The Retail loan book increased 3% to
£3.1billion (31 July 2021: £3.0billion), with
7% growth in Motor Finance as we saw
strong new business levels, reecting
continued demand in the used car market
and the benets from investment in the
Motor Finance transformation programme.
This was partly offset by a 4% decline in the
Premium Finance book as a result of lower
demand for the funding of insurance policies
from consumers, following previous Covid-19
restrictions.
The Property loan book contracted 2%,
despite the growth seen in the second half
of the year. This reected high repayment
levels, which more than offset drawdowns,
given we continued to see heightened
unit sales by developers as a result of the
buoyant UK property market. Our new
business volumes remained strong and our
pipeline stands at over £1 billion.
Loan Book Analysis
31 July 2022
£million
31 July 2021
1
£million
Change
%
Commercial 4,561.4
4,191.0 9
Asset Finance
3,032.5
2,845.9 7
Invoice and Speciality Finance
1,528.9
1,345.1 14
Retail 3,064.0
2,974.3 3
Motor Finance
2,051.2
1,924.4 7
Premium Finance
1,012.8
1,049.9 (4)
Property 1,473.5
1,502.1 (2)
Closing loan book and operating lease assets
2
9,098.9
8,667.4 5
1 Commercial, Asset Finance and Invoice and Speciality Finance loan books have been re-presented for 31 July 2021 to include
£222.9million of operating lease assets (£1.3million in Asset Finance and £221.6million in Invoice and Speciality Finance).
2 Operating lease assets of £0.5million (31 July 2021: £1.3million) relate to Asset Finance and £239.5million (31 July 2021:
£221.6million) to Invoice and Speciality Finance.
Book 1.indb 66 27/09/2022 23:46:14
67
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Operating income increased 19% to
£343.4million (2021: £288.9million), reecting
strong loan book growth in both Asset
Finance and Invoice Finance. The net interest
margin increased marginally to 7.8% (2021:
7.7%), mainly driven by a lower cost of funds.
Adjusted operating expenses of £180.0million
(2021: £158.2million) were 14% higher than
the prior year, reecting higher staff costs to
reect business growth and the inationary
environment, as well as costs in relation to
the group’s withdrawal from the legal services
nancing market. In addition, investment
spend in the Asset Finance transformation
programme continued. The expense/income
ratio decreased to 52% (2021: 55%) as the
growth in operating income more than offset
the cost increase.
Impairment charges decreased 7%
to £72.4million (2021: £77.9million),
corresponding to a reduced bad debt ratio
of 1.7% (2021: 2.1%), reecting the reduction
in the Covid-19 forborne book and a lower
charge in the year relating to Novitas, partly
offset by an increase in provisions against
certain individual exposures. A signicant
portion of the impairment charges reported
in Commercial related to credit provisions
against the Novitas loan book (2022:
£60.7million, 2021: £73.2million), which
reect the latest assumptions on the case
failure and recovery rates in this business.
The provision coverage reduced marginally
to 4.0% (31 July 2021: 4.2%) reecting
reduced Covid-19 forbearance, partly offset
by provisions against the Novitas loan book
to take into account updated assumptions
on case failure rates. Excluding Novitas, the
provision coverage ratio reduced to 1.6%
(31 July 2021: 2.1%).
Banking: Commercial
1
2022
£million
2021
2
£million
Change
%
Operating income
343.4
288.9 19
Adjusted operating expenses
(180.0)
(158.2) 14
Impairment losses on nancial assets
(72.4)
(77.9) (7)
Adjusted operating prot 91.0
52.8 72
Net interest margin
7.8%
7.7%
Expense/income ratio
52%
55%
Bad debt ratio
1.7%
2.1%
Closing loan book and operating lease assets
3
4,561.4
4,191.0 9
1 Adjusted measures are presented on a basis consistent with pr
ior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group’s acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reect underl
ying trading performance. Further detail on the reconciliation
between operating and adjusted measures can be found in note 3.
2 Commercial, Asset Finance and Invoice and Speciality Finance loan books have been re-presented for 31 July 2021 to include
£222.9million of operating lease assets (£1.3million in Asset Finance and £221.6million in Invoice and Speciality Finance).
3 Operating lease assets of £0.5million (31 July 2021: £1.3million) relate to Asset Finance and £239.5million (31 July 2021:
£221.6million) to Invoice and Speciality Finance.
maximising commercial opportunities
arising in the space, for example through the
nancing of battery electric storage systems
and charging infrastructure across the UK.
The Asset Finance business is well positioned
to capitalise on continued demand for asset
nancing. During the year, we have expanded
our sector coverage, hiring agricultural
equipment and materials handling teams who
have both completed their rst deals, and
have increased our focus on the nancing of
green and transition assets.
In Invoice Finance, we expect the growth
trajectory to follow the economic conditions.
We continue to pursue opportunities in the
ABL space, including identifying syndication
opportunities, partnering with other
lenders. Our Brewery Rentals business has
delivered a record year and our direct-to-
outlet container rental product, EkegPlus,
continues to see strong demand.
Our investment in the Motor Finance
transformation programme has enabled
us to further broaden our offering in this
market and take advantage of heightened
demand for used cars. The programme has
improved efciency and the introduction
of e-sign functionality has delivered
sustainability benets. We have developed
a unique proposition to provide dealers
with real-time data and market insights,
in partnership with AutoTrader, which has
supported an increase in dealer numbers
and reducing vehicle sales times. We have
also developed a set of APIs that enable
us to connect seamlessly into strategic
partners including AutoTrader and iVendi
and provide our nance offering at various
points of the customer journey. Alongside
this, we continue to explore opportunities
for growth over the longer term through
the shift to Alternatively Fuelled Vehicles
(“AFVs”), as they become more prevalent in
the second hand car market. AFVs currently
make up a low proportion of our Motor
Finance loan book, in line with penetration in
the wider second hand car market. We have
expanded our credit policy to capture such
vehicles and are currently piloting new AFV-
suited offerings in selected markets.
For Premium Finance, we have launched
new insight tools, Foresight and Focus
360, to enhance our offering and support
brokers’ decisioning. We anticipate
demand for the funding of insurance
policies could increase given the uncertain
macroeconomic conditions.
In Property, we continue to make good
progress expanding our regional presence,
which now contributes over 50% of our loan
book, as well as building out our bridging
nance offering. In partnership with Travis
Perkins, we have established a new facility,
allowing SME housebuilders to access
discounted building supplies and materials
directly via a credit facility, without the
need to demonstrate any trading or credit
history,where a relationship with the client
already exists and funding has previously
been agreed. We are also piloting a specialist
buy-to-let extension to our existing Property
bridging nance clients, which is a natural
evolution of our expertise in Property Finance
and well aligned with our business model
and risk appetite. Our pipeline of undrawn
commitments remains strong at above
£1billion, although the heightened economic
uncertainty is expected to continue to impact
activity in the property market.
Overall, we remain condent in the growth
outlook for the loan book over both the short
and medium term.
Commercial
The Commercial businesses provide
specialist, predominantly secured lending
principally to the SME market and include
Asset Finance and Invoice and Speciality
Finance. We nance a diverse range
of sectors, with Asset Finance offering
commercial asset nancing, hire purchase
and leasing solutions across a broad range
of assets including commercial vehicles,
machine tools, contractors’ plant, printing
equipment, company car eets, energy
project nance, and aircraft and marine
vessels. The Invoice and Speciality Finance
business provides debt factoring, invoice
discounting and asset-based lending, as well
as covering our specialist businesses such as
Brewery Rentals, Vehicle Hire and Novitas.
Adjusted operating prot in Commercial rose
72% to £91.0million (2021: £52.8million) as
the business achieved positive operating
leverage and saw a decrease in impairment
charges. Statutory operating prot was
£90.9million (2021: £35.9million).
Book 1.indb 67 27/09/2022 23:46:14
68
Close Brothers Group plc
Annual Report 2022
Banking
continued
Banking: Retail
1
2022
£million
2021
£million
Change
%
Operating income
237.0
219.8 8
Adjusted operating expenses
(151.6)
(138.0) 10
Impairment losses on nancial assets
(24.4)
(9.9) 146
Adjusted operating prot 61.0
71.9 (15)
Net interest margin
7.8%
7.6%
Expense/income ratio
64%
63%
Bad debt ratio
0.8%
0.3%
Closing loan book 3,064.0
2,974.3 3
1 Adjusted measures are presented on a basis consistent with pr
ior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group’s acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reect underlying trading performance. Further detail on the reconciliation
between operating and adjusted measures can be found in note 3.
partly offset by expected credit losses
increasing to reect loan book growth.
The Retail loan book increased 3% to
£3.1billion (31 July 2021: £3.0billion). The
Motor Finance book grew 7% to £2.1billion
(31 July 2021: £1.9billion), as high new
business levels reected continued
demand, and strong prices continued in
the used car market.
The Premium Finance book declined 4%
to £1.0billion (31 July 2021: £1.0billion)
primarily as a result of lower demand for
the funding of insurance policies from
consumers. This was partially offset by
strong new business volumes as customers
look to ease cash ow pressures in the
commercial market.
We remain condent in the credit quality of
the Retail loan book. The Motor Finance loan
book is predominantly secured on second-
hand vehicles which are less exposed to
depreciation or signicant declines in value
than new cars. Our core Motor Finance
product remains hire-purchase contracts, with
less exposure to residual value risk associated
with Personal Contract Plans (“PCP”), which
accounted for c.11% of the Motor Finance
loan book at 31 July 2022. The Premium
Finance loan book benets from various forms
of structural protection including premium
refundability and, in most cases, broker
recourse for the personal lines product.
Property
Property comprises Property Finance and
Commercial Acceptances. The Property
Finance business is focused on specialist
residential development nance to
established professional developers in the UK.
Commercial Acceptances provides bridging
loans and loans for refurbishment projects.
Operating prot decreased 14% to
£75.2million (2021: £87.8million) primarily
reecting a reduction in income, as well
as an increase in impairment charges on
the prior year.
Operating income was down 8% to
£112.7million (2021: £123.0million) reecting
the reduction in the loan book. The net
interest margin was stable at 7.6% (2021:
7.6%), mainly driven by lower cost of funds,
partly offset by the negative impact of rising
rates in the last few months of the nancial
year on the interest rate oors, which were
set at 1%. With the UK base rate now above
1%, we expect no further impact in respect
of these oors as a result of future rate rises.
Banking: Property
2022
£million
2021
£million
Change
%
Operating income
112.7
123.0 (8)
Operating expenses
(31.0)
(32.9) (6)
Impairment losses on nancial assets
(6.5)
(2.3) 183
Operating prot 75.2
87.8 (14)
Net interest margin
7.6%
7.6%
Expense/income ratio
28%
27%
Bad debt ratio
0.4%
0.1%
Closing loan book 1,473.5
1,502.1 (2)
The Commercial loan book increased 9% to
£4.6billion (31 July 2021: £4.2billion). The
Asset Finance book grew 7% to £3.0billion
(31 July 2021: £2.8billion), reecting strong
new business volumes. The Invoice and
Speciality Finance loan book increased 14%
to £1.5billion (31 July 2021: £1.3billion),
driven by high sales volumes, supported by
the Recovery Loan Scheme, and improved
utilisation, albeit this continues to remain
slightly below pre-Covid-19 levels.
Retail
The Retail businesses provide intermediated
nance, principally to individuals and small
businesses, through motor dealers and
insurance brokers.
Operating prot for Retail reduced 15% to
£61.0million (2021: £71.9million), driven by
higher impairment charges and increased
operating expenses, which more than offset
income growth.
Operating income increased 8% to
£237.0million (2021: £219.8million), reecting
loan book growth and an increase in the net
interest margin to 7.8% (2021: 7.6%), mainly
driven by higher fee income in Premium
Finance and a lower cost of funds.
Operating expenses rose 10% to
£151.6million (2021: £138.0million), driven by
higher staff costs and the cost of responding
to ongoing regulatory change. In addition,
ongoing investment in the Retail businesses,
alongside related depreciation, continued.
The expense/income ratio increased
marginally to 64% (2021: 63%).
Impairment charges increased to £24.4
million (2021: £9.9 million), with a bad debt
ratio of 0.8% (2021: 0.3%) which reected
a more normalised level of cancellations in
the consumer portfolio in Premium Finance
following the strong credit performance in the
prior year and a rise in arrears in the Motor
Finance business as a result of the impact
on customers from the cessation of the UK
government’s Covid-19 job retention scheme
and the increase in ination.
The provision coverage ratio remained stable
at 2.2% (31 July 2021: 2.2%), mainly driven
by the release of model-driven adjustments,
Book 1.indb 68 27/09/2022 23:46:14
CONFIDENT
IN THE LONG-
TERM GROWTH
PROSPECTS
OF OUR
BUSINESSES
69
Close Brothers Group plc
Annual Report 2022
Governance Report
Strategic Report
Operating expenses were 6% lower at
£31.0million (2021: £32.9million) as we
maintained our rigorous focus on cost
discipline. The expense/income ratio
remained broadly stable on the prior year at
28% (2021: 27%).
Impairment charges increased to £6.5million
(2021: £2.3million) following the ongoing
review of provisions and the prior year
beneting from the release of Covid-19
related provisions, resulting in a bad debt
ratio of 0.4% (2021: 0.1%). The provision
coverage ratio decreased marginally to 2.4%
(31 July 2021: 2.6%).
In spite of strong new business volumes,
the Property loan book reduced £29million
to £1.5billion (31 July 2021: £1.5billion),
as high repayment levels more than offset
drawdowns, with the buoyant UK property
market resulting in heightened unit sales
by developers. Our pipeline of undrawn
commitments remains strong at £1.0billion
(31 July 2021: £0.9billion) and we continue
to see success from regional expansion, with
the regional loan book making up over 50%
of the Property Finance portfolio.
The Property loan book is conservatively
underwritten, with typical LTVs below
standard market levels. We work with
experienced, professional developers, with a
focus on mid-priced family housing, and have
minimal exposure to the prime central London
market. Our long track record, expertise and
quality of service ensure the business remains
resilient to competition and continues to
generate high levels of repeat business.
Financial
S
tatement
s
Book 1.indb 69 27/09/2022 23:46:14
70
Close Brothers Group plc
Annual Report 2022
Asset Management
Key Financials
1
2022
£million
2021
£million
Change
%
Investment management
110.4
102.9 7
Advice and other services
2
36.1
36.4 (1)
Other income
3
1.5
0.1 n/a
Operating income 148.0
139.4 6
Adjusted operating expenses
(126.3)
(115.9) 9
Impairment gains on nancial assets
–
0.2 n/a
Adjusted operating prot 21.7
23.7 (8)
Revenue margin (bps)
87
91
Operating margin
15%
17%
Return on opening equity
28.6%
31.7%
1 Adjusted measures are presented on a basis consistent with pr
ior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group’s acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reect underlying trading performance. Further detail on the reconciliation
between operating and adjusted measures can be found in note 3.
2 Income from advice and self-directed services, excluding investment management income.
3 Other income includes £1.4 million gain on disposal of an advised client book.
Continuing to Build on a Long Track
Record of Growth
Close Brothers Asset Management provides
personal nancial advice and investment
management services to private clients in
the UK, including full bespoke management,
managed portfolios and funds, distributed
both directly via our advisers and investment
managers, and through third party nancial
advisers.
Adjusted operating prot in CBAM
decreased 8% to £21.7 million (2021:
£23.7 million), driven by negative market
movements which adversely impacted
revenue in the second half of the year and
higher staff costs. The operating margin
reduced to 15% (2021: 17%). Statutory
operating prot before tax was £19.8 million
(2021: £22.4million).
Total operating income grew 6% to £148.0
million (2021: £139.4 million), reecting positive
net inows and market movements in the rst
half of the year, despite falling markets and
their impact on wider client sentiment in the
second half of the year. The revenue margin
reduced to 87bps (2021: 91bps) reecting
lower investment management margins as
ows have included a higher proportion of
lower margin products.
Adjusted operating expenses increased 9%
to £126.3 million (2021: £115.9 million), driven
by higher staff costs, primarily reecting
the current inationary environment and
new hires, as we continue to invest to grow
the business. As a result, expense/income
ratio grew to 85% (2021: 83%) with the
compensation ratio remaining in line with the
prior year at 56% (2021: 56%).
We have been investing in technology in the
business and recently completed a major
re-platforming project to rationalise legacy
systems and increase efciency, while
adding a digital portal to improve functionality
and customer experience. Our technology
projects have been focused on increasing
efciency and operational resilience,
improving client experience by using best-
of-breed applications, digital technology and
selective in-house development.
Continued Positive Net Inows, Despite
Volatile Market Conditions
Equity markets have experienced a mixed
performance during the nancial year. In the
second half of the year, a global equity market
sell-off led to largely unfavourable conditions,
with some major indices suffering near-
unprecedented declines. Although concerns
over continued ination and geopolitical
uncertainty continue to weigh on markets
and adversely impact investor sentiment, we
saw net inows of £844 million for the year,
delivering a net inow rate of 5% (2021: 7%).
Total managed assets decreased 2% to
£15.3 billion (2021: £15.6 billion), as negative
market movements of £1.1 billion more than
offset net inows. Total client assets, which
includes advised and managed assets,
reduced by 3% overall to £16.6 billion (2021:
£17.0 billion).
Fund Performance
Our funds and segregated bespoke portfolios
are designed to provide attractive risk-
adjusted returns for our clients, consistent
with their long-term goals and investment
objectives. Fund performance over the 12
months since 31 July 2021 has been mixed,
reecting volatile markets across asset
classes since the start of 2022. As a result,
all our funds have delivered negative absolute
returns over this period. In relative terms,
eight of our 15 funds have outperformed their
relevant peer group averages. Our bespoke
strategy composites have outperformed their
respective peer groups in a falling market
environment, except for the Equity Risk
strategy, which was the most impacted by the
2022 marketfalls.
Our Approach to ESG and Sustainability
ESG integration in our investment research
and stewardship remains a key area of focus
and we continue to expand our Responsible
Investment team.
Our sustainable funds (Close Sustainable
Balanced Portfolio Fund and Close Sustainable
Bond Portfolio Fund), launched in 2020 to
complement the existing SRI discretionary
service, are gaining traction and we continue
to develop our sustainable proposition as more
of our clients look to how they can make a
difference with their investments.
Movement in Client Assets
31 July
2022
£million
31 July
2021
£million
Opening managed assets
15,588
12,594
Inows
2,330
2,284
Outows
(1,486)
(1,367)
Net inows
844
917
Market movements
(1,130)
2,077
Total managed assets 15,302
15,588
Advised only assets
1,272
1,435
Total client assets
1
16,574
17,023
Net ows as % of opening managed assets 5%
7%
1 Total client assets include £5.9 billion of assets (31 July 2021: £6.0 billion) that are both advised and managed.
Book 1.indb 70 27/09/2022 23:46:15
CONTINUING
TO BUILD ON
ALONG TRACK
RECORD OF
GROWTH
Governance Report
Strategic Report
71
Close Brothers Group plc
Annual Report 2022
We have mobilised a Sustainability
Programme with dedicated initiatives to
embed the Principles for Responsible
Investment (“PRI”) and stewardship across
all facets of our business, and as part of this,
have recently become a signatory to the
UKStewardship Code.
CBAM will be making a commitment
to actively contribute towards the UK
government’s net zero climate goals, through
the Net Zero Asset Managers initiative. In
line with our regulatory reporting obligations
and desire to be transparent in fullling our
commitments, we are also working towards
aligning our disclosures with the TCFD
recommendations by 2024.
Well Positioned for Future Growth
We remain condent that our vertically
integrated, multi-channel business model
positions us well for ongoing demand for
our services and the structural growth
opportunity presented by the wealth
management industry.
Our focus remains on providing excellent
service to our clients whilst investing in
new hires to support the long-term growth
potential of our business. While CBAM is
sensitive to nancial market conditions,
we remain committed to driving growth
both organically and through the continued
selective hiring of advisers and investment
managers, and through in-ll acquisitions.
As previously announced, Eddy Reynolds
took over the leadership of the Asset
Management division from Martin
Andrew in March 2022. Eddy has over 30
years’ experience in the fund and wealth
management industries and has brought with
him outstanding experience and knowledge
to lead our talented team at CBAM.
Financial
S
tatement
s
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72
Close Brothers Group plc
Annual Report 2022
Key Financials
2022
£million
2021
£million
Change
%
Operating income
95.2
182.0 (48)
Operating expenses
(81.1)
(121.2) (33)
Impairment gains on nancial assets
–
0.1 n/a
Operating prot 14.1
60.9 (77)
Average bargains per day (‘000)
81
101
Operating margin
15%
33%
Return on opening equity
1
10.5%
63.5%
1 Reecting increase in capital base in nancial year 2021.
Cyclicality in the Trading Business
Impacted Performance; Well Placed for
When Investor Appetite Returns
Winterood is a leading UK market maker,
delivering high quality execution services
to stockbrokers, wealth managers
and institutional investors, as well as
providing corporate advisory services to
investment trusts and outsourced dealing
and custody services via Winterood
Business Services (“WBS”).
Global geopolitical events, in particular
the ongoing conict in Ukraine, energy
and commodity price rises, supply chain
issues, new Covid variants and the resulting
restrictions, have all negatively impacted
market conditions in the 2022 calendar
year. Tightening monetary policy to combat
ination and concerns over slowing
economic growth have also resulted in a risk-
off sentiment for markets, further subduing
investor risk appetite.
Cyclicality seen in the trading business
negatively impacted Winterood’s
performance, with a signicant reduction in
trading opportunities, exacerbated by periods
of volatility in falling markets. Following the
exceptionally strong trading performance and
elevated market activity experienced during
the prior year, operating prot was down 77%
to £14.1 million (2021: £60.9 million).
Operating income decreased 48% to £95.2
million (2021: £182.0 million), primarily driven
by a market-wide slowdown in trading activity
and a change in the mix of trading volumes,
exacerbated by falling markets.
We also saw a decline in fees generated from
corporate activity, although WBS continued to
generate increased levels of income, up 12%
to £10.2 million on the prioryear.
Trading volumes have reduced, with average
daily bargains at 81k (2021: 101k), but they
remain elevated on pre-Covid levels (2019:
56k). However, there has also been a change
in the composition of trading volumes, with
volumes in the higher-margin markets of AIM
and Small Cap both down on the prior year,
as retail investor appetite has fallen, and retail-
driven trading opportunities have reduced. As
a result, trading income has declined to £80.7
million for the year (2021: £164.1 million).
Securities
Winterood Business Services
WBS provides outsourced dealing, settlement and custody services to
asset managers, wealth mana
gers and retail platforms.
WBS has been operating for more than 10 years and provides services to over
150,000 retail clients and over 50 institutions on its platform. It has a sticky annuity
style income stream based on assets under administration fees and dealing
commissions, a key differentiator to our core trading business. WBS has grown
signicantly in the last few years and had assets under administration of £7.2 billion
at 31 July 2022. We continue to see signicant growth potential in this business,
with a solid pipeline of clients. Our award-winning proprietary technology developed
in house is highly scalable and allows us to design bespoke solutions for our
customers that support the growth in assets and trading volumes.
WBS Clients
WBS Income
£m
2022
2021
2020
10.2
9.1
6.5
2022
2021
2020
7. 2
6.2
4.1
WBS AuA
£bn
3
Diversication of client base
3
Fee-driven revenue model,
greater predictability from
fees and trading volumes
3
Sticky annuity style
income stream
3
Strong growth
potential
Book 1.indb 72 27/09/2022 23:46:16
Governance Report
Strategic Report
73
Close Brothers Group plc
Annual Report 2022
WELL PLACED
FOR WHEN
INVESTOR
APPETITE
RETURNS
Global equity markets have experienced
substantial volatility in the past six months
and indices have suffered, with US stocks
recording their worst rst half in more than
50 years, the FTSE 250 losing 14% and the
AIM index down 24% this year. We have
navigated the volatile intraday trading well,
beneting from the expertise of our traders
and our strong focus on risk management,
which has resulted in eight loss days for the
year (2021: one loss day), of which seven
occurred in the second half of theyear.
Operating expenses decreased 33% to
£81.1 million (2021: £121.2 million) driven
by the variable nature of Winterood’s cost
base, as the reduced revenue performance
and trading volumes led to lower staff
compensation and settlement costs. The
expense/income ratio increased to 85%
(2021: 67%) as the reduction in income
was not fully offset by the corresponding
decrease in variable costs. The
compensation ratio fell to 47% (2021: 48%).
WBS, which provides outsourced dealing
and custody services, has delivered another
strong performance, generating £10.2 million
of income (2021: £9.1 million) and growing
its assets under administration to £7.2 billion
(31 July 2021: £6.2 billion). Net inows over
the period were £1.3 billion (2021: £1.2
billion). We see signicant growth potential
in this business, with a solid pipeline of
clients expected to increase assets under
administration in excess of £10 billion in the
2023 nancial year.
As a daily trading business, Winterood
is sensitive to changes in the market
environment but remains well positioned to
continue trading protably, taking advantage
when investor appetite returns. Winterood
continues to diversify its revenue streams
and explore growth opportunities, balancing
the cyclicality seen in the trading business.
Our recently appointed new chief executive,
Bradley Dyer, will be well placed to lead
Winterood in the next stage of its growth
and development. We would like to thank
Philip Yarrow for his signicant contribution
to the group and to Winterood following his
decision to retire as chief executive.
Financial
S
tatement
s
Book 1.indb 73 27/09/2022 23:46:16
74
Close Brothers Group plc
Annual Report 2022
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Risk Report
Enterprise Risk Management
The group employs an Enterprise Risk Management
Framework to provide the board and senior management
with oversight of the organisation’s nancial position as
well as the risks that might adversely affect it.
The framework details the core risk management
components and structures used across the rm, and
denes a consistent and measurable approach to
identifying, assessing, controlling and mitigating, reviewing
and monitoring, and reporting risk – the risk process
lifecycle. This sets out the activities, tools, techniques and
organisational arrangements that ensure all principal risks
facing the group are identied and understood; and that
appropriate responses are in place to protect the group
and prevent detriment to its customers and colleagues.
This enables the group to meet its goals and enhances its
ability to respond to new opportunities.
The framework is purposely designed to allow the
capture of business opportunities whilst maintaining an
appropriate balance of risk and reward within the group’s
agreed risk appetite.
Enterprise Risk Management Framework
Protecting our established business model is a
key strategic objective. Effective management of
the risks we face is central to everything we do.
Our Approach to Risk
The group faces a number of risks in the
normal course of business providing lending,
deposit taking, wealth management services
and securities trading. To manage these
effectively, a consistent approach is adopted
based on a set of overarching principles,
namely:
• adhering to our established and proven
business model, as outlined on pages
10to 13;
• implementing an integrated risk
management approach based on the
concept of “three lines of defence”; and
• setting and operating within clearly dened
risk appetites, monitored with dened
metrics and limits.
This Risk Report provides a summary of
our approach to risk management, covering
each of the key aspects of the rm’s
Enterprise Risk Management Framework.
Information on the group’s principal risks,
including an overview of the frameworks
in place to manage them, is also included,
together with an overview of current
emerging risks and uncertainties.
Role of the Board
The board retains overall responsibility for
overseeing the maintenance of a system
of internal control which ensures that an
effective risk management framework and
oversight process operates across the
group. The risk management framework and
associated governance arrangements are
designed to ensure a clear organisational
structure with distinct, transparent and
consistent lines of responsibility and effective
processes to identify, manage, monitor and
report the risks to which the group is, or may
become, exposed.
Risk management across the group is
overseen by the Board Risk Committee.
The Committee is responsible for reviewing
risk appetite, monitoring the group’s risk
prole against this and reviewing the day-to-
day effectiveness of the risk management
framework. In addition, the Committee is
responsible for overseeing the maintenance
and development of an appropriate and
supportive risk culture and for providing risk
input into the alignment of remuneration
with performance against risk appetite. The
Committee’s key areas of focus over the last
nancial year are set out on pages117 to 119.
The group closely monitors its risk prole
to ensure that it continues to align with its
strategic objectives as documented on
pages24 to 33. The board considers that
the group’s current risk prole remains
consistent with its strategic objectives.
Risk Appetite
Risk appetite forms a key component of
the group’s risk management framework
and refers to the sources and levels of
risk that the group is willing to assume in
order to achieve its strategic objectives
and business plan. It is managed through
an established framework that facilitates
ongoing communication between the
board and management with respect to the
group’s evolving risk prole. This enables key
decisions concerning the allocation of group
resources to be made on an informed basis.
Risk appetite is set on a top-down basis by
the board with consideration to business
requests and executive recommendation.
Appetite measures, both qualitative and
quantitative, are applied to inform decision-
making, and monitoring and reporting
processes. Early-warning triggers are also
employed to drive required corrective action
before overall tolerance levels are reached.
The group conducts a formal review of its risk
appetites annually, as part of the strategy-
setting process. This aligns risk-taking with
the achievement of strategic objectives.
Adherence is monitored through the group’s
risk committees on an ongoing basis with
interim updates to individual risk appetites
considered as appropriate through the year.
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Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Stress Testing
Stress testing represents another core
component of the risk management
framework and is employed, alongside
scenario analysis, to support assessment
and understanding of the risks to which
the group might be exposed in the future.
As such, it provides valuable insight to the
board and senior management, playing an
important role in the formulation and pursuit
of the rm’s strategic objectives.
Stress testing activity within the group is
designed to meet three principal objectives:
1. Inform capital and liquidity planning–
including liquidity and funding risk
assessment, contingency planning and
recovery and resolution planning;
2. Support ongoing risk and portfolio
management – including risk appetite
calibration, strategic decisioning and
planning, risk/reward optimisation and
business resilience planning; and
3. Provide a check on the outputs/accuracy of
risk models – including the identication of
non-linear effects when aggregating risks.
To support these objectives, stress testing is
designed to cover the group’s most material
risks, with activity conducted at various levels,
ranging from extensive group-wide scenario
analysis to simple portfolio sensitivity analysis.
Stress testing also represents a critical
component of both the rm’s Internal
Capital Adequacy Assessment (“ICAA”) and
Internal Liquidity Adequacy Assessment
(“ILAA”) processes, with scenario analysis
additionally employed as part of the group’s
RecoveryPlan.
Risk Governance
The group’s risk management approach
is underpinned by a strong governance
framework that it considers appropriate to
both the size and strategic intentions of its
businesses.
The framework is founded on a “three lines
of defence” model, as set out below:
The key principles underlying this
approach are that:
• business management owns all the risks
assumed throughout the group and is
responsible for their management on a
day-to-day basis to ensure that risk and
return are balanced;
• the board and business management
together promote a culture in which risks
are identied, assessed and reported in an
open, transparent and objective manner;
• the overriding priority is to protect the
group’s long-term viability and produce
sustainable medium to long-term revenue
streams;
• risk functions are independent of the
businesses and provide oversight of and
advice on the management of risk across
the group;
• risk management activities across the
group are proportionate to the scale
and complexity of the group’s individual
businesses;
• risk mitigation and control activities are
commensurate with the degree of risk; and
• risk management and control supports
decision-making.
Aligned to these core principles, the
governance framework operates through
various delegations of authority from the board
downwards. These cover both individual
authorities as well as authorities exercised via
the group’s risk committee structure.
First line of defence Second line of defence Third line of defence
The Businesses Risk and Compliance Internal Audit
Group Risk and Compliance Committee
(Reports to the Risk Committee)
The Risk Committee
(Reports to the board)
The Audit Committee
(Reports to the board)
The chief executive delegates to divisional
and operating business heads day-to-day
responsibility for risk management, regulatory
compliance, internal control and conduct in
running their divisions or businesses.
Business management has day-to-
day ownership, responsibility and
accountability for:
• identifying and assessing risks;
• managing and controlling risks;
• measuring risk (key risk indicators/early
warning indicators);
• mitigating risks;
• reporting risks; and
• committee structure and reporting.
Key Features
• Promotes a strong risk culture and focus
on sustainable risk-adjusted returns.
• Implements the risk framework.
• Promotes a culture of adhering to limits
and managing risk exposures.
• Promotes a culture of customer focus and
appropriate behaviours.
• Ongoing monitoring of positions and
management and control of risks.
• Portfolio optimisation.
• Self-assessment.
The Risk Committee delegates to the group
chief risk ofcer day-to-day responsibility for
oversight and challenge on risk-related issues.
Risk functions (including compliance) provide
support, assurance and independent
challenge on:
• the design and operation of the risk
framework;
• risk assessment;
• risk appetite and strategy;
• performance management;
• risk reporting;
• adequacy of mitigation plans;
• group risk prole; and
• committee governance and challenge.
Key Features
• Overarching “Risk Oversight Unit” takes
an integrated view of risk (qualitative and
quantitative).
• Supports through developing and advising
on risk strategies.
• Facilitates constructive check and
challenge – “critical friend”/“trusted
adviser”.
• Oversight of business conduct.
The Audit Committee mandates the head
of group internal audit with day-to-day
responsibility for independent assurance.
Internal audit provides independent
assurance on:
• rst and second lines of defence;
• appropriateness/effectiveness of internal
controls; and
• effectiveness of policy implementation.
Key Features
• Draws on deep knowledge of the group
and its businesses.
• Provides independent assurance on the
activities of the rm, including the risk
management framework.
• Assesses the appropriateness and
effectiveness of internal controls.
• Incorporates review of culture and conduct.
Three Lines of Defence
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Close Brothers Group plc
Annual Report 2022
Together, these committees facilitate an
effective ow of key risk information, aswellas
functioning to support appropriate risk
management at each stage of the risk process
lifecycle. They also provide an escalation
channel for any risks or concerns, supporting
the maintenance of an effective risk culture.
Over the past 12 months the group has
further enhanced its risk governance
framework and specically the organisation’s
risk and compliance committees, both at a
group and divisional level. This has included
the continued renement of committee Terms
of References and the evolution of reporting
packs and MI suites. All committees continue
to work efciently and effectively.
Internal Control System
Aligned to the risk governance framework,
oversight across the group is supported
by the maintenance of a range of internal
controls. These cover risk and nancial
management and reporting and control
processes and are designed to ensure the
accuracy and reliability of the rm’s nancial
information and reporting.
The main features of these controls include
consistently applied accounting policies,
clearly dened lines of responsibility and
processes for the review and oversight of
disclosures within the Annual Report. These
controls are overseen by the Audit Committee.
The accounting policies form part of a broader
policy framework, overseen by the board,
that supports the foundation of a strong risk
management structure. Group policies are
supported by group standards, divisional/
business-level policies and procedures which,
together, outline the way in which policy is
implemented and detail the process controls
in place to ensure compliance. Policies and
standards relating to the group’s principal
risks are fully covered within the framework,
and include specic documents relating to
nancial crime compliance (e.g. anti-money
laundering/anti-bribery and corruption) and
whistleblowing.
• Group Risk and Compliance Committee
• Model Governance Committee
• Capital Adequacy Committee
• Asset and Liability Committee
• Credit Risk Management Committee
• Group Credit Committee
• Impairment Adequacy Committee
• Operations and Technology Risk
Committee
• Divisional Risk and Compliance
Committees
Group Board
Board Risk Committee
Risk-Specic Committees
Divisional Committees
Executive Committees
Risk Committee Structure
Risk Committee Overview
Group Risk and Compliance
Committee
Provides oversight of the group’s risk prole, alignment to risk appetite and effectiveness of the
risk management and compliance framework.
Model Governance Committee
Provides oversight of the group’s exposure to model risk through the review, approval and
monitoring of all high materiality models.
Capital Adequacy Committee
Monitors group and bank capital adequacy, inco
rporating capital planning, stress testing,
governance, processes and controls.
Asset and Liability Committee
Provides oversight of risk management and internal control for the bank and its subsidiaries
across liquidity, funding and market risk.
Credit Risk Management
Committee
Monitors the group’s credit risk prole, examining current performance and key portfolio
trends, ensuring compliance with risk appetite.
Group Credit Committee
Reviews material credit transactions and exposures from a credit, reputational, funding
structure and business risk perspective.
Impairment Adequacy Committee
Governs the bank’s impairment process, reviewing the nancial position relating to impairment
and ensuring adequate coverage is held across the portfolio.
Operations and Technology
Risk Committee
Monitors and oversees group-wide operational resilience, including technology, security,
supplier and operational risk appetite, examining industry, regulatory and technical risks.
Divisional Risk and Compliance
Committees
Provide oversight of risk prole, alignment to risk appetite and effectiveness of the risk
management and compliance framework
at a divisional or business level.
Risk Report
continued
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Financial Statements
Strategic Report
This structure establishes a link between
group strategy and day-to-day operations
in a manner consistent with agreed risk
appetite, while simultaneously facilitating
board and executive-level oversight and
assurance as to the application of said
strategy via conformance with underlying
policy and standard requirements.
Review of Effectiveness of Risk
Management and Internal Control
Systems
Throughout the year, the board, assisted by
the Risk Committee and the Audit Committee,
monitors the group’s risk management and
internal control systems and reviews their
effectiveness. This covers all material controls,
including nancial, operational and compliance
controls. The board also reviews the
effectiveness of both committees on an annual
basis. Based on its assessment throughout
the year, and its review of the committees’
effectiveness, the board considers that, overall,
the group has in place adequate systems and
controls with regard to its prole and strategy.
Risk Culture and Awareness
Maintenance of an effective risk management
culture is integral to the group meeting its
regulatory conduct requirements and assisting
the accomplishment of key strategic goals.
The risk culture:
• supports the group and its directors
in meeting their legal and regulatory
obligations, particularly with respect to the
identication and management of risks and
the need for a robust control environment;
• underpins the group’s purpose, strategy,
cultural attributes and divisional values;
• provides enhanced awareness of risk
in business operations by highlighting
strengths and weaknesses and their
materiality to the business and, in turn,
facilitating informed decision-making;
• optimises business performance by
facilitating challenge of ineffective controls
and improving the allocation of resources;
• ensures allocation of capital for operational
risk is proportionate for the risks identied;
• improves the group’s control environment;
and
• assists in the planning and prioritisation of
key projects and initiatives.
While risk management is led by the centre,
it is embedded locally within our businesses.
Managers actively promote a culture in which
risks are identied, assessed, managed
and reported in an open, transparent and
objective manner, and where appropriate
staff conduct is viewed as critical.
All members of staff are responsible for
risk identication and reporting within their
area of responsibility and are encouraged
to escalate risks and concerns where
necessary, either through line or business
management or by following the provisions
of the Group Whistleblowing Policy.
Group Risk Management operates
independently of the business, providing
oversight and advice on the operation of
the risk framework, and assurance that
agreed processes operate effectively
and that a risk and conduct culture is
embedded within the business.
The relationship between risk and reward
is also a key priority with all staff evaluated
against both agreed objectives (the what)
and desired behaviours (the how). This
encourages long-term, stewardship
behaviours together with a strong and
appropriate risk and conduct culture.
For further information on our approach to
remuneration for the group’s directors see
pages123 to 143.
Group Standards
Divisional / Business-
Level Policies
Procedures
Group Policies
ERMF
Group
Business
Group Policy Framework
Open escalation
channels
Escalation of risks
and concerns
encouraged; individual
accountability
Independent
second line
Providing oversight,
advice and assurance
Locally embedded
Risks managed in an
open, transparent and
objective manner
Risk/Reward
Regular evaluations
encourage long-
term, stewardship
behaviours
Risk
Culture
Risk Culture
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Principal Risks
The following pages set out the principal
risks that may impact the group’s ability
to deliver its strategy, the frameworks in
place to mitigate them, and relevant key
developments, both over the last year and
anticipated for the next nancial 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.
This should not be regarded as a complete
and comprehensive statement of all potential
risks faced by the group but reects those
which the group currently believes may have a
signicant impact on its future performance.
Business risk
Business risk is dened as the risk of
realising lower than anticipated prots or
experiencing a loss rather than a prot.
Exposure
The group operates in an environment where
it is exposed to an array of independent
factors. Its protability 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
Winterood or result in additional investment
requirements and higher costs of operation.
Risk appetite
The group seeks to address business risk
through the execution of a sustainable
business model based on:
• focusing on specialist markets where we
can build leading market positions based
on service, expertise and relationships;
• focusing on quality and returns rather
than overall loan book growth or
market share;
• investing in the business for the long term;
• maintaining a strong balance sheet;
• consistently supporting our customers
and clients through the cycle; and
• acting sustainably and responsibly,
considering the needs of all stakeholder
groups and increasing demand for
sustainable products and services.
Measurement
Business risk is measured through a number
of key performance metrics (including those
set out on page 33) and risk indicators at a
business, divisional and group level which
provide transparency on progress and
execution against strategy. These indicators
are typically reported monthly via relevant
risk and nance committees, with oversight
also exercised via the board, most notably
through their review of key nancial metrics
and underlying performance trends.
Alongside these measures, the status of key
group initiatives and projects is also tracked
and discussed, noting the importance of
their successful delivery to the group’s
strategic trajectory.
Mitigation
To support the management of its core
strategy, and help mitigate potential business
Principal Risk Change/Outlook
Business Risk
The risk of realising lower than anticipated prots or experiencing a
loss rather than a prot.
Capital Risk
The risk that the group has insufcient regulatory capital (including
equity and other loss absorbing debt instruments) to operate
effectively, including meeting minimum regulatory requirements,
operating within board approved risk appetite and supporting its
strategic goals.
Conduct Risk
The risk that the group’s behaviours, or those of its colleagues,
whether intentional or unintentional, result in poor outcomes for
customers or the markets in which it operates. It is rooted in the
importance of delivering good customer outcomes at every stage
ofthe customer journey.
Credit Risk
The risk of a reduction in earnings and / or value due to the failure of a
counterparty or associated party, with whom the group has contracted
or is exposed as part of its operations, to meet its obligations in a timely
manner.
Funding and Liquidity Risk
Funding risk is the risk of loss caused by the inability to raise funds
atan acceptable price or to access markets in a timely manner.
Liquidity risk is dened as the risk that liabilities cannot be met when
they fall due or can only be met at an uneconomic price.
Market Risk
The risk that a change in the value of an underlying market variable will
give rise to an adverse movement in the value of the group’s assets.
To support the management of market risk, the group distinguishes
between traded market risk and non-traded market risk, as set out in
the sections that follow.
Traded
Market Risk
Non-Traded
Market Risk
Operational Risk
The risk of loss or adverse impact resulting from inadequate or
failedinternal processes, people and systems or from external events.
This includes the risk of loss resulting from fraud/nancial crime, cyber
attacks and information security breaches.
Reputational Risk
The risk of detriment to stakeholder perception of the rm, leading to
impairment of the business and its future goals, due to any action or
inaction of the company, its employees or associated third parties.
Key:
No change
Risk decreased
Risk increased
Principal Risks and Direction of Outlook
Risk Report
continued
Note: While dened benet pension obligation risk, intra group ri
sk and tax risk are also classied internally as principal ris
ks, none
are deemed sufciently material to impact the group’s ability to deliver its strategy. The group’s dened benet pension scheme
was
closed to new entrants in 1996 and to future accrual in 2012. For further information see Note 25 on pages 187 and 188.
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Annual Report 2022
Governance Report
Financial Statements
Strategic Report
risk, the group maintains a comprehensive
framework covering both the design and
approval of strategy, and the ongoing
monitoring of its implementation.
The group’s core strategic pillars are
regularly reviewed and updated to ensure
we continue to focus on strategic priorities
that support our business model and adapt
to changes and expectations in the external
operating environment.
The group’s long track record of successful
growth and protability 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 the group to continue
to support customers at all stages in the
nancial cycle.
We also build and maintain long-term
relationships with our clients and
intermediaries based on:
• speed and exibility 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 and consistent approach
results in strong customer relationships and
high levels of repeat business.
The group is 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.
Monitoring
On an ongoing basis, strategy is formulated
and managed at an individual business level
through local Executive Committees with
top-down oversight maintained through the
Group Executive Committee. Outputs also
feed into the group’s annual budgeting and
planning process which typically operates
on a three-year time horizon. The group’s
budget and plan is subject to review and
challenge, initially at a business level, and
subsequently by the group’s Executive
Committee ahead of nal submission to the
board who review, challenge and agree the
group’s budget for the followingyear.
The ongoing strategic planning process is
supplemented by an annual board strategy
day, which takes a thematic approach to the
review and challenge of group and business-
level strategic priorities. In addition, a deep dive
on strategy for each business is presented to
the board for discussion on a biennial basis.
New growth initiatives and potential
acquisitions are assessed against both
the group’s strategic objectives and Model
Fit Assessment Framework, to ensure
consistency with the group’s strategic priorities
and the key attributes of its business model.
Capital and liquidity adequacy planning
conducted as part of both the annual ICAA
and ILAA processes is also used to assess
the resilience of the group’s current strategy
and business model in the event of different
stress scenarios. Although not intrinsically
linked, outputs and analysis from both
exercises are used to guide strategic planning.
The annual risk appetite statement review
also ensures that risk appetite, and
supporting key risk indicators, is fully aligned
with the nancial and strategic plan. Agreed
appetite is communicated throughout the
group through the review and approval
of divisional risk appetite statements and
business-level key risk indicators.
The group also conducts monitoring focused
on the external environment (for example,
key market indices, growth of sustainable
products and services). Within credit risk,
all of the banking businesses monitor
agreed external early warning indicators (for
example, movement in housing indices) with
a view to supporting the early identication of
negative trends, and enhancing the group’s
ability to respond appropriately, minimising
potential impact on performance.
In addition to business-level monitoring,
emerging risks are also monitored and
debated on an ongoing basis at all levels of
the group and across all functions. These
include developments in areas concerning
technology, regulation and sustainability,
which have the potential to present both
opportunities and threats. Within the risk
function specically, reporting capabilities
continue to be enhanced to further support
the group’s ability to identify, and more
importantly, respond effectively, to changes
in the external environment and in customer
behaviours with a view to mitigating any
potential impact on business performance.
Change/Outlook
Notwithstanding the continued uncertain
macroeconomic enviro
nment our business
model as outlined on pages 10 to 13
remains proven and resilient. We continue
to focus on supporting our customers,
maintaining underwriting standards and
investing in our business.
As the pressures resulting from Covid-19
have receded these have been replaced
with other macroeconomic and geopolitical
tensions. Accordingly, the group remains
prepared 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.
For further details on emerging risks
and uncertainties see pages 90 to 92.
In addition, further commentary on the
market environment and its impact on
each of our divisions is outlined on pages
65 to 73.
Capital risk
Capital risk is the risk that the group has
insufcient regulatory capital (including equity
and other loss-absorbing debt instruments)
to operate effectively, including meeting
minimum regulatory requirements, operating
within board-approved risk appetite and
supporting its strategic goals.
Exposure
The group’s exposure to capital risk
principally arises from its requirement to
meet minimum regulatory requirements set
out in the Capital Requirements Directive
and from related additional requirements
and guidelines specied by the Prudential
Regulation Authority (“PRA”), and is usually
specied in terms of minimum capital ratios
which assess the level of regulatory capital
and risk weighted assets.
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Risk appetite
The group looks to maintain a strong base
level and composition of capital, sufcient to:
• support the development and growth of
business;
• continue to meet Pillar 1 requirements,
Individual Capital Guidance, additional
Capital Requirements Directive buffers
and leverage ratio requirements; and
• be able to withstand a severe but plausible
stress scenario with satisfactory capital
and leverage ratios.
A prudent capital position is a core part of
the group’s business model, allowing it to
grow and invest in the business, support
paying dividends to shareholders and meet
regulatory requirements.
Capital triggers and limits are maintained
within the risk appetite framework and are
approved by the board at least annually.
Measurement
Capital risk is measured using CET1, Tier 1
and total capital ratios, and leverage 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 pages184 to 186.
Mitigation
The group retains a range of capital risk
mitigants, the most notable being its strong
capital generating capacity, as evidenced by
its track record of sustained protability. It
also maintains access to capital markets and
in recent years has successfully renewed
and increased its Tier 2 capital instruments.
Monitoring
Both actual and forecast capital adequacy
is reported through the group’s governance
framework with oversight from the Capital
Adequacy Committee (“CAC”). Annually, as
part of the ICAAP, the group also undertakes
its own assessment of its capital requirements
against its principal risks (Pillar2a) 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 sufcient
levels of capital adequacy.
The group’s nance team is responsible
for measuring and monitoring the capital
position and reporting to the board on a
regular basis, with any changes to the capital
structure of the group reserved for the CBG
Board. On a monthly basis, the group’s latest
and forecast capital positions are reported
to the CAC, whose membership consists
of nance, business and risk executives
and senior management. The committee
also monitors actual, forecast and stressed
capital metrics under an Internal Ratings
In addition, a number of quantitative and
qualitative key risk indicators are determined
at an individual business level, with reporting
to and oversight via the relevant divisional Risk
and Compliance Committee. Performance
against the key risk indicators is reported to
the Group Risk and Compliance Committee
and the Board Risk Committee as needed.
Mitigation
The following controls and procedures are in
place to help mitigate conduct risk:
• The group takes steps to proactively
identify conduct risks and encourages
individuals across the organisation to feel
responsible for managing the conduct of
their business and/or function.
• The group provides support to colleagues
to enable them to improve the conduct of
their business or function, including training
and specialist training where required.
• The group’s remuneration strategy is
designed to incentivise good behaviours
and due consideration is given to individual
conduct as part of any remuneration.
• Policies and standards set out employee
expectations around key areas including
dealing with clients, dealing with markets,
complaint handling, vulnerable customers,
and conicts of interest. Mandatory staff
training on these topics is provided on a
regular basis.
• All products are subject to a robust
risk-based product development and
review process.
Monitoring
Risk identication and management action
are undertaken by management and
employees as the rst line of defence. Risk
and compliance provide support, review and
challenge, to ensure conduct risk reporting is
robust and remains t for purpose. Compliance
monitoring undertake regular reviews of
key areas, such as complaint handling and
vulnerable customer processes to conrm
customers are experiencing good outcomes.
Group internal audit provide independent
assurance on the control effectiveness of key
areas using a risk-based approach.
All Risk and Compliance Committees are
required to review conduct risk reporting and
outputs and consider any required action.
Where appropriate, issues may be escalated
to both the Group Risk and Compliance
Committee and the Board Risk Committee.
Over the past 18 months, conduct risk
reporting has been enhanced in some of our
businesses to provide increased transparency
and visibility to monitor conduct risk.
Reporting on, and monitoring of, conduct
risk is expected to further evolve with the
introduction of new regulatory requirements
for the Financial Conduct Authority’s (“FCA”)
Consumer Duty for retail customers for our in-
scope businesses of Motor Finance, Premium
Finance, Asset Finance and Savings.
Based approach in order to prepare for
anticipated future transition to this approach.
Change/Outlook
Continuing economic uncertainty may
impact capital in the short to medium
term due to lower than expected prots.
RWA density is expected gradually
to increase as Coronovirus Business
Interruption Loans (“CBILS”) are
renanced. Capital is expected to be
adversely impacted as IFRS9 transitional
effects reduce. The group’s capital
requirements are forecast to increase
by 1.4 percentage points as UK and
Irish countercyclical capital buffers are
introduced. These factors are embedded
in the group’s capital planning process
and distance to risk appetite remains
substantial.
Conduct risk
Conduct risk is the risk that the group’s
behaviours, or those of its colleagues, whether
intentional or unintentional, result in poor
outcomes for customers or the markets in
which it operates. It is rooted in the importance
of delivering good customer outcomes at every
stage of the customer journey.
Exposure
The group is exposed to conduct risk in
its provision of products and services to
customers and through other business
activities that enable delivery. The group
faces a signicant volume of regulatory
change, which is expected to continue over
the near term, aimed at enhancing consumer
protection and maintaining market integrity
given the current economic conditions.
Failure to deliver good customer outcomes
may lead to reputational harm, legal or
regulatory sanctions or customer redress.
Risk appetite
The group recognises the importance of
delivering good customer outcomes and
seeks to avoid customer detriment resulting
from inappropriate judgements or behaviours
in the execution of our business activities. To
support this, it strives to maintain a culture
which places the customer at the heart of
the business model and remains dedicated
to addressing customer dissatisfaction or
detriment in a timely and fair manner.
The group is committed to maintaining the
integrity of the markets in which it operates,
avoiding any abusive or anti-competitive
behaviour.
Measurement
Conduct risk is measured through a number
of business activities which form part of the
Conduct Risk Framework. These activities
span seven areas where harm could occur,
be it intentional or unintentional.
Risk Report
continued
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Governance Report
Financial Statements
Strategic Report
Change/Outlook
Conduct risk has increased in the last
12months.
The economic environment is increasing
pressure on consumers as result of the
higher cost of living. This may widen the
number of individuals and businesses
requiring credit in an environment of rising
interest rates. As a result, support for
customers in nancial difculty, including
vulnerable customers, is expected to
increase. This comes at a time when
the FCA has outlined new requirements
under Consumer Duty, which introduces
Principle 12 and requires rms to act
to deliver good outcomes for retail
customers. It sets a higher standard than
the existing Principle 6 (a rm must pay
due regard to the interests of its customers
and treat them fairly) and Principle 7 (a rm
must pay due regard to the information
needs of its clients and communicate
information to them in a way which is
clear, fair and not misleading) for retail
businesses. Implementation activities for
Consumer Duty are underway and will
be incorporated into the Conduct Risk
Framework. In the meantime, the group
is focused on tailoring its approach to
supporting customers to drive good
customer outcomes.
Credit risk
Credit risk is dened as the risk of a
reduction in earnings and/or value due to the
failure of a counterparty or associated party,
with whom the group has contracted or is
exposed as part of its operations, to meet its
obligations in a timely manner.
Exposure
Credit risk across the group arises
predominantly through the lending activities
of the bank. 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
2022 the group had loans and advances to
customers amounting to £9.1 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.
Further details on loans and advances to
customers and debt securities held are in
notes 11 and 12 on pages 172 to 176 of the
nancial statements. Further commentary on
the credit quality of our loan book is outlined
on pages 195 to 202.
Risk appetite
The group seeks to maintain the discipline
of its lending criteria both to preserve its
business model and maintain an acceptable
return that appropriately balances risk and
reward. This is underpinned by a strong
customer focus and credit culture that
extends across people, structures, policies
and principles. This in turn provides an
environment for long-term sustainable
growth and low, predictable loan losses.
To support this approach, the group
maintains a credit risk appetite framework in
order to dene and align credit risk strategy
with its overall appetite for risk and business
strategies as dened by the board.
The group Credit Risk Appetite Statement
(“CRAS”) outlines the specic level of
credit risk that the group is willing to
assume, utilising dened quantitative
limits and triggers, and covers both credit
concentration and portfolio performance
measures.
All are based on the following key principles:
1. To lend within asset classes we are
familiar with, and in markets we know and
understand.
2. To operate as a predominantly secured,
or structurally protected, lender against
identiable and accessible assets, and
maintain conservative loan to values
(“LTVs”) across our portfolios.
3. To maintain a diversied loan portfolio (by
business, asset class and geography),
as well as a short average tenor and low
average loan size.
4. To rely on local underwriting expertise,
with delegated authority cascaded from
the chief risk ofcer, with ongoing central
oversight.
5. To maintain rigorous and timely collections
and arrears management processes.
6. To operate strong control and governance
within our lending businesses overseen by
a central group credit risk team.
Ultimate responsibility for the approval and
governance of the Group CRAS lies with
the board, on recommendation from the
Group Risk and Compliance Committee
(“GRCC”), with support from the Credit
Risk Management Committee (“CRMC”).
Performance is monitored against agreed
appetites on a monthly basis.
The CRAS is embedded into business unit
credit risk management through a hierarchy of
local triggers and limits, which are approved
by the CRMC (or the chief credit risk ofcer
depending on materiality) and include
formal caps and triggers against which
performance is similarly monitored monthly
via local Risk and Compliance Committees
(“RCCs”). Material breaches are escalated via
established governance channels.
Conduct Risk Framework
Conduct Risk
Framework
Governance
Product
Customer /
Client
Culture &
Behaviour
Business
Process
External
Risk
Infrastructure
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Whilst diverse, our businesses adhere to a
set of common lending principles resulting in
stable portfolio credit quality and consistently
low loss rates through the cycle.
The bank’s common lending principles are
as follows:
1. Predominantly secured lender:
97.7% of loan book secured or
structurally protected.
2. Short average tenor: portfolio residual
maturity of 17 months.
3. Low average loan size: approximately 42%
of loan book has a value of less than £50k.
4. Diversied portfolio: by sector, asset class
and UK geography. Low single-name
concentration risk with the top 10 facilities
representing less than 5% of book.
5. Local underwriting expertise with central
oversight: focus on assets “we know and
understand”, with continued investments
in people and systems.
We seek to minimise our exposure to credit
losses by applying these strict lending criteria
when testing the credit quality and covenant
of the borrower and maintaining consistent
and conservative loan to value ratios with low
average loan size and short-term tenors. All
lending criteria and assessment procedures
are thoroughly documented in robust credit
policies and standards, at both a bank and
business level.
Expertise
We also employ credit risk staff across our
various businesses who are specialists in
their area and can support book growth in
a manner that is consistent with both risk
strategy and appetite. This local distribution
allows us to form strong relationships with
our customers and intermediaries based on
a deep understanding of their needs and the
markets in which they operate. Consistent
underwriting disciplines and lending against
assets that we know and understand
benets customers through the cycle and
allows us to maintain our track record of
strong margins and protability.
Governance framework and oversight
Our lending is underpinned by a strong
control and governance framework both
within our lending businesses and through
oversight via a central group credit risk team.
Credit underwriting is undertaken either
centrally or through regional ofce networks,
depending on the nature of the business and
the size and complexity of the transaction.
Underwriting authority is delegated from
the Board Risk Committee, with lending
businesses approving lower-risk exposures
locally subject to compliance with credit
policy and risk appetite.
Local risk directors assure quality of
underwriting decisions for all facilities within
the business’s delegated sanctioning
authority level via a quality assurance
programme which samples new business
underwritten, with a particular focus on
lending hotspots; for example, long-tenor
agreements, new asset classes, or high
LTVs. Outputs are reported at least
quarterly with consolidated summaries
presented at CRMC.
These underwriting approaches are
reinforced by timely collections and arrears
management, working in conjunction with
the customer to ensure the best possible
outcome for both customer and the group.
The local model is supported by central
oversight and control. An independent
central credit risk function provides ongoing
monitoring of material credit risks through
regular reviews of appetite and policy.
CRAS metrics are closely aligned with the
bank’s overall strategy to facilitate monitoring
of the composition and quality of new
lending to ensure it remains within dened
appetite.
Measurement
Consistent, accurate and consolidated Credit
Risk Management Information (“CRMI”)
represents a key tool for effective credit risk
management and measurement. CRMI
facilitates the identication, measurement,
monitoring and control of all material credit
risks within the lending portfolios, setting
clear credit risk appetite within which all
lending is originated and ensures that
asset portfolios are grown responsibly and
protably.
A central repository facilitates:
• the use of common data denitions for
CRMI across all business units;
• consistent and controlled extraction and
housing of credit data from the bank’s
core business systems;
• dynamic credit risk management to
improve strategic policy decision-making;
• oversight and control of the prole of the
lending book to manage to credit risk
appetite;
• identication, monitoring and control
of material credit risks against a clear
and communicated credit risk appetite
statement.
Mitigation
Credit assessment/lending criteria
Our general approach to credit mitigation is
based on the provision of affordable lending on
a secured or structural protected basis, against
assets that we know and understand. These
assets are typically easily realisable with strong
secondary markets and predictable values,
and spread across a broad range of classes
within established sectors.
Impairment
Adequacy
Committee
Policy &
Governance
Exceptions &
Large Deals
Third-line Oversight
Credit Risk Appetite Statements /
Early Warning Indicators
Credit Risk
Management
Committee
Group Risk
and Compliance
Committee
Group
Credit
Committee
Models
Governance
Committee
Board Risk Committee
Risk-Specic Committees
Group Internal Audit
Divisional Risk Committees
Credit Risk Governance Framework
Risk Report
continued
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Financial Statements
Strategic Report
Counterparty risk mitigation
Exposures to counterparties with whom
we trade or place deposits are mitigated by
continuous monitoring of the credit quality
of our counterparties within approved set
limits and Winterood’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.
Monitoring
High-level requirements are outlined
in standards documents covering the
identication, monitoring and management
of problem lending, with detailed credit
policy and guidance formalised within local
credit policies, including guidelines on the
identication and treatment of vulnerable
customers.
This includes the documentation of internal
policy and process for monitoring, recording
and approving problem credits at all levels
of exposure, business-specic denitions
of criteria for identifying problem cases and
requirements for outlining the courses of
action available to protect our position, taking
account of the terms/covenants of facilities,
security enforcement options, legal remedies
and third-party intervention (for example,
brokers).
This process is owned by the risk directors,
ensuring that prompt action is taken to
review the nancial conditions of customers
when warning signs indicate deterioration
in nancial health, credit quality, covenant
compliance or asset strength/coverage.
Where possible, credit limits are amended
where there is evidence of delinquency or
deteriorating nancial condition/capacity
torepay.
Our credit risk framework aligns with the
broader “three lines of defence” approach,
with a governance structure owing
from local rst line business teams, up to
second line risk directors (and key oversight
committees such as Credit Committees,
divisional RCCs, CRMC, Model Governance
Committee (“MGC”) and the BRC) overlaid
with a third line group internal audit function.
