CAY.L Regulatory News (CAY)

22 November 2017

Charles Stanley Group PLC

Interim results for the six months ended 30 September 2017

"Completed the initial turnaround and continued the trend of improving profitability by focusing on core wealth management activities."

Charles Stanley Group PLC (the Group or Charles Stanley) today announces its interim results for the six months ended 30 September 2017.

Financial highlights:

· Reported profit before tax up by 53.3% to £6.9 million (H1 2017: £4.5 million)

· Funds under Management and Administration up 1.3% to £24.3 billion (FY 2017: £24.0 billion)

· Core Business revenue up 9.8% to £74.0 million (H1 2017: £67.4 million)

· Core Business operating margin improved to 7.3% (H1 2017: 6.2%); Target of 15%

· Balance sheet strengthened - regulatory capital resources increased to £65.0 million (FY 2017: £61.4 million)

· Interim dividend increased to 2.5 pence per share (H1 2017: 1.5 pence)

Operational highlights:

· Finalised the disposal of our only remaining non-core activity, EBS Management PLC

· Reputation for client service reaffirmed with recent independent survey confirming that 58% of our clients would recommend us, compared to an industry average of 43%

· Good progress made on a range of initiatives to drive revenue growth including: greater external marketing activity; ongoing implementation of repricing; greater focus on discretionary services; more resource devoted to developing and integrating our financial planning proposition; and launch of new mobile app for Charles Stanley Direct

· Beginning to optimise the operating model to create capacity in the front office and efficiencies throughout our Support Functions

· Welcomed Hugh Grootenhuis and Marcia Campbell to our Board as independent Non-executive Directors

Paul Abberley, Chief Executive Officer, commented:

"Charles Stanley aims to become the UK's leading wealth manager by 2020. The first step toward this has now been delivered and the business has returned to profitability, achieving topline growth by focusing on core wealth management activities.

Our second step has been to put in place improved governance, better cost control and revised remuneration structures. We are now focused on the third but hardest step, that of invigorating our new business channels and more generally improving our productivity across both front and back office.

The