First line credit risk management
Lending businesses have primary
responsibility for ensuring that a robust risk
and control environment is established as
part of day-to-day operations, and good
quality credit applications are brought
forward for consideration. They are also
responsible for ensuring that their activities
are compliant with the rules and guidance
set out in local credit policies and processes.
Each business unit has its own formalised
credit risk appetite and policy documents,
approved by divisional RCCs. This risk
culture is facilitated by local prot and loss
ownership, ensuring a long-term approach
is taken, with an understanding of how loans
will be repaid.
Credit risk oversight and control
The second line of defence has three tiers:
business-aligned risk directors and their
teams, the central group credit risk team,
and oversight committees. The risk directors
in the bank, who report to the chief credit
risk ofcer, are responsible for setting
and communicating credit risk strategy,
identifying exceptions and ensuring local
compliance. Similarly, the risk heads in
Close Brothers Asset Management and
Winterood Securities, and the asset and
liability management risk lead, ensure that
their respective operations are performed in
line with the group nancial institution and
non-banking nancial institution credit risk
standards and also report up through their
divisional RCCs. The group credit risk team
provides a further layer of oversight and
approval, supported by credit committees,
CRMC, MGC, GRCC and the BRC. Together,
the second line of defence provides a clear
tactical and strategic understanding of
credit risk, proposing enhancements to the
credit risk framework for ongoing effective
management and control.
The third line of defence is the group internal
audit function. They use both a risk-based
approach and a rolling programme of
reviews to ensure that the rst and second
lines of defence are working effectively.
Change/Outlook
Credit losses have increased in the year
to 31 July 2022, reecting the impacts of
ongoing market uncertainty, which we
continue to monitor closely. While direct
Covid-19 impacts have receded, the overall
credit risk outlook reects a heightened
level of uncertainty in the macroeconomic
environment in the short- to medium-term
due to a combination of evolving factors.
These include the ongoing conict in
Ukraine, supply chain disruption, the rising
cost of living, and ination. 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 monitored. These factors could
result in higher credit losses in the future.
Bad debt levels are broadly consistent
year-on-year, with these new challenges
offsetting earlier improvements in the
macroeconomic outlook as we emerged
from the pandemic. Risk appetite has
remained consistent with our prudent,
through-the-cycle underwriting standards.
Forbearance levels have further decreased
from those observed at the peak of the
pandemic; however, they remain above
historical, pre-pandemic levels.
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
195 to 202. Further details on loans and
advances to customers and debt securities
held are in Notes 11 and 12 on pages 172
to 176 of the nancial statements. Our
approach to credit risk management and
monitoring is outlined in more detail in note
28 on pages 195 to 202.
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Funding and liquidity risk
Funding risk is dened as the risk of loss
caused by the inability to raise funds at an
acceptable price or to access markets in a
timely manner.
Liquidity risk is dened as the risk that
liabilities cannot be met when they fall due or
can only be met at an uneconomic price.
Exposure
Funding and liquidity are managed on a
separate legal entity basis with each division
responsible for ensuring it maintains sufcient
liquidity for its own purposes. The group’s
divisions operate independently of each other
with no facilities or other funding arrangements
in place between them, and there is no liquidity
reliance between the different divisions.
Close Brothers Group plc has relatively
few material cash requirements and all
requirements are known in advance; for
example, external dividends. It meets its
cash requirements through deposits placed
with the Banking division and the group’s
committed borrowing facilities.
The Banking division’s funding prole benets
from a broad array of liabilities, comparable
with those of much larger banks. Its diversied
approach to funding includes using secured
funding, unsecured funding, retail deposits
and non-retail deposits. Funding risk
exposure primarily arises if it is unable to
obtain the necessary funding to support its
asset positions for the maturity expected to
be required. Unsustainable or undiversied
funding bases, such as an over-reliance on
short-term deposits, can increase the level
of risk and can lead to a deviation from the
funding plan. In turn this can increase the
costs of raising new funds, reducing our ability
to originate new assets and potentially leading
to negative market or customer perception.
The Banking division’s Internal Liquidity
Adequacy Assessment Process (“ILAAP”)
covers potential event drivers of a range
of stress testing scenarios, including
idiosyncratic examples, to ensure liquidity
management remains a source of strength
with a robust and prudent approach
to assessing and maintaining liquidity
requirements in place.
Funding and liquidity risk in Winterood
Securities is driven from four primary
sources: long trading book risk positions;
overnight and intraday normal and failed
settlement; margin requirements; and
multiday client orders. Winterood maintains
risk appetite sufcient to ensure continued
compliance with Individual Liquidity
Guidance (“ILG”) set by the regulator.
For Close Brothers Asset Management, cash
requirements, such as payroll and dividends
to the group, are known in advance. Funding
and liquidity risks are considered through the
division’s cash ow forecasting, ensuring that
sufcient liquidity is maintained to cover the
next three months of outows.
Further detail on the group’s funding and
liquidity exposure is provided on page 64 of
the Financial Overview and page 204 of the
nancial statements.
Risk appetite
The group adopts a conservative approach
to funding and liquidity risk and seeks to
maintain a distinctive funding and liquidity
position characterised by preserving a simple
and transparent balance sheet, sustaining a
diverse range of funding sources and holding
a prudent level of high quality liquidity. As
such, the weighted average maturity of its
funding is longer than the weighted average
maturity of its lending portfolio.
These objectives form the basis for the
Group Funding and Liquidity Risk Appetite
Statement, approved annually by the board,
which outlines the specic levels of funding
and liquidity risk that the group is willing to
assume. Given the materiality of the Banking
division, this is primarily focused on the levels
of risk assumed within the bank.
Measurement
A variety of metrics are used to measure
the Banking division’s funding and liquidity
position to ensure compliance with both
external regulatory requirements and internal
risk appetite. These cover both the short and
long-term view of liquidity and funding and
have limits and early-warning indicators in
place that are approved via the Asset and
Liability Committee (“ALCO”). These metrics
include term funding as a percentage of loan
book, weighted average tenor of loan book
versus weighted average tenor of funding,
available cash balance with the Bank of
England and liquid to total asset ratio.
The primary measurement tool for funding
is the Banking division’s funding plan which
seeks to ensure that the bank maintains
a balanced and prudent approach to its
funding risk that is in line with risk appetite.
The funding plan is supplemented by metrics
that highlight any funding concentration risks,
funding ratios and levels of encumbrance.
Liquidity is managed in accordance with the
ILAAP which is approved by the board. In
addition to regulatory metrics, the banking
division also uses a suite of internally
developed liquidity stress scenarios to
monitor its potential liquidity exposure daily
and determine its high quality liquid asset
requirements. This ensures that the bank
remains within risk appetite and identies
potential areas of vulnerability. The outcomes
of these scenarios are formally reported to
the ALCO, GRCC and the board.
Mitigation
Our funding approach is based on the
principles of “borrow long, lend short”
and ensuring a diverse range of sources
and channels of funding. In the Banking
division, retail and corporate customer
funding is supported by wholesale funding
programmes including unsecured medium-
term notes and securitisation programmes.
The bank has also drawn against the
Bank of England’s TFSME scheme, that
was introduced to support lending in the
prevailing low interest rate environment. This
approach provides resilience and exibility.
Total available funding is kept well in excess
of the loan book funding requirement 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 ALCO.
Monitoring
Liquidity is measured and monitored on a
daily basis with monthly reports forming
standing items for discussion at both the
ALCO and GRCC, with the Board Risk
Committee maintaining overall oversight. Any
liquidity and funding issues are escalated as
required to the ALCO, and then onwards to
the GRCC and the Board Risk Committee.
The bank operates a three lines of defence
model, with Treasury responsible for the
measurement and management of the
bank’s funding and liquidity position and
Asset and Liability Management (“ALM”) risk
providing independent review and challenge.
ALCO provides oversight of funding and
liquidity and supports the relevant senior
managers in discharging their senior
management function responsibilities.
Change/Outlook
Economic uncertainty has continued over
the last 12 months, increasing market
competitiveness. Despite the challenges
this has presented, the Banking division’s
ability to fund the loan book has been
largely unaffected and it continues to retain
access to a wide range of funding sources
and products. Similarly, elevated levels of
liquidity have continued to be maintained
despite market volatility and uncertainty.
The Banking division successfully issued a
new £200 million securitisation transaction
in April 2022 and has continued to
enhance its current retail product range.
For example, this year saw the launch of
a new version of our Personal Fixed Rate
Bond product which has greatly increased
operational efciencies and allowed us to
scale up our level of xed funding. ISAs
continue to feature heavily in our range and
represent a key product for growth.
Risk Report
continued
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Strategic Report
Market risk
Market risk is dened as the risk that
a change in the value of an underlying
market variable will give rise to an adverse
movement in the value of the group’s assets.
Market volatility impacting equity and
xed income exposures, and/or changes
in interest and exchange rates, has the
potential to impact the group’s performance.
To support the management of market risk,
the group distinguishes between traded
market risk and non-traded market risk, as
set out in the sections that follow.
Traded market risk
Exposure
Traded market risk in the group only arises in
Winterood Securities, whose core business
is to provide liquidity and interact with the
market on a principal basis, holding positions
in nancial instruments as a result of its client
facilitation activity.
Winterood operates as a market maker
in equities, exchange-traded products,
investment trusts and sovereign and
corporate bonds, operating across three
primary markets: the United Kingdom, North
America and Europe. For hedging purposes,
a number of derivatives are also traded,
although these are limited to listed futures in
UK equity and xed income markets.
See page 203 for details of the group’s trading
book exposure to market price risk.
Risk appetite
Winterood’s strategic objectives and
business plan are centred on its ability to
continue transacting in the markets in which
it operates, in the manner it has historically.
The group sets its risk appetite accordingly,
acknowledging that an acceptable level of
traded market risk must be incurred for the
business to operate effectively.
Winterood seeks to always ensure sufcient
levels of capital and liquidity are maintained
to cover its traded market risk exposure.
Measurement
Traded market risk is measured against a
set of dened risk limits set at overall global,
desk and individual stock levels, on both
an intraday and end-of-day basis. These
limits are monitored via a combination of
internally developed, and external, industry
leading systems on an intraday and overnight
basis against a limit framework aligned to
the company risk appetite. The framework
incorporates:
• Market risk appetite being managed via
trading book exposures limits. These are
set using gross cash positions and the
sterling value of a basis point (“SV01”) for
products with interest rate exposure.
• Adoption of a real-time limit monitoring
system, along with end-of-day summary
reports to track equity, xed income
and foreign exchange (“FX”) book cash
exposure risk against agreed limits.
• Minimal exposure to derivatives (limited to
hedging of interest rate exposures and FX
positions resulting from trades in foreign
currencies).
Mitigation
The management of traded market risk is
fully embedded under Winterood’s training
and governance framework. Key attributes
include:
• An established training programme for
junior dealers, requiring their supervision
by a senior dealer until deemed competent
to trade on their own.
• The provision of training to all new
joiners and newly certied staff by front
ofce controls. This includes market risk
considerations as well as detail regarding
order entry controls.
• The maintenance of risk mandates for all
traders, detailing the rm’s market-making
strategy, controls frameworks and policies
and procedures.
• Oversight of all risk issues, including
traded market risk, via the Winterood Risk
and Compliance Committee. Management
information and key risk indicators are
reported to the committee on a monthly
basis with escalation to the Group Risk
and Compliance Committee and Board
Risk Committee in case of need.
• The maintenance of a Group Market Risk
Policy and specic Traded Market Risk
Standard, outlining minimum governance
requirements and escalation.
• Order entry controls in place across
the trading oor, limiting, amongst
other trading variables, the amount of
capital that can be committed per order
(these are documented in a front ofce
procedure).
• Daily total value traded caps to limit the
amount the business can trade through a
single broker.
• Minimal exposure to derivatives (limited
to conservative hedging of FX positions
resulting from trades in foreign currencies).
Monitoring
Building on the use of real-time limit
monitoring (see above), the monitoring of
traded market risk is embedded across all
three lines of defence. Top-down visibility
is exercised via the Winterood Risk and
Compliance Committee which retains regular
oversight of core traded market risk MI and
key risk indicators, as well as stress testing
outputs and policies and standards.
The Winterood risk team works in
conjunction with the front ofce controls
team to ensure the management of
traded market risk is correctly aligned to
documented controls. To support this, MI
dashboards are utilised alongside daily
reporting to help manage market risk on a
daily and intraday basis.
Change/Outlook
While the impacts of Covid-19 have largely
fallen away, in recent months China’s
economy has been impacted by further
lockdowns which has had an onward
impact to global markets and supply
chains. This has been coupled with a
rising interest rate environment, driven by
ination, and a backdrop of global political
uncertainty, driving higher volatility into
what is now a bear market.
The Investment Firms Prudential Regime
(“IFPR”) has been introduced in the
past 12 months, changing the way the
company calculates capital. From a
market risk perspective this has had very
little impact in the calculations we perform
for the regulator or those we conduct
internally. Over the next 12 months it
was expected that the introduction of
the Fundamental Review of the Trading
Book (“FRTB”) may change the rm’s
calculation of regulatory capital; however,
the implementation of this regulation has
been delayed.
Non-traded market risk
Exposure
The group’s non-traded market risk exposure
consists of interest rate risk in the banking
book (“IRRBB”) and foreign exchange risk.
Interest rate risk is predominantly incurred in
the Banking division as a result of the bank’s
lending and funding activities.
Foreign exchange risk is incurred across the
group and arises from:
• managing the funding requirements of
the bank’s lending subsidiaries through
deposit gathering and wholesale funding
and managing the associated FX risks;
• conducting foreign exchange payment
services on behalf of the group; and
• non-sterling investments.
Further detail on the group’s exposure to
non-traded market risk is outlined in note28
on pages 202 and 203 of the nancial
statements.
Risk appetite
The group has a simple and transparent
balance sheet and a low appetite for interest
rate risk which is limited to that required to
operate efciently. The group’s policy is to
match repricing characteristics of assets and
liabilities naturally where possible or by using
interest rate swaps to secure the margin on
its loans and advances to customers.
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The group also has a low appetite for foreign
exchange risk, avoiding large open positions
and applying individual currency limits to
mitigate risk.
The group does not use nancial instruments
for speculation although it retains a limited
risk appetite to take advantage of prot
opportunities that may arise in the normal
course of business.
Measurement
The group recognises three main sources of
IRRBB which could adversely impact future
income or the value of the balance sheet:
• 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
into certain assets and liabilities; and
• basis risk – the risk presented by a
mismatch in the interest rate reference rate
for assets and liabilities.
IRRBB is assessed and measured by
applying key behavioural and modelling
assumptions including, but not limited to,
xed rate loans subject to prepayment risk,
behaviour of non-maturity assets, treatment of
own equity and the expectation of interest rate
options. This is performed across a range of
regulatory prescribed and internal interest rate
shocks approved by the bank’s ALCO.
Two measures are used for measuring
IRRBB, namely Earnings at Risk (“EaR”) and
Economic Value (“EV”):
• EaR measures short-term impacts to
earnings, including basis risk, highlighting
any earnings sensitivity should rates
change unexpectedly.
• EV measures longer-term earnings
sensitivity due to rate changes, highlighting
the potential future sensitivity of earnings,
and ultimately risk to capital.
The group is exposed to transaction,
translation and structural foreign exchange
risk. Transaction risk is measured daily
within Treasury based on net cash ows and
contracted future exposures. Translation
risk is monitored within local business units
monthly, translating non-UK prots regularly
to mitigate uctuations in foreign exchange
rates. Structural risk is assessed at least
annually as part of the group’s ICAAP and is
deemed to be immaterial.
Mitigation
As noted above, the group maintains a low
appetite for interest rate risk with simple
hedging strategies in place to mitigate risk.
The Banking division’s treasury is responsible
for hedging the non-traded interest rate risk.
Any residual risk which cannot be naturally
matched is hedged utilising vanilla derivative
transactions to remain within prescribed risk
limits. The ALCO is responsible for approving
any changes to hedging strategies before
implementation.
Derivative transactions can only be
undertaken with approved counterparties
and within the respective credit risk limits
assigned to those counterparties.
Foreign exchange exposures are generally
hedged using foreign exchange forwards or
currency swaps with exposures monitored
daily against approved limits.
Monitoring
ALCO is responsible for monitoring the
non-traded market risk of the current and future
risk prole within dened limits. Treasury are
responsible for day-to-day management of all
non-traded market risks. Day-to-day oversight
of non-traded market risk is exercised via a
combination of daily reporting by bank nance
and review and challenge through local RCCs.
Further independent oversight is provided via
the second line of defence through ALM risk,
with monthly reporting into the ALCO.
Local businesses have operational
processes and controls in place to monitor
their exposure to IRRBB and ensure it
remains within approved local risk appetites.
Any exceptions are reported to ALM risk on
the same working day. Residual IRRBB that
is not transferred into treasury for central
management through the Banking division’s
funding transference process is monitored
by the local business through their RCC.
ALM risk is responsible for maintaining
processes and controls to monitor the
divisional position and report exposures to
ALCO, and subsequently GRCC and Board
Risk Committee. An ALM system is deployed
as the primary source for IRRBB reporting
and risk measurement.
Change/Outlook
In recent years, the Banking division’s
exposure to IRRBB has been driven by
embedded optionality with some variable
rate lending businesses utilising contracts
with oors. With rates now rising, this
embedded optionality risk is decreasing,
with repricing risk now the biggest driver
of EaR. The Banking division currently
has positive sensitivity under both up and
down rate scenarios for the group’s EaR
as shown in note 28 on page 202.
Operational risk
Operational risk is dened as the risk of
loss or adverse impact resulting from
inadequate or failed internal processes,
people and systems or from external events.
This includes the risk of loss resulting from
fraud/nancial crime, cyber attacks and
information security breaches.
Exposure
The group is exposed to various operational
risks through its day-to-day operations, all of
which have the potential to result in nancial
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 nancial performance, capital, liquidity
and the markets in which we operate.
Risk appetite
We manage our exposure to operational
risk through a balanced consideration of
investment case and risk, accepting that it is
not proportionate or feasible to fully eliminate
operational risk.
In line with the group’s conservative
approach to risk management, we
implement controls in a manner that reduces
the likelihood of higher-impact risk events
crystallising. Further, we monitor aggregate
loss trends and seek to limit aggregate
losses arising in any given year.
The group has limited appetite for operational
risks with signicant residual exposure and as
such requires a near-term mitigation strategy
for any such identied risks.
Measurement
Operational risk is measured through Key
Risk Indicators (“KRIs”), observed impact
of risk incidents, risk and control self-
assessment and scenario analysis.
Each key risk within operational risk has a set
of dened KRIs. These are regularly monitored
via local, divisional and group committees with
exceptions reported to both the GRCC and
Board Risk Committee. The population of KRIs
is reviewed annually in line with the scheduled
review of the rm’s risk appetite.
Operational risk incidents are identied
and recorded in a common system. This
facilitates root cause analysis, enables
thematic and trend an
alysis, and enables
the consistent delivery of management
information into risk committees.
Risk and control self-assessments are
completed by risk owners on a regular basis.
This enables the consistent identication and
assessment of key risks and controls. Where
a risk owner self-assesses elevated levels of
residual risk, additional management action
is considered.
Risk Report
continued
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Financial Statements
Strategic Report
Key Operational Risks
Scenario analysis is utilised to identify and
consider potential low frequency/high impact
events. Complementary approaches to
desktop scenario analysis and scenario
testing are deployed to test the efcacy of
risk and control self-assessments, evaluate
the resilience of important business services
and drive Pillar 2a operational risk capital
calculations.
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 benet
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 prole;
and
•
planning and rehearsing strategic and
operational responses to severe but
plausible stress scenarios.
Robust model risk framework embedded across the
group to reduce the risk of potential adverse outcomes
arising from the use of models.
The group uses models for a range of different purposes,
including provisioning, stress testing, credit approval, risk
management and nancial reporting. In doing so, it seeks
to minimise the occurrence of nancial loss, lost income or
reputational damage as a result while ensuring transparency
regarding the level of model risk incurred.
A model risk framework is embedded across the group to
manage and mitigate risk through the model lifecycle. This
is underpinned by a Group Model Risk Policy and various
supporting standards and procedures outlining clear roles and
responsibilities in terms of model risk management. A dedicated
model risk management team is also in place, responsible for
the independent validation of all models, the identication of
potential limitations and assumptions and the proposal of approval
recommendations, including the use of expert judgement to adjust
model outputs or identify appropriate post-model adjustments.
The MGC provides oversight of the group’s exposure to model risk
through the review, approval and monitoring of material models
used within the group, alongside regular reporting on a set of
dened key risk indicators which form part of the Group Risk
Appetite. Ongoing evolution of the model risk framework is aligned
to the rm’s ongoing advanced internal rating based (“AIRB”)
application.
The group recognises the importance of protecting
information and systems from the ever-growing cyber
threat faced by the nancial services industry.
The group uses an industry standard framework to anchor its
cyber risk management, continually assessing and developing
its maturity. We acknowledge the challenge of preventing all
incidents as the capabilities and tactics of malicious actors
advance and focus efforts across a spectrum of controls to
mitigate occurrence and potential impacts.
A group chief information security ofcer maintains a dedicated
team and sets the policy for the group’s posture, with an
emphasis on delivering controls against identied external and
internal threats.
The cyber risk management lifecycle is aligned to the group’s
broader approach to operational risk management. The group
has strategic partnerships with external experts, participates
in industry fora and utilises the three lines of defence model to
manage cyber risk. This is underpinned by supporting standards
and baselines which set the terms for the management of
cyber risk. The Board Risk Committee has oversight of the
group’s cyber risk prole, supported by detailed oversight by the
Operations and Technology Risk Committee.
Operational Risk Areas of Focus
Data
Protection
Information
Security
Financial
Crime
Fraud
Third
Party
Workplace
Data
Technology
Process
People
Model
Regulatory
and
Compliance
Operational Risk
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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.
Monitoring
The board delegates authority to the GRCC
to manage the group’s operational risk
framework on a day-to-day basis and provide
oversight of its exposure. The committee
is supported by the Operations and
Technology Risk Committee (“OTRC”) which
is responsible for oversight of technology,
information security, third party and certain
other resilience-related risks. Regular
management information is presented to and
discussed by these committees.
The risk function has a dedicated operational
risk team that is responsible for maintaining
the framework, toolsets and reporting
Reputational risk
Reputational risk is dened as the risk of
detriment to stakeholder perception of the
rm, leading to impairment of the business
and its future goals, due to any action or
inaction of the company, its employees or
associated third parties.
Exposure
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. The group
remains exposed to potential reputational
risk in the course of its usual activities,
such as through employee, supplier or
intermediary conduct, the provision of
products and services, crystallisation of
another risk type, or as a result of changes
outside of its inuence.
Risk appetite
The group has a strong reputation which it
has built over many years and considers it
a valuable asset, managing it accordingly
through consistent focus on a set of cultural
and responsible attributes. The group has
no tolerance for behaviours that contradict
these attributes in a manner that could harm
the organisation, and avoids engaging with
third parties, markets or products that would
inhibit the rm’s adherence to them.
The group seeks to operate in a responsible
manner that has client outcomes at the heart
of everything that it does. Protection of the
group’s reputation is rmly embedded in its
business-as-usual activities, and the group,
as part of its overall strategy, adopts a prudent
approach to risk taking.
necessary for effective operational risk
management. Operational risk managers
are aligned to businesses with a technical
second line of defence team providing
specialist oversight of technology,
information security, data and resilience-
related risks. Monitoring of all operational
risk types is conducted via divisional RCCs
with escalation to the GRCC and Board Risk
Committee as appropriate.
In addition to the delivery of standardised
management information across all
operational risks, periodic deep dives are
also conducted on key focus areas and
reviewed by the GRCC and Board Risk
Committee. In the last year, these have
covered third party risk, cyber and more
broadly operational resilience. Further
independent assurance is obtained through
reviews conducted by the compliance
monitoring team, specialist external partners
(e.g. regarding cyber risk management), and
group internal audit.
Change/Outlook
Operational risks arising from Covid-19
subsided during the year following a
global vaccine rollout. Ways of working
have stabilised with associated control
environment considerations having
embedded. Investments in operational
and cyber resilience continue to
deliver improved control maturity.
Notwithstanding these improvements,
the overall operational risk prole has
increased. Drivers include market-wide
people risks relating to recruitment and
retention, industry-wide information
security, cyber threats and supply
chain impacts arising from the Russian
/ Ukrainian conict and expected
increasing trends in attempted external
fraud coinciding with increasing cost of
living pressures.
Drivers
Impact Areas
Reputational
Risk
1. Employee conduct
2. Supplier and intermediary conduct
3. Products and services
4. Changes in business/societal conduct
5. Crystallisation of another risk type
1. Customers and clients
2. Intermediaries
3. Employees
4. Suppliers
5. Regulators and government
6. Communities and the environment
7. Investors
Core Drivers of Reputational Risk
Risk Report
continued
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Financial Statements
Strategic Report
The group also recognises that its reputation
is linked to broader responsibilities to help
address social, economic and environmental
challenges, and maintains appropriate
sustainable objectives that the group sets
itself as a business.
Measurement
The group recognises ve core drivers of
reputational risk and considers potential
impact across seven areas as shown in the
diagram.
Risk identication and subsequent
management action are embedded within
business-as-usual activities.
Additionally, the group actively monitors for
changes in the business, legal, regulatory
and social environment in which it operates to
ensure the timely identication, assessment
and mitigation of any potential reputation
concerns that may arise following changes in
the expectations of key stakeholders.
Mitigation
Reputational risk mana
gement is embedded
through 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.
In addition, the group maintains policies and
standards that serve to protect the group’s
reputation, most notably those covering
anti-bribery, conicts of interest, dignity at
work and high-risk client policies. These
are regularly reviewed and updated with
staff receiving annual training to reinforce
understanding of their obligations.
The group crisis management team
supports management of cases where
there is a potential risk of reputational impact
on the group on an exceptional basis. A
communications plan also forms part of the
group’s recovery plan, which sets out core
principles to ensure fair and transparent
communication, to control the risk of
misinformation and minimise any negative
reaction to the implantation of recovery options.
Monitoring
Reputational risk is considered across all
three lines of defence as part of oversight
and assurance activities.
Adherence to the group’s cultural framework
is monitored through the culture dashboard,
which is reported to the board on a quarterly
basis and includes key metrics in relation
to culture across the group and each of its
divisions. Customer forums are also in place
across the rm, reinforcing the organisation’s
commitment to favourable client outcomes.
Regular engagement with our investors
also enables open communication with this
stakeholder group.
A series of sustainability forums and
committees operate at a divisional and
group level to ensure that the organisation
appropriately addresses its sustainable and
responsible priorities and expectations of
wider stakeholder groups.
Change/Outlook
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.
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Emerging Risk/Uncertainty Mitigating Actions and Key Developments Outlook
Economic uncertainty
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 nancial and capital position, we aim
to be able to absorb short-term economic
downturns, respond to any change 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 nancial
position by carrying out regular stress testing
on our performance and nancial position in
the event of adverse economic conditions.
The group adopts a prudent and conservative
approach and regularly reviews its risk
appetite to ensure it remains appropriate in
the prevailing economic environment.
There remains signicant ongoing
uncertainty regarding the future economic
trajectory in both 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
diversied business model is shown on
pages 10 to 13 with commentary on the
market environment and its impact on each
of our divisions outlined on pages 65 to 73.
Geopolitical uncertainty
The group operates predominantly in the UK
and Republic of Ireland, with approximately
99% of our loan book exposure to the UK,
Republic of Ireland and Channel Islands.
Monitoring is in place to track changes in
the geopolitical landscape that could have
an impact on the group and its operations,
its customers and its supply chain, either
directly or indirectly.
The group has a strong nancial position
and maintains capital and liquidity levels
well in excess of regulatory minimums.
Further information on the group’s nancial
performance during the year can be found
on pages 61 to 73
Regular stress testing is undertaken on our
performance and nancial position in the
event of various adverse conditions to test
the robustness and resilience of the group.
The group adopts a prudent and
conservative approach and regularly
reviews its risk appetite to ensure it remains
appropriate in the prevailing geopolitical and
economic environment.
The geopolitical environment remains
uncertain, with conict in Ukraine, possible
Brexit-related changes to the Northern Ireland
protocol and the potential for a Scottish
independence referendum amongst others.
Going forward, we will continue to closely
monitor changes in the geopolitical
landscape and regularly test the nancial and
operational resilience of the group under an
evolving range of scenarios.
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:
identied by directors
and executives at a group level via the
GRCC and the board.
• Bottom-up:
identied at a business
level and escalated, where appropriate,
via risk updates into the GRCC.
Additionally, active monitoring of the
correlation impacts across emerging risks,
uncertainties and principal risks is undertaken.
Group-level emerging risks are monitored by
the GRCC and Board Risk Committee on an
ongoing basis, with agreed actions tracked
to ensure the group’s preparedness should a
risk crystallise.
Emerging risks and uncertainties currently
tracked by the group include:
Risk Report
continued
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Emerging Risk/Uncertainty Mitigating Actions and Key Developments Outlook
Financial loss or
disruption resulting
from the impacts of
climate change
Since 2019 the group has been working
to embed an appropriate and regulatory-
compliant climate risk framework, overseen
by a Climate Risk Steering Committee and
supporting working groups for credit risk,
scenarios, disclosures and sustainability.
Regular updates are provided to the Board
Risk Committee, which retains oversight
responsibility, while senior management
responsibility is assigned to the group chief
risk ofcer.
Monitoring is in place to continually identify
and assess climate risks and opportunities,
supported by annual climate-related
scenario analysis.
For further detail, see the rm’s inaugural
Task Force on Climate-related Financial
Disclosures (“TCFD”) Report on pages42
to 59.
Climate risk represents an area of continued
focus, both within the group and across
the industry more broadly. We continue to
closely monitor government and regulatory
developments as well as emerging best
practice.
The short-dated tenor of our lending book
and strong business model resilience
capabilities mitigate current risk exposure
while the continued embedding of our
climate framework will enable us to review
the evolution of the risk landscape on an
ongoing basis.
Legal and regulatory
change
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. We engage regularly with
regulators in the jurisdictions in which we
operate, 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 identied
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.
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 the
possibility of regulatory and legal divergence
between the UK and EU.
Increasing regulatory focus on consumer
and small business customer outcomes is
seen from the group’s regulators in the UK,
the Republic of Ireland and other jurisdictions
in which the group operates.
Evolving working
practices
The group continues to assess 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.
Ways of working are risk assessed quarterly,
enabling the identication and mitigation of
any risks arising.
All roles are assessed to ensure exibility can
be offered where appropriate in response to
competitive pressure for talent attraction and
retention. Market developments continue
to be monitored for further shifts in working
patterns which could impact employee and
candidate expectations.
We remain focused on maintaining our
company culture and ensuring optimisation
of the workspace and in-ofce activities to
support collaboration and inclusion.
Management continues to monitor market
expectations regarding work patterns to
ensure levels of exibility can be offered to
compete effectively in a tight labour market.
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Emerging Risk/Uncertainty Mitigating Actions and Key Developments Outlook
Technological change and
new business models
Technological change and new business
models have the potential to impact
the group’s market position and future
protability.
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 nancial technology
companies continue to develop alternative
business models.
Notwithstanding, 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.
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 the customer
journey and associated experience.
The technology function is actively planning
to benet from cloud arrangements which
match the agility and scalability of any
potential competitor or new entrant.
The group is also focused on upskilling
current staff and strategic third party
provider partnerships to support the digital
transformation of our businesses.
Supply chain risk
The group’s third party management
framework ensures a risk-based approach
is adopted with regard to the identication,
classication and management of the many
potential business impacts that can result
from failures in the supply chain.
Through the identication 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 GRCC 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.
While Covid-19 continues to impact supply
chains globally, this has been further
aggravated by the conict in Ukraine and the
general inationary economic environment
in key markets. Direct impacts have thus far
proved relatively moderate across the sector
and less so for the group given its relatively
low level of reliance on offshore service
provision, although close monitoring and
management is ongoing in more sensitive
goods and services categories.
Notwithstanding, continued improvement
to the group’s third party management
framework is likely to be 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.
Future pandemics and
ability to respond
Capabilities delivered through the group’s
focus on operational resilience are primary
mitigants against plausible and controllable
impacts of a future pandemic. The group’s
ability to respond to pandemic-induced
disruption was tested through Covid-19.
The resilience of the group’s workforce,
suppliers and systems is tested on a
risk-based cycle, considering severe but
plausible disruptions. This approach to
ongoing testing enables maintenance
of suitable readiness should another
pandemic emerge in the future.
Pandemics of a nature that cause material
societal impact are inherently low-likelihood,
high-impact events.
It is unlikely that another pandemic will
emerge in any given year, although it is
probable that at some future point another
one will emerge.
Risk Report
continued
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Financial Statements
Strategic Report
The group’s business activities, nancial
performance, capital levels, liquidity and
funding position, and risk management
framework, along with the principal and
emerging risks likely to affect its future
performance, are described in the Strategic
Report and the Risk Report.
The group continues to have a strong, proven
and conservative business model supported
by a diverse portfolio of businesses,
maintaining its consistent track record of
delivering prots. The group remains well
positioned in each of its core businesses, and
is strongly capitalised, soundly funded and
has good levels of liquidity.
As part of the directors’ consideration of
the appropriateness of adopting the going
concern basis in preparing the Annual Report,
a range of forward-looking scenario analyses
have been considered. This included a central
scenario and a downside scenario.
The scenarios modelled are based on a
range of economic assumptions, considering
the highly uncertain external environment,
including the recent impact of increasing
geopolitical tensions and rising ination on
our customers and wider nancial market
conditions. In all modelled scenarios it has
been concluded that no signicant structural
changes to the company or group will be
required. Further details of these scenarios
are set out in the Viability Statement.
Going Concern Statement
Under both scenarios the company and
group continue to operate with sufcient
levels of liquidity and capital for the next 12
months, with the group’s capital ratios and
liquidity comfortably in excess of regulatory
requirements.
For each of the divisions, the directors
have also considered the impact of the
central and downside scenarios on nancial
performance. For Banking these include
expected customer demand that underpins
loan book growth, the impact of rising
interest rates and inationary pressures
on our customers and the impact this will
have on the bad debt ratio and net interest
margin. For Asset Management, the level
of markets and amount of net ows as a
percentage of opening managed assets was
considered. For Winterood, the volume
of trading activity within their markets and
expected trading revenue was assessed.
Across all the divisions, the impact of the
selected downside scenario demonstrated
the resilience of our business model.
The group acknowledges that the risk
landscape is constantly evolving and as such
continually reviews its principal and emerging
risks. As part of this review, risks are assessed
with robust oversight exercised at both a local
business unit and group level through risk and
compliance committees and the board. The
group’s strong risk assessment framework
provides a solid foundation to assess going
concern throughout the organisation on a
regular and consistent basis.
In making this assessment, the directors
have also considered the operational agility
and resilience of the company and group,
noting that the business has successfully
adapted to new ways of working and that
operational and system performance have
been maintained, and are expected to
continue to be.
In conclusion, the directors have determined
that they have a reasonable expectation that
the company and the group, as a whole,
have adequate resources to continue as
a going concern for a period of at least 12
months from the date of approval of the
nancial statements.
Accordingly, they continue to adopt the going
concern basis in preparing the Annual Report.
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Viability Statement
In accordance with provision 31 of the UK
Corporate Governance Code, the board
has assessed the prospects of the group
and conrms that it has a reasonable
expectation that the company and group
will continue to operate and meet their
liabilities, as they fall due, for the three-year
period up to 31 July 2025.
The board considers three years to be an
appropriate period for the assessment to
be made. A period of three years has been
chosen given the group’s proven and resilient
business model, prudent maturity prole
and because it is the period covered by the
group’s well embedded strategic planning
cycle. We continue to adopt a three-year
period for our regulatory and internal stress
testing processes, including: (i) group-wide
internal forecasting and stress testing,
which has undergone signicant review and
challenge, to conrm the viability of the group;
(ii) the Internal Capital Adequacy Assessment
Process (“ICAAP”), which assesses capital
requirements; and (iii) the Internal Liquidity
Adequacy Assessment Process (“ILAAP”),
which identies liquidity requirements.
In making its assessment, the board has
identied and assessed the principal and
emerging risks facing the group and these are
highlighted on pages 78 to 92. The group’s
approach to monitoring and managing
principal risks faced by the group’s business,
including nancial, business, market and
operational risks, have remained consistent
given the group’s activities, business model
and strategy are unchanged.
The group utilises an established risk
management framework to monitor its
portfolio of emerging risks incorporating
the group’s “bottom up” and “top down”
approach. These are monitored by the local
and group risk and compliance committees
with agreed actions regularly tracked. Key
emerging risks include:
• economic uncertainty regarding the future
economic trajectory in both the UK and
across global markets more generally;
• geopolitical uncertainty with conict in
Ukraine, possible Brexit-related changes
to the Northern Ireland protocol and the
potential for a Scottish independence
referendum amongst others;
• nancial loss or disruption resulting from
the impacts of climate change;
• legal and regulatory changes including
the possibility of regulatory and legal
divergence between the UK and EU; and
• supply chain risk, with Covid-19 continuing
to impact supply chains globally, further
aggravated by the conict in Ukraine
and the general inationary economic
environment in key markets.
The group will continue to monitor and assess
these risks, adhering to our established
and proven business model, as outlined on
pages 10 to 12; implementing an integrated
risk management approach based on the
concept of “three lines of defence”; and
setting and operating within clearly dened
and monitored risk appetites. The group’s
business model, supported by a solid track
record and sustained protability, has worked
well through a range of economic, social
and environmental conditions over multiple
economic cycles and this is projected to
continue over the medium term. Given the
diversied portfolio of the businesses across
the group, the board considers medium-
term economic, social, environmental and
technological trends at the individual business
unit level as part of the strategic planning
cycle. This includes focusing on the long-
term strategic approach to protect, grow and
sustain our business model, with key priorities
outlined on page 32.
The board has also assessed the group’s
viability by considering regular forecasting
and stress testing undertaken to reect
uncertainties in the economic environment. A
range of forward-looking scenarios has been
considered, with distinct social and economic
assumptions. Differing macroeconomic
assumptions have been assessed across the
scenarios including GDP growth, ination,
interest rates, unemployment, residential
house prices and equity prices. The modelling
considers the group’s future projections of
protability, cash ows, capital requirements
and resources, and other key nancial and
regulatory ratios over the period. In the
modelled scenarios, it has been assumed
that no signicant structural changes to the
company or group will be required.
These scenarios have been built using
the same principles as those in the going
concern assessment, extended out over the
three-year period:
• the central scenario presents our base
case assuming ination levels remain
elevated, reecting the latest economic
outlook, with minimal GDP growth, whilst
unemployment remains low; and
• the downside scenario assumes a
pronounced and sudden rise in ination
and interest rate levels, with impairment
losses front-loaded as customer
affordability is impacted, coupled with
lower income in market-facing businesses
as equity prices and market levels decline.
The group maintains capital ratios
signicantly above regulatory minima, which
are currently set at a minimum common
equity tier 1 ratio of 7.6% and a minimum
total capital ratio of 11.5%, excluding any
applicable Prudential Regulation Authority
(“PRA”) buffer. In all scenarios, the company
and group continue to operate with sufcient
levels of capital, with the group’s capital
ratios and funding and liquidity positions well
within appetite and comfortably in excess of
regulatory requirements.
Across the divisions, the nancial impact of
each scenario demonstrates the resilience of
our business model. In addition, the directors
have reviewed the key management actions
which would be taken in the event of a
downside, in order to mitigate the stress, and
the viability of these actions.
In making this assessment, the directors
have considered a wide range of information,
including:
• the board’s risk appetite and robust
assessment of the principal and emerging
risks, which could impact the performance
of the group, and how these are managed
– please refer to the Risk Report on pages
74 to 92;
• the group’s current nancial position and
prospects – please refer to the Financial
Overview on pages 61 to 64; and
• the group’s business model and strategy –
please refer to the Business Model on pages
10 to 12, and Strategy and Key Performance
Indicators on pages 32to33.
The directors have also considered the
results from the most recent version of the
following reviews:
• the annual review of the Recovery Plan
which included employing a number of
scenarios to test our recovery plan, our
wide range of risk indicators and recovery
options available to the group;
• the 2021 ICAAP, which included both
stress testing and scenario analysis.
At a group level, two severe stress test
scenarios were assessed representing
protracted downside scenarios. This
took account of the availability and likely
effectiveness of mitigating actions that
could be taken by management to avoid
or reduce the impact or occurrence of
underlying risks. As part of the ICAAP,
reverse stress testing was also employed
to support the identication of potential
adverse circumstances and events; and
• the 2021 ILAAP, which was undertaken to
assess the group’s liquidity across a range
of market-wide and idiosyncratic scenarios
demonstrating the ongoing strength of the
group’s funding and liquidity model.
This forward-looking viability statement
made by the board is based on
information and knowledge of the group at
27 September 2022. Unexpected risks and
uncertainties may arise from future events or
conditions, such as economic changes and
business conditions, which are beyond the
group’s control and could cause the group’s
actual performance and results to differ from
those anticipated.
This Strategic Report was approved by the
board and signed on its behalf by:
Adrian Sainsbury
Chief Executive
27 September 2022
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Financial Statements
Strategic Report
Audit Committee member
Risk Committee member
A
RI
Committee chair
Remuneration Committee member
Nomination and Governance Committee member
R
N
Board of Directors
Mike Biggs
R
N
Chairman | Appointed to the Board on 14March 2017,
and as Chairman on 1May 2017
Background and Experience
Mike was the chairman of Direct Line Insurance Group plc from 2012
until August 2020. He was previously chairman of Resolution Limited,
then a FTSE 100 UK life assurance business, and has acted as both
chief executive ofcer and group nance director of Resolution plc.
Mike was group nance director of Aviva plc and is an Associate of
the Institute of Chartered Accountants in England and Wales.
Adrian Sainsbury
Chief Executive | Appointed on 21September 2020
Current External Appointments
Non-executive director of UK Finance, the banking and nance
industry body.
Background and Experience
From 2016 until September 2020, Adrian was managing director of
Close Brothers’ Banking division. Since August 2013 he has been a
director of Close Brothers Limited, the group’s banking subsidiary.
Adrian has previously held executive roles at Barclays, RBS and Bank
of Ireland and was chief executive of ANZ Bank in Europe. Adrian has
also served as chairman of the Asset Based Finance Association, the
UK and Ireland industry body.
Mike Morgan
Group Finance Director | Appointed on 15November 2018
Background and Experience
From 2010 to 2018, Mike was chief nancial ofcer of Close Brothers’
Banking division and has been a director of Close Brothers Limited, the
group’s banking subsidiary, since 2010. Mike is a chartered accountant
and from June 2019 to June 2021 was chair of the ICAEW Financial
Services Faculty Board and an ICAEW Council member. Mike also held
senior roles at Scottish Provident and RBS, most recently as nance
director of the Wealth Management Division of RBS.
Mark Pain
R
N
RI
Senior Independent Director | Appointed on 1January 2021
Current External Appointments and Changes
Mark now serves as the chairman of AXA UK plc where he chairs the
Nomination and Risk Committees and he serves on the Investment
and Remuneration Committees, London Square Limited and Empiric
Student Property plc (also chair of the Nomination Committee and a
member of the Remuneration Committee).
Background and Experience
Mark has extensive nance, risk management and commercial
experience, having held board positions at Barratt Developments
plc and Abbey National Group. Mark has previously been a non-
executive director of Yorkshire Building Society (where he served
as senior independent director), Ladbrokes Coral Group plc, Punch
Taverns plc, Spirit Pub Company plc, Johnston Press plc, and Aviva
Insurance Limited, among others.
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Board of Directors
continued
Patricia Halliday
A
RI
Independent Non-executive Director | Appointed
on 1August 2021
Background and Experience
Patricia has over 30 years’ experience in risk management across
the investment, corporate and retail banking sectors. Patricia was
chief risk ofcer (“CRO”) of Santander UK with responsibility for risk
management and oversight across retail and commercial banking.
Prior to Santander, Patricia was CRO of GE Capital International
Holdings Limited. She began her career at NatWest, followed
by senior credit risk roles at Barclays Capital and then Deutsche
Bank, including as Head of Leveraged and Structured Finance and
Commercial Real Estate, and chair of the Underwriting Committee,
covering the UK, European and US markets.
Tracey Graham
R
RI
Independent Non-executive Director | Appointed
on 22March 2022
Current External Appointments
Non-executive director of Ibstock plc, DiscoverIE Group plc and LINK
Scheme Limited.
Background and Experience
Tracey has broad executive experience from companies operating in the
nancial and business services sectors, both in the UK and internationally.
She has extensive experience as a remuneration committee chair and
also serves as a senior independent director. Tracey began her career at
HSBC and subsequently held the role of director of customer services at
AXA Insurance plc. She was chief executive ofcer of Talaris Limited, an
international cash management business. Before that, she held a number
of senior roles in De La Rue plc, including as managing director – Identity
Systems, president – Sequoia Voting Systems and managing director–
Cash Systems. Tracey served as a non-executive director of Royal
London Mutual Insurance Society Limited for nine years until March 2022.
Peter Duffy
R
RI
Independent Non-executive Director | Appointed
on 1January 2019
Current External Appointments
Chief executive ofcer of Moneysupermarket.com Group plc.
Background and Experience
Peter previously served as chief executive ofcer of Just Eat Limited,
having been interim chief executive ofcer and chief customer ofcer of
Just Eat plc before that. Between 2011 and 2018, Peter held a number
of senior roles at easyJet plc, including as chief commercial ofcer and
group commercial director. Prior to that, Peter held roles at Audi UK Ltd
and Barclays Bank plc over a period of more than 15 years. Peter was
also president of the Incorporated Society of British Advertisers.
Oliver Corbett
A
N
RI
Independent Non-executive Director | Appointed
on 3June 2014
Current External Appointments
Chief nancial ofcer of McGill & Partners Ltd.
Background and Experience
Oliver was formerly chief nancial ofcer of Hyperion Insurance Group
Limited and nance director of LCH. Clearnet Group Limited and of
Novae Group plc. Oliver is a chartered accountant and previously
worked for KPMG, SG Warburg, Phoenix Securities (later Donaldson
Lufkin Jenrette) and Dresdner Kleinwort Wasserstein, where he was
managing director of investment banking. Oliver was also a non-
executive director of Rathbone Brothers plc.
Book 1.indb 96 27/09/2022 23:46:46
97
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Lesley Jones
A
R
N
RI
Independent Non-executive Director | Appointed on
20December 2013
Current External Appointments
Chair of Sainsbury’s Bank; non-executive director of Moody’s
Investors Service Limited; and non-executive director of
Moneysupermarket.com Group plc.
Background and Experience
Lesley has extensive banking experience, having previously held
several line management positions within Citigroup and was group
chief credit ofcer of Royal Bank of Scotland plc from 2008 to 2014.
Lesley was previously a non-executive director of N Brown Group plc,
ReAssure Group plc (where she also chaired the Risk Committee)
and Northern Bank Limited.
Tesula Mohindra
A
RI
Independent Non-executive Director | Appointed
on 15July 2021
Current External Appointments and Changes
Non-executive director of NHBC (National House-Building Council)
andtrustee of Variety, the Children’s Charity, and was appointed as
non-executive director of the RAC group in September 2022.
Background and Experience
Tesula qualied as a chartered accountant with PricewaterhouseCoopers,
and held managing director roles at JP Morgan and at UBS, specialising
in corporate nance for nancial institutions and pension fund risk
management. She was also a founding member of the management
team of Paternoster, the specialist bulk annuity insurer, where she was a
member of the executive committee. Since then, she has worked as an
independent nancial consultant on business plans and capital raising.
Sally Williams
A
RI
Independent Non-executive Director | Appointed
on 1January 2020
Current External Appointments
Non-executive director of Lancashire Holdings Limited and of Family
Assurance Friendly Society Limited (OneFamily) and chair of the audit
committee at both companies.
Background and Experience
Sally is a member of the Institute of Chartered Accountants of
England and Wales. Sally has extensive risk, compliance and
governance experience, having held senior executive positions at
Marsh, National Australia Bank and Aviva. Prior to that, Sally held
roles at PricewaterhouseCoopers LLP in both their risk management
and audit teams over a period of 15 years.
Audit Committee member
Risk Committee member
A
RI
Committee chair
Remuneration Committee member
Nomination and Governance Committee member
R
N
The Board considered and approved the additional external commitments taken on by Mark Pain and Tesula Mohindra during the peri
od. In each case, it was agreed that there would be
no impact on the time commitment required as non-executive direct
ors, or on the independence and objectivity required to discha
rge the agreed responsibilities of the roles.
Bridget Macaskill
R
RI
N
Independent Non-executive Director | Appointed on
21November 2013
Current External Appointments
Non-executive director of Jones Lang LaSalle Incorporated and
chairman of Cambridge Associates LLC.
Background and Experience
Bridget was formerly chairman of First Eagle Holdings, Inc. and a senior
adviser to First Eagle Investment Management LLC, of which she
was president and chief executive ofcer. Bridget was also a trustee
of the TIAA-CREF funds and a non-executive director of Jupiter Fund
Management plc, Prudential plc, Scottish & Newcastle plc, J Sainsbury
plc, Hillsdown Holdings plc and of the Federal National Mortgage
Association in the US.
Book 1.indb 97 27/09/2022 23:47:07
98
Close Brothers Group plc
Annual Report 2022
Executive Committee
Members at 27 September 2022
Adrian Sainsbury
Chief Executive
Robert Sack
Group Chief Risk Ofcer
Frank Pennal
Chief Executive Ofcer Property
Bradley Dyer
Winterood Chief Executive
Rebekah Etherington
Group Head of Human Resources
Angela Yotov
Group General Counsel
Martyn Atkinson
Group Chief Operating Ofcer
Neil Davies
Chief Executive Ofcer Commercial
Mike Morgan
Group Finance Director
Eddy Reynolds
Asset Management Chief Executive
Rebecca McNeil
Chief Executive Ofcer Retail
Naz Kazi
Group Head of Internal Audit
Book 1.indb 98 27/09/2022 23:48:19
On behalf of the board, I am pleased to introduce the
Corporate Governance Report for the year ended 31 July
2022. The following pages explain the group’s governance
structure and key activities undertaken by the board and
its committees during the year. The report describes how
we have complied with the UK Corporate Governance
Code in full during the year.
At Close Brothers, we rmly believe in the important role that
high standards of corporate governance and effective board
oversight play in supporting the group’s performance, the delivery
of its strategy and achieving long-term sustainable success for
the company’s shareholders and other stakeholders. The board
is committed to maintaining a robust and effective governance,
control and risk management framework and I have been pleased
once again this year to see the benets of that framework.
As the country has moved out of the pandemic and restrictions
eased, the board has returned to a more normal schedule of
meetings and board operations. The meetings have been mainly
in person, except where circumstances have prevented individuals
from attending. The board has welcomed the return to the ofce
and the opportunity to meet board colleagues and employees in
person again.
Strategy, Purpose and Culture
The board plays an important role in setting the group’s strategy,
purpose, business model and culture and the board spends time
on each of these areas throughout the year. Each of the directors
recognises their role in setting the tone from the top and in
monitoring how the group’s culture and values are communicated
and embedded. We also acknowledge the crucial link between
culture, governance and leadership and the role that decision-
making plays as a key driver of culture. Once again this year, in my
own engagement with employees, I have been pleased to see the
group’s strong and distinctive culture in action, as shown by the
continuing commitment on the part of our employees to support
customers, clients and partners.
Michael N. Biggs
Chairman
Corporate Governance Report
Compliance with the UK Corporate Governance Code
The UK Corporate Governance Code 2018 (the “Code”),
published by the Financial Reporting Council (“FRC”), applied to
the company throughout the nancial year. A copy of the Code
can be found on the FRC’s website: www.frc.org.uk.
It is the board’s view that, throughout the year, the company has
applied the principles and complied with the provisions set out in
the Code. Details on how the company has applied and complied
with the Code are set out in this Corporate Governance Report
and in other sections of the Annual Report. We have aligned
our report with the ve sections of the Code and the underlying
principles and provisions.
Board leadership Page 101
Division of responsibilities Page 108
Composition, succession and evaluation Page 113
Audit, risk and internal control Page 117
Remuneration Page 123
Governance Report
99
Close Brothers Group plc
Annual Report 2022
F
inancial
S
tatement
s
Strate
g
ic Repor
t
Book 1.indb 99 27/09/2022 23:48:25
Changes to the Board
During the year, we were pleased to welcome Patricia Halliday
and Tracey Graham as non-executive directors. More details on
their appointments and the process may be found on page 114.
Lesley Jones and Bridget Macaskill will retire from the board at
the conclusion of the annualgeneral meeting (“AGM”). Patricia will
assume the role of chair of the Risk Committee from the date of the
AGM.
The board continues to be diverse, with directors from a range
of backgrounds, and I am pleased that we comply with the
recommendations of the FTSE Women Leaders and Parker Reviews
in terms of the composition of the board.
Board Effectiveness
This year, in line with the Code, the board undertook an internal
process to review its effectiveness and performance. The review
concluded that the board remains strong and effective, and that it has
responded well to the challenges arising from the uncertain current
economic situation. The evaluation also acknowledged that the board
has addressed each of the recommendations made in the external
evaluation in 2021. The board welcomes the ndings and will work to
consider opportunities for incremental improvements during the year
ahead. Further detail on the evaluation can be found on page 111.
Stakeholder Engagement
Stakeholder engagement remains a priority for the board. During the
year the board has used formal meetings and other opportunities to
discuss the group’s performance and delivery of its strategy with group
and divisional executives. These discussions included consideration of
stakeholders and their interests, as well as risks arising from the wider
regulatory, economic and political environment. As part of the board’s
regular meetings and in sessions specically focusing on strategy, the
directors have spent considerable time assessing and having regard
to the impact of individual decisions and the group’s operations on
different stakeholder groups. This has included extensive discussion
of points arising from engagement with shareholders, customers,
employees, regulators and other groups. The board has engaged
with its employees in a variety of forums as part of its workforce
engagement activities. You can nd our formal statement in relation to
section 172 of the Companies Act 2006, together with further detail
about how the directors have engaged with, and had regard to the
interests of, stakeholders in the Strategic Report on pages 14 to 17 and
in the Corporate Governance Report on pages 106 to107.
Sustainability
The board and its committees spent time on a broad range of
sustainability considerations, including as part of its regular discussions
about the group’s strategy and regular environmental, social and
governance (“ESG”) updates. I have been pleased to discuss the
board’s approach in this area as part of my regular meetings with
shareholders. As part of wider sustainability discussions, the board
has continued to focus on external and internal developments in
relation to climate change. This has included discussion of the group’s
climate strategy and goals, together with oversight of progress towards
disclosure requirements relating to the Task Force on Climate-related
Financial Disclosures (“TCFD”) which apply to the group for the rst
time this year.
The board and the Nomination and Governance Committee have
continued to monitor diversity and inclusion, both as part of ongoing
board succession planning and in relation to activities aimed at
developing a diverse and inclusive talent pipeline below board level.
Further information on the board’s approach to diversity and inclusion
can be found on page 115.
Engagement with Shareholders
Engagement and dialogue with shar
eholders continues to be a key
focus for the board and I have been pleased to meet with a number
of our shareholders during the year to discuss a range of topics and
to ensure that the board is aware of our shareholders’ views.
We are delighted to welcome shareholders to an in-person AGM
this year. Further details will be set out in the Notice of AGM sent to
shareholders in due course.
On behalf of the board, I would like to thank shareholders for their
continued engagement and support. My fellow directors and I
look forward to continued engagement with you in the year ahead,
including at the AGM.
Michael N. Biggs
Chairman
27 September 2022
100
Close Brothers Group plc
Annual Report 2022
Corporate Governance Report
continued
Book 1.indb 100 27/09/2022 23:48:25
Effective Leadership
The board’s primary role is to provide effective leadership and
direction for the group as a whole, and to ensure that the company
is appropriately managed, delivers long-term shareholder value and
contributes to wider society. It establishes the group’s purpose and
strategic objectives ensuring that these are aligned with the group’s
culture and monitors management’s performance on an ongoing
basis against those objectives. The board also supervises the group’s
operations, with the aim of ensuring that it maintains a framework
of prudent and effective controls which enables risks to be properly
assessed and appropriately managed.
The board acknowledges its role in assessing the basis on which the
group generates and preserves value over the long term. It spends
time during the year, in scheduled board meetings, during its annual
strategy discussions and in other sessions with senior management
and stakeholders, considering how opportunities and risks to the
future success of the group’s business should be addressed. These
discussions include the sustainability of the group’s model. Further
information on these considerations can be found in the Strategic
Report on pages 3 to 59 of this Annual Report.
Another key function of the board is to dene, promote and monitor
the company’s culture and values, setting the “tone from the top”.
It also ensures effective engagement with, and participation from,
shareholders and other stakeholder
s. When making decisions, the
board has regard to the interests of a range of stakeholders, including
employees, customers, clients and shareholders, as well as its
broader duties under section 172 of the Companies Act 2006. The
company’s formal section 172 statement can be found on page 17 of
this Annual Report.
Board Size and Composition
The board has 12 members: the chairman, two executive directors
and nine independent non-executive directors. The board’s members
come from a range of backgrounds and the board is structured to
ensure that no individual or group of individuals is able to dominate
the decision-making process and no undue reliance is placed on any
individual. The Nomination and Governance Committee monitors the
overall size of the board and the balance between its executive and
non-executive membership.
During 2022, the board appointed two additional non-executive
directors as part of its proactive and orderly approach to succession
planning. The overall size of the board has grown slightly in recent
years as new directors have been appointed to bring additional and
complementary knowledge, skills and experience, and to ensure
continuity of membership and knowledge as other directors near the
end of their terms in the years ahead.
The board considers that recent appointments have resulted in a
valuable refreshing of the board, providing new perspectives and
challenge which have further strengthened the board’s effectiveness
and the quality of its deliberations. As mentioned above, Lesley and
Bridget, who have served on the Board for nine years, will retire at the
forthcoming AGM.
Role of the Board in Relation to Strategy and Purpose
The board recognises its responsibility for establishing and monitoring
the strategy and purpose of the group. During the year, a range of
activities enabled the board to focus on these areas. These included
a strategy session in May 2022. The session covered a broad range
of strategic issues, including the group’s three-year strategic plan,
shareholder feedback during the year, opportunities for individual
businesses and people-related issues, including the results of the
recent employee opinion survey.
In addition, the board considers strategic issues and the group’s
business model as part of regular meetings throughout the year. At
each scheduled meeting, group and divisional executives provide
updates on performance against strategic goals and relevant
developments in the wider market, including from a competitor or
regulatory perspective. During the year, the board has held a number
of “deep-dive” strategy sessions, each focused on an individual
business. The board aims to cover each of the group’s businesses at
such a session on a rolling two-year basis.
101
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Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Board leadership
Book 1.indb 101 27/09/2022 23:48:26
Governance Framework and Board Resources
The governance framework supports good governance across the group and facilitates delivery of the strategy through effective d
ecision-making.
The board has delegated responsibility for certain matters to its committees. Each committee has written terms of reference. Th
e chair of each
committee reports regularly to the board on matters discussed at committee meetings. All members of the board have access to th
e papers of
all committees, and have a standing invitation to attend any committee meeting. Reports from the board’s committees are set out
later in this
report and they include further detail on each committee’s role and responsibilities, and the activities undertaken during the
year.
The board
The role of the board is to promote the long-term success of the group and to deliver value to shareholders and other stakehold
ers.
It sets the governance framework and has responsibility for the leadership, management direction, culture and performance of th
e group
Executive Directors
The board delegates the execution of the group’s strategy and the day-to-day management of the business to the executive direct
ors
Executive Committee
Together with the Executive Directors, the Executive Committee is responsible for the day-to-day
execution of the group’s strategy and management of the business
Supporting Committees
Supporting committees provide oversight on key business activities and risk
Audit
Committee
– Oversees the group’s
nancial reporting
– Maintains and manages the
relationship with
the external auditor
–
Receives reports from
group Internal Audit
–
Monitors internal
nancial controls
Risk
Committee
– Reviews and monitors the
principal and emerging
risks
– Reviews the effectiveness
of the group’s risk
management systems
–
Oversees compliance
Nomination and
Governance Committee
–
Reviews board composition,
structure and diversity
– Monitors that the board
collectively has the skills and
experience to operate and
deliver the strategy
– Oversees the board
effectiveness review
–
Considers succession
planning for the board and
Executive
Committee
–
Reviews ESG strategy
Remuneration
Committee
– Determines the
remuneration policy for
the executive directors
and ensures that there is a
clear link between reward
and performance
–
Reviews workforce
remuneration policies
–
Reviews and approves
the remuneration of the
chairman, executive
directors and other senior
employees
102
Close Brothers Group plc
Annual Report 2022
Corporate Governance Report
continued
Board leadership
Book 1.indb 102 27/09/2022 23:48:26
Meetings of the Board
At each scheduled meeting, the board receives reports from the
chief executive and group nance director on the performance and
results of the group. The board discusses performance, strategic
initiatives and developments in each of the group’s divisions, including
updates from divisional chief executives on their respective areas.
The group chief risk ofcer and the group general counsel have a
standing invitation to attend and provide updates on their respective
functions. The board also receives regular reports from the group
human resources, operations, corporate development, compliance
and internal audit functions.
Each scheduled board meeting includes time for discussion between
the chairman and the non-executive directors without the executive
directors.
The non-executive directors meet during the year on an informal basis
to discuss matters relevant to the group.
In addition to the scheduled meetings, all directors attended a
strategy session with senior management in May 2022. There were a
further eight ad hoc meetings during the year to discuss progress on
key projects and the Annual Report. The Nomination and Governance
Committee held two additional ad hoc meetings during the year to
discuss, among other things, non-executive director recruitment, and
to consider and recommend to the board the appointment of Tracey
Graham. The Remuneration Committee held two additional ad hoc
meetings during the year to discuss, among other things, matters
relating to compensation planning. The Risk Committee held one
additional ad hoc meeting during the year to receive project updates.
These additional meetings are not reected in the table below.
The annual schedule of board meetings is decided a substantial time
in advance in order to ensure, so far as possible, the availability of
each of the directors. In the event that directors are unable to attend
meetings, they receive papers in the normal manner and have the
opportunity to relay their comments and questions in advance of the
meeting, as well as follow up with the chairman if necessary. The
same process applies in respect of the various board committees.
Board
Nomination and
Governance
Committee
Risk
Committee
Audit
Committee
Remuneration
Committee
Executive directors
Adrian Sainsbury 7/7
Mike Morgan 7/7
Non-executive directors
Mike Biggs 7/7 5/5 5/5
Oliver Corbett 7/7 5/5 5/5 5/5
Peter Duffy 7/7 5/5 5/5
Tracey Graham
1
3/3 1/1 3/3
Patricia Halliday
2
7/7 5/5 5/5
Lesley Jones 7/7 5/5 5/5 5/5 5/5
Bridget Macaskill 7/7 5/5 5/5 5/5
Tesula Mohindra 7/7 5/5 5/5
Mark Pain 7/7 5/5 5/5 5/5
Sally Williams 7/7 5/5 5/5
1 Tracey Graham was appointed as an independent non-executive director and a member of the Remuneration and Risk Committees wit
h effect from 22 March 2022.
2 Patricia Halliday was appointed as an independent non-executive director and a member of the Audit and Risk Committees with e
ffect from 1 August 2021.
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Financial Statements
Strategic Report
Book 1.indb 103 27/09/2022 23:48:26
Board Activities
Strategy
• Held an offsite strategy session
in conjunction with the Executive
Committee
• Reviewed Investment Programme
strategy and update
• Reviewed the group’s sustainability
strategy
• Received regular business unit
updates
• Received deep-dive reviews of
selected business areas
• Received regular updates on climate
and sustainability activities
• Approved annual tax strategy
Financial and Corporate Reporting
• Received regular reports from the
group nance director on nancial
performance
• Reviewed rolling forecasts and
approved 2023 budget
• Approved full-year and half-
year results
• Received reports from group
Internal Audit
• Reviewed new disclosure framework
to ensure compliance with TCFD
reporting
Structure/Capital
• Reviewed the group’s stress
testing policy
• Reviewed the group’s treasury policy
• Reviewed the group’s capital strategy
2021
August
• Board papers
• Appointment
of Patricia
Halliday as a
non-executive
director on
1 August 2021
Board and
committee
meetings
Announcements
and investor
engagement
September
• Board
• Remuneration
• Audit
• Risk
• Nomination and
Governance
•
• Year-end results
and Annual
Report
• Year-end analyst
brieng
• Year-end
roadshow
October
• Board
• Nomination and
Governance
November
• Board papers
• Risk
• Audit
• Annual General
Meeting
• Trading update
• Results of AGM
December
• Board update
104
Close Brothers Group plc
Annual Report 2022
Corporate Governance Report
continued
Board leadership
Book 1.indb 104 27/09/2022 23:48:26
Stakeholders
• Received regular updates
on customers
• Received regular updates on
suppliers
• Reviewed the annual employee
opinion survey results
• Reviewed regular updates on the
culture dashboard
• Received regular updates on investor
relations activities including meetings
with shareholders and post-results
roadshows
• Approved the annual Modern
Slavery Statement
• Held the 2021 Annual General
Meeting in hybrid format
Risk and Control
• Received reports from the
chief risk ofcer
• Approved the group’s Enterprise
Risk Management Framework
• Approved the group’s Recovery Plan
• Approved the annual review of the
ICAAP and ILAAP
• Reviewed the group’s risk
appetite statements
• Reviewed Pillar 3 disclosures
• Reviewed the group’s principal risks
and considered emerging risks
• Reviewed the group’s annual
compliance plan
• Reviewed the group’s whistleblowing
policy and received an update on
activity
• Approved the annual renewal of the
group’s insurances
Governance
• Appointed Tracey Graham as an
independent non-executive director
• Reviewed the board and committee
performance evaluation and the
review of the chairman’s performance
by the senior independent director
• Monitored progress on actions from
previous years’ board and committee
performance evaluations
• Reviewed the terms of reference
of the Audit, Remuneration, Risk
and Nomination and Governance
Committees
• Reviewed the matters reserved for
the board
• Approved the board Diversity and
Inclusion Policy
• Received regular training and updates
• Undertook a review of NED fees and
recommended no change
• Approved the arrangements for the
Annual General Meeting 2021
• Recommended the reappointment of
directors
January
• Board
• Remuneration
• Audit
• Risk
• Nomination and
Governance
• Pre-close
trading update
February
• Board papers
March
• Board
• Audit
• Risk
• Half-year results
• Half-year analyst
brieng
• Half-year
roadshow
• Appointment
of Tracey
Graham as a
non-executive
director on
22 March 2022
April
• Board
• Remuneration
• Nomination and
Governance
May
• Strategy session
• Board update
• Trading update
June
• Board
• Remuneration
• Audit
• Risk
July
• Board
• Remuneration
• Nomination and
Governance
• Pre-close
trading update
2022
105
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Strategic Report
Book 1.indb 105 27/09/2022 23:48:26
Engagement with Stakeholders
The board recognises that, for the company to be successful
over the long term, it is important to build and maintain successful
relationships with a wide range of stakeholders and for the board to
understand the views of key stakeholders. When taking decisions,
the board considers the interests of, and impact on, key stakeholders,
including its relationships with shareholders, customers, partners,
regulators, employees and suppliers.
Stakeholders include:
• Colleagues
• Customers, clients and partners
• Suppliers
• Regulators and government
• Communities and environment
• Investors
Further detail and examples of how the board has considered
stakeholder interests, as well as the company’s section 172
statement, can be found in the Strategic Report on pages 14 to 17.
The sections below describe the board’s approach to engagement
with employees and shareholders. Further information about how
the directors have engaged with employees and had regard to
their interests is set out in the Strategic Report on page 14. This
section further explains how the directors have had regard to the
need to foster the company’s business relationships with suppliers,
customers and others, and the effect of this on the principal decisions
taken by the company during the nancial year.
During the year, as part of the group’s responsibility to wider society,
the board discussed the group’s charitable efforts and community
activities, including donations of £150,000 each to Stop Hate UK, The
Wildlife Trusts and Smart Works.
Engagement with Employees
As permitted by the Code, the board has put in place its own
arrangements to engage with employees across the group rather
than using one of the specic methods set out in the Code. The board
believes that there is value to be derived from all directors participating
in meaningful employee engagement ac
tivities and, following discussion
by the Nomination and Governance Committee, a framework for board
engagement with employees is managed by the company secretary.
This framework builds on existing employee engagement activities that
have been in place for some time, and presents a range of different
opportunities for board members to engage directly with employees
and also to receive feedback on relevant issues from management. The
framework takes account of guidance and suggestions published by the
FRC in this area.
The board acknowledges the benets of meaningful two-way
engagement between the directors and senior management (on
the one hand) and employees (on the other hand). To this end, the
board and senior management provide employees with regular
information on matters of interest or concern to them and consult
with them or relevant representatives in order to take their views into
account when making relevant decisions which are likely to affect
their interests. An example of engagement and consultation in the
year included working arrangements on the easing of restrictions.
In addition, engagement with, and consideration of the interests
of, employees continues to form a signicant part of the board’s
oversight of programmes across the group.
The directors undertake a range of direct and indirect employee
engagement activities during the year to ensure that they are aware
of relevant issues and considerations as part of their decision-making
and oversight activities. The directors have opportunities throughout
the year to discuss their own observations following engagement
activities and also to feed back comments raised with them by
employees. The board considers that its employee engagement
activities during the year have been effective.
Employee engagement activities undertaken by the board in the year
included:
• attendance or participation in business and other functional Town
Hall sessions to explain the group’s strategy and operations;
• regular communications from executive directors to employees on
the performance and operations of the group, in relation to the half-
year and full-year results;
• detailed discussion of the results, themes and next steps arising
out of the group’s employee opinion survey;
• attendance at committees and other forums below board level to
understand employee-related issues and priorities;
• reviewing the quarterly culture dashboard which summarises
the group’s cultural attributes and provides an overall cultural
assessment;
• site visits by non-executive directors to meet employees at different
levels of the group’s operations. The board has started to resume
its programme of visits, in particular for newly appointed non-
executive directors as part of their induction programmes;
• participation by directors in programmes and initiatives operated for
different groups of employees, including training and development
programmes;
• participation by executive and non-executive directors in Q&A
sessions with employees; and
• attendance or participation in diversity and inclusion events.
The board recognises that the activities above are important in
helping to achieve a common awareness on the part of all employees
of the nancial and economic factors affecting the performance
of the company. This contributes to a better understanding of
the group’s activities, purpose, strategic aims, and the long-term
success of the company. Throughout the year, both as part of its
oversight of business performance and developments, and in the
context of strategic discussions, individual board members have
provided insight from their own engagement with employees across
the group. This insight makes a meaningful contribution to the
board’s discussions and decision-m
aking. By way of example, the
Remuneration Committee has considered points arising from the
employee opinion survey undertaken in the year in its discussions
in relation to compensation. Members of the Nomination and
Governance Committee have discussed their own observations
from their engagement with employees as part of the committee’s
oversight of diversity and inclusion initiatives around the group.
The board supports and encourages the involvement of employees
in the company’s performance through two types of share scheme
operated by the group: Save As You Earn (“SAYE”) and Buy As You
Earn (“BAYE”). Both schemes are open to eligible employees who
have completed six months’ continuous employment with the group.
During the year, the Remuneration Committee has considered
data showing the participation of employees in the schemes and
discussed steps to improve participation levels.
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Corporate Governance Report
continued
Board leadership
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Engagement with Shareholders
The group has a comprehensive investor relations programme to
ensure that current and potential shareholders, as well as nancial
analysts, are kept informed of the group’s performance and have
appropriate access to management to understand the company’s
business and strategy.
The group’s investor relations team, reporting to the group nance
director, has primary responsibility for managing the group’s
relationship with shareholders. The team runs a structured programme
of meetings, calls and presentations around the nancial reporting
calendar, as well as throughout the year. The team also regularly seeks
investor feedback, both directly and via the group’s corporate brokers,
which is communicated to the board and management. Once again
throughout the year, the team has responded to a range of enquiries
and points of feedback raised by shareholders, including in relation to
ESG issues.
The board is regularly updated on the investor relations programme
through a report, which is produced for each board meeting and
summarises share price performance, share register composition and
feedback from any investor meetings. In addition, periodic specic
“deep dives” on investor relations matters are provided to the board.
The board believes it is important to maintain open and constructive
relationships with shareholders and for them to have opportunities
to share their views with the board. The chief executive and
group nance director engage with the group’s major institutional
shareholders on a regular basis. In addition, the chairman meets
with major institutional shareholders to discuss matters such as
strategy, corporate governance, and succession planning. The
Remuneration Committee chair is av
ailable to discuss remuneration
matters. Feedback on these meetings is provided to the board during
the course of the year. Separately, the senior independent director is
available to meet with shareholders.
The chairs of the board’s committees periodically seek engagement
with shareholders on signicant matters that arise relating to their
areas of responsibility and are available for engagement with
shareholders at other times.
Periodically, the group runs seminars covering different aspects of
its business to provide additional detail to investors and analysts.
Relevant presentations, together with all results announcements,
Annual Reports, regulatory news announcements and other relevant
documents are available on the investor relations section of the
company’s website.
The group engages with institutional shareholder bodies and proxy
advisers during the year.
Annual General Meeting
The directors regard the company’s AGM as an important
opportunity for shareholders to engage directly with the board.
The board acknowledges the importance of shareholders
receiving presentations from the board at the meeting and
being able to ask questions on the business of the AGM and
the performance of the group.
All voting at general meetings of the company is conducted by
way of a poll which results in a fairer and more accurate indication
of the views of shareholders as a whole. All shareholders have the
opportunity to cast their votes in respect of proposed resolutions by
proxy, either electronically or by post. Following the AGM, the voting
results for each resolution are published and made available on the
company’s website.
The company will return to a solely in-person meeting this year. The
meeting is scheduled to take place on Thursday 17 November 2022
at 11.00 am.
Principal Board Decision: Climate Risk Scenario Analysis
Stress Testing
As a regulated lender, we are required by the Bank of England/
Prudential Regulation Authority to conduct stress testing annually
as part of our Internal Capital Adequacy Assessment Process
(“ICAAP”). This year, we further enhanced our consideration of
climate risk impacts within our ICAAP approach and specically
addressed long-horizon climate scenario analysis, aligning with
PRA Supervisory Statement SS3/19, to assess the potential
nancial implications of climate-related risks and opportunities and
assess our resilience to both physical and transition risks.
The Close Brothers Group also enhanced its climate risk
disclosures to align with the recommendations of the Task
Force on Climate-related Financial Disclosures (“TCFD”), which
incorporated the scenario analysis and stress testing conducted
on certain lending portfolios.
How the board considered, and had regard to, the
interests of key stakeholders and the requirements of
section 172(1)
• The board recognises its requirement by the regulator to
understand the nancial risks and opportunities from climate
change and assess their impact on the company, including
business strategy and risk appetite. The review of the climate
risk scenario analysis by the board formed a core part of
satisfying this requirement.
• The analysis considered various scenario temperature
transition paths and the impact that these would have on the
environment, our people, our customers and strategic partners.
• The behaviour of customers in response to the various climate
scenarios was considered and taken into account when
deciding on likely management actions and any potential impact
on business strategy. In these scenarios, some customer
behaviours were likely to be guided by personal choice, with
others impacted by government policy.
• The impact of any management actions inuence future
business strategy and risk appetite.
• The climate disclosures produced by the Group are focused on
enhancing transparency for the Group’s stakeholders.
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continued
Division of responsibilities
The roles and responsibilities of the chairman and chief executive are separate with clear divisions and set out formally in wr
iting. Each member
of the board has a distinct role and is part of the cohesive membership of the board. Each role on the board is discussed below
.
Role Responsibility
Mike Biggs
Chairman
• Responsible for leading the board and ensuring it operates effectively
• Sets the agenda for meetings and ensures efcient and balanced decision-making and sufcient time for
boardroom discussion
• Ensures that the board as a whole develops the group’s strategy
• Ensures the culture in the boardroom promotes effective debate and good governance
• Supports the development of the group’s culture and sets the tone from the top
• Promotes effective engagement between the board, its shareholders and other stakeholders
• Leads the annual board evaluation process
• Chairs the Nomination and Governance Committee and monitors the board’s composition
Adrian Sainsbury
Chief Executive
• Executes the group’s strategy as agreed with the board
• Leads the Executive Committee in the day-to-day management of the group
• Ensures the group’s business is conducted with the highest standards of integrity aligned with the
group’s culture
• Manages the group’s risk exposure in line with board policies and risk appetite
• Leads the group’s investor relations activities
Mark Pain
Senior Independent
Director
• Provides a sounding board for the chairman
• Provides an alternative channel of communication for shareholders and other stakeholders
• Leads the annual meeting of non-executive directors without the chairman present to appraise the
chairman’s performance
Non-Executive Directors • Provide constructive challenge and scrutiny of the performance of management
• Bring an external perspective, knowledge and experience to the board
• Assist in the development of strategy and the decision-making process
• Promote the highest standards of integrity and governance
• Through membership of the group’s committees, determine appropriate levels of remuneration, review the
integrity of the nancial statements, review succession plans for the board and the Executive Committee
and monitor the risk prole of the group
• Gather the views of the workforce through attendance at key business events and through employee
engagement
Company Secretary • Ensures the board receives high quality information and in sufcient time
• Advises on corporate governance
• Facilitates board induction and training
• Available to provide advice and services to support all directors
• Organises the Annual General Meeting
The chairman and chief executive have various prescribed
responsibilities under the Senior Managers Regime overseen by the
PRA.
Non-Executive Directors’ Independence and Time
Commitment
The board has assessed the independence of each of the non-
executive directors, in accordance with provision 10 of the Code,
and is of the opinion that each acts in an independent and objective
manner and therefore, under the Code, is independent and free from
any relationship that could affect their judgement. The board’s opinion
was determined by considering for each non-executive director,
among other things:
• whether they are independent in character and judgement;
• how they conduct themselves in board and committee meetings;
• whether they have any interests which may give rise to an actual or
perceived conict of interest; and
• whether they act in the best interests of the company, its
shareholders and other stakeholders at all times.
The chairman, Mike Biggs, was considered to be independent on
appointment in line with the provisions of the Code.
The company has complied with the Code provision that at least half
the board, excluding the chairman, should comprise independent
non-executive directors. Each non-executive director is required to
conrm at least annually whether any circumstances exist which
could impair their independence. At the start of each board meeting,
all directors are reminded of their obligations relating to conicts of
interest and asked to declare any changes since the last meeting. The
company secretary mains a register of conicts of interest.
In addition, the board is satised that each non-executive director is
able to dedicate the necessary amount of time to the company’s affairs,
following consideration of each non-executive director’s other time
commitments. The letters of appointment for each of the company’s
non-executive directors set out a minimum time commitment in
discharging their duties as a director, and require them to seek prior
board approval before they take on additional commitments.
As required by the Code, and in advance of Tesula Mohindra taking
on an additional directorship of a non-listed entity and the change
of responsibilities at AXA UK for Mark Pain, the board reviewed the
proposed roles. It considered the time commitment and whether the
roles presented any potential conicts of interest for the group. In each
case following that review, the board was satised that none of the
proposed appointments would restrict these directors from carrying
out their duties and responsibilities as a director of the company, and
accordingly it approved the appointments.
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Financial Statements
Strategic Report
Powers of Directors
The directors are responsible for the management of the company.
They may exercise all powers of the company, subject to any
directions given by special resolution and the articles of association.
The directors have been authorised to allot and issue ordinary shares
and to make market purchases of the company’s ordinary shares
by virtue of resolutions passed at the company’s 2021 AGM. Further
detail regarding these authorisations is set out on page 141.
Appointment and Removal of Directors
The appointment of directors is governed by the company’s articles
of association, the Companies Act 2006 and other applicable
regulations and policies. Directors may be elected by shareholders in
general meeting or appointed by the board of directors in accordance
with the provisions of the articles of association.
In accordance with the Code, all directors retire and submit
themselves for reappointment at each AGM. The board will only
recommend to shareholders that executive and non-executive
directors be proposed for reappointment at an AGM after evaluating
the performance of the individual directors.
Appointment and Reappoint
ment of Directors at the
2022AGM
Tracey Graham joined the board on 22 March 2022 and will be
proposed for appointment at the AGM.
Following performance evaluations undertaken during the year, the
board has conrmed that each director continues to be effective and
demonstrate commitment to their role. On the recommendation of
the Nomination and Governance Committee, the board will therefore
be recommending that all other serving directors be reappointed by
shareholders at the 2022 AGM, with the exception of Lesley Jones
and Bridget Macaskill, who will retire from the board at the conclusion
of the AGM.
Induction and Professional Development
On appointment, all new directors receive a comprehensive and
personalised induction programme to familiarise them with the group
and the regulatory, market, risk and governance framework within
which it operates, and to meet any specic development requirements
identied during the recruitment process. The company also provides
bespoke inductions for directors when they are appointed as a
committee chair or member. Induction programmes are tailored to a
director’s particular requirements, but would typically include site visits,
one-to-one meetings with executive directors, the company secretary,
senior management for the business areas and support functions
and a condential meeting with the external auditor. Directors also
receive guidance on directors’ respon
sibilities and the Senior Managers
Regime, together with a range of relevant current and historical
information about the group and its business. A key aim of the induction
is to ensure that new board members are equipped to contribute to the
group and the work of the board as quickly as possible.
Directors provide input on how their individual inductions should
be tailored both in terms of content and structure. The company
secretary engages regularly with individual directors as their
inductions progress and, once they have served on the board for
a period, seeks their input on any further induction or development
requirements they may have. The chairman also discusses induction
plans and training and development more broadly, with new joiners
as part of regular one-to-one meetings.
There is a central training programme in place for the directors, which
is reviewed at least annually by the Nomination and Governance
Committee. In addition, the chairman discusses and agrees any
specic requirements as part of each non-executive director’s regular
reviews. During the year, training and development activities took a
number of forms, including meetings with senior management within
the businesses and control functions, in-depth business reviews,
attendance at external seminars and dedicated briengs from
management and external advisers covering topics such as climate
change, regulatory developments and horizon-scanning, corporate
governance changes, accounting updates, the regulatory Senior
Managers Regime, changes in remuneration regulation and practice,
and consumer duty of care, climate risk and ESG.
Induction Programme for Tesula Mohindra, Patricia Halliday
and TraceyGraham
All new directors joining the board undertake a comprehensive
and tailored induction process which is designed to provide an
understanding of the company’s business, strategy, culture,
governance, management and stakeholders. In relation to the most
recent non-executive directors that have joined the board, namely
Tesula Mohindra, Patricia Halliday and Tracey Graham, personalised
induction programmes have been completed or are ongoing. The
chairman and the company secretary design and facilitate the
programme and their ongoing training.
For these new non-executive directors, their induction
programmes included the following elements:
• one-to-one meetings with the executive directors, covering
strategy, operational and nancial matters, people, the
regulatory framework and culture and values;
• briengs from the company secretary, the investor relations
team and the group’s external legal advisers on legal and
governance matters and shareholder relationships, which are
followed up by sessions with the company’s corporate brokers;
• meeting with the external audit partner;
• briengs from Executive Committee members and senior
managers about their business areas and support functions
including risk, corporate development, human resources, IT
and cyber security;
• access to reference materials including relevant current and
historical information about the group and its business such as
nancial data, the corporate team and policies supporting our
business practices;
• access to board papers through the online board paper
portal; and
• site visits to the group’s ofces with the relevant senior
management recommenced following the easing of Covid-19
restrictions.
Additional sessions are tailored to the individual to reect their
previous experience and committee responsibilities:
• in her role as a member of the Audit and Risk Committees,
Tesula attended, in an observer capacity, a number of the
business risk committees as well as the Group Risk and
Compliance Committee;
• as a member of the Risk Committee, Patricia met with
relevant subject matter experts on technical risk matters
and modelling and attended a number of the business risk
committees and Group Risk and Compliance Committee;
and
• Tracey, in her role as a member of the Remuneration
Committee, met with the Remuneration Committee’s advisers.
Regular meetings with the chairman and company secretary were
held to monitor progress and ensure that the non-executive directors
were receiving all the information they required to full their roles.
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continued
Division of responsibilities
In addition to training organised by the group specically for the
board, directors attend a range of other training and development
sessions as part of other roles they hold. Training and development
records are maintained by the company secretary and reviewed
annually by the chairman and each individual director.
Conicts of Interest
The articles of association include provisions giving the directors
authority to approve conicts of interest and potential conicts of
interest as permitted under the Companies Act 2006.
Directors are responsible for notifying the chairman and the company
secretary of any actual or potential conicts as soon as they become
aware of them. A procedure has been established, whereby
actual and potential conicts of interest are regularly reviewed
and appropriate authorisation so
ught. This procedure includes
mechanisms for the identication of conicts prior to the appointment
of any new director or if a new conict arises during the year. The
decision to authorise a conict of interest can only be made by non-
conicted directors and in making such a decision the directors must
act in a way they consider, in good faith, will be most likely to promote
the success of the company. The company secretary maintains a
register of conicts authorised by the board. The board believes this
procedure operated effectively throughout the year.
Culture and Values
The board recognises the importance that culture and values play in
the long-term success and sustainability of the group, and the role
of the board in establishing, monitoring and assessing culture. The
board also acknowledges the importance of individual directors, and
the board as a whole, acting with integrity, leading by example and
promoting the desired culture.
The ongoing assessment of the contribution of culture and values
to the group’s long-term success remains a key focus for the board.
The board also spends time monitoring, and satisfying itself as to, the
alignment of the group’s purpose, values and strategy with its culture.
During the year, the board monitored, assessed and promoted the
group’s culture in the following ways:
• review and discussion by the board of a quarterly culture
dashboard, setting out an assessment of culture, and culture and
conduct metrics, across the group and each of its divisions from
the perspective of customers, people and control;
• regular updates to the board on external guidance and insight on
culture, including from regulators and industry bodies, which are
used by the board to benchmark the group’s approach and plans;
• discussing feedback received from employees across the group in
regular employee opinion surveys;
• informal feedback from meetings of non-executive directors
with employees in their workforce engagement capacity and
attendance at various employee forums;
• updates on activities across the group in relation to culture and
values, including employee training programmes, activities in
relation to the group code of conduct, the Close Brothers Way, and
other initiatives;
• the employee opinion survey included specic questions in
the areas of culture and inclusivity, customers and clients and
wellbeing;
• following the activities of employee networks considering discrete
areas in relation to diversity and inclusion, including gender, ethnic
diversity, LGBTQ+, disability, working parents and carers, mental
wellbeing and social mobility;
• inclusion of culture-related objectives as part of the executive
directors’ balanced scorecard assessed by the Remuneration
Committee (further detail on which can be found in the Directors’
Remuneration Report on page 132) continuing to focus on
rewarding and investing in the group’s employees, including
discussions by the Remuneration Committee in relation to gender
pay reporting and a strong focus on employee considerations as
part of board decision-making and oversight;
• consideration of culture, behaviour and conduct issues by the
Remuneration Committee;
• discussion of cultural and behavioural attributes by the Nomination
and Governance Committee as part of regular talent reviews and
succession planning;
• reviewing the group’s whistleblowing arrangements by which
employees can raise concerns in condence and, if they wish,
anonymously;
• the Risk Committee’s regular review of a conduct risk dashboard
covering an assessment of relevant issues and developments for
each of the group’s divisions;
• discussing culture and conduct issues arising out of specic
activities and programmes being undertaken by the group;
• supporting and participating in training and development
programmes for employees; and
• encouraging and enabling eligible employees to participate in
schemes to promote share ownership. Eligible employees are
able to participate in the group’s SAYE and BAYE schemes, which
provide cost-effective opportunities for employees to acquire
shares in the company.
The activities described above have allowed the board to monitor
effectively the group’s culture during the year and to ensure that
culture continues to be aligned with the group’s purpose, values and
strategy. In the year, the board and its committees considered the role
and impact of culture as part of individual decisions and its oversight
of the group’s operations. Considerations relating to culture and
values have also formed an important part of the board’s discussions
on the group’s strategy, model and purpose, including in the context
of M&A opportunities considered by the group.
Whistleblowing
The board has responsibility for oversight of the group’s
whistleblowing arrangements. It monitors the operation and
effectiveness of these arrangements and ensures that processes
are in place for the proportionate and independent investigation of
matters raised through the mechanisms available to the workforce
and for follow-up action.
Among other things, the board discharges this responsibility through
the provision of half-yearly updates by the group head of operational
risk and compliance. These updates include:
• an overview of the group’s whistleblowing arrangements and an
assessment of their effectiveness;
• information on steps taken by the group to ensure the protection of
those using the group’s whistleblowing arrangements; and
• a summary of whistleblowing events, including outcomes and any
follow-up actions.
In addition, the board appoints one of the directors to act as the
group’s whistleblowing champion. This is currently Oliver Corbett. As
part of his role, Oliver engages with the group head of operational risk
and compliance regularly in relation to whistleblowing matters during
the course of the year.
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Strategic Report
The board undertakes a formal and rigorous evaluation of its
effectiveness and the performance of the whole board, its individual
directors and its committees annually.
In accordance with the Code, the board has a three-year cycle for
evaluations of its performance. In 2021, the board appointed an
external evaluator to undertake the board performance review and
the results of that review were set out in full in that Annual Report.
This year, the board undertook an internal evaluation led by the
chairman. Each of the directors completed a questionnaire which
considered a range of different areas relevant to board effectiveness
and corporate governance, including:
• the role and composition of the board;
• strategy;
• oversight of business performance;
• culture, purpose and values;
• management of the work of the board;
Board and Committee Effectiveness
Annual board and committee evaluation
• board behaviours;
• the operation of the board during the Covid-19 pandemic
(with a reduced focus this year recognising the easing of
restrictions and return to the ofce for employees);
• the work and contribution of the board’s committees;
• stakeholder engagement and wider societal impact; and
• risk management.
The results were presented and discussed at the July board
meeting. The board also discussed the progression against the key
outcomes identied in the 2021 external evaluation, recognising that
a continuous approach to improvement will continue to deliver good
governance.
The overall conclusion of the evaluation was that the board and its
committees remain strong and effective, with clarity as to their role
and purpose. In terms of the operation of the board, the evaluation
found that the board is chaired well, demonstrating rigour and focus
in its work, whilst creating an atmosphere of inclusivity and openness,
combined with constructive challenge, which allows for diversity of
opinion.
2022 review
Findings Actions taken
• To reduce the length and density
of Board papers
• To consider the number of and
frequency of Board meetings
• To provide more detailed
reporting on stakeholders and
engagement
• The strategy session was well-
received and the format worked
well. This will be repeated on an
annual basis with the Executive
Committee
• The board recognised the
strategic focus over the last
twelve months
• Further suggestions on topical
areas for Board training and
development were provided for
inclusion in the annual training
programme
• A detailed review
of the ndings from
the evaluation will be
undertaken and a
programme scheduled
to continue to improve
the matters raised
2021 review
Findings Actions taken
• Increased customer-
related data for individual
businesses
• Included the annual talent
review within a dedicated
session of the Nomination
and Governance
Committee, with all non-
executive directors invited
to attend
• Additional topics for
inclusion in the board’s
annual training and
development programme
• More detailed reports to
the board on committee
discussion points and
decisions
• More detailed information has
been provided to the board
• A more frequent talent review
by the Nomination and
Governance Committee has
been introduced and all non-
executive directors invited to
attend the committee for these
sessions
• The additional topics have
been incorporated into
the annual training and
development programme
• Extra time has been
incorporated in the board
agenda to provide for more
detailed reports to the
board from the chairs of the
committees. Full minutes of
all committee meetings are
available to all directors
2021
External evaluation
2022
Internal evaluation
Consider external evaluation
recommendations
2023
Internal evaluation
Consider internal evaluation
recommendations
Evaluation Cycle
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continued
Division of responsibilities
Directors’ performance
During the nancial year, the chairman holds regular meetings with
individual directors at which, among other things, their individual
performance is discussed. Informed by the chairman’s continuing
observation of individual directors during the year, these discussions
form part of the basis for recommending the appointment and
reappointment of directors at the company’s AGM, and include
consideration of the director’s performance and contribution to the
board and its committees, their time commitment and the board’s
overall composition.
Chairman’s performance
As in previous years, Mark Pain, in his role as the senior independent
director, has led an annual performance assessment process in
respect of the chairman. This involves review meetings during the
year with the other non-executive directors individually, without the
chairman being present, and consultation with the chief executive,
group nance director and other members of senior management.
The senior independent director subsequently provides feedback to
the chairman.
Directors’ tness and propriety
In line with its regulatory obligations, the group undertakes annual
reviews of the tness and propriety of all those in senior manager
functions, including all of the company’s directors and a number of
other senior executives. This process comprises assessments of
individuals’ honesty, integrity and reputation, nancial soundness,
competence and capability, and continuing professional
development. This year’s reviews have conrmed the tness and
propriety of all of the company’s directors and other senior executives
who perform senior manager functions. Consideration of matters
relating to tness and propriety also form an important part of the
board’s recruitment process for non-executive directors.
Penny Thomas
Company Secretary
27 September 2022
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Nomination and Governance Committee Report
Chair’s Overview
Dear Shareholder
On behalf of the board, I am pleased to present the report of the
Nomination and Governance Committee for 2022. The report sets
out an overview of the Committee’s roles and responsibilities and its
key activities during the year.
During the year, non-executive succession and recruitment remained
an important focus for the Committee as the longer-term succession
planning that has been implemented over the past two years
culminated in the appointment of Patricia Halliday in August 2021 and
Tracey Graham in March 2022. The Committee adopts a proactive
and structured approach to succession planning and remained
mindful of board changes that will naturally occur in the years ahead,
as directors reach the end of their terms, and the need to ensure
continuity of knowledge and experience among the board as a whole.
The Committee spent time considering succession planning and
talent management for roles below board level. Once again this
year, it has monitored activities and initiatives to develop the group’s
talent pipeline and improve gender and other diversity among senior
management. The Committee reviewed the skills and experience of
the non-executive directors to ensure that the board continues to be
able to perform its role effectively. In light of this and other activities in
the year, it recommended to the board that all serving directors with
the exception of Lesley Jones and Bridget Macaskill, be reappointed
at the 2022 AGM. Lesley and Bridget will retire at the conclusion of
the AGM.
The Committee has closely monitored sustainability and
environmental, social and governance (“ESG”) developments
relevant to the group, including consideration of points arising from
engagement with shareholders and other stakeholders in these
areas. These will continue to be key areas for the Committee and the
board as a whole in the coming years.
This year, the annual evaluation of the board and its committees was
an internally conducted process and is discussed on page 111.
Membership
Mike Biggs (Chair)
Oliver Corbett
Lesley Jones
Bridget Macaskill
Mark Pain
The chief executive, group head of human resources and group
head of sustainability attend the Committee by invitation.
Meetings
Five scheduled meetings held
100% attendance (see also page 103)
Key Responsibilities
• regularly reviewing the structure, size and composition of the
board and its committees, and making recommendations to the
board with regard to any changes.
• considering the leadership needs of the group and considering
succession planning for directors and senior executives.
• considering the appointment or retirement of directors.
• reviewing the continued independence of the non-executive
directors.
• assessing the board’s balance of skills, knowledge and
experience.
• evaluating the skills, knowledge and experience required for a
particular appointment, normally with the assistance of external
advisers to facilitate the search for suitable candidates.
• assessing the contribution and time commitment of the non-
executive directors.
The Committee’s terms of reference are available at
www.closebrothers.com.
2022 Highlights
• considering board composition and succession, including the
search for additional non-executive directors.
• reviewing talent and executive management succession
planning, including oversight of activities to support and
encourage the development of a diverse and inclusive talent
pipeline.
• the annual review of the board diversity and inclusion policy.
• oversight of the board and committee evaluation process
undertaken during the year.
• monitoring sustainability and ESG developments and
considering the implications for the group.
• reviewing the TCFD framework and disclosure.
Composition, succession and evaluation
Michael N. Biggs
Chairman
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continued
Composition, succession and evaluation
Overview of Main Activities During the Year
NED succession
Patricia Halliday joined the board on 1 August 2021. The search
process for this appointment was described in the Annual Report
2021.
This year, the search continued for a further non-executive director.
The Committee oversaw the formal and robust search processes
that culminated in the decision by the board to appoint Tracey
Graham as an independent non-executive director.
The Committee reviewed and approved a detailed description for
the role, having considered the particular skills, experience and
background required. As part of board recruitment searches, the
Committee assesses the balance of knowledge and expertise needed
to ensure the continued effective leadership of the group, and the
development and oversight of its strategy, purpose and culture. In
identifying and recommending candidates for appointment to the
board, the Committee considers candidates from a wide range of
backgrounds, assessing them on merit against objective criteria and
with due regard for the benets of diversity on the board.
The search for Tracey Graham followed the same detailed and
considered approach and was conducted in conjunction with an
external search rm, Russell Reynolds. The rm was instructed
to consider candidates from a diversity of backgrounds and
experiences. The rm is not connected to the company in any way
and is a signatory to the Voluntary Code of Conduct for Executive
Search Firms.
Following the preparation of a long-list of candidates, a shortlist
was selected by the Committee and interviews were held with the
involvement of both non-executive and executive members of the
board and members of senior management. As part of the process,
the Committee considered the other commitments of candidates to
ensure that they would have sufcient time to devote to their duties to
the group. Following completion of the processes to the Committee’s
satisfaction and receipt of all necessary regulatory approvals, it
recommended Tracey’s appointment to the board. The Committee
also considered and recommended to the board her appointment to
the Remuneration Committee.
Further details on Tracey’s experience may be found in her biography
on page 96. Tracey brings signicant experience from operational
roles and nancial services and is a strong addition to the existing
range of skills and expertise on the board.
Executive Director and Non-Executive Director Tenure
Years
Non-executive director tenure
Executive director tenure
Mike Biggs
Mark Pain
Oliver Corbett
Bridget Macaskill
Lesley Jones
Peter Duffy
Sally Williams
Tesula Mohindra
Patricia Halliday
Tracey Graham
Adrian Sainsbury
Mike Morgan
012345678910
Committee memberships
The Committee will continue to monitor the composition of each
of the board’s committees. Last year, the committee reviewed the
composition of its committees and made a number of changes. The
current composition of the committees is as follows:
Nomination and
Governance
Committee
Audit
Committee
Risk
Committee
Remuneration
Committee
Mike Biggs
1
Chair
•
Oliver Corbett
•
Chair
•Peter Duffy
••
Tracey Graham
••
Patricia Halliday
••
Lesley Jones
••
Chair
•
Bridget Macaskill
••
Chair
Tesula Mohindra
••
Mark Pain
•••
Sally Williams
••
1 Mike Biggs attends all Risk Committee meetings though he is not a member of the committee
Non-executive directors’ skill sets
The Committee has considered and reafrmed the skill sets and
experience of the company’s non-executive directors, including their
extensive experience within nancial services and in regulated or
listed companies. The Committee also assesses the contribution and
time commitment of the non-executive directors.
A summary of the range of skills of the non-executive directors is set
out below.
The following chart indicates the number of non-executive directors
who possess the broad cross-section of skills set out below on the
board.
Broad
nancial services
Technolog
y/digital/operations
Strategy
Leadership
UK listed company
Risk
Finance/audit/accounting
Regulatory framework
ESG
People/culture
9
9
10
9
10
10
10
10
9
10
Further information on the background and experience of each of the
non-executive directors can be found in their biographies
on pages 95 to 97.
All directors are required to undertake the annual PRA tness and
proprietary assessment.
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Appointment and reappointment of directors
Tracey Graham joined the Board during the year and will therefore
stand for appointment at the AGM.
Prior to the company’s AGM each year, the Committee considers,
and makes recommendations to the board concerning, the
reappointment of directors, having regard to their performance,
suitability, time commitment and ability to continue to contribute to
the board. Following this year’s review in advance of the 2022 AGM,
the Committee has recommended to the board that all serving
directors, with the exception of Lesley Jones and Bridget Macaskill,
be reappointed at the AGM. Lesley and Bridget have served nine
years on the board of the company and will retire at the conclusion of
the AGM.
Oliver Corbett has served as a director for more than six years. The
extension of his term of ofce has been subject to particularly rigorous
review by the Committee, including with respect to his performance,
contribution and independence. He did not participate in the discussion
on the proposed extension of his term of ofce. The Committee has
noted the signicant contribution that he makes, including with respect
to the particular responsibilities he undertakes as chair of the Audit
Committee. The Committee values the knowledge, experience and
continuity that his continued appointment would bring.
Senior management talent
development and succession
planning
The Committee spent considerable time during the year reviewing
talent and considering the group’s succession planning at board
and senior management level. Activities included a formal review
by the Committee of senior management succession planning,
looking at the capability and potential of incumbents in key roles
and the succession pipeline across the group. The Committee also
considered specic appointments to senior management roles
at both group and divisional level. The Committee recognises the
importance of talent development and ensuring that the group
continues to attract, retain and develop skilled, high potential
individuals, and this will remain an important focus in the year ahead.
All non-executive directors are invited to attend the sessions of the
Committee which consider talent and development to give them full
visibility of the succession pipeline.
During the year, the Committee was updated on the various initiatives
in place across the group to support talent development at different
levels of the group’s operations. Further information in relation to
the group’s activities in this area can be found on page 38 of the
Sustainability Report.
Sustainability
The Committee recognises and welcomes the continuing focus on
sustainability and the contribution that business makes to the wider
community. On behalf of the board, during the year, the Committee
regularly discussed sustainability considerations across a broad
range of different areas, including diversity and inclusion and ESG.
Further details on each of these areas are set out below.
Diversity and inclusion
Diversity and inclusion remain a key focus of the Committee. The
Committee recognises the importance of having directors with
a range of skills, knowledge and experience and embraces the
advantages to be derived from having a diversity of gender and
social and ethnic backgrounds represented on the board. Such
diversity brings different perspectives and the challenge needed to
ensure effective decision-making.
Diversity and inclusion have been
discussed throughout the year, including in the context of succession
planning at both board and senior management level and in the
consideration of particular appointments. In addition, the Committee
undertook its annual review of the board diversity and inclusion policy,
and recommended a number of incremental enhancements. The
updated policy was subsequently approved by the board.
1 Comprises Executive Committee, Company Secretary and their direct reports
2 Number of employees excluding board and senior management
Board Diversity
Q
Male – 50% (6)
Q
Female – 50% (6)
Workforce Diversity
2
Q
Male – 56% (2,122)
Q
Female – 44% (1,681)
Senior Management
1
Q
Male – 69% (52)
Q
Female – 31% (23)
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continued
Composition, succession and evaluation
The Committee considers that the board remains diverse, drawing
on the knowledge, skills and experience of directors from a range of
backgrounds, but will seek to take opportunities to further improve
the diversity of the board, where it is consistent with the skills,
experience and expertise required at a particular point in time. The
Committee is pleased with the progress made in recent years to
ensure that the board comprises individuals from a diverse range of
backgrounds. The board supports the recommendations set out in
the Parker Review and aims at all times to have at least one director
of colour. The group currently meets the target. Diversity and inclusion
at board level will continue to be an area of focus for the Committee,
particularly as directors reach the end of their nine-year terms in the
years ahead and the size of the board reduces.
The Committee takes seriously its role in overseeing the development
of a diverse pipeline for senior management positions and the link
between diversity and inclusion and delivery of the company’s purpose
and strategic aims. To that end, it considered updates during the
year in relation to diversity and inclusion initiatives across the group.
Among other things, the Committee discussed the group’s approach
to recruitment, training and development programmes for employees,
management’s work with diversity and inclusion campaign groups,
and activities of discrete employee networks including in the areas
of gender, ethnic diversity, disability, LGBTQ+, working parents and
carers, mental wellbeing and social mobility. The group is a member
of Moving Ahead, Mission Include and is a signatory to the Women in
Finance Charter, the Race at Work Charter and the Business Disability
Forum. The Committee recognises the importance, and the benets to
the group, of developing a diverse pipeline and it will continue to work
with senior management in this area.
In line with the Code, see the charts on page 115 for the breakdown
of the group’s gender diversity. More detail on the group’s approach
to diversity and inclusion can be found in the Sustainability Report on
pages 37 to 38.
Environmental, social and governance
Throughout the year, the Committee received and considered
dedicated updates on ESG issues relevant to the group. The group’s
head of sustainability attends relevant parts of the Committee’s
meetings to provide updates on the group’s activities in this area.
The Committee’s discussion of ESG issues covered a wide range
of areas and was informed by, among other things, engagement
with shareholders and other stakeholders, legislative and regulatory
initiatives and wider market developments. Areas of focus this year
included the group’s sustainability strategy and targets (including
progress in the year and future plans), wider market themes and trends
and the group’s progress towards disclosure requirements relating to
the Task Force on Climate-related Financial Disclosures (“TCFD”). The
Committee will continue to consider ESG and broader sustainability
matters in the year ahead and make such recommendations to the
board as it considers necessary.
Further information on the group’s approach to sustainability can be found
in the Sustainability Report starting on page 35 of this Annual Report.
Committee Effectiveness
As described in more detail on page 111, an internal evaluation of
the effectiveness of the board and its committees was undertaken
during the year in line with the requirements of the UK Corporate
Governance Code.
The Committee considers that, during the year, it continued to have
access to sufcient resources to enable it to carry out its duties and
has continued to perform effectively. During the year, the Committee
reviewed its terms of reference to ensure that they remain appropriate.
Michael N. Biggs
Chair of the Nomination and Governance Committee
27 September 2022
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Membership
Lesley Jones (Chair)
Oliver Corbett
Patricia Halliday
Tesula Mohindra
Sally Williams
Peter Duffy
Bridget Macaskill
Tracey Graham
Mike Pain
The chairman of the board, the executive directors, the group chief
risk ofcer, the group head of compliance and the group head of
internal audit attend by invitation.
Meetings
Five scheduled meetings held
100% attendance (see also page 103)
Key Responsibilities
• to support the board in its oversight of risk management across
the group;
• oversee the maintenance and development of a supportive
culture and “tone from the top” in relation to the management
of risk;
• review and recommend to the board for approval the group’s
risk appetite, which is the level of risk the group is willing to take
in pursuit of its strategic objectives;
• monitor the group’s risk prole against the prescribed appetite;
• review the effectiveness of the risk management framework to
ensure that key risks are identied and appropriately managed;
• provide input from a risk perspective into the alignment of
remuneration with performance against risk appetite (through
the Remuneration Committee); and
• undertake a robust assessment of both the principal and
emerging risks facing the group over the course of the year, and
review reports from the risk and compliance functions on the
effectiveness of the processes that support the management
and mitigation of those risks.
2022 Highlights
• further strengthening of the risk infrastructure through the
recruitment and development of additional skills and resource.
• enhanced our conduct and compliance operating model
to strengthen second line review and improve the quality of
information that the Committee and board receive on the
effectiveness of our customer processes.
• increased usage of quantitative analysis to support our risk
appetite decisioning.
• monitoring the risk posed by cyber crime, with regular updates
provided over the course of the year.
• oversight of broader operational resilience, including a review of
entity-specic self-assessments, approval of standards adopted
for delivery of its important business services, and a data centre
failover simulation exercise.
• increased focus on the risks faced by climate change with
regular updates received on our progress in developing a
regulatorily-compliant climate risk framework.
• challenge on expected credit losses and bad debt as a result of
estimated increased stress in an inationary environment.
• periodic reviews of the Property and Motor businesses covering
performance, credit quality in the loan book and notable
developments.
The Committee’s terms of reference are available at
www.closebrothers.com.
Risk Committee
Audit, risk and internal control
Chair’s Overview
On behalf of the board, I am pleased to introduce the Risk Committee
Report for the year ended 31 July 2022. The report sets out an
overview of the Committee’s key responsibilities and the principal
areas of risk upon which we have focused during the year.
Looking back over the last 12 months, I am pleased with the way
in which the group has been able to manage risk effectively, and in
particular our evolving approach to the new hybrid working patterns
that we and the whole banking industry are adjusting to post the
pandemic shutdown. We are condent in the strength of our control
environment but we will need to keep a close eye in coming months
on the people and operational risk aspects of these new working
practices. Further detail on our approach to risk and the internal
controls for risk management are provided in the Risk Report on
pages 74 to 77.
While the immediate risks associated with Covid have now begun to
recede, challenges of a different kind have arisen. The advent of war
in Ukraine has heightened the UK’s geopolitical risk environment, and
while our UK-focused model protects us from material direct impacts,
we must remain alert to the indirect impact on our customers and wider
stakeholders, as well as disruption to key suppliers and third parties.
Turbulence in the UK political environment and the exceptional
challenge posed by the trajectory for ination and increased cost of
living, predominantly driven by a continued rise in energy costs, pose
additional risks for the group. The Committee has received regular
updates on the risk areas most impacted: credit risk, where bad
debt is likely to rise in the short to medium term; interest rate risk,
where the benet of embedded optionality in some of our lending
businesses decreased as base rates increased; and operational risk,
given the traditionally strong linkage between recessionary economic
cycles and instances of fraud as well as the challenge to operational
capacity should bad debt case volumes increase.
The group is well prepared to face into each of these challenges. We
have for some time been preparing for the next credit downturn and
continue to rene our business-tailored playbooks to ensure that we
are ready for a range of economic scenarios.
Lesley Jones
Chair of the Risk Committee
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continued
Audit, risk and internal control
The group’s use of nance and risk models has evolved further with
the continued development of our credit and impairment models.
Following the submission of our IRB application in the previous
nancial year, we continue to work closely with the PRA as we
progress through the regulatory approval process. Our model
risk framework and supporting model governance infrastructure
are operating well and in line with regulatory expectations.
Notwithstanding this, we continue to rene our processes and
approach, both to reect the increasing maturity of our model
suite and the awareness/understanding of the board and senior
management. We are also closely monitoring developments in the
regulatory landscape to ensure we remain aligned with expectations
in this area. Given recent developments in the macroeconomic
environment, we are also looking closely at the behaviour of our
models to monitor their performance as we move through a more
testing economic cycle.
The Committee also remains alert to the risk posed by cyber crime,
with regular updates provided over the course of the year. The group
continues to invest in its detection and monitoring capabilities and is
making good progress with its cyber maturity plan. In addition, the
Committee has raised the bar on the standards the group needs to
be able to demonstrate on its broader operational resilience. This has
included a review of entity-specic self-assessments and approval
of standards adopted for delivery of its important business services.
In November, the Committee reviewed the results of a data centre
failover simulation exercise in the Bank which further informed the
group’s disaster recovery strategy.
As the threat of climate change increasingly dominates our daily
lives, we have increased our Committee focus on the risks we as a
group will face and have received regular updates on our progress
in developing a regulatorily-compliant climate risk framework.
Specically, these have included the evolution of credit risk climate
MI and reporting, and a review of outputs from the Bank’s inaugural
long-term scenario analysis exercise which focused on our Motor
and Asset and Leasing portfolios. The Committee heard plans for the
group’s rst TCFD report which is included in our Annual Report this
year (see pages 42 to 57. While we have made strong progress as a
rm in building out our risk management approach to climate risk, we
know that we, along with the broader industry, have much more to
do and we remain committed to enhancing our disclosures over the
coming years.
Over the course of 2022, the Committee has also continued to
exercise robust oversight of Novitas as it navigates the legal,
regulatory and commercial challenges of wind down whilst continuing
to deliver good customer outcomes. This has included oversight of
the assessment of customer outcomes and relevant remediation
where necessary and ongoing review of the effectiveness of local
and group-level risk and control governance, together with challenge
and discussion on both the nancial and non-nancial risks in the
business.
Remuneration
The linkage between culture, risk and compensation remains an
important one and the Risk Committee and the group chief risk
ofcer have provided input to the Remuneration Committee again
this year to ensure that risk behaviours and the management of
operational risk incidents over the course of the nancial year are
appropriately reected in decisions taken about performance and
reward.
We also continue to progress against the broader regulatory agenda,
in particular with regard to climate risk, conduct risk, new Consumer
Duty regulation, operational resilience, cyber risk and outsourcing/
third party risk. The Committee has received regular updates on each
of these areas and I remain condent that we are well positioned to
meet the challenges and uncertainties that each of these will pose.
In addition, the Committee has regularly reviewed reports from the
risk and compliance functions on the effectiveness of the processes
that support the management and mitigation of both principal and
emerging risks. The board also engages in this process through its
annual assessment of the principal risks and uncertainties that might
threaten its business model, future protability, solvency or liquidity. A
summary of these principal and emerging risks and uncertainties is
set out on pages 78 to 92.
Membership and Meetings
The Committee comprises all Close Brothers Group independent
non-executive directors and myself as chair.
Six meetings were held during the year (ve scheduled and one ad
hoc). Full details of attendance by the non-executive directors at
scheduled meetings are set out on page 103.
Members of the Committee are regularly joined by the chairman of
the board, the executive directors, the group chief risk ofcer, the
group head of compliance and the group head of internal audit, all of
whom receive standing invitations to attend.
Other executives, subject matter experts, risk team members and
external advisers are invited to attend the Committee from time to
time as required, to present and advise on reports commissioned.
I continue to meet frequently with the group chief risk ofcer and his
risk team in a combination of formal and informal sessions, and with
senior management across all divisions of the group, to discuss the
business environment and to gather
their views on emerging risks,
business performance and the competitive environment.
Committee Effectiveness
As described in more detail on page 111, an evaluation of the
effectiveness of the board and its committees was undertaken
during the year in line with the requirements of the UK Corporate
Governance Code. The results conrm that the Committee is
operating effectively. The Committee considers that during the year it
continued to have access to sufcient resources to enable it to carry
out its duties and has continued to perform effectively.
Activity in the 2022 Financial Year
The mandate and scope of the risk function continues to evolve,
with the three lines of defence model now well established and a
mature and effective risk management framework in place. Over the
course of the last year, the risk infrastructure has been strengthened
further through the recruitment and development of additional skills
and resource. The fair treatment of customers and good outcomes
has long been important to the group and as the regulatory agenda
continues to deepen in this area, we have responded by enhancing
our conduct and compliance operating model to strengthen second
line review and improve the quality of information that the Committee
and board receive on the effectiveness of our customer processes.
The Committee believes strongly in the value of good management
information and as the risk framework has continued to mature, we
have seen increased usage of quantitative analysis to support our risk
appetite decisioning. This has allowed us to understand our portfolios
at an increasingly granular level and to anticipate areas where controls
and limits may be appropriate for tightening or growth.
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Looking Ahead to 2023
Given the forecast macro environment, and in particular the
threat posed by ination and higher interest rates, the year ahead
promises to be another challenging one, with a need to balance the
Committee’s time between management of emerging threats and
fullment of its normal duties.
Notwithstanding, we will not lose sight of the longer-term focus areas
we have identied for further focus and challenge in FY2023, namely:
• Review and renement of the Bank’s credit playbooks, noting they
may need to be utilised as we move through the economic cycle.
• Greater use of scenario analysis and other quantitative analysis
tools and techniques to support the modelling of potential nancial
impacts.
• Continued oversight of the group’s evolving climate risk framework,
including review and challenge of the next stage of long-term
scenario analysis.
• Enhancement of our conduct risk framework with a view to
ensuring the group continues to ensure positive customer
outcomes.
• Review and challenge of the rm’s plans to address new Consumer
Duty requirements.
• Continued focus on the group’s operational resilience framework,
and the planned maturation of its cyber risk framework.
• As part of the IRB programme, continued review and assessment
of the group’s modelling capabilities, including the further
development of our models strategy.
Finally, I extend my thanks to my fellow members of the Risk
Committee, whose engagement and contribution have been of
great support to me over the past 8 years as Chair. At the AGMI
will be stepping down from both the board and as Chair of the
Risk Committee, to be replaced by Patricia Halliday. Patricia brings
with her substantial experience in similar roles and I am sure the
Committee will benet from this in the years to come.
Lesley Jones
Chair of the Risk Committee
27 September 2022
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continued
Audit, risk and internal control
Chair’s overview
The work undertaken by the Committee to discharge its
responsibilities is set out below.
During the year the Committee has again had a full agenda and
continued to focus on its principal roles and responsibilities. A
key area of discussion over the past 12 months has been on the
level of ECL provisioning, including assessing the impact of the
war in Ukraine and of increasing ination especially energy costs
on our customer base, particularly within the bank. There has
been a review of the BEIS proposals on audit reform and on the
increasing disclosure relating to climate change. We have focused
on challenging the key accounting judgements across the group,
assessing the integrity and fair presentation of the group’s external
nancial reporting and reviewing the maintenance and effectiveness
of the group’s internal control framework. The Committee monitored
and reviewed the activities and performance of internal and external
audit, along with oversight of non-audit services provided by the
external auditor.
Further details of work in respect of these and other key areas are set
out in the sections below.
The Committee members bring a diverse range of experience in
nance, risk, control and business, with particular experience in the
nancial services sector. The board has conrmed that the members
of the Committee have the necessary expertise required to provide
effective challenge to management. The board also considers that
I have appropriate recent and relevant experience. The qualication
foreach of the members is outlined on pages 95 to 97.
In addition to the Committee members, standing invitations are
extended to the chairman of the board and all other directors. The
Group Financial Controller, the Group Head of Operational Risk and
Compliance, the Group Chief Risk Ofcer and the Group Head of
Internal Audit attend meetings by invitation. I meet with this group as
well as the Group Finance Director ahead of each meeting to agree
the agenda and to receive a full brieng on all relevant issues.
Invitations to attend are extended to other members of management
to brief the Committee on specic issues as necessary. The external
auditor attends each meeting and I had regular contact with the
lead audit partner during the year. The Committee holds private
sessions with internal and external audit following each meeting of the
Committee, without members of management.
Membership
Oliver Corbett (Chair)
Lesley Jones
Patricia Halliday
Tesula Mohindra
Sally Williams
Meetings
Five scheduled meetings held
100% attendance (see also page 103)
Key responsibilities
• monitoring the integrity of the nancial statements and any
other formal announcements relating to the group’s nancial
performance;
• reviewing the annual report and accounts including signicant
nancial reporting judgements and recommending to the Board
whether it is fair, balanced and understandable;
• reviewing and monitoring the group’s internal controls and the
effectiveness of the group internal audit function;
• monitoring and reviewing the effectiveness and quality of the
external audit process and the independence of the external
auditor;
• recommending the appointment, re-appointment and removal
of the external auditor of the group or any of its subsidiary
companies, and of their fees;
• reviewing the ndings of the audit with the external auditors; and
• reviewing and challenging the group’s Recovery and Resolution
Plans.
The Committee’s terms of reference are available at
www.closebrothers.com.
2022 highlights
• discussing and challenging key accounting judgements made
by management, with a particular focus on expected credit loss
(“ECL”) provisioning, and revenue recognition;
• regular meetings with key business areas to review and
challenge;
• assisting with the determination of the appropriateness
of adopting the going concern basis of accounting and in
performing the assessment of the viability of the group;
• reviewing, challenging and approving the annual internal audit
plan and internal audit reports; and
• overseeing the relationship with PricewaterhouseCoopers LLP
and evaluating its independence, objectivity, qualications and
effectiveness.
Audit Committee
Oliver Corbett
Chair of the Audit Committee
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Committee Effectiveness
An internal evaluation of the board and its committees was
undertaken this year in line with the requirements of the UK Corporate
Governance Code. The results of this review conrmed that the
Committee is operating effectively. The Committee considers during
the nancial year that it had access to sufcient resources to enable it
to carry out its duties.
Activity in the 2022 Financial Year
Key accounting judgements
The Committee spent considerable time reviewing the interim report
and Annual Report. The Committee discussed and challenged
the key areas of accounting judgement taken by management in
preparing the nancial statements and the external auditor’s work.
This also included consideration of the internal controls over nancial
reporting. The Committee noted that there were no new standards,
or amendments to standards, relevant to the group that had become
effective for the reporting period.
The key judgement areas were largely unchanged from the prior
year, reecting the group’s adherence to its business model and
consistency of its approach to nancial reporting. A more pessimistic
economic outlook has led to a particular focus by the Committee in
challenging expected credit loss provisioning with management.
The main areas of focus are outlined below. Each of these matters
was discussed with the external auditor and, where appropriate, have
been addressed in the external auditor’s report.
IFRS 9
Given the materiality of the group’s loan book, ensuring that the
group’s ECL models and related IFRS 9 judgements and disclosures
are appropriate, remains a key priority for the Committee. Regular
updates were provided to the Committee throughout the year.
The Committee challenged the level of provisions held by the group,
and the judgements and estimates used to calculate these provisions.
Particular focus was given to:
• the August Monetary Policy Committee Report sets out the
economic analysis and ination predictions which will form part of
the decision-making process for future interest rate decisions
• the ongoing use and approval of model adjustments, and the
evolution of these adjustments as the impact of Covid-19 moderates
• impact of increasing interest rates and ination on the group’s client
base and the extent to which models are able to capture the risks,
such as ination.
• the high level of estimation uncertainty in setting forward-looking
macroeconomic assumptions; and associated weights;
• management’s model enhancement plans;
• provisioning levels for Novitas and key assumptions.
Credit risk and provisions disclosures were discussed to ensure they
were clear and gave a transparent articulation of the group’s credit
risk prole, and key drivers of the expected credit loss charge. In the
next nancial year, the Committee will continue to monitor IFRS9
provisions and disclosures with a focus on a deterioration in the
broader nancial outlook.
Revenue recognition
The Committee reviewed management’s approach to revenue
recognition, highlighting the key areas where judgement is required
across interest, fee and commission income. The Committee noted the
consistency of approach with prior years and concluded that revenue
recognition for each of the group’s key businesses is appropriate.
Other Financial Reporting and Control
Going concern and viability statement
The Committee assisted the board in determining the
appropriateness of adopting the going concern basis of accounting
and in performing the assessment of the viability of the group. The
Committee reviewed a paper from management in support of the
going concern basis and the longer-term viability of the group.
The Committee assessed the proven stability of the group’s business
model which is supported by a diverse portfolio of businesses,
resilience when subjected to internal stress testing, and a strong
capital base with adequate access to liquidity.
The Committee discussed the group’s principal risks which may
affect future development, performance, and nancial position. The
Committee considered projected protability and capital ratios,
over a period of three years; in addition it considered changes in the
economic, technological and regulatory environment.
Overall the Committee concluded that it remained appropriate to
prepare the accounts on a going concern basis, advised the board
that three years was a suitable period of review for the viability
statement, and recommended the viability statement to the board for
approval, set out on page 94.
Fair, balanced and understandable
On behalf of the board, the Committee reviewed the nancial
statements as a whole to assess whether they were fair, balanced
and understandable. The group’s performance was reviewed in
light of the risks associated with current economic environment and
relative to peers. The Committee discussed and challenged the
balance and fairness of the overall report with the executive directors
and considered the views of the external auditor. During this review
the Committee carefully considered the clarity and coherence of
disclosures, in particular in respect of the impact of ECL’s and climate
risk.
The Committee considered the overall presentation of the nancial
statements and was satised that the Annual Report could be
regarded as fair, balanced and understandable and proposed that
the board approves the Annual Report in that respect.
Risk Management and Internal Controls
In conjunction with the Risk Committee, we have satised ourselves
that the group’s internal control framework is effective and adequately
aligned with the groups risk prole. We are satised that the internal
controls in relation to the nancial reporting process is appropriately
designed and effective in identifying risks faced by the group. Full
details of the internal control framework are given within the risk
management section on pages 76 and 77.
At each meeting we receive a report from the Head of Internal
Audit, and we review major ndings into control weaknesses and
management’s response. We actively
follow-up with management the
rectication of identied control weaknesses.
Impairment of Goodwill and Intangible Assets Acquired on
Acquisition
The Committee was presented with the annual goodwill impairment
review and was satised that there were no impairment indicators.
The Committee challenged the appropriateness of the assessment,
including discussing the outcome with the group’s auditor, and
concluded the approach was reasonable.
Whistleblowing champion
I act as the group’s Whistleblowing Policy champion. The group
continues to place a high priority on employees’ understanding of
the process to enable them to speak out with condence when
appropriate. Further information on the board’s activities in this area
can be found on page 110 of the Corporate Governance Report.
Restoring trust in audit and corporate governance
The committee has, and will continue to, evaluate the impact of the
Department for Business, Energy and Industry Strategy (“BEIS”)
consultation and resulting proposals for restoring trust in audit and
corporate governance on the group.
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continued
Audit, risk and internal control
Other policies
The Committee has also reviewed and approved the approach to
hedging for share awards and the policy for the provision of non-audit
services by the external auditor. It considered that the group’s tax
policy continued to be appropriate.
Internal Audit
The Committee reviewed, challenged, and approved the annual
internal audit plan and amendments made during the year. It received
regular reports on internal audit activities across the group detailing
areas identied during audits for strengthening across the group’s
risk management and internal control framework. 31 audits were
distributed to the Committee during the nancial year. All audits were
summarised at meetings of the Committee together with an update
on the status of issues identied by internal audit.
The Annual Internal Audit Assessment, which found the governance
and risk and control framework of the group to be generally effective,
was received by the Committee in accordance with the Chartered
Institute of Internal Auditors’ guidance.
The Committee completed its annual review of the effectiveness
of the internal audit function and its level of independence. The
evaluation for the year under review was completed internally and
supported by feedback from stakeholders across the group. The
internal audit function was found to be working to all applicable
internal auditing standards.
In addition to reviewing the internal audit function’s effectiveness,
the Committee assessed the level of internal audit resource and the
appropriateness of the skills and experience of the internal audit
function. I was also involved during the year in the recruitment of
a new head of the group’s internal audit function and ensured that
during the period prior to his starting in role the function performed in
line with expectations.
External Audit
The Committee oversees the relationship with
PricewaterhouseCoopers LLP (“PwC”), its external auditor, covering
engagement terms, fees and independence. Both the Committee
and the external auditor have policies and procedures designed to
protect the independence and objectivity of the external auditor.
PwC has been auditor to the group since August 2017. Mark Hannam
stood down as the group’s lead audit partner in March 2022 at which
time Heather Varley replaced him. Either Heather or Mark attended all
meetings of the Committee.
During the year the Committee reviewed the external audit plan as
well as the resulting ndings. Principal matters discussed with PwC
are set out in their report on pages 144 to 150.
The Committee assesses the independence and objectivity,
qualications and effectiveness of the external auditor on an annual
basis as well as making a recommendation on the reappointment
of the auditor to the board. This year our evaluation focused on the
following key areas:
• the quality of audit expertise, judgement and dialogue with the
Committee and senior management;
• the independence and objectivity demonstrated by the audit team;
• change of PwC audit partner and ensuring effective handover
• the senior leadership of the audit team; and
• the quality of service including consistency of approach and
responsiveness;
The process was facilitated by a group-wide survey of nance, a
survey of the PwC senior audit team’s view on the group and a review
of audit and non-audit fees. Overall, the Committee has concluded
that PwC remains independent, and it was satised with the auditor’s
performance and recommended to the board a proposal for the
reappointment of the auditor at the company’s AGM.
Statutory Audit Services Compliance
The company conrms compliance with the provisions of the
Statutory Audit Services for Large Companies Market Investigation
(Mandatory Use of Competitive Tender Processes and Audit
Committee Responsibilities) Order 2014 for the year to 31 July 2022.
Subject to shareholder approval, PwC will undertake the audit of
the company and the group for the year ended 31 July 2023. In
conformance with the required rules, provisions, and good corporate
governance in respect of audit tendering and rotation the group
will be required to tender for the external audit in the 2027 nancial
year end. The Committee will consider in due course its plan for the
external auditing tendering ahead of 2027 but there is no mandatory
rotation point.
Non-Audit Services
The Committee oversees the group’s policy on the provision of
non-audit services by the external auditor, which incorporates the
Financial Reporting Council’s Revised Ethical Standard from March
2020.
The group’s policy is that permission to engage the external auditor
will always be refused where there is an actual or potential threat to
independence. However, the Committee will give permission where
the service complies with the group policy and where:
• work is closely related to the audit;
• a detailed understanding of the group is required; and
• the external auditor can provide a higher quality and/or better value
service.
The regulatory cap on the annual value of non-audit services of 70%
of the average of three years’ audit fees has become mandatory,
following the fourth nancial year following the change of auditor.
During the year, total audit fees amounted to £2.9 million (2021:
£2.6million) while total non-audit fees including those relating to
services required by legislation amounted to £0.8 million (2021:
£0.7million) representing 28% (2021: 27%) of the current year audit
fee. This includes non-audit services not required by legislation
of £0.3 million (2021: £0.3 million), 10% (2021: 12%) of the audit
fee, predominantly relating to the review of the group’s interim
nancial statements and funding assurance work. The Committee
was satised that these fees, individually and in aggregate, were
consistent with the non-audit services policy and did not believe that
they posed a threat to the external auditors’ independence.
Oliver Corbett
Chair of the Audit Committee
27 September 2022
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Strategic Report
Membership
Meetings
Key responsibilities
Annual Statement from the Remuneration Committee Chair
On behalf of the board and the Remuneration Committee, I am
pleased to present the Directors’ Remuneration Report for the
2022 nancial year. This sets out our pay decisions for the year,
including how we implemented the Remuneration Policy approved by
shareholders at the 2021 AGM.
How the group performed during the 2022 nancial year
Close Brothers has a well-established business model that enables
us to support our clients and deliver strong returns for shareholders
in a wide range of market conditions. Our model is focused on
sustainable lending, with a strong net interest margin and disciplined
underwriting, supported by a clearly dened risk appetite and a
prudent approach to managing our business and nancial resources.
As described in the Chairman’s and Chief Executive’s Statements, in
2022 the group performed solidly despite a backdrop of continued
market uncertainty. Adjusted operating prot was down 13% to
£234.8 million (2021: £270.7 million) and we achieved a return on
opening equity (“RoE”) of 10.6% (2021: 14.5%). The group maintained
strong capital, funding and liquidity positions. The common equity
tier 1 (“CET1”) capital ratio decreased to 14.6% (2021: 15.8%),
but remained well ahead of the applicable minimum regulatory
requirements.
The Banking division performed well reecting continued good demand
across our lending businesses, with loan book growth of 5%, and
strong net interest margin of 7.8%. Adjusted operating prot in the
Banking division increased 7% to £227.2 million (2021: £212.5million).
While our market-facing businesses were negatively impacted by
volatility and falling markets, we continued to attract client assets in
CBAM, with net inows of 5%. CBAM’s adjusted operating prot
was down 8% to £21.7 million (2021: £23.7 million). Winterood’s
performance was adversely impacted by cyclicality in the trading
business, with a market wide slowdown in trading activity and periods of
volatility in falling markets. Winterood’s operating prot was down 77%
to £14.1 million (2021: £60.9 million), following the exceptionally strong
trading performance in the prior year.
Following the group’s solid nancial performance in the year and strong
capital position, and to reect our continued condence in business
model, the board is proposing a nal dividend of 44.0p per share.
This will result in a full-year dividend per share of 66.0p (2021: 60.0p),
returning to the pre-pandemic level.
Bridget Macaskill
Chair of the Remuneration Committee
Directors’ Remuneration Report
Membership
Bridget Macaskill (Chair)
Mike Biggs
Peter Duffy
Lesley Jones
Mark Pain
Tracey Graham
The chief executive, group head of human resources and the head
of reward and HR operations also attend meetings by invitation.
Meetings
Five scheduled meetings held
Two additional ad-hoc meetings held
100% attendance (see page 103)
Key responsibilities
• Determine the overarching principles and parameters of the
Remuneration Policy on a group-wide basis.
• Establish and maintain a competitive remuneration package to
attract, motivate and retain high-calibre executive directors and
senior management across the group.
• Align senior executives’ remuneration with the interests of
shareholders.
• Promote the achievement of the group’s annual plans and
strategic objectives by providing a remuneration package that
contains appropriately motivating targets that are consistent
with the group’s risk appetite.
• Provide oversight of all the group’s remuneration policies and
practices, to ensure fair and equitable pay for all employees.
This report sets out our approach to remuneration for the group’s
employees and directors for the 2022 nancial year.
The Directors’ Remuneration Report is divided into three sections:
Annual Statement from the Remuneration
Committee Chair Pages 123 to 125
Directors’ Remuneration Policy Pages 126 to 128
Annual Report on Remuneration Pages 129 to 140
Remuneration Committee
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continued
The table below sets out an overview of our one-year and
three-year key performance indicators which provide context for
theRemuneration Committee’s decisions taken this year.
Key performance indicator
2022
2021
Return on opening equity
10.6%
14.5%
Average return on opening equity over
three years
1
11.0%
12.7%
CET1 capital ratio
14.6%
15.8%
Adjusted operating prot (£ million)
234.8
270.7
Adjusted earnings per share growth over
three years
1
(18.4)%
0.1%
Distributions to shareholders (£ million)
2
98.4
89.5
1 For the three-year periods ended 31 July 2022 and 31 July 2021.
2 For the 2022 nancial year, interim dividend paid and proposed nal dividend.
Executive director remuneration outcomes for the 2022
nancial year
Last year, as required by new regulations, we introduced a new capital
requirement directive V (“CRD V”) compliant Remuneration Policy
(the “Policy”). I am pleased that this was widely supported by our
shareholders, receiving an 84.2% vote in favour at the AGM. The 2021
Policy included much-reduced maximum incentive opportunities to
reect requirements that the group adopt the maximum 2:1 variable:
xed pay cap required for Level 3 banks under CRD V. Under the new
Policy, the maximum opportunities for both directors under the annual
bonus and long-term incentive plan (“LTIP”) are 95% and 125% of
salary respectively.
In determining executive director outcomes for the year, which are the
rst under the new Policy, the Remuneration Committee considered
the need to maintain a fair balance between the interests of all our
stakeholders, while rewarding the management team for delivery of
good performance, including on culture and conduct aspects.
For 2022, the overall bonus outcome was 46.7% of maximum for
both directors. The nancial element of the executive directors’
bonus, which is linked to RoE and the CET1 capital ratio, paid
out at 41.1% of maximum. Performance against the strategic
scorecard was assessed at the year end, and an outcome of 55% of
maximum was approved for this element. This scorecard outcome
reects progress against key strategic, people, customer and risk
priorities, including completion of a strategic review of the group,
maintaining good employee engagement, delivering strong customer
satisfaction and improving on risk objectives. Full details, including
detail on performance against the balanced scorecard, is set out on
pages131to 133.
The 2019 LTIP vested at 27.5% of maximum. The award was based
on adjusted EPS growth, average RoE and a scorecard of risk
management objectives assessed over the three-year performance
period. Unfortunately, neither the EPS nor the RoE nancial metrics
achieved the threshold target, due to the difcult conditions following
the pandemic, which have depressed our performance over the
past three years. Adjusted EPS growth over the three-year period
declined by 18.4% against a performance threshold of 10%, while
average annual RoE over the performance period was 11.0% against
a performance threshold of 12%. The risk management objectives
element scored 27.5% out of a maximum 30%, based on executives
demonstrating prudent capital management and strong performance
in risk, compliance and controls and capital management across the
period.
Although acknowledging that there have been a number of
headwinds over which our executives had no control, the Committee
decided after careful consideration that the risk management
objectives, and therefore the LTIP outcome, should be reduced by
25% to align better with the returns our shareholders experienced
over the three years of the vesting period. The total award that will
vest is therefore 20.6%.
The Committee decided to apply no reduction to the annual bonus
outcome as it considered that the outcome appropriately reects
performance achieved in the year, with signicant progress made in
key strategic areas. While continued pressure on the share price over
the last year is disappointing, the Committee believed it appropriate
to reect this through the discretionary LTIP adjustment, rather than
an adjustment to the annual bonus. Both the LTIP and annual bonus
vesting outcomes are lower than those achieved last year, which the
Committee judged as appropriate in light of group performance.
Proposed implementation of the Policy for the 2023 nancial year
For the 2023 nancial year, the Committee has decided to apply no
increase to the executive directors’ salaries. There will be no change
to the incentive opportunities available to the executive directors,
which will remain at 95% and 125% of salary for both directors under
the annual bonus and LTIP respectively. There will also be no change
to the level of pension provision, which will remain aligned with the
wider workforce at 10% of salary.
Over the last year, the Committee has reviewed the performance
metrics in the annual bonus and LTIP to ensure they continue to
reect the group’s strategy, incentivise outperformance and reect
group objectives around risk and conduct.
The Committee determined that the current metrics in the annual
bonus remain appropriate, and therefore the annual bonus for the 2023
nancial year will continue to be based on RoE (40%), CET1 (20%)
and a strategic scorecard (40%). The Committee decided to retain the
current target range on the RoE and CET1 measures for 2023 (10%
to 18% and 12.6% to 15.6% respectively). The Committee has also
refreshed the strategic scorecard to align with the forward-looking
objectives for the group. Detail on performance against the scorecard
will be provided in next year’s report. Further detail on the targets for
2023 is set out on page 135.
The Committee also decided to retain the current balance of
metrics in the LTIP, and so the award will continue to be based on
average three-year RoE (35%), adjusted EPS growth (35%) and risk
management objectives (30%). Further detail on the targets for this
year’s award is set out on page 136.
Environmental, social and governance metrics
The Committee is conscious that shareholders are increasingly
expecting environmental, social and governance measures (“ESG”)
to be embedded within remuneration frameworks for senior
management. As part of the review of performance objectives for
2023, the Committee considered how ESG is reected within our
incentives, and whether there are additional ESG metrics that should
be introduced. Customer, people and risk metrics already feature in
the strategic scorecard for directors in the annual bonus, and risk
management objectives, including su
stainability, form a signicant
part of the LTIP. Close Brothers is currently reviewing its broader ESG
strategy, and the Committee expects to reect any key outputs from
that in the remuneration framework in the 2023 nancial year and
future years.
Group-wide employee remuneration
The Committee is also responsible for determining the reward practices
on a group-wide basis. As in previous years, the Committee continues
to direct effort into reviewing and approving the overall remuneration for
all levels of employees across the group. For further details, please see
the Remuneration Committee activity table on page 129.
During the 2022 nancial year, the average salary increase for the
general population was 5.7%, which included a 3% mid-year salary
increase for all Banking employees, excluding executive directors and
group Executive Committee members. At the start of the 2023 nancial
year a further average salary increase of 4.3% was awarded across
the group with base salary uplifts focused on more junior staff. These
increases reect the continuing pressures on wages and the cost of
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Strategic Report
living, driven by the current inationary environment and ensures those
most susceptible to the economic environment are best protected.
The group continues to pay all staff at or above the national living wage,
which is in excess of the national minimum wage.
During the year, the Committee also reviewed the approach to
remuneration within group subsidiaries Close Brothers Asset
Management (“CBAM”) and Winterood Securities (“WINS”) to ensure
that the remuneration policies within each comply with requirements
under the new Investment Firms Prudential Regime (“IFPR”) and
the associated MIFIDPRU remuneration code. While the executive
directors are identied as Material Risk Takers under the MIFIDPRU
code for both CBAM and WINS, no changes to their remuneration
will be required given the existing directors’ remuneration policy
reects the necessary remuneration features. As WINS is an
Extended rm for MIFIDPRU purposes, changes have been made to
the remuneration for some affected staff to reect new deferral and
payment in instruments requirements.
Diversity and inclusion
The FCA has introduced new listing rules that include reporting
requirements around diversity. While these will only take effect for Close
Brothers for the 2023 nancial year, with the rst mandatory comply-or-
explain reporting in next year’s report, Close Brothers currently meets
the requirements that more than 40% of the board are women and one
board member is from a minority ethnic background.
This year the Remuneration Committee has again overseen the
publication of our gender pay gap report, which is published on our
website. We are condent that men and women are paid equally for
performing equivalent roles across our businesses and are committed
to taking steps to reduce our gender pay gap, which is primarily
driven by a lower proportion of women in senior and front ofce roles
where market rates are higher. Our focus on closing the gender pay
gap is through increasing female representation at all levels by setting
representation targets and supporting development programmes.
Whilst gender pay provides the most direct link to remuneration, our
broader focus on inclusion ensures we prioritise fairness and equality for
all colleagues. We are signatories of the Social Mobility Pledge and of the
Race at Work Charter to help direct our actions around race equality.
Objectives to support inclusion are linked to executive pay through
risk management objectives within our executives’ long-term
incentive plan. We are pleased that our employees continue to feel
that we are an inclusive organisation, as demonstrated by responses
in the employee opinion survey, and we continue to push forward
and implement activities and initiatives in this sphere to ensure we are
building an inclusive environment where all our colleagues feel proud
to work for us.
Concluding remarks
I would like to again thank shareholders who supported our new
Remuneration Policy at the 2021 AGM. Though passed with a
strong vote in favour, I am conscious that some shareholders
felt unable to support our proposals. The Committee undertook
signicant shareholder consultation in advance of the new
Policy and we remain committed to ongoing dialogue with our
shareholders on remuneration matters. I hope that you will nd this
report on the directors’ remuneration accessible and clear, and that
you agree with the decisions we have taken, which balance the
interests of all stakeholders.
Finally, I would like to thank my fellow members of the Remuneration
Committee for their commitment and engagement in the last year.
After nine years on the Board of Close Brothers, at the AGM, I will
be stepping down from the Board and as Chair of the Remuneration
Committee.
Bridget Macaskill
Chair of the Remuneration Committee
27 September 2022
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Directors’ Remuneration Report
continued
Directors’ Remuneration Policy
The directors’ Remuneration Policy was approved by shareholders at the 2021 AGM on 18 November 2021. It is intended that the po
licy will
apply for three years up to the 2024 AGM, unless amendments are required, in which case further shareholder approval will be so
ught.
The policy can be read in full on pages 100 to 110 of the 2021 Annual Report, which is available on our website at www.closebro
thers.com. A
summary of the main elements of the Remuneration Policy is set out in the table below.
Information on how the Remuneration Policy will be applied in 2023 is included in the Annual Report on Remuneration section, on
pages 135 to 136.
Remuneration Policy for executive directors
Element and how it supports the group’s
short-term and long-term strategic
objectives Operation and maximum payable Perfor
mance framework, recovery and withholding
Base salary
Attracts and retains high
calibre employees.
Reects the individual’s role and experience and external factors,
as applicable.
Paid monthly in cash.
Increases will generally not exceed those for the broader employee
population unless there is a change in role, responsibility or the
regulatory environment.
Not applicable.
Benets
Enables the EDs to perform
their roles effectively by
contributing to their wellbeing
and security.
Provides competitive benets
consistent with the role.
Benets may include private medical cover, health screening, life
assurance, income protection cover and an allowance in lieu of a
company car.
Other benets may also be provided in certain circumstances,
such as relocation expenses.
Not applicable.
Pension
Provides an appropriate and
competitive level of personal
and dependant retirement
benets.
EDs receive a level of pension contribution (in the form of a cash
allowance or contribution to a pension arrangement) that is in line
with the wider workforce.
Not applicable.
Annual bonus
Rewards good performance.
Motivates executives to
support the group’s goals,
strategies and values over
both the medium and long
term.
Aligns the interests of senior
employees and executives
with those of key stakeholders,
including shareholders, and
increases retention for senior
employees, through the use of
deferrals.
60% of the annual bonus will usually be deferred into
shares (in the form of nil cost options or conditional awards) and
will usually vest in equal tranches over three years, subject to
remaining in service. The remaining annual bonus will be delivered
immediately in cash.
The annual bonus is capped at 95% of base salary.
At the Remuneration Committee’s discretion, dividend equivalents
will usually be paid in cash or additional shares when the deferred
awards vest.
Individual bonuses are determined based
on both nancial and non-nancial
performance measures in the nancial year,
including adherence to relevant risk and
control frameworks. At the Remuneration
Committee’s discretion, an element of the
bonus may also be based on personal
performance.
At least 60% of the annual bonus
opportunity will be based on nancial
performance.
The non-nancial element will be
determined based on performance
measured against a balanced scorecard,
including (but not limited to):
• strategic objectives; and/or
• people and customer metrics; and/or
• risk, conduct and compliance measures.
The Remuneration Committee has
overriding discretion to adjust vesting
outcomes where it considers appropriate.
The cash element is subject to clawback
and the deferred element is subject to
malus and clawback conditions.
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Element and how it supports the group’s
short-term and long-term strategic
objectives Operation and maximum payable Perfor
mance framework, recovery and withholding
Long-Term Incentive Plan
Motivates executives to
achieve the group’s
longer-term strategic
objectives and aligns their
interests with those of
shareholders.
Aids the attraction and
retention of key staff.
Awards are made in the form of nil cost options or
conditional awards and usually vest after three years subject to
achieving performance conditions and remaining in service.
On vesting, awards will usually be subject to a further
two-year post-vesting retention period before options can be
exercised by, or conditional awards paid to, EDs.
EDs are eligible to receive an annual award of shares with a face
value of up to 125% of base salary, excluding dividend equivalents.
Individual awards vest based on
performance against both nancial and
non-nancial performance measures.
At least 70% of the award will be based on
performance against nancial measures.
The remainder will be based on non-
nancial performance.
The Remuneration Committee has
overriding discretion to adjust vesting
outcomes where it considers appropriate.
LTIP awards are subject to malus and
clawback provisions.
Shareholding requirement
Aligns the interests of
executives with those of
shareholders.
EDs are expected to build and maintain a holding of company
shares equal to at least 200% of base salary.
EDs will normally be expected to maintain a minimum shareholding
of 200% of base salary for the rst two years after stepping down
as an ED.
Not applicable.
Other
The group will pay legal, training and other reasonable and
appropriate fees, including any relevant tax liabilities, incurred by
the EDs as a result of doing their job.
The EDs are also permitted to participate in the group-wide Save
As You Earn schemes and Share Incentive Plan.
Legacy arrangements
Share awards granted under the previous Remuneration Policy will
continue to vest and be released on their usual timescales. These
awards to executive directors are also subject to a three-year
performance period and usually post-vesting to a two-year
retention period. The single gure for 2022 includes values relating
to the 2019 LTIP grant.
Additional details on the
directors’ Remuneration
Policy
The Remuneration Committee has discretion to amend
performance conditions in appropriate circumstances, provided
that the performance condition is not made either materially easier
or materially more difcult to achieve. The Committee also has
discretion to adjust vesting outcomes where it considers the
application of formulaic performance conditions to be
inappropriate. The Remuneration Committee may make minor
amendments to this Policy (for regulatory, exchange control, tax or
administrative purposes, to correct clerical errors or to take
account of a change in legislation) without obtaining shareholder
approval for that amendment.
Rationale for choice of
performance conditions
The Remuneration Committee selects nancial and non-nancial
performance measures that strengthen the alignment of the
remuneration arrangements to the business model and the
interests of our shareholders. The Committee believes the current
combination of metrics provides a good balance between nancial
and non-nancial measures, and supports the medium and
long-term strategic objectives of the group.
Malus and clawback
Malus and clawback provisions apply to the variable pay that can
be earned by executive directors. The specic circumstances in
which malus and clawback can be applied are set out in our full
Policy on pages 105 and 106 of the 2021 Annual Report, which is
available on our website.
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Directors’ Remuneration Report
continued
Dates of EDs’ service contracts
Name
Date of service contract
Adrian Sainsbury
1 May 2020
Mike Morgan
15 November 2018
Remuneration Policy for the chairman and non-executive directors
Element and how it supports the group’s short-term
and long-term strategic objectives Operation and maximum payable
Fees
Attract and retain a chairman and
independent non-executive directors
who have the requisite skills and
experience to determine the strategy of
the group and oversee its
implementation.
Fees are paid in cash and are reviewed periodically.
Fees for the chairman and non-executive directors are set by the board. The non-executive directors
do not participate in decisions to set their own remuneration.
The chairman of the board receives a fee as chairman but receives no other fees for chairmanship or
membership of any committees.
Non-executive directors receive a base fee.
The senior independent director receives an additional fee for this role.
Additional fees are paid for chairmanship of each of the Audit, Remuneration and Risk Committees.
Additional fees are paid for membership of committees, with the exception of the Nomination and
Governance Committee, for which no additional fees are payable.
Additional fees may be payable for other additional board responsibilities and/or time commitments.
The chairman and non-executive directors are entitled to claim reimbursement for reasonable
expenses and associated tax liabilities incurred in connection with the performance of their duties for
the company, including travel expenses.
Overall aggregate fees will remain within the £1.25 million authorised by our articles of association.
There is no performance framework, recovery or withholding.
Non-executive directors’ appointment letters
Name
Date of appointment Current letter of appointment start date
Mike Biggs
14 March 2017 21 September 2020
Lesley Jones 23 December 2013 21 November 2019
Bridget Macaskill 21 November 2013 21 November 2019
Oliver Corbett
3 June 2014 21 November 2019
Peter Duffy
1 January 2019 21 November 2019
Sally Williams
1 January 2020 1 January 2020
Mark Pain
1 January 2021 1 January 2021
Tesula Mohindra
15 July 2021 15 July 2021
Patricia Halliday
1 August 2021 1 August 2021
Tracey Graham
22 March 2022 22 March 2022
Consideration of shareholders’ and employees’ views
The chairman of the board consults our major shareholders on a regular basis on key issues, including remuneration. A formal co
nsultation
exercise was undertaken during 2021 with our major shareholders and shareholder advisory bodies as part of the process of revie
wing this
Policy.
The pay and terms and conditions of employment of employees within the group are taken into consideration when setting the Dire
ctors’
Remuneration Policy and pay of the EDs. The Remuneration Committee does not formally consult with employees when setting the Po
licy,
although the employee opinion survey conducted every year includes remuneration as one of the topics surveyed. The Remuneration
Committee also receives feedback from engagement with, and communication to, employees on matters relating to remuneration issu
es,
which it uses to inform its broader approach to remuneration, including with respect to the alignment between executive remuner
ation
and the approach to compensation for employees across the group. At each scheduled meeting, the Remuneration Committee reviews
a
‘Remuneration Dashboard’ containing metrics, analysis and other information, which the Committee uses as part of its decision-m
aking,
including as part of the annual compensation process. It covers a wide range of areas throughout the year, such as workforce de
mographics,
pay and reward at different levels across the group, gender pay and SAYE participation.
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Governance Report
Financial Statements
Strategic Report
Annual Report on Remuneration
Remuneration Committee
The Committee’s main responsibilities are to:
• review and determine the total remuneration packages of executive directors and other senior executives, including group mate
rial risk-takers
and senior control function staff in consultation with the chairman and chief executive and within the terms of the agreed poli
cy;
• approve the design and targets of any performance-related pay schemes operated by the group;
• review the design of all-employee share incentive plans;
• ensure that contractual terms on termination and any payments made are fair to the individual and the group, that failure is
not rewarded and
that a duty to mitigate risk is fully recognised;
• review any major changes in employee benets structures throughout the group;
• ensure that the remuneration structures in the group are compliant with the rules and requirements of regulators, and all rel
evant legislation;
• ensure that provisions regarding disclosure of remuneration are fullled; and
• seek advice from group control functions to ensure remuneration structures and annual bonuses are appropriately aligned to th
e group’s risk
appetite.
Membership activity in the 2022 nancial year
There were seven meetings of the Committee held during the year. There is a standing calendar of items which is supplemented by
other
signicant issues that arise during the year. The key matters addressed during the year were as follows:
September
2021
Additional
September
2021
Additional
September
2021
January
2022
April
2022
June
2022
July
2022
Remuneration policy and disclosures
Review and approval of Remuneration Policy Statement for 2021
•
Review and approval of Directors’ Remuneration Report for 2021
•
Review and approval of the remuneration section of the Pillar 3
disclosure for 2021
•
Annual remuneration governance review
•
Annual review of Total Reward Principles
•
Risk and reward
Review and approve risk-adjustment process/outcomes
••
••
Annual review whether to apply malus and clawback to
remuneration
•
Annual remuneration discussions
Approval of LTIP performance targets for 2022 awards
•
Final review and approval of EDs’ annual bonus targets and
objectives
•
Review of performance testing results for vesting 2018 LTIP awards
•
Review EDs’ performance against their annual bonus targets and
objectives
••
•••
Review and approval of approach to year-end compensation
•
Year-end all-employee group-wide salary and bonus analysis/
proposals for 2022
••
Governance review of the sales incentive schemes
•
Review and approval of the risk management objectives for the
2019 LTIP vesting
••
Review of the risk management objectives for the 2023 LTIP
•
Review proposed 2022 compensation for Material Risk Takers
••
Initial review of EDs’ annual bonus targets and objectives for 2023
•
Review of sales incentive schemes and approval of schemes for
2023
•
Regulatory and external developments
Material Risk Takers identication for 2022
•
•
MIFIDPRU impact on CBAM’s and Winterood’s remuneration
•
•
••
Gender pay gap review
•
Special business
Approve Save As You Earn plan rules
•
Approve Omnibus Scheme rules changes
•
•
Review and approve mid-year salary increases, including Material
Risk Takers in group and central functions
•
Committee remit and effectiveness
Review terms of reference
•
UK Corporate Governance Code
We continue to be compliant with the executive pay provisions of the 2018 UK Corporate Governance Code. Our pay arrangements ar
e also
consistent with the following principles set out in the Code:
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Directors’ Remuneration Report
continued
• Clarity – this Directors’ Remuneration Report provides open and transparent disclosure of our executive remuneration arrangem
ents for our
internal and external stakeholders.
• Simplicity and alignment to culture – incentive arrangements for our executives are straightforward, with individuals eligibl
e for an annual
bonus and, at more senior levels, a single long-term incentive plan. Performance measures used in these plans are designed to s
upport
delivery of the group’s key strategic priorities and our commitment to adopt a responsible, sustainable business model, in line
with our
purpose and values.
• Predictability – our incentive arrangements contain maximum opportunity levels with outcomes varying depending on the level o
f
performance achieved against specic measures. The charts on page 107 of the 2021 annual report provide estimates of the potent
ial
totalreward opportunity for the executive directors under the Policy.
• Proportionality and risk – our variable remuneration arrangements are designed to provide a fair and proportionate link betwe
en group
performance and reward. In particular, partial deferral of the annual bonus into shares, ve-year release periods for LTIP awar
ds and
stretching shareholding requirements that apply during and post-employment provide a clear link to the ongoing performance of t
he group
and therefore long-term alignment with stakeholders. We are also satised that the variable pay structures do not encourage ina
ppropriate
risk-taking. Notwithstanding this, the Remuneration Committee retains an overriding discretion that allows it to adjust formula
ic annual bonus
and/or LTIP outcomes so as to guard against disproportionate out-turns. Malus and clawback provisions also apply to both the an
nual bonus
and LTIP and can be triggered in circumstances outlined in the Policy.
Advice
During the year under review and up to the date of this report, the Remuneration Committee consulted and received input from th
e chairman of
the board, the chief executive, the group head of HR, the head of reward and HR operations, the group chief risk ofcer and the
company
secretary. Where the Remuneration Committee seeks advice from employees, this never relates to their own remuneration.
The Remuneration Committee’s remuneration advisers are Deloitte LLP (a member of the Remuneration Consultants Group) who were
appointed by the Remuneration Committee following a competitive tendering process. During the year, separate teams within Deloi
tte provided
advice to the group on risk, cyber, IT, internal audit and related projects. The Remuneration Committee is satised that the pr
ovision of these
other services does not affect the objectivity and independence of the remuneration advice provided by Deloitte as the other se
rvices are
unrelated to reward matters. Total fees paid to Deloitte were £112,750 during the 2022 nancial year, calculated on a time and
material basis.
Slaughter and May provided legal advice on the company’s equity scheme rules. Fees paid to Slaughter and May were £46,800, calc
ulated on
a time and material basis.
Statement of voting on the Directors’ Remuneration Policy at the 2021 AGM
For Against
Number of
abstentions
Directors’ Remuneration Policy 84.2% 15.8% 3,218,903
Statement of voting on the Directors’ Remuneration Report at the 2021 AGM
For Against
Number of
abstentions
Annual Report on Remuneration 97.8% 2.2% 386,154
Implementation of the Policy in 2022
Single total gure of remuneration for executive directors 2022 (Audited)
Salary Benets Pension
Total xed
remuneration Annual bonus
1
Performance
awards
2,3
Total variable
remuneration
Total
remuneration
2022
2021
20222021
20222021
20222021
20222021
20222021
20222021
20222021
Name
£’000
£’000
£’000
£’000£’000
£’000£’000
£’000£’000
£’000£’000
£’000£’000
£’000
£’000
£’000Adrian Sainsbury
4,5,6
930
475
37
9330
47
1,060
552
412
1,618843
146
325
558
1,168
1,720
Mike Morgan
6
560
400
8
14
56
24835
624
449
551
136
263
384
814
1,008
1,263
1 60% of Adrian Sainsbury’s and Mike Morgan’s annual bonus is deferred into shares.
2 The gures for the performance awards for 2021, granted in 2018, have been recalculated using the actual share price on the date of vesting for the LTIP of £15.27. The three-month average to
31July 2021 was used for the 2021 report given that the awards were vesting after publication of the report.
3 The gures for the performance award for 2022, granted in 2019, have been calculated using the three-month average to 31 July 2022. As this share price is lower than the grant date share price,
none of this value relates to share price appreciation.
4 Adrian Sainsbury was appointed chief executive on 21 September 2020. His 2021 salary, benets, bonus and pension relate to the period he was an executive director.
5 Adrian Sainsbury’s performance awards for 2021 and 2022 were granted before he was appointed to the board. The full awards re
late to vested LTIPs that were subject to the performance criteria
outlined in the 2021 annual report on page 117 and in this report on page 133 respectively.
6 Benets for 2021 have been restated to include additional taxable expenses. Adrian Sainsbury’s benet gure has changed from
£22,463 to £29,587 and Mike Morgan’s from £9,091 to £13,674.
Link between reward and performance
The group delivered a solid performance in the 2022 nancial year, with strong income growth in Banking, offset by reduced inco
me in
Winterood. Group adjusted operating prot reduced 13% to £234.8 million (2021: £270.7 million). The board is proposing a nal
dividend of
44.0p per share. This will result in a full-year dividend per share of 66.0p (2021: 60.0p), returning to the pre-pandemic level
. This reects the
group’s nancial performance in the year and strong capital position, as well as the board’s continued condence in the busines
s model.
The group achieved an RoE of 10.6% (2021: 14.5%), reecting the reduction in Winterood’s prot and continued growth in the equ
ity base. This
has been reected in the ED’s bonuses, with this element vesting at 36.7% of the potential maximum. The CET1 measure, introduce
d in the
2021 nancial year, has decreased to 14.6% (2021: 15.8%) and is vesting at 50.0%. The resulting combined overall vesting of the
two nancial
measures is 41.1% of the potential maximum. The executive directors demonstrated a strong level of progress against specied ob
jectives, and
this resulted in performance scores against the strategic scorecard of 55% (see pages 131 to 133 for further details).
For the 2019 Long-Term Incentive plan vesting this year, 70% of the vesting is based on nancial goals and 30% is based on risk
, compliance
and control objectives. For the nancial goals, the adjusted earnings per share growth, which decreased by 18.4% over the last
three years,
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Governance Report
Financial Statements
Strategic Report
and the average annual return on equity of 11.0% per annum, were below the threshold targets of 10% and 12.0% per annum, respec
tively. The
continued prudent approach to capital management combined with a good performance in risk, compliance and controls mean that th
e risk
management objectives element vested at 91.7%, contributing 27.5% to the overall vesting. Acknowledging the returns to sharehol
ders over the
past three years, which were depressed by the pandemic, the Committee decided after careful consideration to reduce the risk ma
nagement
objectives, and therefore the LTIP vesting by 25%. The total award that shall vest is therefore 20.6%.
Additional disclosures on the single total remuneration gure for executive directors table (Audited)
Salary
The per annum salaries paid during the year are as shown in the single total remuneration gure table on the previous page. Whe
n reviewing salary
levels, the Remuneration Committee takes into account the individual’s role and experience, pay for the broader employee popula
tion, market and
external factors, where applicable. No merit-base or cost of living increases were given to the executive directors, although b
ase salaries did increase
from £550,000 to £930,000 for the group chief executive and £400,000 to £560,000 for the group nance director as part of a com
pensation mix
adjustment in response to the implementation of the bonus cap introduced as part of CRD V during the 2022 nancial year. The co
mpensation mix
adjustments received shareholder approval at the 2021 AGM. The average increase for the general employee population was 5.7%; t
his includes the
3% mid-year salary increase given to all Banking employees.
Benets
Adrian Sainsbury received an £18,000 allowance in lieu of a company car. Mike Morgan does not receive an allowance in lieu of a
company car.
They also received private health cover. The discount to the share price on grant of SAYE options is included in the year of gr
ant.
Pension
Adrian Sainsbury and Mike Morgan received a pension allowance equivalent to 10% of base salary, the maximum percentage the gene
ral
employee population are eligible to receive.
Annual bonus
Maximum bonus potential for the 2022 nancial year was 95% of salary for Adrian Sainsbury and Mike Morgan. The bonuses for exec
utive
directors were determined with reference to RoE and CET1 targets and a group-wide strategic scorecard. Details of the achieveme
nts and
targets are outlined below.
Summary of annual bonus achievement
Financial Target (RoE) Financial Target (CET1)
Group-wide strategic scorecard
Overall total
Weighting
Potential
maximum
£’000
Actual
percent of
maximum
Actual
amount
awarded
£’000
Weighting
Potential
maximum
£’000
Actual
percent of
maximum
Actual
amount
awarded
£’000
Weighting
Potential
maximum
£’000
Actual
percent of
maximum
Actual
amount
awarded
£’000
Total
bonus
percent
awarded
Total
bonus
awarded
£’000
Adrian
Sainsbury 40% 353
36.7% 130
20% 177
50.0% 88
40% 353
55.0% 194 46.7% 412
Mike
Morgan
40% 213
36.7% 78
20% 106
50.0% 53
40% 213
55.0% 117 46.7% 248
The RoE for the 2022 nancial year was 10.6% against a target range of 10% to 18%, warranting an award of 36.7% of the potentia
l maximum
bonus for this element.
The CET1 capital ratio for the 2022 nancial year was 14.6% against a target range of 12.6% to 15.6%, warranting an award of 50
% of the
potential maximum bonus for this element.
Financial measures
Financial measure
Threshold
33.3% of maximum
potential
Target
50% of maximum
potential
Maximum
100% of ma ximum
potential
Actual nancial
element achieved
Percentage of
nancial element paid
RoE 10.0% 13.0% 18.0%
10.6% 36.7%
CET1 capital ratio 12.6% 14.6% 15.6%
14.6% 50.0%
For Adrian Sainsbury and Mike Morgan, 60% of any annual bonus is deferred into group shares vesting in equal tranches over thre
e years in line
with the 2021 Remuneration Policy.
Group-wide performance and executive directors’ objectives for the 2022 nancial year (Audited)
Annual performance objectives are determined by the Remuneration Committee at the start of each nancial year, and are designed
to support
the group’s wider strategic priorities to “Protect”, “Grow” and “Sustain” our business model.
The table on pages 132 to 133 sets out examples of the strategic scorecard objectives which were in place in 2022, performance
metrics
against these objectives where appropriate, and an overview of the factors that the Remuneration Committee has taken into accou
nt when
assessing the performance of the executives.
The Remuneration Committee determines the overall outcome of the balanced scorecard and, if appropriate, adjusts the nal indiv
idual rating to
take into account the individual contributions to successful outcomes of the scorecard objectives. This year, overall performan
ce against the
strategic scorecard was rated at target or above target for most goals, with some delays in the implementation of risk programm
es. There was
no adjustment on the nal individual rating.
For reasons of commercial sensitivity, not all performance criteria and factors taken into consideration by the Committee have
been disclosed.
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Directors’ Remuneration Report
continued
Key:
Performance objective has been achieved
Satisfactory outcome, further progress to be made
Performance objective has not been met
Objective Assessment of performance against
objectives including performance metrics
Embed and deliver on the
evolved “Protect, Grow,
Sustain” strategy
Performance metrics
• Net interest margin at 7.8% (2021: 7.7%)
• Bad debt ratio of 1.2% (2021: 1.1%)
• Good loan book growth of 5% (10-year range: 0%-14%)
• Return on net loan book of 2.6% (10-year range: 1.3%-3.7%)
• RoE of 10.6% (2021: 14.5%)
• Over 90% of the loan book is secured or has some form of structural protection
• Average loan book maturity of 17 months (31 July 2021: 17 months)
• Average maturity of funding allocated to loan book of 21 months (31 July 2021: 24 months)
• £1.9 billion of treasury assets (31 July 2021: £1.8 billion), predominantly held on deposit with the Bank
of England
• CET1 capital ratio of 14.6% (31 July 2021: 15.8%)
• Leverage ratio of 12.0% (31 July 2021: 11.8%)
• Group’s strong credit ratings have been afrmed by Moody’s Investors Services (“Moody’s”) and
Fitch Ratings (“Fitch”) in the 2022 nancial year
Assessment
• The Banking division performed well while the market-facing businesses were negatively impacted by
extreme volatility and falling markets
• Strong net interest margin at 7.8%
• Bad debt ratio of 1.2% included the impact of updated assumptions for the Novitas loan book, which
resulted in further impairment charges related to this business. Excluding Novitas, the bad debt ratio
was 0.5% (2021: 0.2%)
• The group achieved an RoE of 10.6% (2021: 14.5%), reecting the reduction in Winterood’s prot
and continued growth in the equity base
• Continued focus on delivering disciplined growth. For example, the asset coverage in Asset Finance
has been expanded with the hiring of agricultural equipment and materials handling teams, with
further initiatives identied for future development
• Signicant progress has been made developing our climate strategy, covering not just our operational
impacts, but also understanding the implications across our nanced activities
Complete a further review of the
group’s growth prospects
Assessment
• Completed an in-depth further review of existing businesses focusing on potential growth prospects,
with a pipeline of identied target areas that are aligned with the group’s model
• Examples of growth initiatives can be found on page 27
People
Maintain strong employee engagement
and reinforce position as employers of
choice
Performance metrics
• 86% employee engagement, closely aligned to pre-pandemic engagement score
• 97% of colleagues believe their immediate team work well together
• 92% see colleagues go the extra mile to meet the needs of customers and clients
• 96% of colleagues believe our culture encourages them to treat customers and clients fairly
• 94% of colleagues feel included and that they are treated with respect
• Organisational culture particularly strong when compared to other nancial services rms, with all
scores aligned or higher than the Financial Services Culture Board (“FSCB”)
Assessment
• Employee opinion survey conrms the group’s continued strong employee engagement scores,
above external benchmark
• Strong organisational culture scores, part
icularly when compared to industry benchmarks
Embed hybrid working model
Assessment
• Hybrid working model implemented where appropriate, aimed at maintaining an effective balance of
customer service, operational risk, collaborative culture and turnover
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Financial Statements
Strategic Report
Objective Assessment of performance against
objectives including performance metrics
Customers
Deliver strong customer satisfaction
Performance metrics
• All businesses scored above average net promoter score (“NPS”) benchmark performance for the broad
nancial services sector (+50), with scores ranging from +73 to +87 in the 2022 nancial year
Assessment
• In Banking, customer satisfaction scores are well above industry averages, with complaints remaining at
low levels
• Fund performance over the 12 months since 31 July 2021 at CBAM has been mixed, reecting volatile
markets across asset classes since the start of 2022. In relative terms, eight of our 15 funds have
outperformed their relevant peer group averages
• Winterood continued to deliver high quality execution services to clients, with a very strong execution
success rate
Enhance customer choice by
delivering new digital platforms
Assessment
• Enhanced digital capabilities in Banking, CBAM and Winterood, leading to improved customer
journeys and new business acquisition
• Investment in the Motor Finance transformation programme enabled the business to further broaden its
offering, improve customer journey and take advantage of heightened demand for used cars. This
included the introduction of an e-sign functionality and the development of APIs that enable the business
to connect into strategic partners and provide nance offering at various points of the customer journey
• Technology transformation projects in CBAM included the delivery of a CRM platform, which was
integrated into CBAM’s client portal and supported an improved digital engagement with clients
• Further details on the group’s investment in digital can be found on page 13
Risk, conduct and compliance
Operate within risk appetite, preserve
compliance with legal and regulatory
obligations, maintain strong control
framework and overall operational
resilience
Assessment
• Continued strengthening of operational risk and compliance framework although risk mitigation
needs to be implemented in certain areas to align with evolving environment and standards
• Maintained key regulatory and compliance controls
• Continued progress on the implementation of the enhanced cyber security strategy agreed with the
Board Risk Committee, with improved cyber risk measurement and reporting across all of the
group’s divisions
Long-term performance awards (Audited)
The performance awards in the single total gure of remuneration include the 2019 LTIP grant. This will vest on 1 October 2022,
and the overall
vesting is outlined in the table below.
Details of the overall vesting for the LTIP
Performance measure Threshold target
1
Maximum target Actual achieved Overall vesting
Adjusted EPS growth
2
(35% weighting) 10% 30%
(18.4)% 0.0%
RoE
3
(35% weighting) 12% 20%
11.0% 0.0%
Risk management objectives (“RMO”)
(30%weighting) n/a n/a
91.7% 27.5%
Assessed outcome (before discretion)
27.5%
Discretionary adjustment (-25%)
(6.9)%
Overall vesting (including application of
discretion)
20.6%
1 25% of the awards vest for satisfying the threshold target.
2 Over three years.
3 Average over three-year performance period.
The Committee decided after careful consideration that the risk management objectives, and therefore the LTIP outcome, should b
e reduced
by 25% to align better with the returns our shareholders experienced over the three years of the vesting period. In addition to
the overall vesting
of the performance measures, both share price and dividend equivalents affect the payout from the LTIP.
The share price during the relevant performance period for the LTIP decreased by 22.7% over the three-year period from the date
of grant to the
end of the performance period. The average share price used to value the awards due to vest in October 2022 was 1,056.6p from 1 May 2022
to 31 July 2022, which was the performance measurement period. The 2019 LTIP award was originally granted at 1,366.4p.
The performance awards also include the amount (in cash or shares) equal to the dividend which would have been paid during the
period from
the beginning of the performance period to the time that the awards vest.
Details of the assessment of the risk management objectives for the LTIP
The Committee considers it to be of critical importance that remuneration arrangements continue to incentivise discipline in th
e management of
the rm’s capital and balance sheet and in the delivery of the business model.
The Committee undertakes a robust assessment of performance against the risk management objectives to ensure that payments to e
xecutive
directors are fair and appropriate with consideration for indivi
dual and corporate performance. In doing so, the Committee asse
sses
performance against a number of key measures in making its determination.
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Directors’ Remuneration Report
continued
Performance was assessed after each of the three years of the LTIP performance period, with each year’s review carrying a weigh
ting of
one-third towards the overall vesting for the award, ensuring a fair assessment of progress over the three-year period.
Year one and year two assessments were set out in the 2020 and 2021 Directors’ Remuneration Reports respectively. The year thre
e
performance assessment
is detailed below.
Year three performance assessment against risk management objectives
Key:
Performance objective has been achieved
Satisfactory outcome, further progress to be made
Performance objective has not been met
Element Measure Extent to which the Committee determined the target has been met
Capital and balance
sheet management
Capital requirements
• CET1 capital ratio of 14.6% (31 July 2021: 15.8%) providing signicant headroom above
the applicable minimum regulatory requirement of 7.6% excluding any PRA buffers
Dividend
• Interim dividend in 2022 of 22.0p declared and paid, reecting the group’s strong
underlying performance
• The board is proposing a nal dividend of 44.0p per share, which will result in a full-year
dividend per share of 66.0p (2021: 60.0p), returning to the pre-pandemic level. This follows
the group’s solid nancial performance in the year and strong capital position, and reects
the board’s continued condence in the business model
Funding
• Average maturity of funding allocated to loan book was 21 months, well in excess of the
loan book at 17 months
Liquidity
• Continued to comfortably meet the liquidity coverage ratio requirement (“LCR”) with a
12-month average LCR to 31 July 2022 of 924% (12 month average to 31 July 2021:
1,003%)
Risk, compliance and
controls
Internal Ratings Based
approach
• Continued to make good progress on the preparations for a transition to the IRB approach
• Following the submission of the initial application to the PRA in December 2020, the group
received conrmation that the application has successfully transitioned to Phase 2 in the
second half of the year
• While all key objectives and milestones were achieved, the timetable for the next phase of
formal review remains under the direction of the regulator
Culture
• Continued enhancement of the group’s Conduct Risk Framework with a group-wide roll
out commenced this nancial year, with a view to ensure the group continues to achieve
positive customer outcomes
• Overall cultural assessment for the group remains positive with strong scores on culture
achieved in the latest employee opinion survey completed
• Remain on track to achieve target of 36% of senior manager roles being held by a female
by 2025. At 31 July 2022, 33% of our senior managers were female (31 July 2021: 32%)
• The group’s ethnicity data disclosure has materially increased from 75% at the end of the
2021 nancial year to 83% as of 31 July 2022, allowing a more accurate measurement of
the group’s ethnic balance
• At 31 July 2022, 10% of our managers identied as being from an ethnic minority background,
versus our target of 14% by 2025
Sustainability
• Sustainability targets met, exceeded or on track. These include the achievement of a
44.8% reduction in group-wide overall Scope 1 and 2 emissions since the 2019 nancial
year, maintenance of strong customer satisfaction scores across all our businesses, and a
42.6% improvement in eet vehicle emissions. Our eet of 639 cars is now almost wholly
battery, electric or hybrid and we anticipate the majority of the vehicles to be battery,
electric later in calendar year 2022
• Signicant progress was made during the year in developing the group’s climate strategy,
with a comprehensive assessment of the group’s indirect Scope 3 emissions across all
categories of operational emissions as well as an initial assessment of nanced emissions,
focusing on the loan book
• The group set wider and longer-term ambition to align all of our operational and
attributable GHG emissions from our lending and investment portfolios on a path to net
zero by 2050. To this end, Close Brothers joined over 115 banks globally, as a signatory to
the Net Zero Banking Alliance in September 2022
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Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Element Measure Extent to which the Committee determined the target has been met
Operational resilience
• The group’s operational resilience framework and strategy have been fully built out in the
nancial year
• Self-assessment completed by businesses and functions, in line with regulatory compliance
timelines, with an external review conrming the appropriateness of the group’s approach
• Remediation plans established for vulnerab
ilities identied, with remediation work
underway
• Important business services and impact tolerances agreed with the Board Risk Committee
The table below summarises the Remuneration Committee’s assessment of performance against the risk management objectives after
each of
the three years of the LTIP performance period.
Element
Year one assessment Year two assessment
Year three assessment Overall vesting
Capital and balance sheet management 95% 100% 95% 96.7%
Risk, compliance and controls 95% 90% 75% 86.7%
Overall vesting
91.7%
Implementation of the Policy in 2023
Base salary
Salary effective from 1 August 2022 Increase
Chief executive – Adrian Sainsbury £930,000 0.0%
Group nance director – Mike Morgan £560,000 0.0%
Base salaries were determined with reference to the executive director’s role, increases for the broader population and externa
l factors. The
Remuneration Committee determined that it was appropriate for the executive directors’ salaries not to be increased. The averag
e salary increase
approved in July 2022 across the wider employee population was 4.3%.
Adrian Sainsbury and Mike Morgan’s allowance in lieu of pension will be 10% of base salary, which is in line with the maximum l
evel of benet
offered to the general employee population.
The executive directors will receive benets in line with those outlined in the Remuneration Policy table on page 126. There wi
ll be no other
increases to allowances or benets other than any potential increase in the cost of providing them.
2023 annual bonus (i.e. bonus awarded in respect of the 2023 performance year)
RoE continues to be a long-standing metric for the nancial element of the executive directors’ remuneration framework. The Rem
uneration
Committee considers it to be a signicant key performance indicator, as it provides strong evidence of adherence to the group’s
business
model. At the start of the 2022 nancial year, the Remuneration Committee reduced the weighting of CET1 capital ratio from 30%
to 20% of the
bonus opportunity and have decided to maintain this weighting for 2023.
Nature of measures Choice of measures Targets
Percentage of bonus
opportunity Vesting ranges
Financial RoE 10% to 18% 40% Threshold – 33%
2
CET1 12.6% to 15.6% 20% Maximum – 100%
Non-nancial Strategic
scorecard:
Strategic,
People, Customers
and Risk, Conduct
and Compliance
objectives
Discretionary
assessment
1
40% Minimum – 0%
Maximum – 100%
1 Due to commercial sensitivity, the details of the performance targets and achievement against those will be outlined in the 2
023 Annual Report on Remuneration.
2 Performance below threshold in the nancial measures would result in zero vesting of the nancial measure.
The Committee retains discretion to adjust the targets if the Board gives approval for a material transaction, to ensure that p
erformance is
measured on a fair and consistent basis. The level of pay-out under the CET1 element may also be adjusted based on an assessmen
t of how
the CET1 has been achieved and whether this is aligned with the capital strategy set out on page 8.
2022 LTIP (i.e. LTIP awarded in respect of the 2023 to 2025 cycle)
The 2022 LTIP awards due to be granted in October 2022 are shown in the table below.
Chief executive
Adrian Sainsbury
Group nance director
Mike Morgan
2022 LTIP award
£1,162,500 £700,000
Percentage change in LTIP award from 2021 0% 0%
2022 LTIP award as a percentage of 2022 salary 125% 125%
The Remuneration Committee determined that it was appropriate to grant the executive directors an LTIP award at the maximum lev
el of 125%
of their base salary, in line with their 2021 LTIP award. The Committee will review the level of vesting upon completion of the
performance
period, being particularly mindful of windfall gains, and apply an adjustment to the vesting outcome if appropriate.
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Annual Report 2022
Directors’ Remuneration Report
continued
The 2022 LTIP targets are detailed in the table below.
Nature of measures Choice of measures Targets Weightings Vesting ranges
Financial Adjusted EPS growth 10% to 30% over 3 years 35% Threshold – 25%
Maximum – 100%
RoE 10% to 18%
1
35% Threshold – 25%
Maximum – 100%
Non-nancial Risk management objectives Discretionary assessment
against specic goals
30% Threshold – 25%
Maximum – 100%
1 Average over three-year performance period.
The Remuneration Committee believes these targets are appropriatel
y stretching and effectively align the executive directors’ i
nterests with
those of shareholders.
The four risk, compliance and control measures within the risk management objectives for the 2023 nancial year are detailed in
the following
table.
Measure
Continue to enhance Risk, Compliance, and Control Infrastructure
Continue to develop the effectiveness of our operational risk and resilience control environment
Continue to evolve the oversight of the conduct and culture and progress towards 2025 diversity representation targets
Develop transition plans and meet targets set against climate strategy
Due to commercial sensitivity, the full details of the milestones
for the risk objectives will be outlined in the Directors’ Re
muneration Report
throughout the performance period rather than prospectively.
Relative spend on pay
The following table shows the total remuneration paid compared to the total distributions to shareholders.
2022
£ million
2021
£ million
Remuneration paid
344.5
363.2
Distributions to shareholders
1
98.4
89.5
1 Interim dividend paid and nal dividend proposed for the nancial year.
Changes in remuneration of the directors and all employees
The following table shows how the remuneration of the directors ch
anged compared to the average employee population for the 202
2 nancial
year. The year-on-year movement in fees and salary for the directors and employees reects the annual review implemented in Aug
ust 2021
and changes throughout the nancial year ending 31 July 2022, including the mid-year salary review conducted for Banking employ
ees in
January2022. There were a number of changes to the board and committees which are reected in the salary gures below. The yea
r-on-
year salary increase for the executive directors relates to the compensation mix adjustments made in response to CRD V, which c
ontributed
to a reduction in the bonus opportunity. Details of the annual bonus decrease for the executive directors is outlined on page 1
31. The average
decrease in bonus for the general population is largely driven by the reduction in average bonuses for Winterood employees due
to business
performance. Tesula Mohindra was appointed a director at the end of the 2021 nancial year, however no remuneration was paid until the 2022
nancial year and has therefore been omitted from the table below. Patricia Halliday and Tracey Graham were appointed directors
during the
2022 nancial year and have been omitted from the table below as there are no year-on-year remuneration comparisons.
2022
2021 2020
Salary Benets Bonus
Salary Benets Bonus Salary Benets Bonus
Average Employee
1
5.7% 5.7% (32.7)%
0.0% 0.0% 21.2% 1.8% 1.8% 13.1%
Executive Directors
2
Adrian Sainsbury
3
95.7% 68.5% (51.1)%
––––––
Mike Morgan
4
40.0% 30.7% (54.9)%
0.0% 32.7% 152.2% 0.0% 0.0% (54.7)%
Chairman & Non-Executive Directors
5
Mike Biggs
6
0.0% 159.9% –
0.0% 119.5% – 0.0% (25.7)% –
Lesley Jones
7
3.5% 0.4% –
0.0% (0.4)% – 5.6% (57.0)% –
Bridget Macaskill
7, 8
0.1% 125.3% –
(1.8)% 33.5% – 5.6% (50.5)% –
Oliver Corbett
9
(1.7)% 87.3% –
(0.1)% 0.0% – 5.6% 0.0% –
Peter Duffy
7
7.7% ( 77. 3)% –
2.8% 0.0% – 0.0% 0.0% –
Sally Williams
10
3.8% 1,165.6% –
0.0%(85.3)%––––
Mark Pain
11
27.5% 0.0% –
––––––
1 Calculated by dividing staff cost related to salaries, bonus and benets by the average number of employees.
2 Calculated using the data from the single gure table in the annual report on remuneration.
3 Adrian Sainsbury was appointed as Group CEO in September 2020 and his 2021 gures are pro-rated based on part-year. Adrian’s salary and benets have increased year-on-year and this is
driven by the part-year in 2021 and the compensation mix adjustment awarded during the 2022 nancial year.
4 Mike Morgan’s 2022 benets increased 30.7%, this is driven by an increase in pension allowance based on the compensation mix
adjustment awarded during the 2022 nancial year.
5 Calculated using the fees and taxable benets from the single gure table for non-executive directors on page 140.
6 Mike Biggs’ 2022 benets increased by £13,245, this related to additional travel and entertainment expenses.
7 Lesley Jones’, Bridget Macaskill, Peter Duffy and Sally Williams 2022 fees increased as the fees for standard non-executive d
irector, committee chair and committee member increased.
8 Bridget Macaskill’s 2022 benets increased by £8,000, this related to reimbursement of travel expenses.
9 Oliver Corbett’s 2022 fees reduced as they are no longer in a senior independent director role.
10 Sally Williams’ 2022 benets increased from £75 in 2021 to £953 in 2022.
11 Mark Pain’s 2022 fees increased as they joined during 2021 and was paid a part year fee.
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Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Pay ratios
The table below compares the chief executive’s single total remuneration gure to the remuneration of the group’s UK employees
as at 31July,
over the last three nancial years. The Remuneration Committee is satised that the median ratio is consistent with the pay, re
ward and
progression policies for our employee population.
The ratio for 2022 has declined on the previous year. Largely this relates to lower variable pay outcomes for the executive dir
ectors having a
corresponding impact on the pay ratio, as well as structural changes to pay introduced last year for CRD V purposes having an i
mpact on the
single gure value.
Year
Method 25th percentile Median 75th percentile
2022
Option A 48 : 1 28 : 1 17 : 1
2021
Option A 79 : 1 37 : 1 29 : 1
2020
Option A 64 : 1 38 : 1 23 : 1
Our ratios have been calculated using the most robust methodology option “A” prescribed under the UK Companies (Miscellaneous R
eporting)
Regulations 2018. Under this option, the ratios are calculated using the following:
• the full-time equivalent salaries and allowances for employees in the UK;
• pensions and benets paid during the nancial years;
• annual bonus awarded for the nancial years;
• actual and projected gains realised from exercising awards from taxable employee share plans;
• sales incentives paid during the nancial years; and
• projection of vested performance awards.
The 2022 total remuneration value for the employee at the 25th percentile, median and 75th percentile was £33,571, £56,952 and
£93,459
respectively, of which the salary component made up £26,780, £30,000 and £85,000 respectively.
Chief executive: Historical information
2013 2014 2015 2016 2017 2018 2019 2020 2021
1,2
2022
Preben Prebensen
Single gure of total remuneration (’000)
3
£5,748 £7,411 £5,962 £3,995 £3,337 £2,541 £2,770 £2,043 £860
–
Annual bonus against maximum opportunity 100% 100% 98% 95% 91% 86% 82% 40% 78%
–
LTIP, SMP and Matching Share Award vesting
4
79% 95% 97% 68% 51% 19% 30% 42% 40%
–
1 The gures for the performance awards for 2021 have been recalculated using the actual share price on the dates of vesting fo
r the LTIP of £15.27. In the 2021 report, the three-month average to
31 July 2021 was used, given that the awards were vesting after publication of the report.
2 Preben Prebensen’s remuneration for the 2021 nancial year has been time pro-rated to 21 September 2020, the day he stepped
down as chief executive.
3 The gures for 2012 to 2014 include the Matching Share Awards that were granted in 2009 at the time of Preben Prebensen’s app
ointment as chief executive.
4 SMP and Matching Share Awards were last granted in the 2016 nancial year.
2021
1,2
2022
Adrian Sainsbury
Single gure of total remuneration (’000)
£1,720
£1,618
Annual bonus against maximum opportunity 78%
47%
LTIP, SMP and Matching Share Award vesting 40%
21%
1 The gures for the performance awards for 2021 have been recalculated using the actual share price on the dates of vesting fo
r the LTIP of £15.27. In the 2021 report, the three-month average to
31 July 2021 was used, given that the awards were vesting after publication of the report.
2 Adrian Sainsbury was appointed chief executive on 21 September 2020 and his remuneration included in the single gure has bee
n time pro-rated accordingly.
LTIP vesting for the last nine years
Vesting percentage
Year awarded Year vested Adjusted EPS TSR RoE RMO Total
2011
1
2014 100% 100% – 85% 95%
2012
2
2015 100% 100% – 87% 97%
2013
2
2016 100% 25% – 89% 68%
2014
2
2017 56% 26% – 92% 51%
2015
2
2018 0% 0% – 93% 19%
2016
2
2019 0% 28% – 94% 30%
2017
3
2020 0% – 38% 94% 42%
2018
3
2021 0% – 32% 95% 40%
2019
3,4
2022 0% – 0% 92% 28%
1 Vesting was subject to one-third adjusted EPS, one-third absolute TSR and one-third strategic goals for all awards granted fo
r 2011.
2 Vesting was subject to 40% adjusted EPS, 40% absolute TSR and 20% risk management objectives for the 2012 to 2016 awards.
3 Vesting was subject to 35% adjusted EPS, 35% RoE and 30% risk management objectives for the 2017, 2018 and 2019 awards.
4 Including the 25% discretionary reduction, the 2019 LTIP award vested at 20.6%.
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Close Brothers Group plc
Annual Report 2022
Directors’ Remuneration Report
continued
Performance graph
The graph below shows a comparison of TSR for the company’s shares for the 10 years ended 31 July 2022 against the TSR for the
companies
comprising the FTSE 250 Index.
July 2012 July 2013 July 2015 July 2017 July 2016
0
50
100
150
200
250
300
350
July 2014
FTSE 250 Index
Close Brothers
July 2022 July 2021 July 2020 July 2018 July 2019
Note:
This graph shows the value, by 31 July 2022, of £100 invested in Close Brothers Group plc on 31 July 2012 compared with the val
ue of £100 invested in the FTSE 250 Index. The other points plotted
are the intervening nancial year ends. TSR has been calculated assuming that all dividends are reinvested on their ex-dividend
date. The index has been selected because the company has been a
constituent of the index throughout the period. The closing mid-market price of the company’s shares on 29 July 2022 was 1,110p and the range during the year was 987p to 1,602p.
Scheme interests awarded during the year (Audited)
The face value and key details of the share awards granted in the 2022 nancial year are shown in the table below. These were a
ll delivered as
nil cost options. The Deferred Share Award (“DSA”) is a mandatory deferral of a portion of the annual bonus. The share price us
ed to calculate
the number of shares awarded was £15.46, the average mid-market closing price for the ve days prior to grant (5 October 2021).
Name Award type
1
Vesting period
Performance
conditions
Face value
‘000
Percentage vesting
at threshold Number of shares
Vesting/
performance period
end date
Adrian Sainsbury
DSA
2
1-3 years No £527 n/a 34,076 05-Oct-24
LTIP
3,4
3 years Yes £1,163 25% 75,204 05-Oct-24
Mike Morgan
DSA
2
1-3 years No £331 n/a 21,384 05-Oct-24
LTIP
3,4
3 years Yes £700 25% 45,284 05-Oct-24
1 The awards are all delivered as nil cost options.
2 The DSA vests in equal tranches over three years.
3 Performance conditions are detailed in the 2021 Annual Report on page 119.
4 LTIPs vested from 2020 have an additional two-year holding period.
External appointments
No external appointments.
Payments to departing and past directors (Audited)
There were no payments for loss of ofce, or payments to past directors during the year other than vesting of outstanding share
awards as
disclosed in previous remuneration reports.
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Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Executive directors’ shareholding and share interests (Audited)
The interests of the directors in the ordinary shares of the group at 31 July 2022 are set out below:
Name
Shareholding
requirement
at 31 July
2022
1
Number of
shares owned
outright
2
2022
Outstanding share awards not
subject to performance conditions
3
Outstanding share awards subject to
performance conditions
4
Outstanding options
5
2022
2021
20222021
20222021
Adrian Sainsbury 167,568
96,797 44,289
22,784
322,287
275,596
2,146
2,146
Mike Morgan 100,901
82,796 35,223
23,573
194,802
172,632
3,778
3,778
1 Based on the closing mid-market share price of 1,110p on 29 July 2022.
2 This includes shares owned outright by closely associated persons.
3 This includes DSA.
4 This includes LTIP awards.
5 These are comprised of SAYE options.
No executive directors held shares that were vested but unexercised at 31 July 2022. There were no changes in notiable interes
ts between
1 August 2022 and 6 September 2022, other than the purchase of shares by Adrian Sainsbury within the SIP which increased his sh
areholding
to 96,825 shares.
Executive directors’ shareholding
The chart below compares the current executive directors’ shareholding versus shareholding policy, as a percentage of salary. A
t the end of the
2021 nancial year, both executive directors exceeded the minimum requirement under the Directors’ Remuneration Policy. Followi
ng the
implementation of the compensation mix adjustments in response to CRD V, Adrian Sainsbury and Mike Morgan are building up their
shareholding over a reasonable time frame to meet the revised minimum requirement.
Adrian Sainsbury
Mike Morgan
200%
116 %
Policy
Actual
0 100 200 300
200%
164%
Details of executive directors’ share exercises during the year (Audited)
Name Award type
Held at
1 August
2021 Called
1
Lapsed
Market price
on award
p
Market price
on calling
p
Total value
on calling
1
£
Dividends
paid on
vested shares
£
Adrian Sainsbury
2018 DSA 4,720 4,720 – 1,588.8 1,544.0 72,877 7,835
2019 DSA 5,489 5,489 – 1,366.4 1,544.0 84,750 5,599
2020 DSA 2,362 2,362 – 987.9 1,544.0 36,469 1,370
Mike Morgan
2018 DSA 315 315 – 1,588.8 1,524.0 4,801 523
2019 DSA 4,997 4,997 – 1,366.4 1,524.0 76,154 5,097
2020 DSA 4,422 4,422 – 987.9 1,524.0 67,391 2,565
1 These are the actual number of shares and values realised on calling. Any variances in totals are due to rounding.
Notes to the details of executive directors’ share exercises during the year
The DSA is a mandatory deferral of a portion of the annual bonus.
The DSA and LTIP give executive directors the right to call for shares in the company from the employee benet trust or Treasury Shares, at nil
cost, together with a cash amount representing accrued notional dividends thereon. They may be called for at any time up to 12
months from
the date of vesting. The DSA and LTIP awards may be forfeited in certain circumstances if the executive director leaves employm
ent before the
vesting date. The value of the awards is charged to the group’s income statement in the year to which the award relates for the
DSA and spread
over the vesting period for the LTIP award.
Details of executive directors’ option exercises during the year (Audited)
No executive director exercised options during the 2022 nancial year.
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Annual Report 2022
Directors’ Remuneration Report
continued
Single total gure of remuneration for non-executive directors (Audited)
Name
2022
2021
Basic fee
1
£’000
Committee
chair
£’000
Committee
member
£’000
Senior
independent
director
£’000
Benets
2
£’000
Total
£’000
Basic fee
1
£’000
Committee
chair
£’000
Committee
member
£’000
Senior
independent
director
£’000
Benets
2
£’000
Total
£’000
Mike Biggs
300 – – – 22 322
300 – – – 8 308
Lesley Jones
71 34 12 – 1 118
70 33 10 – 1 114
Bridget Macaskill
71 34 6 – 16 127
70 33 8 – 7 118
Oliver Corbett
71 34 6 – – 111
70 33 8 2 – 113
Peter Duffy
71 – 12 – – 83
70 – 7 – – 77
Sally Williams
71 – 12 – 1 84
70 – 10 – – 80
Mark Pain
71 – 12 34 – 117
41 – 5 19 – 65
Tesula Mohindra
3
74 – 12 – – 86
––– –––
Patricia Halliday
4
71 – 12 – – 83
––– –––
Tracey Graham
5
26 – 4 – – 30
––– –––
1 Non-executive director fees were last increased with effect from 1 August 2021.
2 Benets include travel-related expenses in respect of attendance at board meetings which are taxable. Amounts disclosed have
been grossed up using the appropriate tax rate as the company
pays the non-executive directors’ tax.
3 Tesula Mohindra was appointed a non-executive director on 15 July 2021 and fees relating to the 2021 nancial year (15 July
2021 to 31 July 2021) were paid in the 2022 nancial year.
4 Patricia Halliday was appointed a non-executive director on 1 August 2021.
5 Tracey Graham was appointed a non-executive director on 22 March 2022.
Notes to the single total gure of remuneration for non-executive directors
The fees payable to non-executive directors for the 2022 and 2023 nancial years are as follows.
Role
2023
2022
Chairman
1
£300,000
£300,000
Non-executive director
£71,000
£71,000
Supplements
Senior independent director
£34,000
£34,000
Chair of Audit Committee
£34,000
£34,000
Chair of Remuneration Committee
£34,000
£34,000
Chair of Risk Committee
£34,000
£34,000
Committee membership
2
£6,000
£6,000
1 The chairman receives no other fees for ch
airmanship or membership of board committees.
2 No fees are payable to the chairman, or for membership, of the Nomination and Governance Committee.
Non-executive directors’ share interests (Audited)
The interests of the non-executive directors in the ordinary shares of the company are set out below:
Name
Shares held
benecially at
31 July 2022
Shares held
benecially at
31 July 2021
Mike Biggs
1,500
500
Lesley Jones
–
–
Bridget Macaskill
2,500
2,500
Oliver Corbett
–
–
Peter Duffy
848
848
Sally Williams
–
–
Mark Pain
–
–
Tesula Mohindra
–
–
Patricia Halliday
–
–
Tracey Graham
–
–
There were no changes in notiable interests between 1 August 2022 and 22 September 2022.
This report was approved by the board of directors on 27 September 2022 and signed on its behalf by:
Bridget Macaskill
Chair of the Remuneration Committee
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Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Directors’ Report
The directors of Close Brothers Group plc (the “company”) present
their report for the year ended 31 July 2022.
The Strategic Report set out on pages 1 to 94 of this Annual Report,
and the Corporate Governance Report, the committee reports and
the Directors’ Remuneration Report set out on pages 123 to 140 of
this Annual Report include information that would otherwise need to
be included in this Directors’ Report. Readers are also referred to the
cautionary statement on page 211 of this Annual Report.
Disclosures by Reference
Additional information, which is incorporated into this Directors’ Report
by reference, including information required by the Companies Act2006,
Disclosure and Transparency Rule 7.2, and Listing Rule 9.8.4R, can be
located by page reference elsewhere in this Annual Report as follows:
Content Page reference
Strategic report
Business activities 4 to 5
Likely future developments 9 and 13
Business relationships 14 to 16
Employment, human rights and environmental matters
Assessing and monitoring culture 22 to 23
Employment practices and approach to disabled
employees
36 to 39 and 41
Employee engagement 14, 17 and 36
to 37
Approach to diversity and inclusion 36 to 38
Investing in and rewarding the workforce 38
Charitable donations 39
Greenhouse gas emissions 54 to 56
Climate-related nancial disclosures 56
Directors
Biographical details 95 to 97
Powers and appointment 109
Induction and continuing professional
development
109
Agreements for loss of ofce 138
Remuneration, including waiver of emoluments 123 to 140
Contracts or service agreements 108 and 128
Interests in share capital 140
Miscellaneous
Section 172 statement 17
Going concern 93
Viability statement 94
Corporate governance statement 148
Risk management objectives and policies 74 to 92
Credit, market and liquidity risks 81 to 86
Financial instruments Note 14 on pages
177 to 179
Shareholder dividend waivers 142
Results and Dividends
The consolidated results for the year are shown on page 151 of the
nancial statements. The directors recommend a nal dividend for the
year of 44p (2021: 42p) on each ordinary share which, together with the
interim dividend of 22p (2021: 18p) paid in April 2022, makes an ordinary
distribution for the year of 66p (2021: 60p) per share. The nal dividend, if
approved by shareholders at the 2022 Annual General Meeting (“AGM”),
will be paid on 22 November 2022 to shareholders on the register on
14October 2022. Further information on the nal dividend recommended
by the directors can be found on page 63 of this Annual Report.
Directors
The names of the directors of the company at the date of this report,
together with biographical details, are given on pages 95 to 97 of this
Annual Report. All the directors listed on those pages were directors
of the company throughout the year, apart from Tracey Graham, who
was appointed as a director on 22 March 2022.
In accordance with the UK Corporate Governance Code, each of the
current directors will retire at the 2022 AGM and offer themselves for
appointment or reappointment at that meeting.
Directors’ indemnities and insurance
In accordance with its articles of association, the company has granted
a deed of indemnity to each of its directors on terms consistent with
the applicable statutory provisions. The deeds indemnify the directors
in respect of liabilities (and associated costs and expenses) incurred
in connection with the performance of their duties as directors of the
company or any associated company. Qualifying third party indemnity
provisions for the purposes of section234 of the Companies Act 2006
were accordingly in force during the course of the year, and remain in
force at the date of this report.
The company also maintains directors’ and ofcers’ liability insurance.
Share Capital
The company’s share capital comprises one class of ordinary share
with a nominal value of 25p per share.
At 31 July 2022, 152,060,290 ordinary shares were in issue, of which
1,605,100 were held by the company in treasury.
Under section 551 of the Companies Act 2006, the directors may allot
equity securities only with the express authorisation of shareholders
which may be given in general meeting, but which cannot last more
than ve years. Under section 561 of the Companies Act, the board
may not allot shares for cash (otherwise than pursuant to an employee
share scheme) without rst making an offer to existing shareholders
to allot such shares to them on the same or more favourable terms in
proportion to their respective shareholdings, unless this requirement
is waived by a special resolution of the shareholders.
Details of directors’ authorities approved by shareholders at the 2021
AGM can be found in the 2021 Notice of Meeting and subsequent
results announcement.
Since the date of the company’s 2021 AGM, with the exception of
the authority to make market purchases, the directors have not used
these authorities. Details of market purchases of the company’s
ordinary shares during the year can be found on page 142 in the
section headed “Purchase of own shares”.
The existing authorities given to the company at the last AGM to allot
and purchase shares will expire at the conclusion of the forthcoming
AGM. At the AGM, shareholders will be asked to renew these
authorities. Details of the relevant resolutions to be proposed will be
included in the Notice of AGM.
New issues of share capital
No ordinary shares were allotted and issued during the year.
Specically, no ordinary shares were allotted and issued during the
year to satisfy option exercises. Full details of options exercised, the
weighted average option exercise price and the weighted average
market price at the date of exercise can be found in note 26 on pages
189 to 190 of the nancial statements.
Rights attaching to shares
The company’s articles of association set out the rights and
obligations attaching to the company’s ordinary shares. All of the
ordinary shares rank equally in all respects.
On a show of hands, each member has the right to one vote at
general meetings of the company. On a poll, each member would be
entitled to one vote for every share held. The shares carry no rights
to xed income. No person has any special rights of control over the
company’s share capital and all shares are fully paid.
The articles of association and applicable legislation provide that
the company can decide to restrict the rights attaching to ordinary
shares in certain circumstances (such as the right to attend or vote
at a shareholders’ meeting), including where a person has failed to
comply with a notice issued by the company under section 793 of the
Companies Act 2006.
Restrictions on the transfer of shares
There are no specic restrictions on the transfer of the company’s
shares which are governed by the general provisions of the articles of
association and prevailing legislation. The articles of association set
Book 1.indb 141 27/09/2022 23:48:39
142
Close Brothers Group plc
Annual Report 2022
Directors’ Report
continued
out certain circumstances in which the directors of the company can
refuse to register a transfer of ordinary shares.
The company is not aware of any arrangements between its
shareholders that may result in restrictions on the transfer of shares
and/or voting rights.
Directors and employees of the group are required to comply with
applicable legislation relating to dealing in the company’s shares
as well as the company’s share dealing rules. These rules restrict
employees’ and directors’ ability to deal in ordinary shares at certain
times, and require the employee or director to obtain permission prior
to dealing. Some of the group’s employee share plans also contain
restrictions on the transfer of shares held within those plans.
Purchase of own shares
Under section 724 of the Companies Act 2006, a company may
purchase its own shares to be held in treasury (“Treasury Shares”).
The existing authority given to the company at the last AGM to
purchase Treasury Shares of up to 10% of its issued share capital will
expire at the conclusion of the next AGM.
The board considers it would be appropriate to renew this authority
and intends to seek shareholder approval to purchase Treasury
Shares of up to 10% of its issued share capital at the forthcoming
AGM in line with current investor sentiment. Details of the resolution
renewing the authority will be included in the Notice of AGM.
Awards under the company’s employee share plans are met from
shares purchased in the market (and held either in treasury or in the
employee share trust).
During the year, the company made market purchases of 415,000
Treasury Shares with an aggregate nominal value of £103,750 and
representing 3.96% of its issued share capital, for an aggregate
consideration of £6.0 million. It transferred 70,978 shares out of
treasury to satisfy share option awards, with an aggregate nominal
value of £17,745 and representing 0.05% of the Company’s issued
share capital, for a total consideration of £0.84 million.
At 31 July 2022, the company held 1,605,100 Treasury Shares with
a nominal value of £0.4 million and representing 1.07% of its issued
share capital. The maximum number of Treasury Shares held at any
time during the year was 1,669,288 with a nominal value of £0.4
million and representing 1.11% of its issued share capital.
Signicant Shareholdings
The table below sets out details of the interests in voting rights
notied to the company under the provisions of the FCA’s Disclosure
Guidance and Transparency Rules. Information provided by the
company pursuant to the Disclosure Guidance and Transparency
Rules is publicly available via the regulatory information services and
on the company’s website.
20 September 2022
Voting rights
31 July 2022
Voting rights
abrdn plc 12.42% 12.07%
Bl ac kRock, Inc. 5.11% 5.83%
FIL Limited 5.06% 5.06%
Royal London Asset Management 4.99% 4.99%
M&G plc 4.83% 4.83%
Substantial shareholders do not have different voting rights from those
of other shareholders.
Employee Share Trust
Ocorian Trustees (Jersey) Limited is the trustee of the Close Brothers
Group Employee Share Trust, an independent trust which holds
shares for the benet of employees and former employees of the
group. The trustee will only vote on those shares in accordance with
the instructions given to the trustee and in accordance with the terms
of the trust deed. The trustee has agreed to satisfy a number of awards
under the employee share plans. As part of these arrangements the
company funds the trust from time to time, to enable the trustee to
acquire shares to satisfy these awards, details of which are set out in
note26 on pages 189 to 190 of the nancial statements. The trustee
has waived its right to dividends on all shares held within the trust.
During the year, the employee share trust made market purchases of
231,544 ordinary shares.
Auditor
PricewaterhouseCoopers LLP (“PwC”) has expressed its willingness
to continue in ofce as the company’s external auditor. Resolutions to
reappoint PwC and to determine their remuneration will be proposed
at the forthcoming AGM. The full text of the relevant resolutions will be
set out in the Notice of AGM.
Signicant Agreements Affected by a Change of Control
A change of control of the company, following a takeover bid, may
cause a number of agreements to which the company is a party
to take effect, alter or terminate. These include certain insurance
policies, bank facility agreements and employee share plan rules.
The group had committed facilities totalling £1.8 billion at 31 July
2022 which contain clauses requiring lender consent for any change
of control. Should consent not be given, a change of control would
trigger mandatory repayment of those facilities.
All of the company’s employee share plan rules contain provisions
relating to a change of control. Outstanding awards and options may
vest and become exercisable on a change of control, subject, where
applicable, to the satisfaction of any performance conditions at that
time and pro-rating of awards.
Research and Development Activities
During the normal course of business, the group continues to invest
in new technology and systems and to develop new products and
services to improve operating efciency and strengthen its customer
proposition.
Post-Balance Sheet Events
There were no material post-balance sheet events.
Political Donations
No political donations were made during the year (2021: £nil).
Branches
The Company has no branches outside the United Kingdom.
Disclosure of Information to the Auditor
Each of the persons who are directors at the date of approval of this
Annual Report conrms that: so far as the director is aware, there
is no relevant audit information of which the company’s auditor is
unaware; and they have taken all the steps that they ought to have
taken as a director in order to make themselves aware of any relevant
audit information and to establish that the company’s auditor is aware
of that information.
This conrmation is given and should be interpreted in accordance
with the provisions of section 418 of the Companies Act 2006.
The Directors’ Report has been approved by the board and signed on
its behalf by:
Penny Thomas
Company Secretary
27 September 2022
Book 1.indb 142 27/09/2022 23:48:39
143
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Statement of Directors’ Responsibilities in Respect of the
Financial Statements
The directors, whose names and functions are listed on pages 95 to
97, are responsible for preparing the Annual Report and the nancial
statements in accordance with applicable law and regulation.
Company law requires the directors to prepare nancial statements
for each nancial year. Under that law the directors have prepared
the group nancial statements in accordance with UK-adopted
international accounting standards and the company nancial
statements in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards,
comprising FRS 102 “The Financial Re
porting Standard applicable in
the UK and Republic of Ireland”, and applicable law).
In preparing the group nancial statements, the directors have also
elected to comply with International Financial Reporting Standards
issued by the International Accounting Standards Board (IFRSs as
issued by IASB).
Under company law, directors must not approve the nancial
statements unless they are satised that they give a true and fair view
of the state of affairs of the group and company and of the prot or
loss of the group and the company for that period. In preparing the
nancial statements, the directors are required to:
•
select suitable accounting policies and then apply them
consistently;
•
state whether applicable UK-adopted international accounting
standards and IFRSs issued by IASB have been followed for
the group nancial statements and United Kingdom Accounting
Standards, comprising FRS 102 have been followed for the
company nancial statements, subject to any material departures
disclosed and explained in the nancial statements;
•
make judgements and accounting estimates that are reasonable
and prudent; and
•
prepare the group and company nancial statements on the going
concern basis unless it is inappropriate to presume that the group
and 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 sufcient to show and explain the group’s and
company’s transactions and disclose with reasonable accuracy at
any time the nancial position of the group and company and enable
them to ensure that the nancial 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 nancial information included on the company’s
website. Legislation in the United Kingdom governing the preparation
and dissemination of nancial statements may differ from legislation in
other jurisdictions.
Directors’ Conrmations
Each of the current directors, whose names and functions are listed on
pages 95 to 97, conrm that, to the best of their knowledge:
•
the group nancial statements, which have been prepared in
accordance with UK-adopted international accounting standards
and IFRSs issued by IASB, give a true and fair view of the assets,
liabilities, nancial position and prot of the group;
•
the company nancial statements, which have been prepared
in accordance with United Kingdom Accounting Standards,
comprising FRS 102, give a true and fair view of the assets,
liabilities, nancial position and prot of the company;
•
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 nancial 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.
By order of the board
Adrian Sainsbury Mike Morgan
Chief Executive Group Finance Director
27 September 2022
Book 1.indb 143 27/09/2022 23:48:39
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Close Brothers Group plc
Annual Report 2022
Report on the audit of the nancial statements
Opinion
In our opinion:
• Close Brothers Group plc’s group nancial statements and company nancial statements (the “nancial statements”) give a true
and fair view
of the state of the group’s and of the company’s affairs as at 31 July 2022 and of the group’s prot and the group’s cash ows
for the year
then ended;
• the group nancial statements have been properly prepared in accordance with UK-adopted international accounting standards;
• the company nancial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting P
ractice
(United Kingdom Accounting Standards, comprising FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of
Ireland”, and applicable law); and
• the nancial statements have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the nancial statements, included within the Annual Report, which comprise: the consolidated and company balanc
e
sheets as at 31 July 2022; the consolidated income statement,
the consolidated statement of comprehensive income, the consolida
ted cash
ow statement and the consolidated and company statements of changes in equity for the year then ended; and the notes to the n
ancial
statements, which include a description of the signicant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Separate opinion in relation to IFRSs as issued by the IASB
As explained in Note 1 to the nancial statements, the group, in addition to applying UK-adopted international accounting stand
ards, has also
applied international nancial reporting standards (IFRSs) as issued by the International Accounting Standards Board (IASB).
In our opinion, the group nancial statements have been properly prepared in accordance with IFRSs as issued by the IASB.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our respon
sibilities under
ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the nancial statements section of our repor
t. We believe that the
audit evidence we have obtained is sufcient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the nancial
statements
in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fullled ou
r other ethical
responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not p
rovided.
Other than those disclosed in Note 5, we have provided no non-audit services to the company or its controlled undertakings in t
he period under
audit.
Our audit approach
Overview
Audit scope
• The scope of our audit and the nature, timing and extent of audit procedures performed were determined by our risk assessment
, the
nancial signicance of components and othe
r qualitative factors (including history of misstatement through fraud or error).
• We performed audit procedures over components considered nancially signicant in the context of the group (full scope audit)
or in
the context of individual primary statement account balances (audit of specic account balances).
• We performed other procedures including testing relevant controls and analytical review procedures to mitigate the risk of ma
terial
misstatement in the residual components.
Key audit matters
• Determination of expected credit loss (‘ECL’) provisions on loans and advances to customers (Group)
• Evaluation of the carrying value of investment in subsidiaries (Company)
Materiality
• Overall group materiality: £11.6m (2021: £13.2m) based on 5% of Prot Before Tax.
• Overall company materiality: £11.1m (2021: £11.1m) based on 1% of Total Assets.
• Performance materiality: £8.7m (2021: £9.9m) (Group) and £8.3m (2021: £8.3m) (Company).
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the nancial state
ments.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most signicance in the audit of the
nancial
statements of the current period and include the most signicant assessed risks of material misstatement (whether or not due to
fraud) identied
by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in t
he audit; and directing
the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addr
essed in
the context of our audit of the nancial statements as a whole, and in forming our opinion thereon, and we do not provide a sep
arate opinion on
these matters.
Independent Auditors’ Report to the Members of
Close Brothers Group plc
Book 1.indb 144 27/09/2022 23:48:39
145
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
This is not a complete list of all risks identied by our audit.
Evaluation of the carrying value of investment in subsidiaries (Company) is a new key audit matter this year.
The following, which were key audit matters last year, are not included because of the following factors:
• The impact of Covid-19 (Group and company) is no longer considered to be a key audit matter because our consideration of the
pandemic in
the current year is adequately captured by other key audit matters and it does not represent an area of increased audit focus i
n its own right.
• Application of effective interest rate (“EIR”) accounting (Group) is no longer considered to be a key audit matter because we
do not consider
the level of estimation uncertainty associated with EIR to be signicant.
Otherwise, the key audit matters below are consistent with last year.
Key audit matter
How our audit addressed the key audit matter
Determination of expected credit loss (‘ECL’) provisions on
loans and advances to customers (Group)
As at 31 July 2022, the Group has gross loans and advances to
customers of £9,144.5m, with ECL provisions of £285.6m
held
against them.
The determination of ECL provisions is inherently judgemental and
involves setting assumptions using forward looking information
reecting the Group’s view of potential future economic events. This
can give rise to increased estimation uncertainty.
There continues to be uncertainty in the determination of ECL
provisions in relation to economic factors, including assessing how
a high ination environment coupled with the cost of energy, supply
chain and other economic developments may impact the credit
performance of the lending book.
Experience continues to develop in relation to the Novitas Loans
business, which the Group has used to update the determination
of the ECL. This remains subjective and the ECL is sensitive to
potential outcomes.
Models are used to collectively assess and determine ECL
allowances on loans and advances which are not classied as
being credit impaired at the reporting date, or are individually
small. We consider the following elements of the determination of
modelled ECL to be signicant:
• The application of forward-looking economic scenarios used in
the models and the weightings assigned to those scenarios;
• The completeness and appropriateness of post-model
adjustments that are recorded to take into account latent risks
and known model limitations; and
• The appropriateness of assumptions used in the determination
of the probability of case failure and loss given case failure in
relation to Novitas.
Individually large exposures to counterparties who are in default
at the reporting date are estimated on an individual basis. We
consider the following elements of the determination of ECL to be
signicant:
• Estimating the amount and timing of the expected future cash
ows under multiple, probability weighted, scenarios.
Relevant references:
• Note 2, critical accounting estimates and judgements on page
162;
• Note 11, Loans and advances to customers on page 172, and
• note 28c, nancial risk management on page 195.
With the support of our credit risk modelling specialists and
economics experts, we performed the following procedures:
For collectively assessed provisions:
• We understood and critically assessed the appropriateness of
the ECL accounting policy and model methodologies used by
management.
• We tested model performance by replicating key model
components and comparing actual outcomes with
those previously predicted by the models. We assessed
management’s judgement as to whether the results of these
activities indicated whether the models continued to perform
appropriately or if any post-model adjustments were required.
• We critically assessed the reasonableness of management’s
selected economic scenarios and associated scenario
weightings, giving specic consideration to current and future
economic uncertainty. We as
sessed their reasonableness
against known or likely economic, political and other relevant
events including the potential future economic impact of
developments in prolonged ination.
• We compared the severity and magnitude of the assumptions
used in the base scenario to external forecasts and historic
trends.
• Based on our knowledge and understanding of the limitations
in management’s models and emerging industry risks, we
evaluated the completeness of the post model adjustments
proposed by management.
• We tested the valuation of in-scope post model adjustments by
critically assessing the methodology and testing the underlying
assumptions used in the calculation to supporting evidence.
• We evaluated management’s model to derive the Novitas
Loans ECL, we critically assessed the assumptions used by
management and we performed our own sensitivity analysis
using plausible scenarios derived from available experience.
From the evidence we obtained we found that the application of
forward-looking economic assumptions and the completeness and
appropriateness of the post model adjustments as they relate to
the ECL provision to be reasonable.
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146
Close Brothers Group plc
Annual Report 2022
Independent Auditors’ Report to the Members of
Close Brothers Group plc
continued
Key audit matter
How our audit addressed the key audit matter
Individually assessed provisions:
For a sample of individually assessed loans in default and related
ECL allowances, we:
• Evaluated the basis on which the allowances were determined,
and the evidence supporting the analysis performed by
management;
• Independently challenged whether the key assumptions used,
such as the recovery strategies, collateral values and ranges
of potential outcomes were appropriate given the borrower’s
circumstances;
• Re-performed management’s provision calculation, critically
assessing key inputs including expected future cash ows,
discount rates, valuations of collateral held and the weightings
applied to scenario outcomes; and
• Considered the extent to which the exposure is impacted by the
economic conditions including high ination levels and whether
these factors had been appropriately reected in the ECL
provision.
We tested and evaluated the reasonableness of the disclosures
made in the nancial statements.
Based on the evidence obtained, we concluded that the
methodologies, modelled assump
tions, management judgements
and collective and individually assessed expected credit losses to
be appropriate.
Evaluation of the carrying value of investment in
subsidiaries (Company)
Identifying and measuring any impairment of investments in
subsidiaries is subjective and is based on an assessment of
impairment indicators in the underlying investments at the year end.
Management determined that there are no indicators of
impairment.
See note 30 for the relevant disclosure.
We tested management’s impa
irment assessment, including
evaluating the key inputs and assumptions.
Based on the evidence obtained, we concluded that the
methodology, inputs and assumptions were appropriate.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the nancial statem
ents as a
whole, taking into account the structure of the group and the company, the accounting processes and controls, and the industry
in which they
operate.
The group is structured into four primary segments being the Close Brothers Group plc company and Bank, Winterood Securities a
nd Asset
Management components. The Bank is subsequently divided into Retail, Commercial and Property segments. The consolidated nancia
l
statements are a consolidation of these components.
In establishing the overall approach to the group audit, we determined the type of work that is required to be performed over t
he components
by us, as the group engagement team, or auditors within the PwC network of rms operating under our instruction (‘component aud
itors’).
Where the work was performed by component auditors, we determined the level of involvement we needed to have in their audit wor
k to be
able to conclude whether sufcient appropriate audit evidence had been obtained as a basis for our opinion on the consolidated
nancial
statements as a whole. This included regular communication with the component auditors throughout the audit, the issuance of in
structions, a
review of the results of their work on the key audit matters and formal clearance meetings.
Any components which were considered individually nancially signicant in the context of the group’s consolidated nancial sta
tements
(dened as components which represent more than or equal to 10% of the total prot before tax of the consolidated group) were c
onsidered full
scope components. We considered the individual nancial signicance of other components in relation to primary statement accoun
t balances.
Our scoping also considered the presence of any signicant audit risks and other qualitative factors (including history of miss
tatements through
fraud or error). Certain account balances were audited centrally by the group engagement team.
As part of considering the impact of climate change in our risk assessment, we evaluated management’s assessment of the impact
of climate
risk, which is set out in the Sustainability Report, including their conclusion that there is no material impact on the nancia
l statements. In
particular, we considered management’s assessment of the impact on ECL on loans and advances to customers, the nancial stateme
nt line
item we determined to be most likely to be impacted by climate risk. Management’s assessment gave consideration to a number of
matters,
including the exposure of underlying portfolios to transition risk. Management’s conclusion that there is no material impact is
consistent with our
audit ndings.
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Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Materiality
The scope of our audit was inuenced by our application of materiality. We set certain quantitative thresholds for materiality.
These, together
with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit p
rocedures on the
individual nancial statement line items and disclosures and in evaluating the effect of misstatements, both individually and i
n aggregate on the
nancial statements as a whole.
Based on our professional judgement, we determined materiality for the nancial statements as a whole as follows:
Financial statements – group Financial statements – company
Overall materiality £11.6m (2021: £13.2m). £11.1m (2021: £11.1m).
How we determined it 5% of prot before tax 1% of Total Assets
Rationale for benchmark applied Prot before tax is a primary measure
used by the shareholders in assessing the
performance of the group and is a generally
accepted benchmark for determining audit
materiality.
We have selected total assets as an
appropriate benchmark for company
materiality, as it is an investment holding
company.
For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality.
The range of
materiality allocated across components was between £4.0 million and £10.4 million. Certain components were audited to a local
statutory
audit materiality that was also less than our overall group materiality.
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and un
detected
misstatements exceeds overall materiality. Specically, we use performance materiality in determining the scope of our audit an
d the nature and
extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Ou
r performance
materiality was 75% (2021: 75%) of overall materiality, amounting to £8.7m (2021: £9.9m) for the group nancial statements and
£8.3m (2021:
£8.325m) for the company nancial statements.
In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment a
nd aggregation
risk and the effectiveness of controls - and concluded that an amount in the upper end of our normal range was appropriate.
We agreed with the Audit Committee that we would report to them misstatements identied during our audit above £500,000 (group
audit)
(2021: £500,000) and £500,000 (company audit) (2021: £500,000) as well as misstatements below those amounts that, in our view,
warranted
reporting for qualitative reasons.
Conclusions relating to going concern
Our evaluation of the directors’ assessment of the group’s and the company’s ability to continue to adopt the going concern bas
is of accounting
included:
• A detailed risk assessment to identify factors that could impact the going concern basis of accounting, including the cost of
living and
economic challenges linked to Covid-19 and wider economic uncertainty;
• Evaluation of management’s going concern assessment as well as the ICAAP and ILAAP submissions to the PRA;
• Evaluation of stress testing performed by management and consideration of whether the stresses applied are appropriate for as
sessing
going concern;
• Evaluation of the Group’s forecast nancial performance, liquidity and capital positions over the going concern period; and
• Consideration of credit rating agency ratings and any actions.
Based on the work we have performed, we have not identied any material uncertainties relating to events or conditions that, in
dividually or
collectively, may cast signicant doubt on the group’s and the company’s ability to continue as a going concern for a period of
at least twelve
months from when the nancial statements are authorised for issue.
In auditing the nancial statements, we have concluded that the directors’ use of the going concern basis of accounting in the
preparation of the
nancial statements is appropriate.
However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the group’s and
the company’s
ability to continue as a going concern.
In relation to the directors’ reporting on how they have applied the UK Corporate Governance Code, we have nothing material to
add or draw
attention to in relation to the directors’ statement in the nancial statements about whether the directors considered it appro
priate to adopt the
going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sect
ions of this report.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the nancial statements and our auditors
’ report
thereon. The directors are responsible for the other information, which includes reporting based on the Task Force on Climate-r
elated Financial
Book 1.indb 147 27/09/2022 23:48:40
148
Close Brothers Group plc
Annual Report 2022
Independent Auditors’ Report to the Members of
Close Brothers Group plc
continued
Disclosures (TCFD) recommendations. Our opinion on the nancial statements does not cover the other information and, accordingl
y, we do not
express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the nancial statements, our responsibility is to read the other information and, in doing so,
consider whether
the other information is materially inconsistent with the nancial statements or our knowledge obtained in the audit, or otherw
ise appears to
be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform
procedures to
conclude whether there is a material misstatement of the nancial statements or a material misstatement of the other informatio
n. If, based on
the work we have performed, we conclude that there is a material misstatement of this other information, we are required to rep
ort that fact. We
have nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors’ Report, we also considered whether the disclosures required by the UK Compa
nies Act
2006 have been included.
Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and
matters as
described below.
Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Dire
ctors’ Report
for the year ended 31 July 2022 is consistent with the nancial statements and has been prepared in accordance with applicable
legal
requirements.
In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit,
we did not
identify any material misstatements in the Strategic Report and Directors’ Report.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act
2006.
Corporate governance statement
The Listing Rules require us to review the directors’ statements in relation to going concern, longer-term viability and that p
art of the corporate
governance statement relating to the company’s compliance with the provisions of the UK Corporate Governance Code specied for
our
review. Our additional responsibilities with respect to the corporate governance statement as other information are described in the Reporting
on other information section of this report.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate gover
nance
statement is materially consistent with the nancial statements and our knowledge obtained during the audit, and we have nothin
g material to
add or draw attention to in relation to:
• The directors’ conrmation that they have carried out a robust assessment of the emerging and principal risks;
• The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging r
isks and an
explanation of how these are being managed or mitigated;
• The directors’ statement in the nancial statements about whether they considered it appropriate to adopt the going concern b
asis of
accounting in preparing them, and their identication of any material uncertainties to the group’s and company’s ability to continue to do so
over a period of at least twelve months from the date of approval of the nancial statements;
• The directors’ explanation as to their assessment of the group’s and company’s prospects, the period this assessment covers a
nd why the
period is appropriate; and
• The directors’ statement as to whether they have a reasonable expectation that the company will be able to continue in operat
ion and
meet its liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to
any necessary
qualications or assumptions.
Our review of the directors’ statement regarding the longer-term viability of the group was substantially less in scope than an
audit and only
consisted of making inquiries and considering the directors’ process supporting their statement; checking that the statement is
in alignment
with the relevant provisions of the UK Corporate Governance Code; and considering whether the statement is consistent with the
nancial
statements and our knowledge and understanding of the group and company and their environment obtained in the course of the aud
it.
In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the co
rporate
governance statement is materially consistent with the nancial statements and our knowledge obtained during the audit:
• The directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and pr
ovides the
information necessary for the members to assess the group’s and company’s position, performance, business model and strategy;
• The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems;
and
• The section of the Annual Report describing the work of the Audit Committee.
We have nothing to report in respect of our responsibility to report when the directors’ statement relating to the company’s co
mpliance with the
Code does not properly disclose a departure from a relevant provision of the Code specied under the Listing Rules for review b
y the auditors.
Book 1.indb 148 27/09/2022 23:48:40
149
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Responsibilities for the nancial statements and the audit
Responsibilities of the directors for the nancial statements
As explained more fully in the Statement of Director’s Responsibilities in respect of the Financial Statements, the directors a
re responsible for the
preparation of the nancial statements in accordance with the applicable framework and for being satised that they give a true
and fair view.
The directors are also responsible for such internal control as they determine is necessary to enable the preparation of nanci
al statements that
are free from material misstatement, whether due to fraud or error.
In preparing the nancial statements, the directors are responsible for assessing the group’s and the company’s ability to cont
inue 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 company or to cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the nancial statements
Our objectives are to obtain reasonable assurance about whether the nancial statements as a whole are free from material misst
atement,
whether due to fraud or error, and to issue an auditors’ 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 reason
ably be expected
to inuence the economic decisions of users taken on the basis of these nancial statements.
Irregularities, including fraud, are instances of non-compliance wi
th laws and regulations. We design procedures in line with o
ur responsibilities,
outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedu
res are capable of
detecting irregularities, including fraud, is detailed below.
Based on our understanding of the group and industry, we identied that the principal risks of non-compliance with laws and reg
ulations
related to breaches of laws and regulations, principally those determined by the Prudential Regulatory Authority (“PRA”) and th
e Financial
Conduct Authority (“FCA”), and we considered the extent to which non-compliance might have a material effect on the nancial st
atements.
We also considered those laws and regulations that have a direct impact on the nancial statements such as the Companies Act 20
06, UK
tax legislation and the Listing Rules of the FCA. We evaluated management’s incentives and opportunities for fraudulent manipul
ation of the
nancial statements (including the risk of override of controls), and determined that the principal risks were related to posti
ng manual journal
entries to manipulate nancial performance, management bias thro
ugh judgements and assumptions in signicant accounting estimat
es and
signicant one-off or unusual transactions. The group engagement team shared this risk assessment with the component auditors s
o that they
could include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the group eng
agement team
and/or component auditors included:
• Discussions with management and those charged with governance
including consideration of known or suspected instances of non-
compliance with laws and regulation and fraud;
• Assessment of matters reported on the Group’s whistleblowing helpline and the results of management’s investigation of such m
atters;
• Challenging assumptions and judgements made by management in their signicant accounting estimates, in particular in relation
to the
allowance for ECL;
• Identifying and testing journal entries, in particular any manual journal entries posted by unexpected or unusual users, post
ed with
descriptions indicating a higher level of risk, and posted late with a favourable impact on nancial performance;
• Performing testing over period end adjustments;
• Incorporating unpredictability into the nature, timing and/or extent of our testing; and
• Reviewing key correspondence with the FCA and PRA.
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-
compliance with
laws and regulations that are not closely related to events and transactions reected in the nancial statements. Also, the ris
k of not detecting a
material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deli
berate concealment
by, for example, forgery or intentional misrepresentations, or through collusion.
Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing
techniques.
However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We wi
ll often seek to
target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling to
enable us to draw a
conclusion about the population from which the sample is selected.
A further description of our responsibilities for the audit of the nancial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chap
ter 3 of
Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibilit
y for any
other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed b
y our prior
consent in writing.
Book 1.indb 149 27/09/2022 23:48:40
150
Close Brothers Group plc
Annual Report 2022
Independent Auditors’ Report to the Members of
Close Brothers Group plc
continued
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not obtained all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from
branches
not visited by us; or
• certain disclosures of directors’ remuneration specied by law are not made; or
• the company nancial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with th
e accounting
records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee, we were appointed by the directors on 17 May 2017 to audit the nancial st
atements
for the year ended 31 July 2018 and subsequent nancial periods. The period of total uninterrupted engagement is 5 years, cover
ing the years
ended 31 July 2018 to 31 July 2022.
Other matter
In due course, as required by the Financial Conduct Authority Disclosure Guidance and Transparency Rule 4.1.14R, these nancial
statements
will form part of the ESEF-prepared annual nancial report led on the National Storage Mechanism of the Financial Conduct Auth
ority in
accordance with the ESEF Regulatory Technical Standard (“ESEF RTS”). This auditors’ report provides no assurance over whether t
he annual
nancial report will be prepared using the single electronic format specied in the ESEF RTS.
Heather Varley
(Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
27 September 2022
Book 1.indb 150 27/09/2022 23:48:41
Governance Report
Strategic Report
Financial Statements
151
Close Brothers Group plc
Annual Report 2022
Consolidated Income Statement
for the year ended 31 July 2022
Note
2022
£million
2021
£million
Interest income
4 690.0 656.8
Interest expense
4
(112.0 )
(119.3 )
Net interest income 578.0 537.5
Fee and commission income
4 259.5 246.1
Fee and commission expense
4
(17.2 )
(16.1 )
Gains less losses arising from dealing in securities 81.6 165.2
Other income
4 106.1 89.4
Depreciation of operating lease assets and other direct costs 16
(71.9 )
(69.5 )
Non-interest income 358.1 415.1
Operating income 936.1 952.6
Administrative expenses
4
(598.0 )
(592.1 )
Impairment losses on nancial assets
11
(103.3 )
(89.8 )
Total operating expenses before amortisation and impairment of intangible assets on acquisition,
goodwillimpairment and exceptional item
(701.3 )
(681.9 )
Operating prot before amortisation and impai
rment of intangible assets on acquisition,
goodwill impairment and exceptional item 234.8 270.7
Amortisation and impairment of in
tangible assets on acquisition 15
(2.0 )
(14.2 )
Goodwill impairment
15 –
(12.1 )
Exceptional item: HMRC VAT refund
6 – 20.8
Operating prot before tax 232.8 265.2
Tax
7
(67.6 )
(63.1 )
Prot after tax 165.2 202.1
Prot attributable to shareholders 165.2 202.1
Basic earnings per share
8 110.4 p 134.8 p
Diluted earnings per share
8 109.9 p 133.6 p
Interim dividend per share paid
9 22.0 p 18.0 p
Final dividend per share
9 44.0 p 42.0 p
Book 1.indb 151 27/09/2022 23:48:41
152
Close Brothers Group plc
Annual Report 2022
Consolidated Statement of Comprehensive Income
for the year ended 31 July 2
022
2022
£ million
2021
£ million
Prot after tax165.2 202.1
Items that may be reclassied to income statement
Currency translation losses
(0.5 )
(1.1 )
Gains on cash ow hedging 30.6 7.4
(Losses)/gains on nancial instruments classied
at fair value through other comprehensive income:
Sovereign and central bank debt 0.9
(1.1 )
Tax relating to items that may be reclassied
(7.9 )
(1.2 )
Items that will not be reclassied to income statement
Dened benet pension scheme (losses)/gains 0.5
(0.1 )
Tax relating to items that will not be reclassied 0.3
(0.6 )
(0.1 )
Other comprehensive income, net of tax 21.3 5.9
Total comprehensive income 186.5 208.0
Attributable to
Shareholders 186.5 208.0
Book 1.indb 152 27/09/2022 23:48:41
Governance Report
Strategic Report
Financial Statements
153
Close Brothers Group plc
Annual Report 2022
Consolidated Balance Sheet
at 31 July 2022
Note
31 July
2022
£ million
31 July
2021
£ million
Assets
Cash and balances at central banks 1,254.7 1,331.0
Settlement balances 799.3 699.6
Loans and advances to banks
10 165.4 136.3
Loans and advances to customers
11 8,858.9 8,444.5
Debt securities
12 612.8 477.3
Equity shares
13 28.4 31.9
Loans to money brokers against stock advanced 48.4 51.1
Derivative nancial instruments
14 71.2 18.3
Intangible assets
15 252.0 232.6
Property, plant and equipment
16 322.5 309.9
Current tax assets 47.0 36.4
Deferred tax assets
7 32.5 56.0
Prepayments, accrued income and other assets 185.2 209.6
17
Total assets 12,678.3 12,034.5
Liabilities
Settlement balances and short positions 796.1 690.6
18
Deposits from banks
19 160.5 150.6
Deposits from customers
19 6,770.4 6,634.8
Loans and overdrafts from banks
19 622.7 512.7
Debt securities in issue
19 2,060.9 1,865.5
Derivative nancial instruments
14 89.2 21.3
Accruals, deferred income and other liabilities 334.5 367.0
17
Subordinated loan capital
20 186.5 222.7
Total liabilities 11,020.8 10,465.2
Equity
Called up share capital
21 38.0 38.0
Retained earnings 1,628.4 1,555.5
Other reserves
(8.9 )
(23.2 )
Total shareholders’ equity 1,657.5 1,570.3
Non-controlling interests –
(1.0 )
Total equity 1,657.5 1,569.3
Total equity and liabilities 12,678.3 12,034.5
The consolidated nancial statements were approved and authorised for issue by the board of directors on 27 September 2022 and
signed on
its behalf by:
Michael N. Biggs Adrian J. Sainsbury
Chairman Chief Executive
Registered number:
520241
Book 1.indb 153 27/09/2022 23:48:41
154
Close Brothers Group plc
Annual Report 2022
Other reserves
Called
up share
capital
£ million
Retained
earnings
£ million
FVOCI
reserve
£ million
Share-
based
payments
reserve
£million
Exchange
movements
reserve
£ million
Cash ow
hedging
reserve
£ million
Total
attributable
to equity
holders
£ million
Non-
controlling
interests
£ million
Total
equity
£ million
At 1 August 2020 38.0 1,435.0 0.2 1,450.6 1,449.6
(15.6 )
(1.3 )
(5.7 )
(1.0 )
Prot for the year – 202.1 – – – – 202.1 – 202.1
Other comprehensive (expense)/income – 0.6 – – 5.4 5.9 – 5.9
(0.1 )
Total comprehensive income for the year – 202.0 0.6 – – 5.4 208.0 – 208.0
Dividends paid (note 9) – (86.6 ) – – – – –
(86.6 )
(86.6 )
Shares purchased – – – – – –
(12.1 )
(12.1 )
(12.1 )
Shares released – – – 10.0 – – 10.0 – 10.0
Other movements – 3.7 – – – –
(4.7 )
(1.0 )
(1.0 )
Income tax – 1.4 – – – – 1.4 – 1.4
At 31 July 2021 38.0 1,555.5 0.8 (0.3 ) 1,570.3 1,569.3
(22.4 )
(1.3 )
(1.0 )
Prot for the year – 165.2 – – – – 165.2 – 165.2
Other comprehensive (expense)/income – 0.2 – 22.0 21.3 – 21.3
(0.7 )
(0.2 )
Total comprehensive income for the year – 165.4 – (0.2 ) 22.0 186.5 – 186.5
(0.7 )
Dividends paid (note 9) – (95.5 ) – – – – (95.5 ) – (95.5 )
Shares purchased – – – (9.5 ) – – (9.5 ) – (9.5 )
Shares released – – – 4.9 – – 4.9 – 4.9
Other movements – 4.1 – (2.2 ) – – 1.9 1.0 2.9
Income tax – – – – – –
(1.1 )
(1.1 )
(1.1 )
At 31 July 2 38.0 1,628.4 0.1 21.7 1,657.5 – 1,657.5
022
(29.2 )
(1.5 )
Consolidated Statement of Changes in Equity
for the year ended 31 July 2
022
Book 1.indb 154 27/09/2022 23:48:41
Governance Report
Strategic Report
Financial Statements
155
Close Brothers Group plc
Annual Report 2022
Consolidated Cash Flow Statement
for the year ended 31 July 2
022
Note
2022
£ million
2021
£ million
Net cash inow from operating activities
27(a) 158.7 119.1
Net cash (outow)/inow from investing activities
Purchase of:
Property, plant and equipment
(7.1 )
(8.9 )
Intangible assets – software
(51.3 )
(47.9 )
Subsidiaries
27(b)
(0.1 )
(2.9 )
Sale of:
Subsidiaries
27(c) 0.1 2.3
(58.4 )
(57.4 )
Net cash inow before nancing activities 100.3 61.7
Financing activities
Purchase of own shares for employee share award schemes
(9.5 )
(12.1 )
Equity dividends paid
(95.5 )
(86.6 )
Interest paid on subordinated loan capital and debt nancing
(10.4 )
(13.6 )
Payment of lease liabilities
(15.1 )
(14.7 )
Net (redemption)/issuance of subordinated loan capital 40.6
(23.4 )
Net decrease in cash
(53.6 )
(24.7 )
Cash and cash equivalents at beginning of year 1,436.6 1,461.3
Cash and cash equivalents at end of year
27(d) 1,383.0 1,436.6
Book 1.indb 155 27/09/2022 23:48:41
156
Close Brothers Group plc
Annual Report 2022
Company Balance Sheet
at 31 July 2022
Note
2022
£ million
2021
£ million
Fixed assets
Intangible assets
15
–
–
Property, plant and equipment
16
10.2
11.5
Investment in subsidiary
30
287.0
287.0
297.2
298.5
Current assets
Amounts owed by subsidiaries due within one year
450.4
434.8
Amounts owed by subsidiaries due after more than one year
340.8
363.4
Corporation tax receivable
3.3
4.6
Other debtors
13.6
8.9
Cash at bank
1.9
1.2
810.0
812.9
Creditors: Amounts falling due within one year
Debt securities in issue
19
1.8
1.8
Subordinated loan capital
1.6
0.6
Provisions
17
1.4
1.2
Deferred tax liability
7
0.2
0.8
Other creditors
1.0
0.8
Accruals
8.3
9.5
14.3
14.7
Net current assets
795.7
798.2
Total assets less current liabilities
1,092.9
1,096.7
Creditors: Amounts falling due after more than one year
Debt securities in issue
19
249.7
249.3
Subordinated loan capital
198.5
221.5
Provisions
17
2.0
1.8
Net assets
642.7
624.1
Capital and reserves
Called up share capital
21
38.0
38.0
Prot and loss account
633.9
608.5
Other reserves
(29.2)
(22.4)
Shareholders’ funds
642.7
624.1
The company reported a prot for the nancial year ended 31 July 2022 of £116.0 million (2021: £116.0 million).
The company nancial statements were approved and authorised for issue by the board of directors on 27 September 2022 and
signed on its behalf by:
Michael N. Biggs Adrian J. Sainsbury
Chairman Chief Executive
Book 1.indb 156 27/09/2022 23:48:41
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Financial Statements
157
Close Brothers Group plc
Annual Report 2022
Company Statement of Changes in Equity
for the year ended 31 July 2022
Other reserves
Share capital
£ million
Prot
and loss
account
£ million
Share-
based
payments
reserve
£million
Shareholders’
funds
£ million
At 1 August 2020
38.0 576.8 (15.6) 599.2
Prot for the year
– 116.0 – 116.0
Other comprehensive expense – (0.1) – (0.1)
Total comprehensive income for the year – 115.9 – 115.9
Dividends paid (note 9)
–(86.6) –(86.6)
Shares purchased
– – (12.1) (12.1)
Shares released
– – 10.0 10.0
Other movements
–2.4(4.7)(2.3)
At 31 July 2021
38.0 608.5 (22.4) 624.1
Prot for the year
– 116.0 – 116.0
Other comprehensive income – 0.2 – 0.2
Total comprehensive income for the year – 116.2 – 116.2
Dividends paid (note 9)
– (95.5) – (95.5)
Shares purchased
– – (9.5) (9.5)
Shares released
––4.94.9
Other movements
–4.7(2.2)2.5
At 31 July 2022
38.0 633.9 (29.2) 642.7
Book 1.indb 157 27/09/2022 23:48:41
158
Close Brothers Group plc
Annual Report 2022
The Notes
1. Signicant Accounting Policies
(a) Reporting entity
incorporated and domiciled in the UK
(collectively, “the group”), operates through ve (2021: ve) operating
segments: Commercial, Retail, Property, Asset Management and
Securities, and is primarily located withinthe UK.
The company nancial statements (“the company accounts”) have
been prepared in compliance with United Kingdom Accounting
Standards, including Financial Reporting Standard 102 ‘‘The Financial
Reporting Standard applicable in the United Kingdom and the
Republic of Ireland’’ (‘‘FRS 102’’) and the Companies Act 2006, under
the provision of the Large and Medium-sized Companies and Groups
(Accounts and Financial Instruments: Recognition and Measurement
Reports) Regulations 2008 (SI 2008/410).
As permitted by FRS102, the company has chosen to adopt IFRS 9
Financial Instruments where applicable and taken advantage of the
disclosure exemptions available under that standard in relation to the
presentation of a cash ow statement, share-based payments and
related party transactions. Where required, equivalent disclosures are
given in the consolidated nancial statements of the group. The
company has also taken advantage of the exemption in section 408
of the Companies Act 2006 not to present its company income
statement and related notes.
Where relevant, the accounting policies of the company are the same
as those of the group set out in this note except for (l) Leases. For the
company, rental costs under operating leases are charged to the
income statement in equal instalments over the period of the lease.
(b) Compliance with International Financial Reporting Standards
The consolidated nancial statemen
ts (“the consolidated accounts”)
have been prepared and approved by the directors in accordance
with all relevant IFRSs as issued by the International Accounting
Standards Board and interpretations issued by the IFRS
Interpretations Committee.
Standards adopted during the year
The accounting policies applied this nancial year are set out in this
note and consistent with those of the previous nancial year.
In the year ended 31 July 2021, the group early adopted the IASB’s
Interest Rate Benchmark Reform Phase 2 amendments, which were
effective for accounting periods beginning on or after 1 January 2021.
These amendments, which addressed the impact on nancial
reporting during the reform of an interest rate benchmark, did not
have a material impact on the group’s nancial results.
Future accounting developments
Minor amendments to IFRSs effective for the group from 1 August
2022 have been issued by the IASB. These amendments are
expected to have no or an immaterial impact on the group.
(c) Basis of preparation
The consolidated and company accounts have been prepared under
the historical cost convention, except for the revaluation of nancial
assets and liabilities held at fair value through prot or loss, nancial
assets held at fair value through other comprehensive income and all
derivative nancial instruments (“derivatives”).
The consolidated accounts have been prepared in accordance with
international accounting standards in conformity with the
requirements of the Companies Act 2006.
The nancial statements are prepared on a going concern basis as
disclosed in the Directors’ Report.
(d) Consolidation and investment in subsidiary
Subsidiaries
Subsidiaries are all entities over which the group has control. The
group controls an entity when it is exposed to, 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. Such power
generally accompanies a shareholding of more than one half of the
voting rights. Subsidiaries are fully consolidated from the date on
which the group effectively obtains control. They are de-consolidated
from the date that control ceases.
The acquisition method of accounting is used to account for the
acquisition of subsidiaries. Under the acquisition method of
accounting, with some limited exceptions, the assets, liabilities and
contingent liabilities of a subsidiary are measured at their fair values at
the date of acquisition. Any non-controlling interest is measured either
at fair value or at the non-controlling interest’s proportion of the net
assets acquired. Acquisition related costs are accounted for as
expenses when incurred, unless directly related to the issue of debt
or equity securities. Any excess of the cost of acquisition over net
assets is capitalised as goodwill. All intra-group balances,
transactions, income and expenses are eliminated.
The company’s investment in its subsidiary is valued at cost less any
accumulated impairment losses.
(e) Foreign currency translation
For the company and those subsidiaries whose balance sheets are
denominated in sterling, which is the company’s functional and
presentation currency, monetary assets and liabilities denominated in
foreign currencies are translated into sterling at the closing rates of
exchange at the balance sheet date. Foreign currency transactions
are translated into sterling at average rates of exchange at the date of
the transaction and exchange differences arising are taken to the
consolidated income statement.
The balance sheets of subsidiaries denominated in foreign currencies
are translated into sterling at the closing rates. The income statements
for these subsidiaries are translated at the average rates and
exchange differences arising are taken to equity. Such exchange
differences are reclassied to the consolidated income statement in
the period in which the subsidiary is disposed of.
(f) Revenue recognition
Interest income
Interest on loans and advances made by the group, and fee income
and expense and other direct costs relating to loan origination,
restructuring or commitments are recognised in the consolidated
income statement using the effective interest rate method.
The effective interest rate method applies a rate that discounts
estimated future cash payments or receipts relating to a nancial
instrument to its net carrying amount. The cash ows take into
account all contractual terms of the nancial instrument including
transaction costs and all other premiums or discounts but not future
credit losses.
Fees and commissions
Where fees that have not been included within the effective interest
rate method are earned on the execution of a signicant act, such as
fees arising from negotiating or arranging a transaction for a third
party, they are recognised as revenue when that act has been
completed. Fees and corresponding expenses in respect of other
services are recognised in the consolidated income statement as the
right to consideration or payment accrues through performance of
services. To the extent that fees and commissions are recognised in
advance of billing they are included as accrued income or expense.
Dividends
Dividend income is recognised when the right to receive payment is
established.
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Gains less losses arising from dealing in securities
Net realised and unrealised gains arising from both buying and selling
securities and from positions held in securities, including related
interest income and dividends.
(g) Adjusted measures
Adjusted measures exclude amortisati
on and impairment of intangible
assets on acquisition, goodwill im
pairment and exceptional items.
Amortisation and impairment of inta
ngible assets on acquisition and
goodwill impairment are excluded to present the performance of the
group’s acquired businesses consistent with its other businesses.
Exceptional items are income and expense items that are material by
size and/or nature and are non-recurring. The separate reporting of
these items helps give an indication of the group’s underlying
performance.
(h) Financial assets and liabilities (excluding derivatives)
Classication and measurement
Financial assets are classied at init
ial recognition on the basis of the
business model within which they are managed and their contractual
cash ow characteristics. The classication categories are amortised
cost, fair value through other comprehensive income (“FVOCI”) and
fair value through prot or loss (“FVTPL”).
Financial assets that are held to collect contractual cash ows where
those cash ows represent solely payments of principal and interest
are measured at amortised cost. Initial recognition is at fair value plus
directly attributable transaction costs. Interest income is accounted
for using the effective interest rate method.
Financial assets that are held to collect contractual cash ows and for
subsequent sale, where the assets’ cash ows represent solely
payments of principal and interest, are classied at FVOCI. Directly
attributable transaction costs are added to the initial fair value. Gains
and losses are recognised in other comprehensive income, except for
impairment gains and losses, until the nancial asset is either sold or
matures, at which time the cumulative gain or loss is recognised in
the income statement. Impairment gains and losses are recognised in
the income statement.
Financial assets are classied at FVTPL where they do not meet the
criteria to be measured at amortised cost or FVOCI or where they are
designated at FVTPL to reduce an accounting mismatch. Financial
assets at FVTPL are recognised at fair value. Transaction costs are
not added to or deducted from the initial fair value, they are
immediately recognised in prot or loss on initial recognition. Gains
and losses that subsequently arise on changes in fair value are
recognised in the income statement.
Financial liabilities are classied at in
itial recognition at amortised cost
except for the following which are classied at FVTPL: derivatives;
nancial liabilities held for trading; and nancial liabilities designated at
FVTPL to eliminate an accounting mismatch.
Financial liabilities at amortised cost are measured at fair value less
directly attributable transaction costs on initial recognition. Interest
expense is accounted for using the effective interest rate method.
Financial liabilities at FVTPL are measured at fair value on initial
recognition. Transaction costs are not added to or deducted from the
initial fair value, they are immediately recognised in prot or loss on
initial recognition. Subsequent change
s in fair value are recognised in
the income statement except for nancial liabilities designated at
FVTPL; changes in fair value attributable to changes in credit risk are
recognised in other comprehensive income.
The fair values of quoted nancial assets or nancial liabilities in active
markets are based on bid or offer prices. If the market for a nancial
asset or nancial liability is not active, or they relate to unlisted
securities, the group establishes fair value by using valuation
techniques. These include the use of recent arm’s length
transactions, discounted cash ow analysis and other valuation
techniques commonly used by market participants.
Derecognition
Financial assets are derecognised when the contractual rights to
receive cash ows from the nancial assets have expired or where the
group has transferred the contractual rights to receive cash ows and
transferred substantially all risks and rewards of ownership. If
substantially all the risks and rewards have been neither retained nor
transferred the assets continue to be recognised to the extent of the
group’s continuing involvement. Financial liabilities are derecognised
when they are extinguished.
Modications
The terms or cash ows of a nancial asset or liability may be
modied due to renegotiation or otherwise. If the terms or cash ows
are substantially different to the original, then the nancial asset or
liability is derecognised and a new nancial asset or liability is
recognised at fair value. If the terms or cash ows are not substantially
different to the original, then the nancial asset or liability carrying
value is adjusted to reect the present value of modied cash ows
discounted at the original EIR. The adjustment is recognised within
income on the income statement.
(i) Impairment of nancial assets
Expected credit losses
In accordance with IFRS 9, expected credit losses (“ECL”) are
recognised for loans and advances to customers and banks, other
nancial assets held at amortised cost, nancial assets measured at
FVOCI, loan commitments and nancial guarantee contracts. The
impairment charge in the income statement includes the change in
expected credit losses and fraud costs.
At initial recognition, nancial assets are considered to be in Stage 1
and a provision is recognised for 12 months of expected credit
losses. If a signicant increase in credit risk since initial recognition
occurs, these nancial assets are considered to be in Stage 2 and a
provision is made for the lifetime expected credit losses. As a
backstop, all nancial assets 30 days past due are considered to
have experienced a signicant increase in credit risk and are
transferred to Stage 2.
A nancial asset will remain classied as Stage 2 until the credit risk
has improved and it can be returned to Stage 1 or until it deteriorates
such that it meets the criteria to move to Stage 3.
Where a nancial asset no longer represents a signicant increase in
credit risk since origination it can move from Stage 2 back to Stage 1.
As a minimum this means that all payments must be up-to-date, the
quantitative probability of default assessment trigger is no longer met,
and the account is not evidencing qualitative assessment triggers.
When objective evidence exists that a nancial asset is credit
impaired, such as the occurrence of a credit default event or
identication of an unlikeliness to pay indicator, the nancial asset is
considered to be in Stage 3. As a backstop, all nancial assets
90 days or more past due are considered to be credit impaired and
transferred to Stage 3.
Cure denitions are in operation where nancial assets in Stage 3 can
move back to Stage 2, subject to Stage 3 indicators no longer being
in effect, and meeting the appropriate cure period.
In all circumstances loans and advances to customers are written off
against the related provisions when there are no reasonable
expectations of further recovery. This is typically following realisation
of all associated collateral and available recovery actions against the
customer. Subsequent recoveries of amounts previously written off
decrease the amount of impairment losses recorded in the income
statement.
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160
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The calculation of expected credit losses for loans and advances to
customers, either on a 12-month or lifetime basis, is based on the
probability of default (“PD”), the exposure at default (“EAD”) and the
loss given default (“LGD”), and includes forward-looking
macroeconomic information where appropriate.
PD, EAD and LGD parameters are projected over the remaining life of
each exposure. ECL is calculated for each future quarter by
multiplying the three parameters and is then discounted back to the
reporting date and summed. The discount rate used in the ECL
calculation is the effective interest rate.
IFRS 9 risk parameters are estimated using historical data wherever
possible, and in the absence of sufcient loss history, an expert
judgment approach is considered for some parameters.
Probability of Default
PD estimates represent the likelihood of a borrower defaulting on its
nancial obligation. Bespoke model-based approaches to estimate
PDs are employed across Commercial, Retail and Property. The
framework applied typically includes
an economic response model to
quantify the impact of macroeconomic forecasts and a risk ranking
mechanism (e.g. a scorecard) to quantify obligor level likelihood of
default. Risk characteristics that feed into the PD model framework
include current and past information related to borrowers, transaction
and payment proles, and future economic forecasts. Statistical
techniques, based on evidence observed in historical data, and
business knowledge are used to determine which characteristics are
predictive of default behaviour.
Exposure at Default
EAD represents the amounts expected to be owed at the time of
default and is estimated using an amortising schedule for the large
majority of exposures, or a credit conversion factor, depending on the
nature of lending.
Loss Given Default
LGD represents an expectation of the extent of loss on a defaulted
exposure after taking into account cash recoveries, including the
value of collateral held and other credit risk mitigants. LGD
methodologies vary by the nature of assets nanced and can include
estimates for the likelihood of collateral recovery and a separate
calculation for the likely loss on recovery. For some businesses LGDs
are estimated using liquidation curves based on historical cashows.
Recoveries are adjusted to account for the impact of discounting
using the effective interest rate.
The calculation of expected credit losses for some loan portfolios,
receivables relating to operating lease assets and settlement
balances is based on a simplied lifetime only expected credit loss
approach. Under the simplied a
pproach, stage classication
represents management’s internal assessment of credit risk.
Expected credit losses are assessed against actual loss experience
via a series of provision adequacy reviews. These reviews also
incorporate management judgement to ensure that our ECL coverage
ratios remain appropriate.
During the year, a number of enhancements were made to the IFRS 9
models used for the calculation of expected credit losses in the
Leasing business. The enhancements were made to address known
model limitations and to ensure modelled provisions better reect
future loss emergence. The impact of model changes to the expected
credit loss provision is disclosed in note 11(d).
(j) Settlement accounts
Settlement balance debtors and creditors are the amounts due to
and from counterparties in respect of the group’s market-making
activities and are carried at amortised cost. The balances are short
term in nature, do not earn interest and are recorded at the amount
receivable or payable.
(k) Loans to and from money brokers against stock advanced
Loans to money brokers against stock advanced is the cash collateral
provided to these institutions for stock borrowing by the group’s
market-making activities and is carried at amortised cost. Interest is
paid on the stock borrowed and earned on the cash deposits
advanced. The stock borrowing to which the cash deposits relate is
short term in nature and is recorded at the amount receivable. Loans
from money brokers against stock collateral provided are recorded at
the amount payable. Interest is paid on the loans.
(l) Leases
Lessor
A nance lease is a lease or hire purchase contract that transfers
substantially all the risks and rewards incidental to ownership of an
asset to the lessee. Finance leases are recognised as loans at an
amount equal to the gross investment in the lease, which
comprises the lease payments receivable and any unguaranteed
residual value, discounted at its implicit interest rate. Finance
charges on nance leases are taken to income in proportion to the
net funds invested.
An operating lease is a lease that does not transfer substantially all
the risks and rewards incidental to ownership of an asset to the
lessee. Rental income from operating leases is recognised in equal
instalments over the period of the leases and included in other
income in the consolidated income statement.
Lessee
A lease liability and right of use asset are recognised on the balance
sheet at the lease commencement date. The lease liability is
measured at the present value of future lease payments. The discount
rate is the rate implicit in the lease, or if that cannot be determined,
the group’s incremental borrowing rate appropriate for the right of use
asset. The right of use asset is measured at cost, comprising the
initial lease liability, payments made at or before the commencement
date less lease incentives received, initial direct costs, and estimated
costs of restoring the underlying asset to the condition required by
the lease.
Lease payments are allocated between the liability and nance cost.
The nance cost relating to the lease liability is charged to the
consolidated income statement over the lease term. The right of use
asset is depreciated over the shorter of the asset’s useful life and the
lease term on a straight line basis.
(m) Sale and repurchase agreements and other secured lending
and borrowings
Securities may be sold subject to a commitment to repurchase them.
Such securities are retained on the consolidated balance sheet when
substantially all the risks and rewards of ownership remain with the
group. The transactions are treated as collateralised borrowing and
the counterparty liability is included within loans and overdrafts from
banks. Similar secured borrowing transactions, including securities
lending transactions and collateralised short-term notes, are treated
and presented in the same way. These secured nancing
transactions are initially recognised at fair value, and subsequently
valued at amortised cost, using the effective interest rate method.
(n) Securitisation transactions
The group securitises its own nancial assets via the sale of these
assets to special purpose entities, which in turn issue securities to
investors. All nancial assets continue to be held on the group’s
consolidated balance sheet together with debt securities in issue
recognised for the funding – see derecognition policy (h).
(o) Offsetting nancial instruments
Financial assets and nancial liabilities are offset and the net amount
presented on the consolidated balance sheet if, and only if, there is a
legally enforceable right to set off the recognised amounts and there
is an intention to settle on a net basis, or to realise an asset and settle
the liability simultaneously.
1. Signicant Accounting Policies
continued
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Close Brothers Group plc
Annual Report 2022
(p) Derivatives and hedge accounting
On adoption of IFRS 9 Financial Instruments in 2018, the group
elected to continue applying hedge accounting under IAS 39
Financial Instruments: Re
cognition and Measurement.
In general, derivatives are used to minimise the impact of interest,
currency rate and equity price changes to the group’s nancial
instruments. They are carried on
the consolidated balance sheet at
fair value which is obtained from quoted market prices in active
markets, including recent market transactions and discounted cash
ow models.
On acquisition, certain derivatives are designated as a hedge and the
group formally documents the relationship between these derivatives
and the hedged item. The group also documents its assessment,
both at hedge inception and on an ongoing basis, of whether the
derivative is highly effective in offsetting changes in fair values or cash
ows of hedged items. If a hedge was deemed partially ineffective but
continues to qualify for hedge accounting, the amount of the
ineffectiveness, taking into account the timing of the expected cash
ows where relevant, would be recorded in the consolidated income
statement. If the hedge is not, or has ceased to be, highly effective,
the group discontinues hedge accounting.
For fair value hedges, changes in the fair value are recognised in the
consolidated income statement, together with changes in the fair
value of the hedged item. For cash ow hedges, the fair value gain or
loss associated with the effective proportion of the cash ow hedge is
recognised initially directly in equity and recycled to the consolidated
income statement in the period when the hedged item affects
income.
(q) Intangible assets
Computer software (acquired and costs associated with
development) and intangible assets on acquisition (excluding
goodwill) are stated at cost less accumulated amortisation and
provisions for impairment which are reviewed at least annually.
Amortisation is calculated to write off their cost on a straight-line basis
over the estimated useful lives as follows:
Computer software 3 to 5 years
Intangible assets on acquisition 8 to 20 years
Goodwill on acquisitions of subsidiaries is included in intangible
assets. Goodwill is assessed annually for impairment and carried at
cost less any accumulated impairment.
(r) Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated
depreciation and provisions for impairment which are reviewed at
least annually. Depreciation is calculated to write off their cost on a
straight-line basis over their estimated useful lives as follows:
Long leasehold property 40 years
Short leasehold property Over the length of the lease
Fixtures, ttings and equipment 3 to 5 years
Assets held under operating leases 1 to 20 years
Motor vehicles 1 to 5 years
(s) Share capital
Share issue costs
Incremental costs directly attributable to the issue of new shares or
options, including those issued on the acquisition of a business, are
shown in equity as a deduction, net of tax, from the proceeds.
Dividends on ordinary shares
Dividends on ordinary shares are recognised in equity in the period in
which they are paid or, if earlier, approved by shareholders.
Treasury shares
Where the company or any member of the group purchases the
company’s share capital, the consideration paid is deducted from
shareholders’ equity as treasury shares until they are cancelled.
Where such shares are subsequently sold or reissued, any
consideration received is included in shareholders’ equity.
(t) Employee benets
The group operates dened contribution pension schemes for eligible
employees as well as a dened benet pension scheme which is
closed to new members and further accrual.
Under the dened contribution scheme the group pays xed
contributions into a fund separate from the group’s assets.
Contributions are charged in the consolidated income statement
when they become payable.
The expected cost of providing pensions within the funded dened
benet scheme, determined on the basis of annual valuations using
the projected unit method, is charged to the consolidated income
statement. Actuarial gains and losses are recognised in full in the
period in which they occur and recognised in other comprehensive
income.
The retirement benet obligation recognised in the balance sheet
represents the present value of the dened benet obligation, as
adjusted for unrecognised past service cost, and as reduced by the
fair value of scheme assets at the balance sheet date. Both the return
on investment expected in the period and the expected nancing
cost of the liability, as estimated at the beginning of the period, are
recognised in the results for the period. Any variances against these
estimates in the year form part of the actuarial gain or loss. The
assets of the scheme are held separately from those of the group in
an independently managed fund.
(u) Share-based payments to employees
At 31 July 2022, the group operates three (31 July 2021: three)
share-based award schemes: the Deferred Share Awards (“DSA”)
scheme, the Long Term Incentive Plan (“LTIP”), and the HMRC
approved Save As You Earn (“SAYE”) scheme.
The costs of the awards granted under the DSA scheme are based on
the salary of the individual at the time the award is made. The value of
the share award at the grant date is charged to the group’s
consolidated income statement in the year to which the award relates.
The costs of LTIP and SAYE are based on the fair value of awards on
the date of grant. Fair values of share-based awards are determined
using the Black-Scholes pricing model, with the exception of fair
values for market-based performance conditions, which are
determined using Monte Carlo simulation. Both models take into
account the exercise price of the option, the current share price, the
risk-free interest rate, the expected volatility of the company’s share
price over the life of the option award and other relevant factors. For
non-market-based performance conditions, vesting conditions are
not taken into account when measuring fair value, but are reected by
adjusting the number of shares in each award such that the amount
recognised reects the number that are expected to, and then
actually do, vest. The fair value is expensed in the consolidated
income statement on a straight-line basis over the vesting period, with
a corresponding credit to the share-based payments reserve. At the
end of the vesting period, or upon exercise, lapse or forfeit if earlier,
this credit is transferred to retained earnings. Further information on
the group’s schemes is provided in note 26 and in the Directors’
Remuneration Report.
(v) Provisions and contingent liabilities
Provisions are recognised in respect of present obligations arising from
past events where it is probable that outows of resources will be
required to settle the obligations and they can be reliably estimated.
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The Notes
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Close Brothers Group plc
Annual Report 2022
Contingent liabilities are possible obligations whose existence depends
on the outcome of uncertain future events or those present obligations
where the outows of resources are uncertain or cannot be measured
reliably. Contingent liabilities are not recognised in the nancial
statements but are disclosed unless they are deemed remote.
(w) Taxes, including deferred taxes
Current tax is the expected tax payable on the taxable prot for the
year. Taxable prot differs from net prot as reported in the
consolidated income statement because it excludes items of income
and expense that are taxable or deductible in other years and items
that are never taxable or deductible. The group’s liability for current
tax is calculated using tax rates that have been enacted or
substantively enacted by the balance sheet date.
To enable the tax charge to be based on the prot for the year,
deferred tax is provided in full on temporary timing differences, at the
rates of tax expected to apply when these differences crystallise.
Deferred tax assets are recognised only to the extent that it is
probable that sufcient taxable prots will be available against which
temporary differences can be set. Deferred tax liabilities are offset
against deferred tax assets when there is both a legal right to set off
and an intention to settle on a net basis.
(x) Cash and cash equivalents
For the purposes of the cash ow statement, cash and cash
equivalents comprises cash and demand deposits with banks,
together with short-term highly liquid investments that are readily
convertible to known amounts of cash.
(y) Segmental reporting
Operating segments are reported in a manner consistent with the
internal reporting provided to the Executive Committee, which is
considered the group’s chief operating decision maker. All
transactions between business segments are conducted on an arm’s
length basis, with intra-segment revenue and costs being eliminated
on consolidation. Income and expenses directly associated with each
segment are included in determining business segment performance.
2. Critical Accounting Estimates and Judgements
The reported results of the group are sensitive to the accounting
policies, assumptions and estimates
that underlie the preparation of
its nancial statements. UK company law and IFRS require the
directors, in preparing the group’s nancial statements, to select
suitable accounting policies, apply them consistently and make
judgements, estimates and assumptions that are reasonable. The
group’s estimates and assumptions are based on historical
experience and reasonable expectations of future events and are
reviewed on an ongoing basis. There are no critical accounting
judgements or key sources of estimation uncertainty relating to the
company.
While the impact of climate change represents a source of
uncertainty, the group does not consider climate related risks to be a
critical accounting judgement or estimate.
Critical accounting judgements
In the application of the group’s accounting policies, which are
described in note 1, judgements that are considered by the board to
have the most signicant effect on the amounts in the nancial
statements are as follows.
Expected credit losses
At 31 July 2022 the group’s expected credit loss provision was
£285.6 million (31 July 2021: £280.4 million). The calculation of the
group’s expected credit loss provision under IFRS 9 requires the
group to make a number of judgements, assumptions and estimates.
The most signicant are set out below.
Signicant increase in credit risk
Assets are transferred from Stage 1 to Stage 2 when there has been a
signicant increase in credit risk since initial recognition. The
assessment, which requires judgement, is probability weighted and
uses historical, current and forward-looking information.
Typically, the group assesses whether a signicant increase in credit
risk has occurred based on a quantitative and qualitative assessment,
with a 30 days past due backstop. Due to the diverse nature of the
group’s lending businesses, the specic indicators of a signicant
increase in credit risk vary by business and may include some or all of
the following factors.
• Quantitative assessment: the lifetime PD has increased by more
than an agreed threshold relative to the equivalent at origination.
Thresholds are based on a xed number of risk grade movements
which are bespoke to the business to ensure that the increased
risk since origination is appropriately captured;
• Qualitative assessment: events or observed behaviour indicate
credit deterioration. This includes a wide range of information that is
reasonably available including individual credit assessments of the
nancial performance of borrowers as appropriate during routine
reviews, plus forbearance and watch list information; or
• Backstop criteria: the 30 days past due backstop is met.
Denition of default
The denition of default is an important building block for expected
credit loss models and is considered a key judgement. A default is
considered to have occurred if any unlikeliness to pay criteria is met or
when a nancial asset meets a 90 days past due backstop. While
some criteria are factual (e.g. administration, insolvency, or
bankruptcy), others require a judgmental assessment of whether the
borrower has nancial difculties which are expected to have a
detrimental impact on their ability to meet contractual obligations. A
change in the denition of default may have a material impact on the
expected credit loss provision.
Key sources of estimation uncertainty
At the balance sheet date, the directors consider that expected credit loss
provisions are a key source of estimation uncertainty which, depending on
a wide range of factors, could result in a material adjustment to the
carrying amounts of assets and liabilities in the next nancial year.
The accuracy of expected credit loss provisions can be impacted by
unpredictable effects or unanticipated changes to model estimates. In
addition, forecasting errors could also occur due to macroeconomic
scenarios or weightings differing from actual outcomes observed.
Regular model monitoring, validations and provision adequacy
reviews are key mechanisms to manage estimation uncertainty
across model estimates.
We continue to monitor and evaluate the impact of climate risk on our
expected credit loss provisions. As at 31 July 2022 we do not
consider climate risk to have a material impact on our credit losses.
Arepresentation of the core drivers of the macroeconomic scenarios
that are deployed in our models are outlined on page 164. In some
instances, our underlying business expected credit loss models use a
range of other macroeconomic metrics and assumptions which are
linked to the underlying characteristics of the business.
Model estimates
Across the Banking Division, expected credit loss provisions are
outputs of models which are based on a number of assumptions. The
assumptions applied involve judgement and as a result are regularly
assessed.
The two assumptions requiring the most signicant judgement relate
to case failure rates and recovery rates in Novitas.
Novitas provides funding via intermediaries to individuals who wish to
pursue legal cases. Over the course of this nancial year, experience
of credit performance has required the group to update a number of
assumptions in the calculation of the expected credit loss provision
for Novitas. A signicant portion of the expected credit loss provision
reported in Commercial relates to the Novitas loan book.
The majority of the Novitas portfolio, and therefore provision, relates
to civil litigation cases. To help protect customers in the event that
their case fails, a standard loan condition is that an individual
purchases an insurance policy which covers loan capital and varying
levels of interest. Across the portfolio there are insurance policies from
a number of well-rated insurers.
1. Signicant Accounting Policies
continued
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The key sources of estimation uncertainty for the portfolio’s expected
credit loss provision are case failure rates and recovery rates. Case
failure rates represent a forward-looking probability assessment of
successful case outcomes, where a claimant is awarded settlement
either prior to or following a court process, informed by actual case
failure rates, where a claim is unsuccessful and expected to be repaid
with proceeds from an insurance policy. Further, when a case fails or
is placed on hold it is immediately considered to be in Stage 2.
Recovery rates represent the level of interest and capital that is
covered by an insurance policy and expected to be recoverable once
a case fails. In addition, an assessment is also undertaken reecting
potential insurer insolvency risk with resultant expected credit losses
held for this. All uninsured cases and nancial assets which are due
for more than 90 days are classied as Stage 3.
Assumptions are informed by experience of credit performance, with
management judgement applied to reect expected outcomes and
uncertainties. In addition, the provision is informed by sensitivity
analysis to reect the level of uncertainty. More detailed credit
performance data continues to develop as the portfolio matures,
which over time will reduce the level of estimation uncertainty.
Based on this methodology, and using the latest information available,
there has been an uplift in the expected credit loss provision in
Novitas, reecting the latest assumptions on case failure and recovery
rates. Further details on provisions are included in note 11.
Given these assumptions represent sources of estimation uncertainty,
management has assessed and completed sensitivity analysis when
compared to the expected credit loss provision for Novitas of
£113.3million (31 July 2021: £89.3 million). At 31 July 2022, a 5%
absolute improvement in case failure rates would decrease the ECL
provision by £5.8 million (31 July 2021: £8.2 million), while a 5%
absolute deterioration would increase it by £4.7 million (31 July 2021:
£8.2 million). Separately, a 10% absolute deterioration or improvement
in recovery rates would increase or decrease the ECL provision by
£13.7million (31 July 2021: £8.4 million).
Forward-looking information
Determining expected credit losses under IFRS 9 requires the
incorporation of forward-looking macroeconomic information that is
reasonable, supportable and includes assumptions linked to
economic variables that impact losses in each portfolio. The
introduction of macroeconomic information introduces additional
volatility to provisions.
In order to calculate forward-looking provisions, economic scenarios
are sourced from Moody’s Analytics, which are then used to project
potential credit conditions for each portfolio. An overview of these
scenarios using key macroeconomic indicators is provided on
page165. Benchmarking to other economic providers is carried outto
provide management comfort on Moody’s Analytics scenariopaths.
Five different projected economic scenarios are currently considered
to cover a range of possible outcomes. These include a baseline
scenario, which reects the best view of future economic events. In
addition, one upside scenario and three downside scenario paths are
dened relative to the baseline. Management assigns the scenarios a
probability weighting to reect the likelihood of specic scenarios and
therefore loss outcomes materialising, using a combination of
quantitative analysis and expert judgement.
The impact of forward-looking information varies across the group’s
lending businesses because of the differing sensitivity of each
portfolio to specic macroeconomic variables. The modelled impact
of macroeconomic scenarios and their respective weightings is
reviewed by business experts in relation to stage allocation and
coverage ratios at the individual and portfolio level, incorporating
management’s experience and knowledge of customers, the sectors
in which they operate, and the assets nanced.
The Credit Risk Management Committee (“CRMC”) including the
group nance director and group chief risk ofcer meets monthly, to
review and, if appropriate, agree changes to the economic scenarios
and probability weightings assigned thereto. The decision is
subsequently noted at the Group Risk and Compliance Committee
(“GRCC”), which includes the aforementioned roles in addition to the
group chief executive ofcer.
Economic forecasts have evolved over the course of 2022. At 31 July
2021, the scenario weightings reected the continued economic
challenges and uncertainty associated with the pandemic, with 40%
allocated to the baseline scenario, 20% to the upside scenario and 40%
across the three downside scenarios. The level of economic uncertainty
associated with the pandemic reduced up to 31 January 2022 and 10%
weight was moved from the 3 downside scenarios to the upside
scenario. In the second half of 2022, 7.5% weight has moved from the
baseline scenario to the 3 downside scenarios, resulting in nal weights
that are considered consistent with the economic uncertainty at 31 July
2022, as follows: 30% strong upside, 32.5% baseline, 20% mild
downside, 10.5% moderate downside and 7% severe downside.
Scenario forecasts deployed in IFRS 9 macroeconomic models are
updated on a monthly basis. As at 31 July 2022, the latest baseline
scenario forecasts GDP growth of 3.4% in calendar year 2022 and an
average Base Rate of 1.1% across calendar year 2022. CPI is forecast
to be 10.7% in calendar year 2022 in the baseline scenario, with 17.1%
forecast in the protracted downside scenario over the same period.
Given the current economic uncertainty, we have undertaken further
analysis to assess the appropriateness of the ve scenarios used.
This included benchmarking these scenarios to consensus economic
views, as well as consideration of an additional forecast related to
stagation, which could be considered as an alternative downside
scenario. When compared to the three downside scenarios, the
stagation scenario included a smaller initial reduction in GDP,
coupled with higher interest rates and economic contraction over a
more sustained period. Given the short tenor of our credit portfolio,
using this forecast instead of the moderate or protracted downside
scenario would result in lower expected credit losses.
The nal scenarios deployed reect the UK economic outlook
deteriorating following Russia’s invasion of Ukraine and the resulting
increase in energy and food commodity prices, as well as the
exacerbation of global supply-chain disruptions after the pandemic.
The forecasts include a subdued rate of growth for the remainder of
the year. Under the baseline scenario, UK headline CPI ination
continues to increase in 2022 owing to higher energy, food and
manufactured goods prices. Higher wages and strong demand for
services continue to add to the price pressures, ensuring ination
remains well above the Bank of England target throughout 2022. To
prevent ination pressures becoming embedded in the economy, the
Bank of England continues to tighten monetary policy.
The forecasts represent an economic view as at 31 July 2022, after
which the economic uncertainty has continued. These trends,
including the risk of further interest rate rises, and their impact on
scenarios and weightings are subject to ongoing monitoring by
management.
The table on page 164 shows economic assumptions within each
scenario, and the weighting applied to each at 31 July 2022. The
metrics below are key UK economic indicators, chosen to describe
the economic scenarios. These are the main metrics used to set
scenario paths which then inuence a wide range of additional
metrics that are used in expected credit loss models. The rst tables
show the forecasts of the key metrics for the scenarios utilised for
calendar years 2022 and 2023. The subsequent tables show
averages and peak to trough ranges for the same key metrics over
the ve-year period from 2022 to 2026.
These periods have been included as they demonstrate the short,
medium and long-term outlook for the key macroeconomic indicators
which form the basis of the scenario forecasts. The portfolio has an
average residual maturity of 17 months, with c.98% of loan value
having a maturity of ve years or less.
Book 1.indb 163 27/09/2022 23:48:42
The Notes
continued
164
Close Brothers Group plc
Annual Report 2022
Baseline
Upside (strong)
Downside (mild)
Downside (moderate)
Downside (protracted)
2022 2023 2022 2023 2022 2023 2022 2023 2022 2023
At 31 July 2022
UK GDP Growth 3.4% 0.8% 4.1% 2.9% 2.7% (1.8%) 2.4% (4.4%) 2.1% (5.9%)
UK Unemployment 3.8% 4.1% 3.6% 3.6% 4.0% 4.6% 4.1% 6.2% 4.2% 7.4%
UK HPI Growth 4.3% 2.6% 10.9% 12.7% 1.1% (3.1%) (0.5%) (9.1%) (2.4%) (15.9%)
BoE Base Rate 1.1% 1.8% 1.1% 1.7% 1.3% 1.0% 1.4% 1.1% 1.5% 1.2%
Consumer Price Index 10.7% 2.8% 10.3% 2.8% 12.3% 0.4% 14.2% 0.2% 17.1% (2.2%)
Weighting 32.5% 30% 20% 10.5% 7%
Baseline
Upside (strong)
Downside (mild)
Downside (moderate)
Downside (protracted)
2021 2022 2021 2022 2021 2022 2021 2022 2021 2022
At 31 July 2021
UK GDP Growth
1
6.1% 6.3% 7.3% 8.7% 5.2% 4.0% 4.5% 2.0% 4.1% 0.8%
UK Unemployment 5.6% 6.3% 5.5% 5.4% 5.8% 7.3% 5.8% 8.0% 5.9% 8.9%
UK HPI Growth
1
(1.4%) 3.1% 3.8% 10.2% (2.5%) (1.6%) (5.3%) (9.0%) (8.2%) (14.2%)
BoE Base Rate 0.1% 0.2% 0.1% 0.3% 0.1% 0.1% 0.1% 0.1% 0.0% (0.1%)
Consumer Price Index 2.7% 2.9% 2.8% 3.0% 2.6% 1.1% 2.5% 0.0% 2.4% (0.5%)
Weighting 40% 20% 15% 15% 10%
Notes:
UK GDP Growth: National Accounts Annual Real Gross Domestic Product, Seasonally Adjusted - YoY change (%)
UK Unemployment: ONS Labour Force Survey, Seasonally Adjusted - Average (%)
UK HPI Growth: Average nominal house price, Land Registry, Seasonally Adjusted - Q4 to Q4 change (%)
BoE Base Rate: Bank of England Base Rate - Average (%)
Consumer Price Index: ONS, EU Harmonised, Annual Ination - Q4 to Q4 change (%).
Five-year average (calendar year 2022 – 2026)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
At 31 July 2022
UK GDP Grow th 1.2% 1.7% 0.8% 0.2% (0.1%)
UK Unemployment 4.4% 3.8% 4.6% 6.4% 7.2%
UK HPI Growth 0.1% 1.8% (1.3%) (2.5%) (4.6%)
BoE Base Rate 2.0% 2.0% 1.5% 0.9% 0.6%
Consumer Price Index 3.8% 3.8% 3.7% 3.6% 3.4%
Weighting 32.5% 30% 20% 10.5% 7%
Five-year average (calendar year 2021 – 2025)
Baseline Upside (strong) Downside (mild) Do
wnside (moderate) Downside (protracted)
At 31 July 2021
UK GDP Growth
1
3.2% 3.6% 3.0% 2.8% 2.4%
UK Unemployment 5.5% 4.8% 6.3% 7.1% 7.7%
UK HPI Growth
1
1.6% 3.0% 0.8% (1.2%) (2.6%)
BoE Base Rate 0.6% 0.8% 0.2% 0.1% 0.0%
Consumer Price Index 2.6% 3.2% 1.9% 1.3% 0.8%
Weighting 40% 20% 15% 15% 10%
Notes:
UK GDP Growth: National Accounts Annual Real Gross Domestic Product, Seasonally Adjusted - CAGR (%)
UK Unemployment: ONS Labour Force Survey, Seasonally Adjusted - Average (%)
UK HPI Growth: Average nominal house price, Land Registry, Seasonally Adjusted - CAGR (%)
BoE Base Rate: Bank of England Base Rate - Average (%)
Consumer Price Index: ONS, EU Harmonised, Annual Ination - CAGR (%)
FY22 and FY21 scenario forecasts and weights
2. Critical Accounting Estimates and Judgements
continued
Book 1.indb 164 27/09/2022 23:48:42
Governance Report
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Financial Statements
165
Close Brothers Group plc
Annual Report 2022
The tables below provide a summary for the ve-year period (calendar year 2022 – 2026) of the peak to trough range of values of
the key UK
economic variables used within the economic scenarios at 31 July 2022 and 31 July 2021:
Five-year period (calendar year 2022-2026)
Baseline
Upside (strong)
Downside (mild)
Downside (moderate)
Downside (protracted)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
At 31 July 2022
UK GDP Growth 6.3% 0.4% 9.0% 0.4% 4.1% (2.6%) 1.0% (5.1%) 0.8% (6.9%)
UK Unemployment 4.8% 3.7% 4.2% 3.5% 4.8% 3.7% 7.4% 3.7% 8.4% 3.7%
UK HPI Growth 2.0% (5.0%) 16.7% (1.1%) 2.0% (11.7%) 2.0% (17.9%) 2.0% (26.0%)
BoE Base Rate 2.5% 0.5% 2.5% 0.5% 2.5% 0.1% 2.4% 0.1% 2.6% 0.1%
Consumer Price Index 10.7% 2.0% 10.3% 2.0% 12.3% 0.4% 14.2% 0.1% 17.1% (2.2%)
Weighting 32.5% 30% 20% 10.5% 7%
Five-year period (calendar year 2021-2025)
Baseline
Upside (strong)
Downside (mild)
Downside (moderate)
Downside (protracted)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
At 31 July 2021
UK GDP Growth
1
17.0% (1.6%) 19.4% (1.6%) 15.7% (1.6%) 14.7% (1.6%) 12.4% (1.6%)
UK Unemployment
1
6.6% 4.8% 6.3% 4.2% 7.5% 4.8% 8.2% 4.8% 9.1% 4.8%
UK HPI Growth
1
8.0% (4.1%) 15.7% 0.5% 4.1% ( 6. 9%) 1. 9% (15. 3%) 1.9% (2 2.1%)
BoE Base Rate
1
1.6% 0.1% 1.9% 0.1% 0.5% 0.1% 0.1% 0.1% 0.1% (0.1%)
Consumer Price Index 3.2% 0.6% 3.9% 0.6% 2.6% 0.6% 2.5% 0.0% 2.4% (0.9%)
Weighting 40% 20% 15% 15% 10%
Notes:
UK GDP Growth: Maximum and minimum quarterly GDP as a percentage change from start of period (%)
UK Unemployment: Maximum and minimum unemployment rate (%)
UK HPI Growth: Maximum and minimum average nominal house price as a percentage change from start of period (%)
BoE Base Rate: Maximum and minimum BoE base rate (%)
Consumer Price Index Ination: Maximum and minimum over the 5-year period (%)
1 Note that the presentation of the macroeconomic outlook above has been amended from the FY21 ARA, with the FY22 gures presen
ted on the same basis. This has been undertaken
to enhance presentation to the users of the nancial statements
by ensuring the macroeconomic variables are displayed in line w
ith common practice. This amendment has no impact
on ECL. These changes impact the way GDP and HPI are presented for the annual forecast, the ve-year forecast and the peak to t
rough values. The annual forecast was previously
presented as the average of the growth in each of the last four quarters and is now presented as the growth in the calendar year. The ve-year forecast is now presented as the
compound annual growth rate instead of the average annual growth rate used previously. Lastly, the presentation of the peak to
trough values now uses the start of the macroeconomic
forecast as a reference point, rather than peaks and troughs in annual growth rates over the period. In addition, we have also
made a presentational change for unemployment and base
rate peaks and troughs from the FY21 ARA, which are now based on quarterly forecasts over calendar years 2021-2025, rather than
monthly forecasts over nancial years 2021-2025.
The expected credit loss provision is sensitive to judgement and estimations made with regard to the selection and weighting of
multiple
economic scenarios. As a result, management has assessed and considered the sensitivity of the provision as follows:
• For the majority of our portfolios, the modelled expected credit loss provision has been recalculated under the upside strong
and downside
protracted scenarios described above, applying a 100% weighting to each scenario in turn. The change in provision requirement i
s driven by
the movement in risk metrics under each scenario and resulting impact on stage allocation.
• Expected credit losses based on a simplied approach, which do not utilise a macroeconomic model and require expert judgement
, are
excluded from the sensitivity analysis.
In addition to the above, key considerations for the sensitivity analysis are set out below, by segment:
• In Commercial, the sensitivity analysis excludes Novitas, which is subject to a separate approach, as it is deemed more sensi
tive to credit
factors than macroeconomic factors.
• In Retail:
– The sensitivity analysis excludes expected credit loss provisions on loans and advances to customers in Stage 3, because the
measurement
of expected credit losses is considered more sensitive to credit factors specic to the borrower than macroeconomic scenarios.
– For some loans, a specic sensitivity approach has been adopted to assess short tenor loans’ response to modelled economic fo
recasts.
For these short-tenor loans, PD has been extrapolated from emerging default rates and then proportionally scaled to reect a sh
arp
recovery in the upside scenario and a slower recovery in a downside scenario.
• In Property, the sensitivity analysis excludes individually assessed provisions, and certain sub portfolios which are deemed
more sensitive to
credit factors than the macroeconomic scenarios.
Based on the above analysis, at 31 July 2022, application of 100% weighting to the upside strong scenario would decrease the ex
pected credit
loss by £15.4 million whilst application to the downside protracted scenario would increase the expected credit loss by £31.8 m
illion driven by
the aforementioned changes in risk metrics and stage allocation of the portfolios.
When performing sensitivity analysis there is a high degree of estimation uncertainty. On this basis, 100% weighted expected cr
edit loss
provisions presented for the upside and downside scenarios should not be taken to represent the lower or upper range of possibl
e and actual
expected credit loss outcomes. The recalculated expected credit loss provision for each of the scenarios should be read in the
context of the
sensitivity analysis as a whole and in conjunction with the narrative disclosures provided in note 11. The modelled impact pres
ented is based on
gross loans and advances to customers at 31 July 2022; it does not incorporate future changes relating to performance, growth o
r credit risk.
In addition, given the change in the macroeconomic conditions, underlying modelled provisions and methodology, and rened appro
ach to
adjustments, comparison between the sensitivity results at 31 July 2022 and 31 July 2021 is not appropriate.
The economic environment remains uncertain and future impairment charges may be subject to further volatility, including from c
hanges to
macroeconomic variable forecasts impacted by geopolitical tensions and rising ination.
Book 1.indb 165 27/09/2022 23:48:43
The Notes
continued
166
Close Brothers Group plc
Annual Report 2022
Banking
Asset
Management
£ million
Commercial
£ million
Retail
£ million
Property
£ million
Securities
£ million
Group
£ million
Total
£ million
Summary income statement
for the year ended 31 July 2022
Net interest income/(expense)
257.1 210.8 112.1 (0.7) (1.1) (0.2) 578.0
Non-interest income
86.3 26.2 0.6 148.7 96.3 – 358.1
Operating income/(expense)
343.4 237.0 112.7 148.0 95.2 (0.2) 936.1
Administrative expenses
(158.3) (131.3) (27.0) (120.7) (77.2) (25.8) (540.3)
Depreciation and amortisation
(21.7) (20.3) (4.0) (5.6) (3.9) (2.2) (57.7)
Impairment losses on nancial assets
(72.4) (24.4) (6.5) – – – (103.3)
Total operating expenses before amortisation and
impairment of intangible
assets on acquisition,
goodwill impairment and exceptional item
(252.4) (176.0) (37.5) (126.3) (81.1) (28.0) (701.3)
Adjusted operating prot/(loss)
1
91.0 61.0 75.2 21.7 14.1 (28.2) 234.8
Amortisation and impairment of intangible assets
on acquisition
(0.1) – – (1.9) – – (2.0)
Goodwill impairment
––– ––––
Exceptional item: HMRC VAT refund
––– ––––
Operating
prot/(loss) before tax 90.9 61.0 75.2 19.8 14.1 (28.2) 232.8
External operating income/(expense)
391.7 268.3 129.4 148.1 95.2 (96.6) 936.1
Inter segment operating (expense)/income
(48.3) (31.3) (16.7) (0.1) – 96.4 –
Segment operating income/(expense)
343.4 237.0 112.7 148.0 95.2 (0.2) 936.1
1 Adjusted operating prot/(loss) is stated before amortisation
and impairment of intangible asse
ts on acquisition, goodwill im
pairment, exceptional item and tax.
The Commercial operating segment above includes the group’s Novitas business. Novitas ceased lending to new customers in July 2
021
following a strategic review. In the year ended 31 July 2022, Novitas recorded impairment losses of £60.7 million (2021: £73.2
million).
Banking
Asset
Management
£ million
Commercial
£ million
Retail
£ million
Property
£ million
Securities
£ million
Group
2
£ million
Total
£ million
Summary balance sheet information
at 31 July 2022
Total assets
1
4,561.4 3,064.0 1,473.5 172.8 972.3 2,434.3 12,678.3
Total liabilities
– – – 70.5 880.6 10,069.7 11,020.8
1 Total assets for the Banking operating segments comprise the
loan book and operating lease assets only. The Commercial operat
ing segment includes the net loan book of Novitas
of £159.4 million.
2 Balance sheet includes £2,425.0 million assets and £10,181.9 mi
llion liabilities attributable to the Banking division primari
ly comprising the treasury balances described in the second
paragraph of this note.
Equity is allocated across the group as set out below. Banking division equity, which is managed as a whole rather than on a se
gmental
basis, reects loan book and operating lease assets of £9,098.9 million, in addition to assets and liabilities of £2,425.0 mill
ion and
£10,181.9million respectively primarily comprising treasury balances which are included within the Group column above.
Banking
£ million
Asset
Management
£ million
Securities
£ million
Group
£ million
Total
£ million
Equity
1,342.0 102.3 91.7 121.5 1,657.5
3. Segmental Analysis
The directors manage the group by class of business and present the segmental analysis on that basis. The group’s activities ar
e presented in
ve (2021: ve) operating segments: Commercial, Retail, Property, Asset Management and Securities.
In the segmental reporting information that follows, Group consists of central functions as well as various non-trading head of
ce companies
and consolidation adjustments and is presented in order that the information presented reconciles to the consolidated income st
atement. The
Group balance sheet primarily includes treasury assets and liabilities comprising cash and balances at central banks, debt secu
rities, customer
deposits and other borrowings.
Divisions continue to charge market prices for the limited services rendered to other parts of the group. Funding charges betwe
en segments
take into account commercial demands. More than 90% of the group’s activities, revenue and assets are located in the UK.
Book 1.indb 166 27/09/2022 23:48:43
Governance Report
Strategic Report
Financial Statements
167
Close Brothers Group plc
Annual Report 2022
Banking
Securities
Commercial Retail Property
Asset
Management Group Total
Other segmental information
for the year ended 31 July 2022
Employees (average number)
1
1,348 1,153 190 722 318 79 3,810
1 Banking segments are inclusive of a central function headcount allocation.
Banking
Asset
Management
£ million
Commercial
£ million
Retail
£ million
Property
£ million
Securities
£ million
Group
£ million
Total
£ million
Summary income statement
for the year ended 31 July 2021
Net interest income/(expense) 218.1 198.8 122.6 (0.1) (1.4) (0.5) 537.5
Non-interest income 70.8 21.0 0.4 139.5 183.4 – 415.1
Operating income/(expense) 288.9 219.8 123.0 139.4 182.0 (0.5) 952.6
Ad m ini str at ive ex pens e s (139.1) (118.6) (29.1) (110.8 ) (118.1) (24.1) (5 39.8 )
Depreciation and amortisation (19.1) (19.4) (3.8) (5.1) (3.1) (1.8) (52.3)
Impairment (losses)/gains on nancial assets (77.9) (9.9) (2.3) 0.2 0.1 – (89.8)
Total operating expenses before amortisation and
impairment of intangible
assets on acquisition,
goodwill impairment and exceptional item (236.1) (147.9) (35.2) (115.7) (121.1) (25.9) (681.9)
Adjusted operating prot/(loss)
1
52.8 71.9 87.8 23.7 60.9 (26.4) 270.7
Amortisation and impairment of intangible assets
on acquisition (12.2) (0.7) – (1.3) – – (14.2)
Goodwill impairment (12.1)–– –––(12.1)
Exceptional item: HMRC VAT refund 7.4 12.3 – – – 1.1 20.8
Operating
prot/(loss) before tax
35.9 83.5 87.8 22.4 60.9 (25.3) 265.2
External operating income/(expense) 343.1 258.7 142.3 139.4 182.0 (112.9) 952.6
Inter segment operating (expense)/income (54.2) (38.9) (19.3) – – 112.4 –
Segment operating income/(expense) 288.9 219.8 123.0 139.4 182.0 (0.5) 952.6
1 Adjusted operating prot/(loss) is stated before amortisation
and impairment of intangible asse
ts on acquisition, goodwill im
pairment, exceptional item and tax.
Banking
Asset
Management
£ million
Commercial
£ million
Retail
£ million
Property
£ million
Securities
£ million
Group
2
£ million
Total
£ million
Summary balance sheet information at 31 July 2021
Total assets
1
4,191.0 2,974.3 1,502.1 139.7 897.9 2,329.5 12,034.5
Total liabilities – – – 78.1 806.5 9,580.6 10,465.2
1 Total assets for the Banking operating segments comprise the
loan book and operating lease assets only. The Commercial operat
ing segment includes the net loan book of Novitas
of £181.5 million.
2 Balance sheet includes £2,299.0 million assets and £9,677.8 mi
llion liabilities attributable to the Banking division primaril
y comprising the treasury balances described in the second
paragraph of this note.
Equity is allocated across the group as set out below. Banking division equity, which is managed as a whole rather than on a se
gmental
basis, reects loan book and operating lease assets of £8,667.4 million, in addition to assets and liabilities of £2,299.0 mill
ion and
£9,677.8million respectively primarily comprising treasury balances which are included within the Group column above.
Banking
£ million
Asset
Management
£ million
Securities
£ million
Group
£ million
Total
£ million
Equity
1,288.6 61.6 91.4 127.7 1,569.3
Banking
Securities
Commercial Retail Property
Asset
Management Group Total
Other segmental information
for the year ended 31July 2021
Employees (average number)
1
1,276 1,163 187 706 300 77 3,709
1 Banking segments are inclusive of a central function headcount allocation.
Book 1.indb 167 27/09/2022 23:48:43
168
Close Brothers Group plc
Annual Report 2022
The Notes
continued
4. Operating Prot before Tax
2022
£ million
2021
£ million
Interest income
1
Cash and balances at central banks
5.9
1.6
Loans and advances to banks
0.3
–
Loans and advances to customers
680.4
652.9
Other interest income
3.4
2.3
690.0
656.8
Interest expense
Deposits by banks
(0.1)
–
Deposits by customers
(64.1)
(66.3)
Borrowings
(33.2)
(38.7)
Other interest expense
(14.6)
(14.3)
(112.0)
(119.3)
Net interest income
578.0
537.5
1 Interest income calculated using the effective interest method.
2022
£ million
2021
£ million
Fee and commission income
Banking
98.1
88.2
Asset Management
148.8
141.2
Securities
12.6
16.7
259.5
246.1
Fee and commission expense
(17.2)
(16.1)
Net fee and commission income
242.3
230.0
Fee income and expense (other than amounts calculated using the effective interest rate method) on nancial instruments that ar
e not at fair
value through prot or loss were £98.1 million (2021: £88.2 million) and £14.7 million (2021: £13.5 million) respectively.
Fee income and expense arising from trust and other duciary activities amounted to £148.8 million (2021: £141.2 million) and £
1.8million (2021:
£1.9 million) respectively.
2022
£ million
2021
£ million
Other income
Operating lease assets rental income
85.4
75.4
Other
20.7
14.0
106.1
89.4
2022
£ million
2021
£ million
Administrative expenses
Staff costs:
Wages and salaries
283.9
297.0
Social security costs
38.8
44.7
Share-based awards
4.9
5.7
Pension costs
16.9
15.8
344.5
363.2
Depreciation and amortisation
57.7
52.3
Other administrative expenses
195.8
176.6
598.0
592.1
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Close Brothers Group plc
Annual Report 2022
5. Information Regarding the Auditor
2022
1
£ million
2021
£ million
Fees payable
Audit of the company’s annual accounts
0.6
0.4
Audit of the company’s subsidiaries pursuant to legislation
2.3
2.2
Audit related services
0.5
0.5
Other services
0.3
0.2
3.7
3.3
1 During the year, an additional audit fee of £0.2 million was paid to the auditors in relation to scope changes in the 2021 au
dit, which is not included above.
The auditor of the group was PricewaterhouseCoopers LLP (2021: PricewaterhouseCoopers LLP).
6. Exceptional Item
In the prior year ended 31 July 2021, the group recorded an exceptional gain of £20.8 million, reecting a VAT refund from HMRC
in relation to
hire purchase agreements in the Motor Finance and Asset Finance businesses. This followed HMRC’s policy in Revenue and Customs
Brief 8
(2020) published in June 2020. The Brief advised businesses who supply goods by way of hire purchase agreements of HMRC’s sugge
sted
method for apportionment of VAT incurred on overheads (and so the reclaimable portion of such VAT). This followed the Court of
Justice of the
European Union’s judgement regarding Volkswagen Financial Services (UK) Ltd.
The group submitted refund claims in respect of the period from 2009 to 2020. HMRC agreed the claims and repayment was made to
the
group in June 2021. In line with the group’s accounting policy set out in Note 1, this was presented as an exceptional item as
it was material by
size and nature and non-recurring.
7. Taxation
2022
£ million
2021
£ million
Tax charged/(credited) to the income statement
Current tax:
UK corporation tax
53.7
75.1
Foreign tax
1.9
1.5
Adjustments in respect of previous years
(2.8)
(3.4)
52.8
73.2
Deferred tax:
Deferred tax charge/(credit) for the current year
11.8
(13.6)
Adjustments in respect of previous years
3.0
3.5
67.6
63.1
Tax on items not charged/(credited) to the income statement
Deferred tax relating to:
Cash ow hedging
8.6
2.0
Dened benet pension scheme
(0.3)
0.6
Financial instruments class
ied as fair value through other comprehensive income
(0.4)
0.3
Share-based payments
1.1
(1.4)
Currency translation losses
(0.3)
(1.1)
Acquisitions
–
1.0
8.7
1.4
Reconciliation to tax expense
UK corporation tax for the year at 19.0% (2021: 19.0%) on operating prot before tax
44.2
50.4
Effect of different tax rates in other jurisdictions
(0.3)
(0.3)
Disallowable items and other permanent differences
0.9
2.9
Banking surcharge
14.9
19.8
Deferred tax impact of decreased/(increased) tax rates
7.7
(9.8)
Prior year tax provision
0.2
0.1
67.6
63.1
Book 1.indb 169 27/09/2022 23:48:43
170
Close Brothers Group plc
Annual Report 2022
The Notes
continued
The standard UK corporation tax rate for the nancial year is 19.0% (2021: 19.0%). However, an additional 8% surcharge applies
to banking
company prots as dened in legislation. The effective tax rate of 29.0% (2021: 23.8%) is above the UK corporation tax rate pri
marily due to the
surcharge applying to most of the group’s prots and to a write-down in deferred tax assets reecting a reduction in the bankin
g surcharge
applying from April 2023 from 8% to 3% passed into law in the year.
On 23September 2022, the Chancellor of the Exchequer announced as part of his Growth Plan that the corporation tax rate increa
se from 19%
to 25% from April 2023 will be cancelled, and that the banking surcharge rate will remain at 8%. The relevant legislation is ex
pected to be
enacted in the year ending 31 July 2023 and is a non-adjusting post balance sheet event. Had this change been enacted before 31
July 2022,
the group’s deferred tax asset balance at 31July 2022 would have decreased by approximately £1.5 million, with a corresponding
tax charge
recognised in the income statement, net of a smaller credit to other comprehensive income.
Movements in deferred tax assets and liabilities were as follows:
Capital
allowances
Pension
scheme
Share-based
payments
and deferred
compensation
Impairment
losses
Cash ow
hedging
Intangible
assets Other Total
£ million £ million £ million £ million £ million £ million £ million £ million
Group
At 1 August 2020 31.5 (1.7) 8.9 9.5 2.1 (3.2) 0.2 47.3
Credit/(charge) to the income statement 3.5 0.1 5.2 (0.7) – 2.5 (0.5) 10.1
Credit/(charge) to other comprehensive income 1.1 (0.6) – – (2.0) – (0.3) (1.8)
Credit to equity – – 1.4
––––1.4
Acquisitions – – – – – (1.0) – (1.0)
At 31 July 2021 36.1 (2.2) 15.5 8.8 0.1 (1.7) (0.6) 56.0
(Charge)/credit to the income statement (10.9) – (1.5) (3.0) – 0.4 0.2 (14.8)
Credit/(charge) to other comprehensive income 0.3 0.3 – – (8.6) – 0.4 (7.6)
Charge to equity – – (1.1)
––––(1.1)
Acquisitions –– ––––– –
At 31 July 2022 25.5 (1.9) 12.9 5.8 (8.5) (1.3) – 32.5
Capital
allowances
Pension
scheme
Share-based
payments
and deferred
compensation Total
£ million £ million £ million £ million
Company
At 1 August 2020
– (1.7) 1.8 0.1
(Charge)/credit to the income statement (0.6) 0.1 0.2 (0.3)
Charge to other comprehensive income – (0.6) – (0.6)
At 31 July 2021
(0.6) (2.2) 2.0 (0.8)
Credit/(charge) to the income statement 0.3 – – 0.3
Credit to other comprehensive income – 0.3 – 0.3
At 31 July 2022
(0.3) (1.9) 2.0 (0.2)
As the group has been and is expected to continue to be consistently protable, the full deferred tax assets have been recognis
ed.
7. Taxation
continued
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Close Brothers Group plc
Annual Report 2022
8. Earnings per Share
The calculation of basic earnings per share is based on the prot attributable to shareholders and the number of basic weighted
average
shares. When calculating the diluted earnings per share, the weighted average number of shares in issue is adjusted for the eff
ects of all dilutive
share options and awards.
2022
2021
Basic
110.4p
134.8p
Diluted
109.9p
133.6p
Adjusted basic
1
111.5p
140.4p
Adjusted diluted
1
111.0p
139.1p
1 Excludes amortisation and impairment of intangible assets on
acquisition, goodwill impairment, exceptional item and their tax
effects.
2022
£ million
2021
£ million
Prot attributable to shareholders
165.2
202.1
Adjustments:
Amortisation of intangible assets on acquisition
2.0
14.2
Goodwill impairment
–
12.1
Exceptional item: HMRC VAT refund
–
(20.8)
Tax effect of adjustments and exceptional item
(0.4)
2.9
Adjusted prot attributable to shareholders 166.8
210.5
2022
million
2021
million
Average number of shares
Basic weighted
149.6
149.9
Effect of dilutive share options and awards
0.7
1.4
Diluted weighted
150.3
151.3
9. Dividends
2022
£ million
2021
£ million
For each ordinary share
Final dividend for previous nancial year paid in November 2021: 42.0p (November 2020: 40.0p)
62.7
59.8
Interim dividend for current nancial year paid in April 2022: 22.0p (April 2021: 18.0p)
32.8
26.8
95.5
86.6
A nal dividend relating to the year ended 31 July 2022 of 44.0p, amounting to an estimated £65.6 million, is proposed. This n
al dividend,
which is due to be paid on 22 November 2022 to shareholders on the register at 14 October 2022, is not reected in these nanci
al statements.
10. Loans and Advances to Banks
On demand
£ million
Within three
months
£ million
Between
three months
and one year
£ million
Between
one and
two years
£ million
Between
two and
ve years
£ million
Total
£ million
At 31 July 2022 147.0 1.9 10.0 2.4 4.1 165.4
At 31 July 2021 121.9 1.0 2.2 10.5 0.7 136.3
Book 1.indb 171 27/09/2022 23:48:44
172
Close Brothers Group plc
Annual Report 2022
The Notes
continued
11. Loans and Advances to Customers
(a) Maturity analysis of loans and advances to customers
The following table sets out a maturity analysis of loans and advances to customers. At 31 July 2022 loans and advances to cust
omers with a
maturity of two years or less was £6,733.0 million (31 July 2021: £6,326.6 million) representing 73.6% (31 July 2021: 72.5%) of
total gross loans
and advances to customers:
On demand
£ million
Within three
months
£ million
Between
three months
and one year
£ million
Between
one and
two years
£ million
Between
two and
ve years
£ million
After
more than
veyears
£ million
Total gross
loans and
advances to
customers
£ million
Impairment
provisions
£ million
Total net
loans and
advances to
customers
£ million
At 31 July 2022 141.3 2,354.2 2,369.0 1,868.5 2,235.0 176.5 9,144.5 (285.6) 8,858.9
At 31 July 2021 71.8 2,276.6 2,289.1 1,689.1 2,242.8 155.5 8,724.9 (280.4) 8,444.5
(b) Loans and advances to customers and impairment provisions by stage
Gross loans and advances to customers by stage and the corresponding impairment provisions and provision coverage ratios are se
t out
below:
Stage 2
Total
£ million
Stage 1
£ million
Less than 30
days past
due
£ million
Greater than
or equal to
30 days past
due
£ million
Total
£ million
Stage 3
£ million
At 31 July 2022
Gross loans and advances to customers
Commercial
3,433.1 778.8 119.4 898.2 169.1 4,500.4
Of which: Novitas 101.3 2.2 93.8 96.0 75.4 272.7
Retail
2,937.6 121.4 9.4 130.8 65.5 3,133.9
Property
1,256.3 83.8 46.1 129.9 124.0 1,510.2
7,627.0 984.0 174.9 1,158.9 358.6 9,144.5
Impairment provisions
Commercial
25.6 14.3 52.0 66.3 87.1 179.0
Of which: Novitas 8.8 1.0 49.5 50.5 54.0 113.3
Retail
22.1 4.9 1.7 6.6 41.2 69.9
Property
2.6 4.2 1.2 5.4 28.7 36.7
50.3 23.4 54.9 78.3 157.0 285.6
Provision coverage ratio
Commercial
0.7% 1.8% 43.6% 7.4% 51.5% 4.0%
Of which: Novitas 8.7% 45.5% 52.8% 52.6% 71.6% 41.5%
Retail
0.8% 4.0% 18.1% 5.0% 62.9% 2.2%
Property
0.2% 5.0% 2.6% 4.2% 23.1% 2.4%
0.7% 2.4% 31.4% 6.8% 43.8% 3.1%
Book 1.indb 172 27/09/2022 23:48:44
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173
Close Brothers Group plc
Annual Report 2022
Stage 2
Total
£ million
Stage 1
£ million
Less than
30 days past
due
£ million
Greater than
or equal to
30 days past
due
£ million
Total
£ million
Stage 3
£ million
At 31 July 2021
Gross loans and advances to customers
Commercial 3,417.2 549.4 74.0 623.4 99.9 4,140.5
Of which: Novitas 185.8 3.6 55.8 59.4 25.6 270.8
Retail 2,817.0 175.3 6.4 181.7 43.2 3,041.9
Property 1,200.1 100.5 54.6 155.1 187.3 1,542.5
7,434.3 825.2 135.0 960.2 330.4 8,724.9
Impairment provisions
Commercial 55.6 30.3 33.6 63.9 52.9 172.4
Of which: Novitas 31.4 2.1 30.6 32.7 25.2 89.3
Retail 22.1 13.3 1.9 15.2 30.3 67.6
Property 2.3 5.0 0.1 5.1 33.0 40.4
80.0 48.6 35.6 84.2 116.2 280.4
Provision coverage ratio
Commercial 1.6% 5.5% 45.4% 10.3% 53.0% 4.2%
Of which: Novitas 16.9% 58.3% 54.8% 55.1% 98.4% 33.0%
Retail 0.8% 7.6% 29.7% 8.4% 70.1% 2.2%
Property 0.2% 5.0% 0.2% 3.3% 17.6% 2.6%
1.1% 5.9% 26.4% 8.8% 35.2% 3.2%
Stage allocation of loans and advances to customers has been applied in line with the denitions set out on page 159.
During the year the staging prole of loans and advances to customers has remained broadly stable. At 31 July 2022, 83.4% (31 J
uly 2021: 85.2%)
of gross loans and advances to customers were Stage 1. Stage 2 loans and advances to customers increased slightly to 12.7% (31
July 2021:
11.0%) as falling Covid-19 forborne exposure has been more than offset by migrations into Stage 2 associated with a signicant
increase in credit
risk. The remaining 3.9% (31 July 2021: 3.8%) of loans and advances to customers was deemed to be credit impaired and classied
as Stage 3.
Overall impairment provisions increased to £285.6 million (31 July 2021: £280.4 million), following regular reviews of staging
and provision
coverage for individual loans and portfolios. The movement in impairment provisions is driven by Novitas, which reects the cas
e failure and
recovery rate assumptions used. The increase was partially offset by reducing impairment provisions across the remainder of the
Bank,
following a reduction in adjustments driven by the encouraging performance of our forborne book.
As a result, there has been a marginal decrease in provision coverage to 3.1% (31 July 2021: 3.2%).
Provision Coverage Analysis by Business
In Commercial, the impairment coverage ratio decreased to 4.0% (31 July 2021: 4.2%) reecting strong new business volumes and p
ositive
performance of the Covid-19 forborne loan book. Excluding Novitas, the Commercial impairment coverage ratio decreased to 1.6% (
31 July
2021: 2.1%) following the release of Covid-19 related adjustments. The signicant increase in credit provisions against the Nov
itas loan book
reects the latest assumptions on case failure and recovery rates.
In Retail, the impairment coverage ratio was unchanged at 2.2% (31 July 2021: 2.2%) reecting the performance of the forborne l
oan book and
strong new business volumes.
In Property the impairment coverage ratio reduced to 2.4% (31 July 2021: 2.6%) reecting the write off of a well provided indiv
idually assessed
case, partially offset by deteriorating macroeconomic forecasts.
(c) Adjustments
By their nature, limitations in the group’s expected credit loss models or input data may be identied through ongoing model mo
nitoring and
validation of models. In certain circumstances, management make appropriate adjustments to model-calculated expected credit los
ses. These
adjustments are based on management judgements or quantitative back-testing to ensure expected credit loss provisions adequatel
y reect all
known information. These adjustments are generally determined by considering the attributes or risks of a nancial asset which
are not captured by
existing expected credit loss model outputs. Management adjustments are actively monitored, reviewed, and incorporated into fut
ure model
developments where applicable.
As the UK economy has emerged from pandemic related restrictions, and the government support measures being unwound, the use of
adjustments has also evolved. In particular, previous adjustments to reect the guarantee under government lending schemes have
now been
incorporated into modelled LGD estimates. The remaining adjustments reect the application of expert management judgement to in
corporate
management’s experience and knowledge of customers, the sectors in which they operate, and the assets nanced.
Book 1.indb 173 27/09/2022 23:48:44
174
Close Brothers Group plc
Annual Report 2022
The Notes
continued
We will continue to monitor the need for adjustments as new information emerges which might not be recognised in our existing m
odels.
At 31 July 2022, £(2.8) million of the expected credit loss provision was attributable to adjustments (31 July 2021: £38.9 mill
ion). The reduction in this
value is driven by incorporation of a number of adjustments into model calculations, as well as the lower volume of Covid-19 fo
rborne exposures
and reduced macroeconomic uncertainty related to the pandemic. The remaining value is driven by a small number of adjustments p
rimarily made
to ensure models are reective of economic conditions.
(d) Reconciliation of loans and advances to customers and impairment provisions
Reconciliations of gross loans and advances to customers and associated impairment provisions are set out below.
New nancial assets originate in Stage 1 only, and the amount presented represents the value at origination.
Subsequently, a loan may transfer between stages, and the presentation of such transfers is based on a comparison of the loan a
t the
beginning of the year (or at origination if this occurred during the year) and the end of the year (or just prior to nal repay
ment or writeoff).
Repayments relating to loans which transferred between stages during the year are presented within the transfers between stages
lines. Such
transfers do not represent overnight reclassication from one stage to another. All other repayments are presented in a separat
e line.
ECL model methodologies may be updated or enhanced from time to time and the impacts of such changes are presented on a separat
e line.
Enhancements to our model suite during the course of the nancial year are a contributory factor to ECL movements and such fact
ors have been
taken into consideration when assessing any required adjustments to modelled output and ensuring appropriate provision coverage
levels.
A loan is written off when there is no reasonable expectation of further recovery following realisation of all associated colla
teral and available
recovery actions against the customer.
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
Gross loans and advances to customers
At 1 August 2021
7,434.3 960.2 330.4 8,724.9
New nancial assets originated
6,537.4 – – 6,537.4
196.2 (278.6) (5.3) (87.7)
(1,056.3) 959.9 (21.4) (117.8)
(206.9) (137.5) 278.6 (65.8)
Net transfers between stages and repayments
1
(1,067.0) 543.8 251.9 (271.3)
Repayments while stage remained unchanged and nal repayments
(5,241.7) (354.2) (157.8) (5,753.7)
Changes to model methodologies
(33.3) 31.6 1.8 0.1
Write offs
(2.7) (22.5) (67.7) (92.9)
At 31 July 2022
7,627.0 1,15 8.9 3 58.6 9,144.5
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
Gross loans and advances to customers
At 1 August 2020
5,906.6 1,574.2 374.6 7,855.4
New nancial assets originated 6,980.2 – – 6,980.2
Net transfers between stages and repayments
1
(547.8) 159.4 152.4 (236.0)
Repayments while stage remained unchanged and nal repayments (4,907.6) (781.4) (106.5) (5,795.5)
Changes to model methodologies 6.3 9.8 (16.0) 0.1
Write offs
(3.4) (1.8) (74.1) (79.3)
At 31 July 2021
7, 43 4 . 3 9 6 0 . 2 3 3 0 .4 8 ,724 .9
1 Repayments relate only to nancial assets which transferred between stages during the year. Other repayments are shown in the
line below.
The gross carrying amount before modication of loans and advances to customers which were modied during the year while in Sta
ge 2 or 3
was £288.3 million (2021: £293.9 million). No gain or loss (2021: £0.8 million loss) was recognised as a result of these modic
ations. The gross
carrying amount at 31 July 2022 of modied loans and advances to customers which transferred from Stage 2 or 3 to Stage 1 durin
g the year
was £110.2million (31 July 2021: £237.9 million).
11. Loans and Advances to Customers
continued
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Financial Statements
175
Close Brothers Group plc
Annual Report 2022
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
Impairment provisions on loans and advances to customers
At 1 August 2021
80.0 84.2 116.2 280.4
New nancial assets originated
37.7 – – 37.7
1.3 (12.2) (1.7) (12.6)
(17.1) 59.4 (9.9) 32.4
(9.0) (28.8) 123.2 85.4
Net remeasurement of expected credit losses arising from transfers between stages and
repayments
1
(24.8) 18.4 111.6 105.2
Repayments and ECL movements while stage remained unchanged and nal repayments
(37.6) (0.7) (9.8) (48.1)
Changes to model methodologies
(2.2) (1.1) 1.9 (1.4)
Charge to the income statement
(26.9) 16.6 103.7 93.4
Write offs
(2.8) (22.5) (62.9) (88.2)
At 31 July 2022
50.3 78.3 157.0 285.6
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
Impairment provisions on loans and advances to customers
At 1 August 2020
57.6 87.3 93.8 238.7
New nancial assets originated 45.0 – – 45.0
4.0 (15.7) (1.0) (12.7)
(2.2) (13.3) 67.6 52.1
Net remeasurement of expected credit losses arising from transfers between stages and
repayments
1
(13.9) 34.4 64.2 84.7
Repayments and ECL movements while stage remained unchanged and nal repayments (9.0) (35.9) (5.0) (49.9)
Changes to model methodologies 0.9 (0.2) (2.8) (2.1)
Charge to the income statement 23.0 (1.7) 56.4 77.7
Write offs
(0.6) (1.4) (34.0) (36.0)
At 31 July 2021
80.0 84.2 116.2 280.4
1 Repayments relate only to nancial assets which transferred between stages during the year. Other repayments are shown in the
line below.
2022
£ million
2021
£ million
Impairment losses relating to loans and advances to customers:
Charge to income statement arising fr
om movement in impairment provisions
93.4
77.7
Amounts written off directly to income statement, net of recoveries and other costs
8.5
10.2
101.9
87.9
Impairment losses relating to other nancial assets
1.4
1.9
Impairment losses on nancial assets
recognised in income statement 103.3
89.8
Impairment losses on nancial assets of £103.3 million (2021: £89.8 million) include £60.7 million in relation to Novitas (2021
: £73.2 million).
The contractual amount outstanding at 31 July 2022 on nancial assets that were written off during the period and are still sub
ject to recovery
activity is £17.3 million (31 July 2021: £19.0 million).
(e) Finance lease and hire purchase agreement receivables
31 July 2022
£ million
31 July 2021
£ million
Loans and advances to customers comprise
Hire purchase agreement receivables
3,725.1
3,554.6
Finance lease receivables
694.4
567.1
Other loans and advances
4,439.4
4,322.8
At 31 July
8,858.9
8,444.5
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176
Close Brothers Group plc
Annual Report 2022
The Notes
continued
The following table shows a reconciliation between gross investment in nance lease and hire purchase agreement receivables inc
luded in the
table above to present value of minimum lease and hire purchase payments:
31 July 2022
£ million
31 July 2021
£ million
Gross investment in nance leases and hire purchase agreement receivables due:
One year or within one year
1,740.2
1,632.6
>One to two years
1,927.1
1,772.0
>Two to three yea r s
943.9
865.8
>Three to four years
475.1
427.2
>Four to ve years
123.7
175.9
More than ve years
36.2
48.9
5,246.2
4,922.4
Unearned nance income
(731.4)
(682.6)
Present value of minimum lease and hire purchase agreement payments
4,514.8
4,239.8
Of which due:
One year or within one year
1,496.9
1,405.5
>One to two years
1,654.4
1,527.3
>Two to three yea r s
815.7
747.2
>Three to four years
410.0
368.1
>Four to ve years
106.6
149.7
More than ve years
31.2
42.0
4,514.8
4,239.8
The aggregate cost of assets acquired for the purpose of letting under nance leases and hire purchase agreements was £7,443.8
million
(2021: £6,775.3 million). The average effective interest rate on nance leases approximates to 9.9% (2021: 9.8%). The present v
alue of minimum
lease and hire purchase agreement payments reects the fair value of nance lease and hire purchase agreement receivables befor
e deduction
of impairment provisions.
12. Debt Securities
Fair value
through prot
or loss
£ million
Fair value
through other
comprehensive
income
£ million
Amortised cost
£ million
Total
£ million
Long trading positions in debt securities
12.4 – – 12.4
Certicates of deposit
––185.0185.0
Sovereign and central bank debt
– 415.4 – 415.4
At 31 July 2022 12.4 415.4 185.0 612.8
Fair value
through prot
or loss
£ million
Fair value
through other
compre
hensive
income
£ million
Amortised cost
£ million
Total
£ million
Long trading positions in debt securities 20.1 – – 20.1
Certicates of deposit – – 264.7 264.7
Sovereign and central bank debt – 192.5 – 192.5
At 31 July 2021 20.1 192.5 264.7 477.3
Movements on the book value of sovereign and central bank debt comprise:
2022
£ million
2021
£ million
Sovereign and central bank debt at 1 August
192.5
72.2
Additions
335.3
313.7
Redemptions
(80.0)
(191.0)
Currency translation differences
(1.2)
(5.2)
Movement in value
(31.2)
2.8
Sovereign and central bank debt at 31 July
415.4
192.5
11. Loans and Advances to Customers
continued
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Close Brothers Group plc
Annual Report 2022
13. Equity Shares
31 July
2022
£ million
31 July
2021
£ million
Long trading positions
27.1
30.8
Other equity shares
1.3
1.1
28.4
31.9
14. Derivative Financial Instruments
The group enters into derivative contracts with a number of nancial institutions to minimise the impact of interest and curren
cy rate changes to
its nancial instruments. The group’s total derivative asset and liability position as reported on the consolidated balance she
et is as follows:
31 July 2022
31 July 2021
Notional
value
£ million
Assets
£ million
Liabilities
£ million
Notional
value
£ million
Assets
£ million
Liabilities
£ million
Exchange rate contracts
109.8 0.7 0.3
104.5 0.2 0.2
Interest rate contracts
4,408.7 70.5 88.9
3,267.8 18.1 21.1
4,518.5 71.2 89.2
3,372.3 18.3 21.3
Notional amounts of interest rate contracts totalling £3,828.8 million (31 July 2021: £2,849.6 million) have a residual maturit
y of more than one year.
Included in the derivatives above are the following cash ow and fair value hedges:
31 July 2022
31 July 2021
Notional
value
£ million
Assets
£ million
Liabilities
£ million
Notional
value
£ million
Assets
£ million
Liabilities
£ million
Cash ow hedges
Interest rate contracts
1,552.0 33.2 1.6
780.7 2.2 1.2
Fair value hedges
Interest rate contracts
1,475.4 28.3 82.3
1,483.5 14.7 17.8
The group generally enters into fair value hedges and cash ow hedges with changes in the relevant benchmark interest rate risk
being the
predominant hedged risk.
The fair value hedges seek to hedge the exposure to changes in the fair value of recognised assets and liabilities or rm commi
tments
attributable to interest rate risk. Changes in interest rate risk are considered the largest component of the overall change in
fair value. Other risks
such as credit risk are managed but excluded from the hedge accounting relationship. The interest rate risk component is the ch
ange in fair
value of the xed rate hedging items arising solely from changes in the benchmark interest rate.
Cash ow hedges seek to hedge the exposure to variability in future cash ows due to movements in the relevant benchmark intere
st rate with
interest rate swaps. These future cash ows relate to future interest payments or receipts on recognised nancial instruments a
nd on forecast
transactions for periods of up to six (2021: ve) years. The group applies portfolio cash ow hedging for interest rate risk ex
posures on a
portfolio of actual and forecast variable interest rate cash ows arising from variable rate borrowings.
Certain items which are economically hedged may be ineligible for hedge accounting in accordance with IAS 39. Therefore, a port
folio of
oating rate liabilities have been designated as eligible hedged items in the cash ow hedge portfolio. The amounts and timing
of future cash
ows are projected on the basis of their contractual and forecast terms and other relevant factors. The exposure from this port
folio frequently
changes due to new facilities being originated, contractual repayments and new interest rate swaps added to the portfolio.
To assess hedge effectiveness the change in fair value or cash ows of the hedging instruments is compared with the change in f
air value or cash
ows of the hedged item attributable to the hedged risk. A hedge is considered highly effective if the results are within a rat
io of 80%-125%.
The main sources of hedge ineffectiveness can include, but are not limited to, cash ow timing differences between the hedged i
tem and the
hedging instrument.
The maturity prole for the notional amounts of the group’s fair value hedges is set out below.
On demand
£ million
Within three
months
£ million
Between
three and
six months
£ million
Between six
months and
one year
£ million
Between
one and ve
years
£ million
After more
than ve
years
£ million
Total
£ million
Fair value hedges
Interest rate risk
31 July 2022 – 0.7 0.4 141.3 680.3 652.7 1,475.4
31 July 2021 – 70.8 41.3 1.0 482.9 887.5 1,483.5
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178
Close Brothers Group plc
Annual Report 2022
The Notes
continued
Fair value hedges have an average xed rate of 1.9% (31 July 2021: 1.9%).
Details of the hedging instruments for the group’s hedge ineffectiveness assessment are set out below.
Changes in fair
value of hedging
instrument
used for
calculating hedge
ineffectiveness
2022
£ million
Hedge
ineffectiveness
recognised in
income statement
2022
£ million
Changes in fair
value of hedging
instrument used for
calculating hedge
ineffectiveness
2021
£ million
Hedge
ineffectiveness
recognised in
income statement
2021
£ million
Cash ow hedges
Interest rate risk
29.6 0.1
8.9 0.1
Fair value hedges
Interest rate risk
(50.4) (0.1)
(29.0) (0.1)
The carrying amount of hedging interest rate swaps is held within derivative nancial instruments and the hedge ineffectiveness
is held within
other income.
Details of the hedged exposures covered by the group’s hedging strategies are set out below.
Carrying amount of
hedged item
£ million
Accumulated amount of
fair value adjustment on
the hedged item
£ million
Changes in
fair value
of hedged
item used for
calculating
hedge
ineffectiveness
£ million
At 31 July 2022
Fair value hedges
Assets
Debt securities
211.1 (24.0) (28.5)
Loans and advances to customers and undrawn commitments
107.4
(4.8) (6.7)
318.5
(28.8) (35.2)
Liabilities
Deposits by customers
––(0.1)
Debt securities in issue
823.3 (72.2) (71.6)
Subordinated loan capital
186.5 (13.0) (13.8)
1,009.8 (85.2) (85.5)
Carrying amount of
hedged item
£ million
Accumulated amount of
fair value adjustment on
the hedged item
£ million
Changes in fair
value of hedged
item used for
calculating
hedge
ineffectiveness
£ million
At 31 July 2021
Fair value hedges
Assets
Debt securities
192.5 4.5 1.2
Loans and advances to customers and undrawn commitments
88.5
1.8 (2.5)
281.0
6.3 (1.3)
Liabilities
Deposits by customers 21.2 0.1 1.5
Debt securities in issue 842.6 (0.5) 27.6
Subordinated loan capital 222.7 0.8 1.1
1,086.5 0.4 30.2
14. Derivative Financial Instruments
continued
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Close Brothers Group plc
Annual Report 2022
Details of the impact of hedging relationships on the income statement and other comprehensive income are set out below.
Changes in fair value of
hedged item used for
calculating hedge
ineffectiveness
£ million
Losses on
discontinued
hedges
recognised in other
comprehensive income
£ million
Gains from
changes in value of
hedging instrument
recognised in other
comprehensive income
£ million
Amounts
reclassied
from reserves to
income
statement
1
£ million
Cash ow hedges
Interest rate risk
31 July 2022 (29.5) (0.4) 29.6 (1.0)
31 July 2021 (8.8) (1.5) 8.9 (0.3)
1 Amounts have been reclassied to other income since hedged cash ows will no longer occur.
15. Intangible Assets
Goodwill
£ million
Software
£ million
Intangible
assets on
acquisition
£ million
Group total
£ million
Company
software
£ million
Co
st
At 1 August 2020
153.0 233.3 67.5 453.8 0.5
Additions
2.0 46.2 4.2 52.4 –
Disposals
(12.1) (6.7) (20.7) (39.5) (0.1)
At 31 July 2021 142.9 272.8 51.0 466.7 0.4
Additions
–56.0 –56.0 –
Disposals
(0.3) (29.3) – (29.6) –
At 31 July 2022 142.6 299.5 51.0 493.1 0.4
Amortisation and impairment
At 1 August 2020 47.9 115.5 50.3 213.7 0.4
Amortisation charge for the year – 29.4 3.0 32.4 –
Impairment charge for the year 12.1 – 11.2 23.3 –
Disposals
(12.1) (2.5) (20.7) (35.3) –
At 31 July 2021 47.9 142.4 43.8 234.1 0.4
Amortisation charge for the year – 34.6 2.0 36.6 –
Impairment charge for the year – – – – –
Disposals
– (29.6) – (29.6) –
At 31 July 2022 47.9 147.4 45.8 241.1 0.4
Net book value at 31 July 2022 94.7 152.1 5.2 252.0 –
Net book value at 31 July 2021 95.0 130.4 7.2 232.6 –
Net book value at 1 August 2020 105.1 117.8 17.2 240.1 0.1
Software includes assets under development of £71.1 million (31 July 2021: £60.1 million).
Intangible assets on acquisition relate to broker and customer relationships and are amortised over a period of eight to 20 yea
rs.
In the 2022 nancial year, £2.0 million (2021: £3.0 million) of the amortisation charge is included in amortisation of intangib
le assets on
acquisition and £34.6 million (2021: £29.4 million) of the amortisation charge is included in administrative expenses shown in
the consolidated
income statement. In the prior nancial year, an impairment charge of £11.2 million relating to intangible assets on acquisitio
n was excluded from
administrative expenses shown in the consolidated income statement.
Impairment tests for goodwill
At 31 July 2022, goodwill has been allocated to eight (31 July 2021: eight) individual CGUs. Six (31 July 2021: six) are within
the Banking division,
one is the Asset Management division and the remaining one is the Securities division. The number of CGUs with goodwill decreas
ed by one in
the prior year ended 31 July 2021 following full impairment of the goodwill allocated to the Novitas CGU (further detail at the end of this note).
Goodwill impairment reviews are carried out annually by assessing the recoverable amount of the group’s CGUs, which is the high
er of fair
value less costs to sell and value in use. The recoverable amounts for all CGUs were measured based on value in use.
A value in use calculation uses discounted cash ow projections based on the most recent three year plans to determine the reco
verable
amount of each CGU. These three year plans include the expected impact of Covid-19. The key assumptions underlying management’s
three
year plans, which are based on past experience and forecast market conditions, are expected loan book growth rates and net retu
rn on loan
book in the Banking CGUs, expected total client asset growth rate and revenue margin in the Asset Management CGU and expected m
arket-
making conditions in the Securities CGU.
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Close Brothers Group plc
Annual Report 2022
The Notes
continued
For cash ows beyond the group’s three year planning horizon, a terminal value was calculated using a prudent annual growth rat
e of 0%
(2021: 0%). The cash ows are discounted using a pre-tax estimated weighted average cost of capital that reects current market
rates
appropriate to the CGU as set out in the following table.
At 31 July 2022, the results of the review indicate there is no goodwill impairment. The inputs used in the value in use calcul
ations are sensitive
primarily to changes in the assumptions for future cash ows, discount rates and long-term growth rates. Having performed stres
s tested value
in use calculations, the group believes that any reasonably possible change in the key assumptions which have been used would n
ot lead to the
carrying value of any CGU to exceed its recoverable amount.
Details of the CGUs in which the goodwill carrying amount is signicant in comparison with total goodwill, together with the pr
e-tax discount
rate used in determining value in use, are disclosed separately in the table below:
31 July 2022
31 July 2021
Cash generating unit
Goodwill
£ million
Pre-tax
discount rate
%
Goodwill
£ million
Pre-tax
discount rate
%
Close Brothers Asset Management
39.9 10.4
40.2 7.1
Winterood Securities
23.3 16.7
23.3 12.0
Other
31.5 15.4-17.1
31.5 9.8-10.9
94.7
95.0
Impairment of goodwill and intangible assets on acquisition
In the prior year ended 31 July 2021, the group recorded an impairment charge of £12.1 million relating to the full impairment
of goodwill
allocated to Novitas, a CGU within the group’s Commercial segment. In addition, a total impairment charge of £11.2 million was
recorded
relating to intangible assets on acquisition, of which £10.1 million related to Novitas.
These impairments reected the value in use of the Novitas CGU and intangible assets on acquisition falling below carrying valu
e, driven by
lower expected future cash ows following strategic decisions made by management. At 31 July 2021, the value in use of the CGU
and intangible
assets on acquisition was £192.4 million and £3.1 million respectively, and the pre-tax discount rate used in the impairment ca
lculations was 9%.
16. Property, Plant and Equipment
Leasehold
property
£ million
Fixtures,
ttings and
equipment
£ million
Assets
held under
operating
leases
£ million
Motor
vehicles
£ million
Right of use
assets
1
£ million
Total
£ million
Group
Cost
At 1 A ugu st 2020 25. 5 6 0.1 3 41.4 0.1 6 0.4 4 87.5
Additions 1.1 17.2 60.6 0.1 17.6 96.6
Disposals (1.4) (2.5) (41.3) – (6.3) (51.5)
At 31 July 2021 25.2 74.8 360.7 0.2 71.7 532.6
Additions 0.6 4.3 67.8 – 13.6 86.3
Disposals (4.9) (16.5) (30.3) – (6.8) (58.5)
At 31 July 2022 20.9 62.6 398.2 0.2 78.5 560.4
Depreciation
At 1 A ugu st 2020 14.8 42.9 119.5 0.1 13 .0 19 0.3
Depreciation and impairment charges for the year 2.3 6.8 44.8 – 13.8 67.7
Disposals (1.4) (2.2) (26.5) – (5.2) (35.3)
At 31 July 2021 15.7 47.5 137.8 0.1 21.6 222.7
Depreciation and impairment charges for the year 2.2 7.6 40.6 0.1 13.2 63.7
Disposals (4.9) (18.2) (20.2) – (5.2) (48.5)
At 31 July 2022 13.0 36.9 158.2 0.2 29.6 237.9
Net book value at 31 July 2022 7.9 25.7 240.0 – 48.9 322.5
Net book value at 31 July 2021 9.5 27.3 222.9 0.1 50.1 309.9
Net book value at 1 August 2020 10.7 17.2 221.9 – 47.4 297.2
1 Right of use assets primarily relate to the group’s leasehold properties.
15. Intangible Assets
continued
Book 1.indb 180 27/09/2022 23:48:45
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Financial Statements
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Close Brothers Group plc
Annual Report 2022
There was a gain of £3.2 million from the sale of assets held under operating leases for the year ended 31 July 2022 (2021: £2.
6 million).
31 July
2022
£ million
31 July
2021
£ million
Future minimum lease rentals receivable
under non-cancellable operating leases
One year or within one year
49.2
44.3
>One to two years
28.2
28.5
>Two to three yea r s
13.5
14.6
>Three to four years
5.6
4.0
>Four to ve years
2.9
1.9
More than ve years
0.6
1.2
100.0
94.5
Leasehold
property
£ million
Fixtures,
ttings and
equipment
£ million
Total
£ million
Company
Cost
At 1 August 2020
1.1 5.5 6.6
Additions
–6.76.7
Disposals
(0.8) (0.4) (1.2)
At 31 July 2021
0.3 11.8 12.1
Additions
–––
Disposals
–––
At 31 July 2022
0.3 11.8 12.1
Depreciation
At 1 August 2020
0.8 0.4 1.2
Charge for the year
–0.60.6
Disposals
(0.8) (0.4) (1.2)
At 31 July 2021
–0.60.6
Charge for the year
0.1 1.2 1.3
Disposals
–––
At 31 July 2022
0.1 1.8 1.9
Net book value at 31 July 2022
0.2 10.0 10.2
Net book value at 31 July 2021
0.3 11.2 11.5
Net book value at 1 August 2020
0.3 5.1 5.4
The net book value of leasehold property comprises:
Group
Company
31 July
2022
£ million
31 July
2021
£ million
31 July
2022
£ million
31 July
2021
£ million
Long leasehold property
1.3
1.5
0.2
0.3
Short leasehold property
6.6
8.0
–
–
7.9
9.5
0.2
0.3
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182
Close Brothers Group plc
Annual Report 2022
The Notes
continued
17. Other Assets and Other Liabilities
31 July
2022
£ million
31 July
2021
£ million
Prepayments, accrued income and other assets
Prepayments
115.6
134.6
Accrued income
14.9
15.7
Trade and other receivables
54.7
59.3
185.2
209.6
Accruals, deferred income and other liabilities
Accruals
149.0
182.8
Deferred income
5.7
4.1
Trade and other payables
155.9
158.3
Provisions
23.9
21.8
334.5
367.0
Provisions movement in the year:
Claims
£ million
Property
£ million
Other
£ million
Total
£ million
Group
At 1 August 2020
–6.19.715.8
Additions
6.2 0.8 5.9 12.9
Utilised
(0.4) (0.1) (2.9) (3.4)
Released
– – (3.5) (3.5)
At 31 July 2021
5.8 6.8 9.2 21.8
Additions
5.8 1.1 2. 2 9.1
Utilised
(1.4) (0.6) (1.9) (3.9)
Released
(1.3) (0.6) (1.2) (3.1)
At 31 July 2022
8.9 6.7 8.3 23.9
Property
£ million
Other
£ million
Total
£ million
Company
At 1 August 2020
0.4 2.9 3.3
Additions
–0.70.7
Utilised
–(1.0)(1.0)
Released
–––
At 31 July 2021
0.4 2.6 3.0
Additions
–1.01.0
Utilised
–(0.4)(0.4)
Released
–(0.2)(0.2)
At 31 July 2022
0.4 3.0 3.4
Provisions are made for claims and other items which arise in the normal course of business. Claims relate to legal and regulat
ory cases, while other
items largely relate to property dilapidations and employee benets. For such matters, a provision is recognised where it is de
termined that there is a
present obligation arising from a past event, payment is probable, and the amount can be estimated reliably. The timing and/or outcome of these
claims and other items are uncertain.
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Financial Statements
183
Close Brothers Group plc
Annual Report 2022
18. Settlement Balances and Short Positions
31 July
2022
£ million
31 July
2021
£ million
Settlement balances
780.7
674.2
Short positions in:
Debt securities
7.5
7.0
Equity shares
7.9
9.4
15.4
16.4
796.1
690.6
19. Financial Liabilities
On demand
£ million
Within three
months
£ million
Between
three
months and
one year
£ million
Between
one and two
years
£ million
Between
two and ve
years
£ million
After
more than
ve years
£ million
Total
£ million
Deposits by banks
6.152.0102.4–––160.5
Deposits by customers
120.9 1,645.2 3,615.6 1,058.8 329.9 – 6,770.4
Loans and overdrafts from banks
12.1 10.7 – 228.0 371.9 – 622.7
Debt securities in issue
–26.7855.3249.4567.0362.52,060.9
At 31 July 2022 139.1 1,734.6 4,573.3 1,536.2 1,268.8 362.5 9,614.5
On demand
£ million
Within three
months
£ million
Between
three months
and
one year
£ million
Between
one and two
years
£ million
Between
two and ve
years
£ million
After
more than
ve years
£ million
Total
£ million
Deposits by banks 2.1 37.7 110.8 – – – 150.6
Deposits by customers 576.3 1,547.9 3,343.6 729.8 437.2 – 6,634.8
Loans and overdrafts from banks 22.7 – – – 490.0 – 512.7
Debt securities in issue
1
(0.6) 57.0 161.2 655.2 327.5 665.2 1,865.5
At 31 July 2021 600.5 1,642.6 3,615.6 1,385.0 1,254.7 665.2 9,163.6
1 Debt securities in issue of £(0.6) million due on demand includes an adjustment relating to the group’s fair value hedges. S
ee note 14 for further information.
At 31 July 2022, the parent company held £251.5 million (31 July 2021: £251.1 million) debt securities in issue.
As discussed in note 28(c) at 31 July 2022 the group accessed £600.0 million cash under the Bank of England’s Term Funding Sche
me with
Additional Incentives for SMEs (31 July 2021: £490.0 million). Cash from the schemes and repurchase agreements is included with
in loans and
overdrafts from banks. Residual maturities of the schemes and repurchase agreements are as follows:
On demand
£ million
Within
three
months
£ million
Between
three months
and one year
£ million
Between
one and
two years
£ million
Between
two and
ve years
£ million
After
more than
ve years
£ million
Total
£ million
At 31 July 2022 – 0.6 – 228.0 372.0 – 600.6
At 31 July 2021 – – – – 490.0 – 490.0
20. Subordinated Loan Capital
Prepayment
date
Initial
interest
rate
31 July
2022
£ million
31 July
2021
£ million
Final maturity date
2027
2022 4.25%
–
23.5
2031
2026 2.00%
186.5
199.2
186.5
222.7
At 31 July 2022, the parent company held £nil million (31 July 2021: £23.5 million) and £186.5 million (31 July 2021: £199.2 mi
llion) of
subordinated loan capital with nal maturity dates of 2027 and 2031 respectively.
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184
Close Brothers Group plc
Annual Report 2022
The Notes
continued
21. Called Up Share Capital and Distributable Reserves
31 July 2022
31 July 2021
million £ million
million £ million
Group and company
Ordinary shares of 25p each (allotted, issued and fully paid)
152.1 38.0
152.1 38.0
At 31 July 2022, the company’s reserves available for distribution under section 830(2) and 831(2) of the Companies Act 2006 we
re
£436.2 million (2021: £417.5 million). The directors have applied the guidance provided by ICAEW TECH 02/17 in determining this
.
22. Capital - unaudited
The group’s policy is to be well capitalised and its approach to capital management is driven by strategic and organisational r
equirements, while
also taking into account the regulatory and commercial environments in which it operates.
The Prudential Regulation Authority (“PRA”) supervises the group on a consolidated basis and receives information on the capita
l adequacy of,
and sets capital requirements for, the group as a whole. In addition, a number of subsidiaries are regulated for prudential pur
poses by either the
PRA or the Financial Conduct Authority (“FCA”). The aim of the capital adequacy regime is to promote safety and soundness in th
e nancial
system. It is structured around three “pillars”: Pillar 1 on minimum capital requirements; Pillar 2 on the supervisory review p
rocess; and Pillar 3
on market discipline. The group’s Pillar 1 information is presented below. Under Pillar 2, the group completes an annual self-a
ssessment of risks
known as the Internal Capital Adequacy Assessment Process (“ICAAP”). The ICAAP is reviewed by the PRA which culminates in the P
RA
setting a Total Capital Requirement (“TCR”) that the group and its regulated subsidiaries are required to hold at all times. Th
e TCR is currently
set at 9.0%, of which 5.1% needs to be met with common equity tier 1 (“CET1”) capital. This includes the Pillar 1 requirements
(4.5% and 8%
respectively for CET1 and total capital) and a Pillar 2A component of 1.0%, of which 0.6% needs to be met with CET1 capital. Pi
llar 3 requires
rms to publish a set of disclosures which allow market participants to assess information on that group’s capital, risk exposu
res and risk
assessment process. The group’s Pillar 3 disclosures, which are unaudited, can be found on the group’s website www.closebrother
s.com/
investor-relations/investor-information/results-reports-and-presentations.
The group maintains a strong capital base to support the development of the business and to ensure the group meets the TCR and
additional
regulatory buffers at all times. As a result, the group maintains capital adequacy ratios above minimum regulatory requirements
, which are
currently set at a minimum CET1 capital ratio of 7.6% and a minimum total capital ratio of 11.5%. The minimum capital requireme
nts are
inclusive of the capital conservation buffer (currently 2.5% for both CET1 capital and total capital) and the countercyclical b
uffer (currently 0%
effective rate for the group, for both CET1 capital and total capital) and exclusive of any applicable PRA buffer.
A full analysis of the composition of regulatory capital and Pillar 1 risk weighted assets (“RWAs”), a reconciliation between e
quity and CET1
capital after adjustments and a table showing the movement in CET1 capital during the year are shown on the following pages.
At 31 July 2022, the group’s CET1 capital ratio was 14.6% (31 July 2021: 15.8%). CET1 capital decreased to £1,396.7 million (31
July 2021:
£1,439.3million) primarily due to regulatory changes to the treatment of software assets, which are now fully deducted from ca
pital, and a
decrease in IFRS 9 transitional arrangements.
RWAs, calculated using the standardised approaches, increased to £9,591.3 million (31 July 2021: £9,105.3 million) driven by gr
owth in the
Commercial division loan book, and in derivative exposures, increasing counterparty credit risk and credit valuation adjustment
s.
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185
Close Brothers Group plc
Annual Report 2022
31 July
2022
£ million
31 July
2021
£ million
CET1 capital
Called up share capital
38.0
38.0
Retained earnings
1,628.4
1,555.5
Other reserves recognised for CET1 capital
10.0
13.1
Adjustments to CET1 capital
Intangible assets, net of associated deferred tax liabilities
1
(250.7)
(180.7)
Foreseeable dividend
2
(65.6)
(62.7)
Investment in own shares
(40.6)
(36.0)
Pension asset, net of associated deferred tax liabilities
(5.3)
(5.4)
Prudent valuation adjustment
(0.5)
(0.3)
Insufcient coverage for non-performing exposures
3
–
–
IFRS 9 transitional arrangements
4
83.0
117.8
CET1 capital
5
1,396.7
1,439.3
Tier 2 capital
6
– subordinated debt
200.0
223.4
Total regulatory capital
5
1,596.7
1,662.7
RWAs (notional)
7
Credit and counterparty credit risk
8,389.0
7,945.8
Operational risk
7
1,085.8
1,038.5
Market risk
7
116.5
121.0
9,591.3
9,105.3
CET1 capital ratio
5
14.6%
15.8%
Total capital ratio
5
16.6%
18.3%
1 In line with CRR, effective on 1 January 2022, the CET1 capital ratio no longer includes the benet related to software asset
s which were previously exempt from the deduction
requirement for intangible assets from CET1.
2 Under the Regulatory Technical Standard on own funds, a deduction has been recognised at 31 July 2022 and 31 July 2021 for a
foreseeable dividend, being the proposed nal
dividend as set out in note 9.
3 In line with CRR, effective on 1 January 2022, the CET1 capital includes a regulatory deduction where there is insufcient co
verage for non-performing exposures, amounting to
£0.03million at 31 July 2022.
4 The group has elected to apply IFRS 9 transitional arrangements for 31 July 2022, which allow the capital impact of expected
credit losses to be phased in over the transitional period.
5 Shown after applying IFRS 9 transitional arrangements and CRR transitional and qualifying own funds arrangements in force at
the time. Without their application, at 31 July 2022 the
CET1 capital ratio would be 13.8% and total capital ratio 15.9% (31 July 2021: CET1 capital ratio 14.7% and total capital ratio
17.2%, which includes the benet related to the previous
treatment of software assets).
6 Tier 2 capital decrease represents the redemption on call date of a prior Tier 2 security, most of which had previously been
redeemed as part of a tender offer.
7 Operational and market risk include an adjustment at 8% in order to determine notional RWAs.
The following table shows a reconciliation between equity and CET1 capital after adjustments:
31 July
2022
£ million
31 July
2021
£ million
Equity
1,657.5
1,569.3
Regulatory adjustments to equity:
Intangible assets, net of associated deferred tax liabilities
(250.7)
(180.7)
Foreseeable dividend
1
(65.6)
(62.7)
IFRS 9 transitional arrangements
2
83.0
117.8
Pension asset, net of associated deferred tax liabilities
(5.3)
(5.4)
Prudent valuation adjustment
(0.5)
(0.3)
Insufcient coverage for non-performing exposures
3
–
–Other reserves not recognised for CET1 capital:
Cash ow hedging reserve
(21.7)
0.3
Non-controlling interests
–
1.0
CET1 capital
1,396.7
1,439.3
1 Under the Regulatory Technical Standard on own funds, a deduction has been recognised at 31 July 2022 and 31 July 2021 for a
foreseeable dividend, being the proposed nal
dividend as set out in note 9.
2 The group has elected to apply IFRS 9 transitional arrangements for 31 July 2022, which allow the capital impact of expected
credit losses to be phased in over the transitional period.
3 In line with CRR, effective on 1 January 2022, the CET1 capital includes a regulatory deduction where there is insufcient co
verage for non-performing exposures, amounting to
£0.03million at 31 July 2022.
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186
Close Brothers Group plc
Annual Report 2022
The Notes
continued
The following table shows the movement in CET1 capital during the year:
2022
£ million
2021
£ million
CET1 capital at 1 August
1,439.3
1,254.0
Prot in the period attributable to shareholders
165.2
202.1
Dividends paid and foreseen
(98.4)
(89.5)
Change in software assets treatment
1
(50.2)
50.2
IFRS 9 transitional arrangements
(34.8)
17.5
(Increase)/decrease in intangible assets, net of associated deferred tax liabilities
(19.7)
6.0
Other movements in reserves recognised for CET1 capital
0.1
0.9
Other movements in adjustments to CET1 capital
(4.8)
(1.9)
CET1 capital at 31 July
1,396.7
1,439.3
1 In line with CRR, effective on 1 January 2022, the CET1 capital ratio no longer includes the benet related to software asset
s which were previously exempt from the deduction
requirement for intangible assets from CET1.
23. Guarantees and Commitments
Guarantees
Group
Company
31 July
2022
£ million
31 July
2021
£ million
31 July
2022
£ million
31 July
2021
£ million
Earliest period in which guarantee could be called
Within one year
109.3
112.5
106.0107.0
More than one year
3.3
–
–
–112.6
112.5
106.0
107.0
Where the group undertakes to make a payment on behalf of its subsidiaries for guarantees issued, such as bank facilities or pr
operty leases or
as irrevocable letters of credit for which an obligation to make a payment to a third party has not arisen at the reporting dat
e, they are included
in these consolidated nancial statements as contingent liabilities.
Commitments
Undrawn facilities, credit lines and other commitments to lend
31 July
2022
£ million
31 July
2021
£ million
Within one year
1
1,223.4
1,310.3
1 Includes both revocable and irrevocable commitments.
Other commitments
Subsidiaries had contracted capital and other nancial commitments of £119.7 million (2021: £88.4 million).
24. Related Party Transactions
Transactions with key management
Details of directors’ remuneration and interests in shares are disclosed in the Directors’ Remuneration Report on pages 123 to
140.
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the acti
vities 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:
2022
£ million
2021
£ million
Emoluments
Salaries and fees
5.8
4.6
Benets and allowances
0.5
0.4
Performance related awards in respect of the current year:
Cash
3.1
5.3
Deferred
0.8
2.5
10.2
12.8
Share-based awards
2.3
2.6
12.5
15.4
22. Capital - unaudited
continued
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Close Brothers Group plc
Annual Report 2022
Gains upon exercise of options by key management personnel, expensed to the income statement in previous years, totalled £1.1 m
illion (2021:
£3.5 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 2022 attributable, in aggregate, to key management were £0.2mil
lion (31 July
2021: £0.2 million).
25. Pensions
The group operates dened contribution pension schemes for eligible employees as well as a dened benet pension scheme which i
s closed
to new members and further accrual. Assets of all schemes are held separately from those of the group.
Dened contribution schemes
During the year the charge to the consolidated income statement for the group’s dened contribution pension schemes was £16.9m
illion (2021:
£15.5 million), representing contributions payable by the group and is included in administrative expenses.
Dened benet pension scheme
The group’s only dened benet pension scheme (“the scheme”) is a nal salary scheme which operates under trust law. The scheme
is
managed and administered in accordance with the scheme’s Trust Deed and Rules and all relevant legislation by a trustee board m
ade up of
trustees nominated by both the company and the members.
The scheme was closed to new entrants in August 1996 and closed to further accrual during 2012. At 31 July 2022 this scheme had
26 (31 July
2021: 28) deferred members and 54 (31 July 2021: 53) pensioners and dependants.
Funding position
The scheme’s most recent triennial actuarial valuation at 31 July 2021 showed that the scheme was fully funded. As such, no fur
ther
contributions are scheduled.
IAS 19 valuation
The following disclosures are reported in accordance with IAS 19. Signicant actuarial assumptions are as follows:
2022
%
2021
%
Ination rate (Retail Price Index)
3.5
3.6
Ination rate (Consumer Price Index)
3.1
3.2
Discount rate for scheme liabilities
1
3.4
1.6
Expected interest/expected long-term return on plan assets
3.4
1.6
Mortality assumptions
2
:
Existing pensioners from age 65, life expectancy (years):
Men
23.5
24.0
Women
25.3
25.7
Non-retired members currently aged 50, life expectancy from age 65 (years):
Men
24.3
24.9
Women
26.6
27.0
1 Based on market yields at 31 July 2022 and 2021 on high qu
ality sterling-denominated corporate bonds, adjusted to be consiste
nt with the estimated term of the post-employment
benet obligation, using the Willis Towers Watson model “Global RATE:Link”.
2 Based on standard tables SAPS S2 Light (2021: SAPS S2 Light) produced by the CMI Bureau of the Institute and Faculty of Actua
ries with adjusted mortality multipliers for pensioners
and non-pensioners, together with projected future improvements in line with the CMI 2020 (2021: CMI 2017) core projection mode
l with a long-term trend of 1.5% per annum.
The scheme has been accounted for in the company and the surplus has been recognised as an asset on the company and group’s bal
ance
sheet within “Trade and other receivables”.
The group has the unconditional right to any surpluses that arise within the scheme once all benets have been secured in full.
As such no asset
ceiling has been applied, and accordingly the scheme surplus is recognised on the consolidated balance sheet.
2022
£ million
2021
£ million
2020
£ million
2019
£ million
2018
£ million
Fair value of scheme assets
1
:
Equities
0.0
9.4 14.0 13.1 12.7
Bonds
30.3
33.6 32.3 29.9 28.7
Cash
3.5
0.2 0.3 0.2 0.1
Insured annuities
1.0
Total Assets
34.8
43.2 46.6 43.2 41.5
Fair value of liabilities
(27.6)
(35.6) (39.2) (36.5) (36.4)
Surplus
7.2
7.6 7. 4 6 .7 5.1
1 There are no amounts included within the fair value of scheme assets relating to the nancial instruments of Close Brothers G
roup plc.
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188
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Annual Report 2022
The Notes
continued
Movement in the present value of scheme liabilities during the year:
2022
£ million
2021
£ million
Carrying amount
(35.6)
(39.2)
Interest expense
(0.6)
(0.5)
Past service cost
–
(0.1)
Benets paid
1.0
5.6
Actuarial gain/(losses)
8.6
(1.4)
Other
(1.0)
–
Total carrying value as on 31 July
(27.6)
(35.6)
Movement in the fair value of scheme assets during the year:
2022
£ million
2021
£ million
Carrying value
43.2
46.6
Interest income
0.7
0.6
Benets paid
(1.0)
(5.6)
Administrative costs
(0.4)
(0.3)
Return on assets excluding interest income
(8.7)
1.9
Other
1.0
–
Total carrying value
34.8
43.2
Historical experience of actuarial gains/(losses) are shown below:
2022
£ million
2021
£ million
2020
£ million
2019
£ million
2018
£ million
Experience gains/(losses) on scheme assets
(8.7)
1.9 4.1 3.3 1.3
Experience gains on scheme liabilities
0.4
––1.3–
Impact of changes in assumptions
8.2
(1.4) (3.2) (2.7) 0.4
Total actuarial changes in liabilities
8.6
(1.4) (3.2) (1.4) 0.4
Total actuarial gain/(losses) (0.1)
0.5 0.9 1.9 1.7
Total actuarial gains have been recognised in other comprehensive income. Income of £0.1 million (2021: £0.1 million) from the
interest on the
scheme surplus has been recognised within administrative expenses in the consolidated income statement. The group’s policy is n
ot to allocate
the net dened benet cost between group entities participating in the scheme.
The valuation of the scheme’s liabilities is sensitive to the key assumptions used in the valuation. The effect of a change in
those assumptions in
2022 and 2021 is set out below. The analysis reects the variation of the individual assumptions. The variation in price inati
on includes all
ination-linked pension increases in deferment and in payment.
Impact on dened benet obligation
increase/(decrease)
2022
2021
Key assumption Sensitivity
% £ million
% £ million
Discount rate 0.25% increase
(3.2) (0.9)
(4.4) (1.6)
Price ination 0.25% increase
1.6 0.4
1.8 0.6
Mortality Increase in life expectancy at age 65 by one year
3.0 0.8
4.0 1.4
Changes in the assumptions used in the valuation due to external factors would affect the carrying value of the scheme. The mos
t signicant
risks are:
• Market factors (movements in equity and bond markets): The scheme’s assets are invested 0% in global quoted equities, 87% in
quoted
bonds, 10% in cash and 3% in insured annuities (2021: 22% global quoted equities and 78% quoted bonds) and the scheme’s liabili
ties are
measured with reference to corporate bond yields. The performance of these asset classes can be volatile. Underperformance of e
ither of
these markets would have an adverse impact on the carrying value of the scheme.
• Ination: Deferred pensions and pensions in payment increase at specied periods in line with ination, subject to certain ca
ps and oors in
place. Changes in ination may impact scheme liabilities.
• Life expectancy: Change in the life expectancy of the scheme’s members may impact scheme liabilities.
The weighted average duration of the benet payments reected in the scheme liabilities is 14 years (2021: 17 years).
25. Pensions
continued
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Financial Statements
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Annual Report 2022
26. Share-based Awards
The Save As You Earn (“SAYE”), Long Term Incentive Plan (“LTIP”) and Deferred Share Awards (“DSA”) share-based awards have been
granted
under the group’s share schemes. The general terms and conditions for these share-based awards are described in the Directors’
Remuneration Report on pages 126 to 128.
In order to satisfy a number of the awards below the company has purchased company shares into Treasury and the Close Brothers
Group
Employee Share Trust has purchased company shares. At 31 July 2022, 1.6 million (31 July 2021: 1.3 million) and 1.4 million (31
July 2021:
1.5million) of these shares were held respectively and in total £40.6 million (2021: £36.0 million) was recognised within the
share-based
payments reserve. During the year £4.9 million (2021: £10.0 million) of these shares were released to satisfy share-based award
s to employees.
The share-based payments reserve as shown in the consolidated statement of changes in equity also includes the cumulative posit
ion in relation
to unvested share-based awards charged to the consolidated income statement of £11.4 million (2021: £13.6 million). The share-b
ased awards
charge of £4.9 million (2021: £5.7 million) is included in administrative expenses shown in the consolidated income statement.
Movements in the number of share-based awards outstanding and their weighted average share prices are as follows:
SAYE
LTIP
DSA
Number
Weighted
average
exercise
price Number
Weighted
average
exercise
price Number
Weighted
average
exercise
price
At 1 August 2020 1,921,106 – 1,373,119 – 836,819 –
Granted 1,385,804 829.5p 502,283 – 146,223 –
Exercised (208,013) 1174.2p (147,807) – (423,915) –
Forfeited (801,716) 923.9p (213,100) – (4,697) –
Lapsed (61,176) 1208.5p (260,721) – (6,932) –
At 31 July 2021
2,236,005 – 1,253,774 – 547,498 –
Granted
420,863 1,042.6p 326,540 – 196,576 –
Exercised
(71,478) 1,180.6p (19,549) – (267,051) –
Forfeited
(288,729) 969.8p (13,274) – (10,211) –
Lapsed
(26,290) 1,158.8p (189,633) – 8,191 –
At 31 July 2022 2,270,371 – 1,357,858 – 475,003 –
Exercisable at:
31 July 2022 48,978 1,184.4p 202,528 – 74,008 –
31 July 2021 11,336 1,141.0p 73,936 – 9,645 –
The table below shows the weighted average market price at the date of exercise:
2022
2021
SAYE
1,319.2p
1,451.2p
LTIP
1,460.4p
1,286.9p
DSA
1,402.9p
1,291.3p
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Annual Report 2022
The Notes
continued
The range of exercise prices and weighted average remaining contractual life of awards and options outstanding are as follows:
2022
Options outstanding
2021
Options outstanding
Number
outstanding
Weighted
average
remaining
contractual
life
Years
Number
outstanding
Weighted
average
remaining
contractual
life
Years
SAYE
Between £7 and £8
1,131,601 2.6
1,244,571 3.5
Between £8 and £9
525,818 1.7
610,912 2.7
Between £9 and £10
282,400 3.7
114,155 2. 3
Between £10 and £11
102,790 1.3
——
Between £11 and £12
70,081 0.9
107,211 1.5
Between £12 and £13
94,729 2.9
68,999 1.1
Between £13 and £14
62,952 2.7
90,157 3.7
LTIP
Nil
1,357,858 3.4
1,253,774 3.7
DSA
Nil
475,003 1.6
547,498 1.7
Total
4,103,232 2.6
4,037,277 3.1
For the share-based awards granted during the year, the weighted average fair value of those options at 31 July 2022 was 928.8p
(31 July
2021:453.3p). The main assumptions for the valuation of these share-based awards comprised:
Exercise period
Share price
at issue
Exercise
price
Expected
volatility
Expected
option life
in years
Dividend
yield
Risk free
interest rate
SAYE
1 Dec 2024 to 31 May 2025 1,551.3p 1,241.0p 32.0% 3 4.1% 0.6%
1 Dec 2026 to 31 May 2027 1,551.3p 1,241.0p 28.0% 5 4.1% 0.7%
1 Jun 2025 to 30 Nov 2025 1,195.0p 956.0p 34.0% 3 5.1% 1.8%
1 Jun 2027 to 30 Nov 2027 1,195.0p 956.0p 30.0% 5 5.1% 1.8%
LTIP
5 Oct 2024 to 1 Oct 2027 1,545.8p – 32.0% 3 4.1% 0.6%
DSA
5 Oct 2022 to 5 Oct 2024 1,545.8p – – – – –
5 Oct 2024 to 5 Oct 2025 1,545.8p – – – – –
22 Mar 2024 to 21 Mar 2025 1,192.0p – – – – –
1 Mar 2025 to 28 Feb 2026 1,297.0p – – – – –
Expected volatility was determined mainly by reviewing share price volatility for the expected life of each option up to the da
te ofgrant.
26. Share-based Awards
continued
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Annual Report 2022
27. Consolidated Cash Flow Statement Reconciliation
2022
£ million
2021
1
£ million
(a) Reconciliation of operating prot before tax to net cash inow from operating activities
Operating prot before tax
232.8
265.2
Tax paid
(63.4)
(69.7)
Depreciation, amortisation and impairment
100.3
123.4
Impairment losses on nancial assets
103.3
89.8
Decrease/(increase) in:
Interest receivable and prepaid expenses
19.8
4.6
Net settlement balances and trading positions
17.2
8.5
Net loans from money brokers against stock advanced
2.7
(23.2)
(Decrease)/increase in interest payable and accrued expenses
(32.2)
27.2
Net cash inow from trading activities
380.5
425.8
Decrease/(increase) in:
Loans and advances to banks not repayable on demand
(5.3)
9.6
Loans and advances to customers
(515.0)
(951.2)
Assets let under operating leases
(54.5)
(43.9)
Certicates of deposit
79.7
21.2
Sovereign and central bank debt
(255.3)
(126.6)
Other assets less other liabilities
(6.4)
29.6
Increase/(decrease) in:
Deposits by banks
11.8
3.9
Deposits by customers
142.7
74 5.1
Loans and overdrafts from banks
110.0
14.8
Net issuance/(redemption) of debt securities
270.5
(9.2)
Net cash inow from operating activities
158.7
119.1
(b)
Analysis of net cash outow in respect of the purchase of subsidiaries and
non-controlling interests
Cash consideration paid
(0.1)
(2.9)
(c) Analysis of net cash inow in respect of the sale of subsidiaries
Cash consideration received
0.1
2.3
(d) Analysis of cash and cash equivalents
2
Cash and balances at central banks
1,236.0
1,314.7
Loans and advances to banks
147.0
121.9
At 31 July
1,383.0
1,436.6
1 Comparatives have been updated to present impairment losses on nancial assets in a separate line with no impact on the net c
ash inow from operating activities gure.
2 Excludes £37.1 million (2021: £30.7 million) of Bank of England and other cash reserve accounts.
During the year ended 31 July 2022, the non-cash changes on debt nancing amounted to £9.6 million (31 July 2021: £18.2 million
) arising
largely from interest accretions and fair value hedging movements.
Book 1.indb 191 27/09/2022 23:48:46
192
Close Brothers Group plc
Annual Report 2022
The Notes
continued
28. Financial Risk Management
As a nancial services group, nancial instruments are central to the group’s activities. The risk associated with nancial ins
truments represents
a signicant component of those faced by the group and is analysed in more detail below.
The group’s nancial risk management object
ives are summarised within the Risk Report
on pages 74 to 92. Details of the signic
ant
accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on whic
h income and
expenses are recognised, in respect of each class of nancial asset, nancial liability and equity instrument are disclosed in
note 1.
(a) Classication
The following tables analyse the group’s assets and liabilities in accordance with the categories of nancial instruments in IF
RS 9.
Derivatives
designated
as hedging
instruments
£ million
Fair value
through prot
and loss
£ million
Fair value
through other
comprehensive
income
£ million
Amortised cost
£ million
Total
£ million
At 31 July 2022
Assets
Cash and balances at central banks
–––1,254.71,254.7
Settlement balances
–––799.3799.3
Loans and advances to banks
–––165.4165.4
Loans and advances to customers
– – – 8,858.9 8,858.9
Debt securities
–12.4415.4185.0612.8
Equity shares
–28.4 – –28.4
Loans to money brokers against stock advanced
– – – 48.4 48.4
Derivative nancial instruments
61.5 9.7 – – 71.2
Other nancial assets
–1.7 –82.684.3
61.5 52.2 415.4 11,394.3 11,923.4
Liabilities
Settlement balances and short positions
–15.4 –780.7796.1
Deposits by banks
–––160.5160.5
Deposits by customers
–––6,770.46,770.4
Loans and overdrafts from banks
–––622.7622.7
Debt securities in issue
–––2,060.92,060.9
Loans from money brokers against stock advanced
–––––
Subordinated loan capital
–––186.5186.5
Derivative nancial instruments
83.9 5.3 – – 89.2
Other nancial liabilities
–––184.2184.2
83.9 20.7 – 10,765.9 10,870.5
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Financial Statements
193
Close Brothers Group plc
Annual Report 2022
Derivatives
designated
as hedging
instruments
£ million
Fair value through
prot and loss
£ million
Fair value
through other
comprehensive
income
£ million
Amortised cost
£ million
Total
£ million
At 31 July 2021
Assets
Cash and balances at central banks – – – 1,331.0 1,331.0
Settlement balances –––699.6699.6
Loans and advances to banks – – – 136.3 136.3
Loans and advances to customers – – – 8,444.5 8,444.5
Debt securities – 20.1 192.5 264.7 477.3
Equity shares – 31.9 – – 31.9
Loans to money brokers against stock advanced – – – 51.1 51.1
Derivative nancial instruments 16.9 1.4 – – 18.3
Other nancial assets – 0.1 – 62.4 62.5
16.9 53.5 192.5 10,989.6 11,252.5
Liabilities
Settlement balances and short positions – 16.4 – 674.2 690.6
Deposits by banks – – – 150.6 150.6
Deposits by customers – – – 6,634.8 6,634.8
Loans and overdrafts from banks – – – 512.7 512.7
Debt securities in issue – – – 1,865.5 1,865.5
Loans from money brokers against stock advanced –––––
Subordinated loan capital – – – 222.7 222.7
Derivative nancial instruments 19.0 2.3 – – 21.3
Other nancial liabilities – – – 194.8 194.8
19.0 18.7 – 10,255.3 10,293.0
(b) Valuation
The fair values of the group’s nancial assets and liabilities are not materially different from their carrying values. The mai
n differences are as
follows:
31 July 2022
31 July 2021
Fair
value
£ million
Carrying
value
£ million
Fair
value
£ million
Carrying
value
£ million
Subordinated loan capital
180.0 186.5
226.5 222.7
Debt securities in issue
2,071.4 2,060.9
1,908.9 1,865.5
Valuation hierarchy
The group holds nancial instruments that are measured at fair value subsequent to initial recognition. Each instrument has bee
n categorised
within one of three levels using a fair value hierarchy that reects the signicance of the inputs used in making the measureme
nts. These levels
are based on the degree to which the fair value is observable and are dened as follows:
• Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or l
iabilities where
prices are readily available and represent actual and regularly occurring market transactions on an arm’s length basis. An acti
ve market is one
in which transactions occur with sufcient frequency to provide ongoing pricing information;
• Level 2 fair value measurements are those derived from quoted prices in less active markets for identical assets or liabiliti
es or those derived
from inputs other than quoted prices that are observable for the asset or liability, either directly as prices or indirectly de
rived from prices; and
• Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability th
at are not based on
observable market data (“unobservable inputs”).
Instruments classied as Level 1 predominantly comprise sovereign and central bank debt and liquid listed equity shares. The fa
ir value of these
instruments is derived from quoted prices in active markets.
Instruments classied as Level 2 predominantly comprise less liqui
d listed equity shares, investment grade corporate bonds and
over-the-
counter derivatives. The fair value of equity shares and bonds are derived from quoted prices in less active markets in compari
son to level 1.
Over-the-counter derivatives largely relate to interest rate and exchange rate contracts (see note 14 for further information).
The valuation of such
derivatives includes the use of discounted future cash ow models, with the most signicant input into these models being inter
est rate yield
curves developed from quoted rates.
Instruments classied as Level 3 predominantly comprise contingent consideration payable and receivable in relation to the acqu
isitions and the
disposal of subsidiaries.
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194
Close Brothers Group plc
Annual Report 2022
The Notes
continued
The fair value of contingent consideration is determined on a discounted expected cash ow basis. The group believes that there
is no
reasonably possible change to the inputs used in the valuation of these positions which would have a material effect on the gro
up’s
consolidated income statement.
There were no signicant transfers between Level 1, 2 and 3 in 2022 and 2021.
The tables below show the classication of nancial instruments held at fair value into the valuation hierarchy.
Level 1
£ million
Level 2
£ million
Level 3
£ million
Total
£ million
At 31 July 2022
Assets
Debt securities:
Long trading positions in debt securities
11.0 1.4 – 12 .4
Sovereign and central bank debt
415.4 – – 415.4
Equity shares
4.1 24.0 0.3 28.4
Derivative nancial instruments
–71.2 –71.2
Contingent consideration
––1.71.7
430.5 96.6 2.0 529.1
Liabilities
Short positions:
Debt securities
5.8 1.7 – 7.5
Equity shares
2.2 5.6 0.1 7.9
Derivative nancial instruments
–89.2 –89.2
Contingent consideration
––3.03.0
8.0 96.5 3.1 107.6
Level 1
£ million
Level 2
£ million
Level 3
£ million
Total
£ million
At 31 July 2021
Assets
Debt securities:
Long trading positions in debt securities 19.0 1.1 – 20.1
Sovereign and central bank debt 192.5 – – 192.5
Equity shares
6.2 25.4 0.3 31.9
Derivative nancial instruments – 18.3 – 18.3
Contingent consideration
––0.10.1
217.7 44.8 0.4 262.9
Liabilities
Short positions:
Debt securities
5.7 1.3 – 7.0
Equity shares
3.2 6.2 – 9.4
Derivative nancial instruments – 21.3 – 21.3
Contingent consideration
––3.03.0
8.9 28.8 3.0 40.7
28. Financial Risk Management
continued
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Financial Statements
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Close Brothers Group plc
Annual Report 2022
Movements in nancial instruments categorised as Level 3 were:
Equity shares
£ million
Contingent
consideration
£ million
At 1 August 2020
0.3 (0.8)
Total gains recognised in the consolidated income statement – 2.6
Purchases and issues
–(2.4)
Sales and settlements
–(2.3)
At 31 July 2021
0.3 (2.9)
Total losses recognised in the consolidated income statement – (0.2)
Purchases and issues
–1.8
Sales and settlements
(0.1) –
At 31 July 2022
0.2 (1.3)
The losses recognised in the consolidated income statement relating to instruments held at the year end amounted to £0.2 millio
n (2021:
£0.1million).
(c) Credit risk
Credit risk is the risk of a reduction in earnings and/or value, as a result of the failure of a counterparty or associated par
ty, with whom the group
has contracted, to meet its obligations as they fall due. Credit risk across the group mainly arises through the lending and tr
easury activities of
the Banking division.
The Banking division applies consistent and prudent lending criteria to mitigate credit risk. Its lending activities are predom
inantly secured
across a diverse range of asset classes. Details of average tenor and loan size by business can be found on page 4 of the strat
egic report. This
ensures concentration risk is controlled in both the loan book and associated collateral. Currently credit risk appetites are s
et around unsecured
lending to ensure the secured lending position is under regular review. As at 31 July 2022, secured lending accounts for 89.6%
of the loan
book, in line with the prior year (31 July 2021: 89.2%).
The group has established limits for all counterparties with whom it places deposits, enters into derivative contracts or whose
debt securities
are held, and the credit quality of the counterparties is monitored. While these amounts may be material, the counterparties ar
e all regulated
institutions with investment grade credit ratings assigned by international credit rating agencies and fall within the large ex
posure limits set by
regulatory requirements.
Maximum exposure to credit risk
The table below presents the group’s maximum exposure to credit risk, before taking account of any collateral and credit risk m
itigation, arising
from its on balance sheet and off balance sheet nancial instruments. For off balance sheet instruments, the maximum exposure t
o credit risk
represents the contractual nominal amounts.
31 July
2022
£ million
31 July
2021
£ million
On balance sheet
Cash and balances at central banks
1,254.7
1,331.0
Settlement balances
799.3
699.6
Loans and advances to banks
165.4
136.3
Loans and advances to customers
8,858.9
8,444.5
Debt securities
612.8
477.3
Loans to money brokers against stock advanced
48.4
51.1
Derivative nancial instruments
71.2
18.3
Other nancial assets
84.3
62.5
11,895.0
11, 220.6
Off balance sheet
Irrevocable undrawn commitments
277.8
239.6
Total maximum exposure to credit risk
12,172.8
11,4 60.2
Assets pledged and received as collateral
The group pledges assets for repurchase agreements and securities borrowing agreements which are generally conducted under term
s that
are customary to standard borrowing contracts.
The group is a participant of the Bank of England’s Term Funding Scheme with Additional Incentives for SMEs (“TFSME”).
Under these schemes, asset nance loan receivables of £626.1 million (31 July 2021: £571.3 million), UK gilts with a market val
ue of £72.6 million
(31 July 2021: £90.2 million), UK T-Bills with a market value of £144.3 million (31 July 2021: £nil) and retained notes relating to Motor Finance loan
receivables of £24.3 million (31 July 2021: £72.1 million) were positioned as collateral with the Bank of England, against whic
h £600.0 million
(31 July 2021: £490.0 million) of cash was drawn.
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196
Close Brothers Group plc
Annual Report 2022
The Notes
continued
The term of these transactions is four years from the date of each drawdown but the group may choose to repay earlier at its di
scretion. The
risks and rewards of the loan receivables remain with the group and continue to be recognised in loans and advances to customer
s on the
consolidated balance sheet.
The group has securitised without recourse and restrictions £1,626.8 million (31 July 2021: £1,386.0 million) of its insurance
premium and motor
loan receivables in return for cash and asset-backed securities in issue of £1,022.4 million (31 July 2021: £915.7 million). Th
is includes the
£24.3 million (31 July 2021: £72.1 million) retained notes positioned as collateral with the Bank of England. Asthe group has
retained exposure to
substantially all the credit risk and rewards of the residual benet of the underlying assets it continues to recognise these a
ssets in loans and
advances to customers in its consolidated balance sheet.
The majority of loans and advances to customers are secured against specic assets. For more information on collateral held see
page200.
Consistent and prudent lending criteria are applied across the whole loan book with emphasis on the quality of the securitypro
vided.
Financial assets: Loans and advances to customers
Credit risk management and monitoring
Overall credit risk appetite is set by the group board. The monitoring of credit policy is the responsibility of the Banking di
vision’s Risk and
Compliance committees. Large loans are subject to approval by a credit committee.
Credit underwriting and in-life monitoring is undertaken either centrally or through regional ofce networks, appropriate to th
e diverse and
specialised nature of the businesses and the size and complexity of the transaction. Underwriting authority is ultimately deleg
ated from the
Board Risk Committee and cascaded accordingly, with lending businesses approving lower risk exposures locally subject to compli
ance with
credit policy and risk appetite.
This model is supported by central oversight and control. An independent central credit risk function provides ongoing monitori
ng of material
credit risks through regular review of appetites and policy. This team reports through the chief credit risk ofcer to the grou
p chief risk ofcer
and provides monthly reporting to the CRMC and GRCC. The Banking division has a dual approach to mitigating credit risk by:
• Lending on a predominantly secured basis with emphasis on both the customer’s ability to repay and the quality of the underly
ing security to
minimise any loss should the customer not be able to repay; and
• Applying greater scrutiny where the asset securing a loan is less tangible, or in cases of higher loan to value (“LTV”).
Collections and recoveries processes are designed to provide a fair, consistent and effective operation for arrears management
with a focus on
good customer outcomes. We seek to engage in early communication with borrowers experiencing difculty in meeting their repayme
nts and
provide forbearance where appropriate. Capacity in collections and recoveries teams is closely monitored with clear plans in pl
ace to deal with
increases in arrears.
Government lending schemes
In addition to the Covid-19 specic forbearance measures covered below, following accreditation, customers facilities were offe
red under the
UK government-introduced Coronavirus Business Interruption Loan
Scheme (“CBILS”), the Coronavirus Large Business Interruption L
oan
Scheme (“CLBILS”) and the Bounce Back Loan Scheme (“BBLS”), thereby enabling us to maximise our support to small businesses. As
at
31 July 2022, 5,445 facilities were drawn, with a residual balance of £747.5 million (31 July 2021: £983.9 million) following c
ommencement of
repayments across our Property, Asset Financ
e & Leasing and Invoice Finance businesses.
We have also received accreditation to offer products under the Recovery Loan Scheme, and schemes in the Republic of Ireland. A
s at
31 July2022, there are 633 live and approved loans, with limits of £181.6 million.
Forbearance
Forbearance occurs when a customer is experiencing difculty in meeting their nancial commitments and a concession is granted,
by
changing the terms of the nancial arrangement, which would not otherwise be considered. This arrangement can be temporary or p
ermanent
depending on the customer’s circumstances.
The Banking division reports on forborne exposures as either performing or non-performing in line with regulatory requirements.
A forbearance
policy is maintained to ensure the necessary processes are in place to enable consistently fair treatment of each customer and
that they are
managed based on their individual circumstances. The arrangements agreed with customers will aim to create a sustainable and af
fordable
nancial position, thereby reducing the likelihood of suffering a credit loss. The forbearance policy is periodically reviewed
to ensure it remains
effective.
Covid-19 approach
As the global pandemic has evolved, the impact on customers and their ongoing performance and requirements have been monitored,
including the uptake of concessions, payment performance, the resumption of normal payment terms and the requirement for furthe
r
concessions. Appropriate cure periods associated with these concessions have been determined based on in-depth knowledge of por
tfolios
and sub-portfolios.
The Central Credit Risk function continues to report on Covid-19 related concessions to the CRMC. Additional reporting tracks t
he trajectory of
Covid-19 related concessions across the businesses and examines sector and asset concentrations.
28. Financial Risk Management
continued
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Financial Statements
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Close Brothers Group plc
Annual Report 2022
The number of customers supported via concessions offered has fallen to 770 from 17,674 at the end of the prior nancial year.
A loan will be treated as forborne until a cure period has been met. The cure periods of Covid-19 related forborne exposures ar
e subject to
expert judgement and are underpinned by carefully considered assumptions. These are subject to regular review and varies per bu
siness and
ranges from instant cure when concession ends (subject to conrmation of no adverse performance) to a cure period of between 3
and 12
months, commencing upon resumption of full repayments in instances where partial repayments had been agreed for a period of tim
e.
BAU forbearance
The Banking division has historically offered a range of concessions to support customers which vary depending on the product a
nd the
customer’s status. Such concessions include an extension outside terms (for example a higher loan to value or overpayments) and
renancing,
which may incorporate an extension of the loan tenor and capitalisation of arrears. Furthermore, other forms of forbearance suc
h as
moratorium, covenant waivers, and rate concessions are also offered.
Loans are classied as forborne at the time a customer in nancial difculty is granted a concession and the loan will remain t
reated and
recorded as forborne until the following exit conditions are met:
1.
The loan is considered as performing and there is no past-due amount according to the amended contractual terms;
2.
A minimum two-year probation period has passed from the date the forborne exposure was considered as performing, during which t
ime
regular and timely payments have been made;
3. None of the customer’s exposures with Close Brothers are more than 30 days past due at the end of the probation period.
Forbearance analysis
At 31 July 2022 the gross carrying amount of exposures with forbearance measures was £208.9 million (31 July 2021: £615.0 milli
on). The key
driver of this decrease has been repayment and curing of Covid-19 related forbearance, the total of which amounts to £40.8 mill
ion at 31 July
2022 (31 July 2021: £454.8 million).
An analysis of forborne loans is shown in the table below:
Gross loans
and advances
to customers
£ million
Forborne
loans
£ million
Forborne loans
as a percentage
of gross loans and
advances to
customers
%
Provision on
forborne loans
£ million
Number
of customers
supported
31 July 2022
9,144.5
Covid-19 forbearance
40.8 0.4% 1.4 770
Non-Covid-19 forbearance
168.1 1.8% 42.9 10,273
9,144.5 208.9 2.3% 44.3 11,043
31 July 2021
8,724.9
Covid-19 forbearance
454.8 5.2% 47.3 17,674
Non-Covid-19 forbearance
160.2 1.8% 35.5 12,679
8,724.9 615.0 7.0% 82.8 30,353
The following is a breakdown of forborne loans by segment split by those driven by Covid-19 compared to concessions that have a
risen in the
normal course of business:
31 July 2022
31 July 2021
Covid-19
£ million
Non-Covid-19
£ million
Total
forborne
loans
£ million
Covid-19
£ million
Non-Covid-19
£ million
Total
forborne loans
£ million
Commercial
34.2 28.1 62.3
287.4 19.8 307.2
Retail
1.8 21.2 23.0
49.2 9.2 58.4
Property
4.8 118.8 123.6
118 .2 131.2 249.4
40.8 168.1 208.9
454.8 160.2 615.0
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198
Close Brothers Group plc
Annual Report 2022
The Notes
continued
The following is a breakdown of the number of customers supported by segment:
31 July 2022
31 July 2021
Covid-19 Non-Covid-19
Total number
of customers
supported
Covid-19 Non-Covid-19
Total number
of customers
supported
Commercial
404 114 518
2,291 136 2,427
Retail
365 10,102 10,467
15,333 12,485 27,818
Property
15758
50 58 108
770 10,273 11,043
17,674 12,679 30,353
The following is a breakdown of forborne loans by concession type split by those driven by Covid-19 compared to concessions tha
t have arisen
in the normal course of business:
31 July 2022
31 July 2021
Covid-19
£ million
Non-Covid-19
£ million
Forborne
loans
£ million
Covid-19
£ million
Non-Covid-19
£ million
Forborne
loans
£ million
Extension outside terms
5.4 107.6 113.0
123.5 121.9 245.4
Renancing
–3.03.0
1.2 5.3 6.5
Moratorium
35.4 34.5 69.9
329.7 16.1 345.8
Other modications
– 23.0 23.0
0.4 16.9 17.3
40.8 168.1 208.9
454.8 160.2 615.0
Segmental credit risk
Commercial is a combination of several specialist, predominantly secured, lending businesses. The nature of assets nanced vari
es across the
businesses. The majority of the loan book is comprised of loans less than £2.5 million. Credit quality is predominantly assesse
d on an individual
loan-by-loan basis. During and post the pandemic, Commercial has provided additional support to customers using the CBILS, CLBI
LS and
RLS products which benet from British Business Bank guarantee support. Collection and recovery activity is executed promptly b
y experts
with experience in the specialised assets. This approach allows remedial action to be implemented at the appropriate time to mi
nimise
potentialloss.
Retail is predominantly high volume secured, refundable or structurally protected lending. The majority of the loan book is com
prised of loans
less than £20,000 and includes both regulated and unregulated agreements. Credit issues are identied via largely automated mon
itoring and
tracking processes. Collections processes and actions (focused on good and fair customer outcomes) are designed and implemented
to
support and restore customers to a performing status, with recovery methods applied to minimise potential loss.
Property is a low volume, specialised lending portfolio with credit quality assessed on an individual loan by loan basis. The m
ajority of the loan
book is comprised of Residential Development loans of less than £10 million. All loans are regularly reviewed to ensure that th
ey are performing
satisfactorily, with Residential Development facilities monitored, broadly, on a monthly basis by independent Close Brothers ap
pointed Project
Monitoring Surveyors (“PMS”) to certify build payments and the residual cost-to-complete. This ensures the thorough supervision
of all live
developments and facilitates the monthly checking of on-site progress against original build plan.
In Commercial and Property, performing loans with elevated levels of credit risk may be placed on watch lists depending on the
perceived
severity of the credit risk.
Credit risk reporting
The following table sets out loans and advances to customers, trade receivables and undrawn facilities by the group’s internal
credit risk grading
and illustrates the allocation of these per IFRS 9 staging category for comparative purposes. The analysis of lending has been
prepared based
on the following risk categories:
Low risk: The credit risk prole of the borrower is considered acceptable with the borrower considered likely to meet obligatio
ns as they fall due.
Standard monitoring in place.
Medium risk: Evidence of deterioration in the credit risk prole of the borrower exists which requires increased monitoring. Po
tential concerns on
ability to meet obligations as they fall due may exist.
High risk: Evidence of signicant deterioration in the credit risk prole of the borrower exists which requires enhanced manage
ment. Full
repayment may not be achieved with potential for loss identied.
28. Financial Risk Management
continued
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Strategic Report
Financial Statements
199
Close Brothers Group plc
Annual Report 2022
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
At 31 July 2022
Gross loans and advances to customers
Low risk
7,356.7 706.9 21.4 8,085.0
Medium risk
259.3 401.9 47.3 708.5
High risk
11.0 50.1 289.9 351.0
Ungraded
––––
7,627.0 1,158.9 358.6 9,144.5
Undrawn commitments
Low risk
1,205.9 10.7 – 1,216.6
Medium risk
0.4 3.8 – 4.2
High risk
–2.40.22.6
1,206.3 16.9 0.2 1,223.4
Trade receivables
1
Low risk
8.6 – – 8.6
Medium risk
–0.4 –0.4
High risk
––0.80.8
8.6 0.4 0.8 9.8
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Total
£ million
At 31 July 2021
Gross loans and advances to customers
Low risk
7, 217. 8 3 28 . 4 10 .8 7, 5 57. 0
Medium risk
210.5 616.5 31.5 858.5
High risk
0.5 13.6 283.0 297.1
Ungraded
5.5 1.7 5.1 12.3
7, 43 4 . 3 9 6 0 . 2 3 3 0 .4 8 ,724 .9
Undrawn commitments
Low risk
1,249.2 5.6 – 1,254.8
Medium risk
51.1 3 .0 – 5 4.1
High risk
––1.41.4
1,300.3 8.6 1.4 1,310.3
Trade receivables
1
Low risk
8.1 – – 8.1
Medium risk
– 1.0 – 1.0
High risk
––0.50.5
8.1 1.0 0.5 9.6
1 Lifetime expected credit losses are recognised for all trade receivables under the IFRS 9 simplied approach. The gures pres
ented are on a net basis after deducting for expected
credit losses of £3.2 million (31 July 2021: £3.4 million) relating to predominantly Stage 3 receivables.
Low risk loans and advances to customers represent 88% of the overall portfolio (31 July 2021: 87%), reective of our prudent a
nd consistent
approach to credit risk management. 80% (31 July 2021: 83%) of total advances are classied as low risk Stage 1, driven by the
strong quality of
the portfolio. Low risk Stage 2 represents 8% (31 July 2021: 4%) of loans and advances to customers, largely comprising early a
rrears cases, or
agreements which have triggered a signicant increase in credit risk indicator, or the 30 days past due backstop. The increase
is primarily driven
by deteriorating macroeconomic forecasts. Low risk Stage 3 loans and advances to customers primarily relate to agreements which
have
triggered the 90 days past due backstop but where full repayment is expected.
Medium risk loans account for 8% (31 July 2021: 10%) of total loans and advances to customers, of which the majority is in Stag
e 2. Medium
risk Stage 1 has increased to 3% (31 July 2021: 2%) as certain parts of the Novitas loan book have been moved to medium risk, r
eecting the
latest case failure rates. Medium risk Stage 2 represents 4% (31 July 2021: 7%), reecting the reduction in Covid-19 forbearanc
e. Loans and
advances to customers reected as medium risk Stage 3 primarily relate to agreements that have triggered the 90 days past due b
ackstop in
addition to other signicant increase in credit risk triggers.
High risk loans account for 4% (31 July 2021: 3%) of total loans and advances to customers with the majority corresponding to S
tage 3.
Book 1.indb 199 27/09/2022 23:48:47
200
Close Brothers Group plc
Annual Report 2022
The Notes
continued
Collateral held
The group mitigates credit risk through holding collateral against loans and advances to customers. The group has internal poli
cies on the
acceptability of specic collateral types, the requirements for ensuring effective enforceability and monitoring of collateral
in-life. Internal policies
dene, amongst other things, legal documentation requirements, the nature of assets accepted, loan to value and age at originat
ion, and
exposure maturity and in-life inspection requirements. An asset valuation is undertaken as part of the loan origination process
.
The principal types of collateral held by the group against loans and advances to customers in the Property and Commercial busi
nesses
include residential and commercial property and charges over business assets such as equipment, inventory and accounts receivab
le. Within
Retail the group holds collateral primarily in the form of vehicles in Motor Finance and refundable insurance premiums in Premi
um Finance,
where an additional layer of protection may exist through broker recourse.
The Banking division’s collateral policies have not materially changed during the reporting period and there has been no signi
cant change in
the overall quality of the collateral held by the group since the prior period.
Analysis of gross loans and advances to customers by LTV ratio is provided below. The value of collateral used in determining t
he LTV ratio is
based upon data captured at loan origination, or where available, a more recent updated valuation.
Commercial
£ million
Retail
£ million
Property
£ million
Total
£ million
LT V
1
60% or lower
1,238.2 179.5 1,011.4 2,429.1
>60% to 70%
471.6 179.5 367.3 1,018.4
>70% to 80%
375.5 374.9 49.8 800.2
>80% to 90%
692.7 1,108.0 4.5 1,805.2
>90% to 100%
1,052.6 477.6 – 1,530.2
Greater than 100%
213.3 318.9 77.2 609.4
Structurally protected
2
291.7 452.8
–
744.5Unsecured
164.8 42.7
–
207.5At 31 July 2022
4,500.4 3,133.9 1,510.2 9,144.5
1 Government lending scheme facilities totalling £913.5 million (31 July 2021: £983.9 million), are allocated to a low LTV cate
gory reecting the nature of the government guarantee and
resultant level of lending risk.
2 Exposures are considered structurally protected when, in manage
ment’s judgement, they have characteristics which mitigate the
credit risk of the exposure to a signicant extent, in
spite of not representing tangible security.
Commercial
£ million
Retail
£ million
Property
3
£ million
Total
£ million
LT V
1
60% or lower
1,301.7 171.5 1,082.1 2,555.3
>60% to 70%
203.9 172.3 323.8 700.0
>70% to 80%
333.5 363.3 35.2 732.0
>80% to 90%
494.2 1,154.9 6.0 1,655.1
>90% to 100%
1,103.4 461.7 7.3 1,572.4
Greater than 100%
237.2 240.4 88.1 565.7
Structurally protected
2
330.5 437.5
–
768.0Unsecured
136.1 40.3
–
176.4
At 31 July 2021
4,140.5 3,041.9 1,542.5 8,724.9
1 Government lending scheme facilities totalling £983.9 million (31 July 2020: £193.8 million), are allocated to a low LTV category reecting the nature of the government guarantee and
resultant level of lending risk.
2 Exposures are considered structurally protected when, in manage
ment’s judgement, they have characteristics which mitigate the
credit risk of the exposure to a signicant extent, in
spite of not representing tangible security.
3 Gross loans and advances to customers by LTV ratio in Property has been updated, with no impact on the total balance, to ensu
re the basis of presentation is consistent with the
current year.
28. Financial Risk Management
continued
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Close Brothers Group plc
Annual Report 2022
Gross loans and advances to customers which are credit-impaired split by LTV ratio:
Commercial
£ million
Retail
£ million
Property
£ million
Total
£ million
LT V
60% or lower
42.5 1.7 9.2 53.4
>60% to 70%
0.7 2.4 14.2 17.3
>70% to 80%
2.7 7.0 19.1 28.8
>80% to 90%
16.4 17.9 4.4 38.7
>90% to 100%
10.1 19.1 – 29. 2
Greater than 100%
4.8 11.9 77.1 93.8
Structurally protected
56.5 4.1 – 60.6
Unsecured
35.4 1.4 – 36.8
At 31 July 2022
169.1 65.5 124.0 358.6
Commercial
£ million
Retail
£ million
Property
1
£ million
Total
£ million
LT V
60% or lower
19.8 2.8 10.1 32.7
>60% to 70%
2.0 2.8 57.6 62.4
>70% to 80%
6.4 6.3 18.2 30.9
>80% to 90%
12.8 12.9 6.0 31.7
>90% to 100%
15.2 9.0 7.3 31.5
Greater than 100%
14.0 5.1 88.1 107.2
Structurally protected
13.0 3.0 – 16.0
Unsecured
16.7 1.3 – 18.0
At 31 July 2021
99.9 43.2 187.3 330.4
1 Credit-impaired gross loans and advances to customers by LTV ratio in Property has been updated, with no impact on the total balance, to ensure the basis of presentation is
consistent with the current year.
Financial assets: Treasury assets
The credit risk presented by the group’s treasury assets is low. Immaterial impairment provisions are recognised for cash and b
alances at
central banks, certicates of deposit and sovereign and central bank debt. These nancial assets are investment grade and in St
age1.
Financial assets: Settlement balances and loans to money brokers against stock advanced
The credit risk presented by settlement balances in the Securities division is limited, as such balances represent delivery ver
sus payment
transactions where delivery of securities occurs simultaneously with payment. The credit risk is therefore limited to the chang
e in market price of
a security between trade date and settlement date and not the absolute value of the trade. Winterood is a market maker and tra
des on a
principal-only basis with regulated counterparties including stockbrokers, wealth managers, institutions and hedge funds who ar
e either
authorised and regulated by the PRA and/or FCA or equivalent regulator in the respective country.
Counterparty exposure and settlement failure monitoring controls are in place as part of an overall risk management framework a
nd settlement
balances past due are actively managed.
Loans to money brokers against stock advanced of £48.4 million (31 July 2021: £51.1 million) is the cash collateral provided to
these institutions.
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Annual Report 2022
The Notes
continued
for stock borrowing by Winterood. The stock borrowing to which the cash deposits relate is short term in nature and is recorde
d at the amount
payable. The credit risk of this nancial asset is therefore limited.
The following table shows the ageing of settlement balances:
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Impairment
provisions
£ million
Total
£ million
At 31 July 2022
Not past due
726.0 – – – 726.0
Less than 30 days past due
70.6 – – – 70.6
More than 30 days but less than 90 days past due
–1.4 – –1.4
More than 90 days past due
– – 1.5 (0.2) 1.3
796.6 1.4 1.5 (0.2) 799.3
Stage 1
£ million
Stage 2
£ million
Stage 3
£ million
Impairment
provisions
£ million
Total
£ million
At 31 July 2021
Not past due 615.2 – – – 615.2
Less than 30 days past due 81.6 – – – 81.6
More than 30 days but less than 90 days past due – 1.2 – – 1.2
More than 90 days past due – – 1.8 (0.2) 1.6
696.8 1.2 1.8 (0.2) 699.6
Company nancial assets: Amounts owed by subsidiaries
Amounts owed by subsidiaries on the company balance sheet largely relate to Close Brothers Limited and Close Brothers Holdings
Limited,
and the credit risk presented by these nancial assets is immaterial.
(d) Market risk
Interest rate risk
The group’s exposure to interest rate risk arises in the Banking division and, accordingly, the remainder of this section relates to the Banking
division. Interest rate risk in the group’s other divisions is considered to be immaterial.
The group has a simple and transparent balance sheet and a low appetite for interest rate risk which is limited to that require
d to operate
efciently. The group’s policy is to match repricing characteristics of assets and liabilities naturally where possible or by u
sing interest rate swaps
to secure the margin on its loans and advances to customers. These interest rate swaps are disclosed in note 14.
The Asset and Liability Committee (“ALCO”) monitors the interest rate risk exposure across the Bank’s balance sheet. There are
three main
sources of interest rate risk recognised, which could adversely impact future income or the value of the balance sheet:
• repricing risk occurs when assets and liabilities reprice at different times;
• embedded optionality risk occurs as a result of special conditions attached to contract terms embedded in some assets and lia
bilities; and
• basis risk occurs where there is a mismatch in the interest rate reference rate for assets and liabilities.
Interest rate risk within the banking book (“IRRBB”) is assessed by applying key behavioural and modelling assumptions includin
g but not
limited to xed rate loans subject to prepayment risk, behaviour of non-maturity assets, treatment of own equity and the expect
ation of interest
rate options. This is performed across a range of regulatory prescribed and internal interest rate shocks approved by ALCO.
Two measures are used for measuring IRRBB, namely Earnings at Risk (“EaR”) and Economic Value (“EV”):
• EaR measures one year impacts to earnings, including basis risk, highlighting any earnings sensitivity should rates change un
expectedly; and
• EV measures longer term earnings capacity due to rate changes, it highlights potential future sensitivity of earnings, and ul
timately risk to capital
The table below sets out the assessed impact on our EaR due to a parallel shift in interest rates at 31 July:
2022
£ million
2021
£ million
0.5% increase
2.1
(11.6)
0.5% decrease
(1.9)
8.3
The table below sets out the assessed impact on our base case EV due to a shift in interest rates at 31 July:
2022
£ million
2021
£ million
0.5% increase
1.1
(4.2)
0.5% decrease
(0.8)
4.3
The impact above is on a comparable 0.5% increase and decrease basis. The Bank of England Base Rate had increased base rate to
1.25% by
31 July 2022, from 0.1% at 31 July 2021. This has resulted in a reduction in embedded optionality risk as oors embedded in som
e variable rate
28. Financial Risk Management
continued
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203
Close Brothers Group plc
Annual Report 2022
loans are no longer generating additional earnings. The reduction in embedded optionality risk is responsible for most of the m
ovement in the
EaR and EV metrics in the year. The major driver for EaR and EV is now Repricing Risk with increasing rates driving positive Ea
R and EV and
modest rate reductions resulting in negative EV and EaR.
Interest rate benchmark reform
During the year, the group completed the transition away from the use of LIBOR to alternative benchmark rates in loan documenta
tion, treasury
transactions and other forms of contract. At 31 July 2021, loans and advances to customers amounting to £995.5 million and deri
vatives with a
notional value of £84.7 million were yet to transition to an alternative benchmark rate. The transition was subsequently comple
ted by
31 December 2021 in compliance with the requirements set by the Prudential Regulation Authority and Financial Conduct Authority
. There are
no signicant changes to the nature of the risks arising from nancial instruments to which the group is exposed as a result of
the transition.
Foreign exchange risk
A change in the euro exchange rate would decrease the group’s equity by the following amounts:
2022
£ million
2021
£ million
20% strengthening of sterling against the euro
(1.7)
(0.9)
The group has additional material currency assets and liabilities primarily as a result of treasury operations in the Banking d
ivision. These assets
and liabilities are matched by currency, using exchange rate derivative contracts where necessary. Details of these contracts a
re disclosed in
note 14. Other potential group exposures arise from share trading settled in foreign currency in the Securities division, and f
oreign currency
equity investments. The group has policies and processes in place to manage foreign currency risk, and as such the impact of an
y reasonably
expected exchange rate uctuations would not be material.
Market price risk
Trading nancial instruments: Equity shares and debt securities
The group’s trading activities relate to Winterood. The following table shows the group’s trading book exposure to market pric
e risk:
Highest
exposure
£ million
Lowest
exposure
£ million
Average
exposure
£ million
Exposure
at 31 July
£ million
For the year ended 31 July 2022
Equity shares
Long
54.0 25.3 32.6 27.1
Short
28.9 5.3 10.0 7.9
22.6 19.2
Debt securities
Long
23.8 14.2 19.5 12.4
Short
16.1 7.2 11.5 7.5
8.0 4.9
Highest
exposure
£ million
Lowest
exposure
£ million
Average
exposure
£ million
Exposure
at 31 July
£ million
For the year ended 31 July 2021
Equity shares
Long
49.0 24.8 30.9 30.8
Short
22.8 5.8 11.0 9.4
19.9 21.4
Debt securities
Long
28.6 19.1 22.7 20.1
Short
12.9 4.5 8.6 7.0
14.1 13.1
With respect to the long and short positions on debt securities £8.0 million and £1.7 million (2021: £9.1 million and £0.1 mill
ion) were due to
mature within one year respectively.
The average exposure has been calculated on a daily basis. The highest and lowest exposures occurred on different dates and the
refore a net
position of these exposures does not reect a spread of the trading book.
Based upon the trading book exposure given above, a hypothetical fall of 10% in market prices would result in a £1.9 million de
crease (2021:
£2.1 million decrease) in the group’s income and net assets on the equity trading book and a £0.5 million decrease (2021: £1.3
million decrease)
on the debt securities trading book. However, the group’s trading activity is mainly market-making where positions are managed
throughout the
day on a continuous basis. Accordingly, the sensitivity referred to above is purely hypothetical.
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Annual Report 2022
The Notes
continued
Non-trading nancial instruments
Net gains and losses on non-trading nancial instruments are disclosed in notes 12 and 13.
(e) Liquidity risk
Liquidity risk is the risk that liabilities cannot be met when they fall due or can only be met at an uneconomic price and aris
es mainly in the
Banking division.
The group has a prudent liquidity position with total available funding at 31 July 2022 of £11.6 billion (31 July 2021: £11.1 b
illion). This funding is
signicantly in excess of its loans and advances to customers at 31 July 2022 of £8.9 billion (31 July 2021: £8.4 billion). The
group has a large
portfolio of high quality liquid assets principally including cash placed on deposit with the Bank of England. The group measur
es liquidity risk
with a variety of measures including regular stress testing and cash ow monitoring, and reporting to both the group and divisi
onal boards.
The following table analyses the contractual maturities of the group’s on balance sheet nancial liabilities on an undiscounted
cash ow basis.
On
demand
£ million
In less
than three
months
£ million
In more
than three
months but
not more
than six
months
£ million
In more than
six months
but not
more than
one year
£ million
In more than
one year but
not more
than ve
years
£ million
In more
than ve
years
£ million
Total
£ million
At 31 July 2022
Settlement balances
–780.7––––780.7
Deposits by banks
6.0 51.9 98.9 4.1 – – 160.9
Deposits by customers
120.9 1,645.1 2,046.5 1,600.1 1,427.2 – 6,839.8
Loans and overdrafts from banks
12.0 12.0 1.9 3.7 610.5 – 640.1
Debt securities in issue
– 30.3 256.2 619.5 890.7 444.2 2,240.9
Loans from money brokers against stock advanced
–––––––
Subordinated loan capital
– 2.0 – 2.0 15.0 218.0 237.0
Derivative nancial instruments
– 6.4 9.0 16.0 89.0 55.6 176.0
Lease liabilities
0.2 4.2 3.6 7.3 33.9 11.8 61.0
Other nancial liabilities
16.1 124.6 5.3 6.8 34.4 7.0 194.2
Total
155.2 2,657.2 2,421.4 2,259.5 3,100.7 736.6 11,330.6
On
demand
£ million
In less
than three
months
£ million
In more than
three months
but not more
than six
months
£ million
In more than
six months
but not more
than one year
£ million
In more than
one year but
not more than
ve years
£ million
In more
than ve
years
£ million
Total
£ million
At 31 July 2021
Settlement balances – 674.2 – – – – 674.2
Deposits by banks 2.1 37.7 105.8 5.0 – – 150.6
Deposits by customers 576.1 1,549.4 1,985.0 1,372.0 1,202.0 – 6,684.5
Loans and overdrafts from banks 22.7 0.1 0.1 0.2 491.1 – 514.2
Debt securities in issue – 58.3 75.5 106.6 1,048.7 705.0 1,994.1
Loans from money brokers against stock advanced – – – – – – –
Subordinated loan capital – 1.0 1.0 2.0 21.0 243.9 268.9
Derivative nancial instruments – 5.3 3.7 8.7 67.8 43.5 129.0
Lease liabilities 0.2 3.8 3.2 6.8 35.0 13.5 62.5
Other nancial liabilities 18.2 158.4 6.7 8.1 47.5 1.3 240.2
To tal 619. 3 2,4 88.2 2,181.0 1,5 09.4 2,913.1 1,0 07.2 10,718.2
28. Financial Risk Management
continued
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Close Brothers Group plc
Annual Report 2022
Derivative nancial instruments in the table above includes net currency swaps. The following table shows the currency swaps on
a gross basis:
On
demand
£ million
In less
than three
months
£ million
In more than
three months
but not more
than six
months
£ million
In more than
six months
but not more
than one year
£ million
In more than
one year but
not more than
ve years
£ million
In more
than ve
years
£ million
Total
£ million
At 31 July 2022 1.7 69.8 9.0 16.0 88.9 55.6 241.0
At 31 July 2021 – 68.0 4.0 9.0 67.8 43.5 192.3
(f) Offsetting
The following table shows the impact on derivative nancial assets and liabilities which have not been offset but for which the
group has
enforceable master netting arrangements in place with counterparties. The net amounts show the exposure to counterparty credit
risk after
offsetting benets and collateral, and are not intended to represent the group’s actual exposure to credit risk.
Master netting arrangements allow outstanding transactions with the same counterparty to be offset and settled net, either unco
nditionally or
following a default or other predetermined event. Financial collateral on derivative nancial instruments consists of cash sett
led, typically daily, to
mitigate the mark to market exposures.
Gross
amounts
recognised
£ million
Master netting
arrangements
£ million
Financial
collateral
£ million
Net amounts
after offsetting
£ million
At 31 July 2022
Derivative nancial assets
71.2 (69.1) (0.5) 1.5
Derivative nancial liabilities
89.2 (69.1) (26.9) (6.8)
At 31 July 2021
Derivative nancial assets 18.3 (16.0) (2.0) 0.3
Derivative nancial liabilities 21.2 (16.0) (16.9) (11.7)
29. Interest in Unconsolid
ated Structured Entities
Structured entities are those entities that have been designed so that voting or similar rights are not the dominant factor in
deciding who has
control, such as when any voting rights relate to administrative tasks only, or when the relevant activities are directed by me
ans of contractual
arrangements.
The group has interests in structured entities as a result of contractual arrangements arising from the management of assets on
behalf of its
clients as part of its Asset Management division. These structured entities consist of unitised vehicles such as Authorised Uni
t Trusts (“AUTs”)
and Open Ended Investment Companies (“OEICs”) which entitle investors to a percentage of the vehicle’s net asset value. The str
uctured
entities are nanced by the purchase of units or shares by investors. The group does not hold direct investments in its structu
red entities.
As fund manager, the group does not guarantee returns on its funds or commit to nancially support its funds. The business acti
vity of all
structured entities is the management of assets in order to maximise investment returns for investors from capital appreciation
and/or
investment income. The group earns a management fee from its structured entities, based on a percentage of the entity’s net ass
et value.
The main risk the group faces from its interest in assets under management on behalf of external investors is the loss of fee i
ncome as a result
of the withdrawal of funds by clients. Outows from funds are dependent on market sentiment, asset performance and investor con
siderations.
The assets under management of unconsolidated structured entities managed by the group were £5,091million at 31 July 2022 (31
July 2021:
£5,467 million). Included in revenue on the consolidated income statement is management fee income of £36.7million (2021: £35.
4 million) from
unconsolidated structured entities managed by the group.
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206
Close Brothers Group plc
Annual Report 2022
The Notes
continued
Registered ofce addresses:
1 10 Crown Place, London EC2A 4FT, United Kingdom.
2 Wimbledon Bridge House, Harteld Road, Wimbledon, London SW19 3RU, United Kingdom.
3 The Atrium Building Cannon Bridge, 25 Dowgate Hill, London EC4R 2GA, United Kingdom.
4 Roman House, Roman Road, Doncaster,
South Yorkshire DN4 5EZ, United Kingdom.
5 Unit 1, Kingsher Park, Headlands Business Park, Ringwood, Hampshire BH24 3NX, United Kingdom.
6 101 Wigmore Street, London W1U 1QU, United Kingdom.
7 4th Floor, The Athenaeum Building, 8 Nelson Mandela Place, Glasgow G2 1BT, United Kingdom.
8 Wilmington House, High Street, East Grinstead, West Sussex RH19 3AU, United Kingdom.
9 10th Floor, 5 Churchill Place, London E14 5HU, United Kingdom.
10 1 Bartholomew Lane, London EC2N 2AX, United Kingdom.
11 Olympic Court Third Avenue, Trafford Park Village, Manchester M17 1AP, United Kingdom.
12 Lows Lane, Stanton-By-Dale, Ilkeston, Derbyshire DE7 4QU, United Kingdom.
13 Grosse Bleiche 35-39, 55116, Mainz, Germany.
14 Conway House, Conway Street, St Helier JE4 5SR, Jersey.
15 1209 Orange Street, Wilmington 19801, New Castle, Delaware, USA.
16 Swift Square, Building 1, Santry Demesne, Northwood, Dublin, DO9 AOE4, Ireland.
17 PO Box 186, Royal Chambers, St Julian’s Avenue, St Peter Port GY1 4HP, Guernsey.
Subsidiaries by virtue of control:
18 The related undertakings are included in the consolidated
nancial statements as they are controlled by the group.
30. Investments in Subsidiaries
In accordance with section 409 of the Companies Act 2006, the following is a list of the group’s subsidiaries at 31 July 2022,
which are all wholly
owned and incorporated in the UK unless otherwise stated.
The investment in subsidiary of £287.0 million (31 July 2021: £287.0 million) in the company balance sheet relates to an invest
ment in the capital
reduction reserve of Close Brothers Holdings Limited. There were no indicators of impairment during the year relating to this i
nvestment (2021: none).
Group
Close Brothers Holdings Limited
1
Banking
Air and General Finance Limited
2
Armed Services Finance Limited
4
Arrow Audit Services Limited
1
Brook Funding (No.1) Limited
10, 18
Capital Lease Solutions Limited
1
CBM Holdings Limited
1
Close Asset Finance Limited
2
Close Brewery Rentals Limited
5
Close Brothers Asset Finance GmbH
13
(Germany)
Close Brothers DAC
16
(Ireland)
Close Brothers Factoring GmbH
13
(Germany)
Close Brothers Finance plc
1
Close Brothers Limited
1
Close Brothers Military Services Limited
4
Close Brothers Premium DAC
16
(Ireland)
Close Brothers Technology Services Limited
1
Close Brothers Vehicle Hire Limited
12
Close Business Finance Limited
2
Close Credit Management (Holdings) Limited
1
Close Finance (CI) Limited
14
(Jersey)
Close Invoice Finance Limited
1
Close Leasing Limited
11
Close Motor Finance Limited
4
Close PF Funding I Limited
9, 18
Commercial Acceptances Limited
6
Commercial Finance Credit Limited
2
Corporate Asset Solutions Limited
1
Finance for Industry Limited
1
Finance for Industry Services Limited
1
Kingston Asset Finance Limited
2
Kingston Asset Leasing Limited
2
Metropolitan Factors Limited
1
Micgate Holdings (UK) Limited
1
Novitas Loans Limited
2
Novitas (Salisbury) Limited
2
Orbita Funding 2017-1 plc
10, 18
Orbita Funding 2020-1 plc
10, 18
Orbita Funding 2022-1 plc
9, 18
Orbita Holdings Limited
10, 18
Orbita Holdings no.2 Limited
9, 18
Surrey Asset Finance Limited
2
Securities
W.S. (Nominees) Limited
3
Winterood Client Nominees Limited
3
Winterood Gilts Limited
3
Winterood Securities Holdings Limited
3
Winterood Securities Limited
3
Winterood Securities US Corporation
15
(Delaware, USA)
Asset Management
Cavanagh Financial Management Limited
7
CBF Wealth Management Limited
1
(80% shareholding)
CFSL Management Limited
1
Close Asset Management Holdings Limited
1
Close Asset Management Limited
1
Close Asset Management (UK) Limited
1
Close Brothers Asset Management (Guernsey) Limited
17
(Guernsey)
Close Investments Limited
1
Close Portfolio Management Limited
1
EOS Wealth Management Limited
1
Lion Nominees Limited
1
Place Campbell Close Brothers Limited
8
(50% shareholding)
PMN Financial Management LLP
1
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Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Glossary and Denition of Key Terms
Adjusted
Adjusted measures are presented on a basis consistent with prior periods and exclude amortisation
of intangible assets on acquisition, to present the performance of the group’s acquired businesses
consistent with its other businesses; and any exceptional and other adjusting items which do not
reect underlying trading performance
Assets under administration
Total assets for which Winterood Business Services provide custody and administrative services
Bad debt ratio
Impairment losses in the year as a percentage of average net loans and advances to customers and
operating lease assets
Bargains per day
Average daily number of Winterood’s trades with third parties
Bounce Back Loan Scheme
(“BBLS”)
UK government business lending scheme that help
s small and medium-sized businesses to borrow
between £2,000 and £50,000 (up to a maximum of 25% of their turnover)
Business as usual (“BAU”) costs
Operating expenses excluding depreciation and other costs related to investments
Buy As You Earn (“BAYE”)
The HM Revenue & Customs-approved Share Incentive Plan that gives all employees the opportunity
to become shareholders in the group
Capital Requirements Directive V
(“CRD V”)
European Union regulation implementing the Basel III requirements in Europe, alongside CRR II
Capital Requirements Regulation
(“CRR”)
Capital Requirements Regulation as implemented in the PRA Rulebook CRR Instrument and the PRA
Rulebook CRR Firms: Leverage Instrument (collectively known as “CRR”)
CDP
Formerly the “Carbon Disclosure Project”, a leading, internationally recognised independent rating
agency and assessor of corporate carbon emissions disclosures and actions
CET1 capital ratio
Measure of the group’s CET1 capital as a percentage of risk weighted assets, as required by CRR
Common equity tier 1 (“CET1”)
capital
Measure of capital as dened by the CRR. CET1 capital consists of the highest quality capital
including ordinary shares, share premium account, retained earnings and other reserves, less
goodwill and certain intangible assets and other regulatory adjustments
Compensation ratio
Total staff costs as a percentage of adjusted operating income
Coronavirus Business
Interruption Loan Scheme
(“CBILS”)
UK government business lending scheme that he
lps small and medium-sized businesses access
loans and other kinds of nance up to £5 million
Coronavirus Large Business
Interruption Loan Scheme
(“CLBILS”)
UK government business lending scheme that he
lps medium and large-sized businesses access
loans and other kinds of nance up to £200 million
Cost of funds
Interest expense incurred to support the lending activities divided by the average net loans and
advances to customers and operating lease assets
Credit impaired
Where one or more events that have a detrimental impact on the estimated future cash ows of a
loan have occurred. Credit impaired events are more severe than SICR triggers. Accounts which are
credit impaired will be allocated to Stage 3
Customer satisfaction score
(“CSAT”)
A measure of customer satisfaction expressed as a percentage of positive responses from the total of
those surveyed
Discounting
The process of determining the present value of future payments
Dividend per share (“DPS”)
Comprises the nal dividend proposed for the respective year, together with the interim dividend
declared and paid in the year
Earnings per share (“EPS”)
Prot attributable to shareholders divided by number of basic shares
Effective interest rate (“EIR”)
The interest rate at which revenue is recognised on loans and discounted to their carrying value over
the life of the nancial asset
Effective tax rate (“ETR”)
Tax on operating prot/(loss) as a percentage of operating prot/(loss) on ordinary activities before tax
Expected credit loss (“ECL”)
The unbiased probability-weighted average credit loss determined by evaluating a range of possible
outcomes and future economic conditions
Expense/income ratio
Total adjusted operating expenses divided by operating income
Exposure at default (“EAD”)
The capital outstanding at the point of default
Financial Conduct Authority
(“FCA”)
A nancial regulatory body in the UK, regulating nancial rms and maintaining integrity of the UK’s
nancial market
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Close Brothers Group plc
Annual Report 2022
Glossary and Denition of Key Terms
continued
Financial Reporting Council
(“FRC”)
An independent regulatory body responsible for promoting high quality corporate governance and
reporting amongst UK companies
Forbearance
Forbearance occurs when a customer is experiencing nancial difculty in meeting their nancial
commitments and a concession is granted, by changing the terms of the nancial arrangement,
which would not otherwise be considered
Funding allocated to loan book
Total funding excluding equity and funding held for liquidity purposes
Funding as % loan book
Total funding divided by net loans and advances to customers and operating lease assets
General Data Protection
Regulation (“GDPR”)
Regulation intended to strengthen and unify data protection for all individuals within the European
Union
Gross carrying amount
Loan book before expected credit loss provision
High quality liquid assets
(“HQLAs”)
Assets which qualify for regulatory liquidity purposes, including Bank of England deposits and
sovereign and central bank debt
HM Revenue & Customs
(“HMRC”)
The UK’s tax, payments and customs authority
Independent nancial adviser
(“IFA”)
Professional offering independent, whole of market advice to clients including investments, pensions,
protection and mortgages
Internal Capital Adequacy
Assessment Process (“ICAAP”)
An annual self-assessment of a bank’s material risks and the associated level of capital needed to be
held, and undertaking appropriate stress testing of capital adequacy
Internal Liquidity Adequacy
Assessment Process (“ILAAP”)
The processes for the identication, measurement, management and monitoring of liquidity
Internal ratings based (“IRB”)
approach
A supervisor-approved method using internal models, rather than standardised risk weightings, to
calculate regulatory capital requirements for credit risk
International Accounting
Standards (“IAS”)
Older set of standards issued by the International Accounting Standards Council, setting up
accounting principles and rules for preparation of nancial statements. IAS are being superseded
byIFRS
International Financial Reporting
Standards (“IFRS”)
Globally accepted accounting standards issued by the IFRS Foundation and the International
Accounting Standards Board
Investment costs
Includes depreciation and other costs related to investment in multi-year projects, new business
initiatives and pilots and cyber resilience. Excludes IFRS 16 depreciation
Leverage ratio
Tier 1 capital as a percentage of total balance sheet assets, adjusted for certain capital deductions,
including intangible assets, and off-balance sheet exposures
Lifetime expected credit loss
provision (“Lifetime ECL”)
Losses that result from default events occurring within the lifetime of the loan
Liquidity coverage ratio (“LCR”)
Measure of the group’s HQLAs as a percentage of expected net cash outows over the next 30 days
in a stressed scenario
Loan to value (“LTV”) ratio
For a secured or structurally protected loan, the loan balance as a percentage of the total value of the
asset
Loss day
Where aggregate gross trading book revenues are negative at the end of a trading day
Loss given default (“LGD”)
The amount lost on a loan if a customer defaults
Managed assets or assets under
management (“AUM”)
Total market value of assets which are managed by Close Brothers Asset Management in one of our
investment solutions
Market abuse regulation (“MAR”)
European regulation aimed at increasing market integrity and investor protection
MiFID II
The Markets in Financial Instruments Directive is the EU legislation that regulates rms who provide
services to clients linked to nancial instruments, and the venues where those instruments are traded
Modelled expected credit loss
provision
ECL = PD x LGD x EAD
Modication losses
Modication losses arise when the contractual terms of a nancial asset are modied. An adjustment
is required to the carrying value of the nancial asset to reect the present value of modied future
cash ows discounted at the original effective interest rate
Net carrying amount
Loan book value after expected credit loss provision
Net ows
Net ows as a percentage of opening managed assets calculated on an annualised basis
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209
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Net interest margin (“NIM”)
Operating income generated by lending activities, including interest income net of interest expense,
fees and commissions income net of fees and commissions expense, and operating lease income
net of operating lease expense, less depreciation on operating lease assets, divided by average net
loans and advances to customers and operating lease assets
Net promoter score (“NPS”)
A measure of customer satisfaction by which unfavourable ratings are deducted from favourable
ratings; hence a score above 0 is good, and above 50 is excellent
Net stable funding ratio (“NSFR”)
Regulatory measure of the group’s weighted funding as a percentage of weighted assets
Net zero
Target of completely negating the amount of greenhouse gases produced by reducing emissions or
implementing methods for their removal
Operating margin
Adjusted operating prot divided by operating income
Paris Agreement
International treaty on climate change, adopted in 2015, with a goal to limit global warming to well
below 2ºC, and preferably to 1.5ºC, compared to pre-industrial levels
Personal Contract Plan (“PCP”)
PCP is a form of vehicle nance where the customer defers a signicant portion of credit to the nal
repayment at the end of the agreement, thereby lowering the monthly repayments compared to a
standard hire-purchase arrangement. At the nal repayment date, the customer has the option to:
(a) pay the nal payment and take the ownership of the vehicle; (b) return the vehicle and not pay
the nal repayment; or (c) part-exchange the vehicle with any equity being put towards the cost of
a new vehicle
Probability of default (“PD”)
Probability that a customer will default on their loan
Prudential Regulation Authority
(“PRA”)
A nancial regulatory body, responsible for regulating and supervising banks and other nancial
institutions in the UK
Recovery Loan Scheme
Launched in April 2021 as a replacement to CBILS. Under the terms of the scheme, businesses of
any size that have been adversely impacted by the Covid-19 pandemic can apply to borrow up to
£10million, with accredited lenders receiving a government-backed guarantee of 80% on losses that
may arise
Return on assets
Adjusted operating prot attributable to shareholders divided by total closing assets at the balance
sheet date
Return on average tangible
equity
Adjusted operating prot attributable to shareholders divided by average total shareholders’ equity,
excluding intangible assets
Return on net loan book
(“RoNLB”)
Adjusted operating prot from lending activities divided by average net loans and advances to
customers and operating lease assets
Return on opening equity (“RoE”)
Adjusted operating prot attributable to shareholders divided by opening equity, excluding non-
controlling interests
Revenue margin
Income from advice, investment management and related services divided by average total client
assets. Average total client assets calculated as a two-point average
Risk weighted assets (“RWAs”)
A measure of the amount of a bank’s assets, adjusted for risk in line with the CRR. It is used in
determining the capital requirement for a nancial institution
Scope 1, 2 and 3 emissions
Categorisation of greenhouse gas emissions, as dened by the Greenhouse Gas (GHG) Protocol, into
direct emissions from owned or controlled sources (Scope 1), indirect emissions from the generation
of purchased electricity, heating and cooling consumed by the reporting company (Scope 2), and all
other indirect emissions that occur in a company’s value chain (Scope 3)
Secured debt
Debt backed or secured by collateral
Senior debt
Represents the type of debt that takes priority over other unsecured or more junior debt owed by the
issuer. Senior debt is rst to be repaid ahead of other lenders or creditors
Signicant increase in credit risk
(“SICR”)
An assessment of whether credit risk has increased signicantly since initial recognition of a loan
using a range of triggers. Accounts which have experienced a signicant increase in credit risk will be
allocated to Stage 2
Standardised approach
Generic term for regulator-dened approaches for
calculating credit, operational and market risk
capital requirements as set out in the CRR
Subordinated debt
Represents debt that ranks below, and is repaid after claims of, other secured or senior debt owed by
the issuer
Task Force on Climate-related
Financial Disclosures (“TCFD”)
Regulatory framework to improve and increase reporting of climate-related nancial information,
including more effective and consistent disclosure of climate-related risks and opportunities
Term funding
Funding with a remaining maturity greater than 12 months
Book 1.indb 209 27/09/2022 23:48:48
210
Close Brothers Group plc
Annual Report 2022
Glossary and Denition of Key Terms
continued
Term Funding Scheme (“TFS”)
The Bank of England’s Term Funding Scheme
Term Funding Scheme for Small
and Medium-sized Enterprises
(“TFSME”)
The Bank of England’s Term Funding Scheme with additional incentives for SMEs
Tier 2 capital
Additional regulatory capital that along with Tier
1 capital makes up a bank’s total regulatory capital.
Includes qualifying subordinated debt
Total client assets (“TCA”)
Total market value of all client assets including both managed assets and assets under advice and/or
administration in the As
set Management division
Total shareholder return (“TSR”)
Measure of shareholder return including share price appreciation and dividends, which are assumed
to be re-invested in the company’s shares
Watch list
Internal risk management process for heightened monitoring of exposures that are showing
increased credit risk
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211
Close Brothers Group plc
Annual Report 2022
Governance Report
Financial Statements
Strategic Report
Financial Calendar (provisional)
Event
Date
First quarter trading update
November 2022
Annual General Meeting
17 November 2022
Final dividend payment
22 November 2022
Pre-close trading update
January 2023
Half year end
31 January 2023
Interim results
March 2023
Third quarter trading update
May 2023
Pre-close trading update
July 2023
Financial year end
31 July 2023
Preliminary results
September 2023
The nancial calendar is updated on a regular basis throughout the year. Please refer to our website www.closebrothers.com for
up-to-date
details.
Cautionary Statement
Certain statements included or incorporated by reference within this report may constitute “forward-looking statements” in resp
ect of the group’s
operations, performance, prospects and/or nancial condition. Forward-looking statements are sometimes, but not always, identi
ed by their
use of a date in the future or such words as “anticipates”, “aims”, “due”, “could”, “may”, “will”, “should”, “expects”, “believ
es”, “inte nds”, “pla ns”,
“potential”, “targets”, “goal” or “estimates”. By their nature, forward-looking statements involve a number of risks, uncertain
ties and assumptions
and actual results or events may differ materially from those expressed or implied by those statements. Accordingly, no assuran
ce can be given
that any particular expectation will be met and reliance should not be placed on any forward-looking statement. Additionally, f
orward-looking
statements regarding past trends or activities should not be taken as a representation that such trends or activities will cont
inue in the future.
Except as may be required by law or regulation, no responsibility or obligation is accepted to update or revise any forward-loo
king statement
resulting from new information, future events or otherwise. Nothing in this report should be construed as a prot forecast. Pas
t performance is no
guide to future performance and persons needing advice should consult an independent nancial (or other professional) adviser.
This report does not constitute or form part of any offer or invitation to sell, or any solicitation of any offer to subscribe
for or purchase any shares or
other securities in the company or any of its group members, nor shall it or any part of it or the fact of its distribution for
m the basis of, or be relied
on in connection with, any contract or commitment or investment decisions relating thereto, nor does it constitute a recommenda
tion regarding the
shares or other securities of the company or any of its group members. Statements in this report reect the knowledge and infor
mation available
at the time of its preparation. Liability arising from anything in this report shall be governed by English law. Nothing in thi
s report shall exclude any
liability under applicable laws that cannot be excluded in accordance with such laws.
Investor Relations
Book 1.indb 211 27/09/2022 23:48:49
212
Close Brothers Group plc
Annual Report 2022
Independent Auditor
PricewaterhouseCoopers LLP
Solicitor
Slaughter and May
Corporate Brokers
J.P. Morgan Cazenove
UBS AG London Branch
Registrar
Link Group
10th Floor
Central Square
29 Wellington Street
Leeds
LS1 4DL
Customer support centre: 0371 664 0300 (calls are charged at the standard geographic rate and will vary by provider)
From overseas: +44 (0)371 664 0300 (calls will be charged at the applicable international rate)
Lines are open from 9.00 am to 5.30 pm Monday to Friday, excluding public holidays in England and Wales
Email: enquiries@linkgroup.co.uk
Website: www.linkgroup.eu
Online proxy voting: www.signalshares.com
Registered Ofce
Close Brothers Group plc
10 Crown Place
London EC2A 4FT
Telephone: +44 (0)333 321 6100
Email: enquiries@closebrothers.com
Website: www.closebrothers.com
Company No. 520241
Shareholder Warning
Fraudsters use persuasive and high-pressure tactics to lure investors into scams. They may offer to sell shares that prove to b
e worthless or
non-existent, or they can offer to buy shares at an inated price in return for you paying upfront. They promise high prots. H
owever, if you buy
or sell shares in this way, you will probably lose your money.
How to Avoid Share Fraud
• Remember that FCA-authorised rms are unlikely to contact you unexpectedly offering to buy or sell shares.
• Do not converse with them. Note the name of the person and rm contacting you, then end the call.
• To see if the person and rm contacting you are authorised by the FCA, check the Financial Services Register at https://regis
ter.fca.org.uk/s/
• Beware of fraudsters claiming to be from an authorised rm; copying its website; or giving you false contact details.
• If you want to phone the caller back, use the rm’s contact details listed on the Financial Services Register at https://regi
ster.fca.org.uk/s/
• If the rm does not have contact details on the Register or they tell you the details are out of date, call the FCA on 0800 1
11 6768.
• Search the list of unauthorised rms to avoid at: https://www.fca.org.uk/consumers/unauthorised-rms-individuals
• Remember that if you buy or sell shares from an unauthorised rm, you cannot access the Financial Ombudsman Service or Financ
ial
Services Compensation Scheme.
• Get independent nancial and professional advice before handing over any money.
• If it sounds too good to be true, it probably is.
Report a Scam
If fraudsters approach you, tell the FCA using the share fraud reporting form at https://www.fca.org.uk/consumers/report-scam-u
s. You
can also nd out more about investment scams at https://www.fca.org.uk/scamsmart/how-avoid-investment-scams. You can call the F
CA
Consumer Helpline on 0800 111 6768. If you have already paid money to share fraudsters, call Action Fraud on 0300 123 2040.
Company Information
Book 1.indb 212 27/09/2022 23:48:49
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Close Brothers Group plc
10 Crown Place
London EC2A 4FT
Tel: +44 (0)333 321 6100
www.closebrothers.com
01_Cover-OBC_SPREAD.indd 1 28/09/2022 00:03:30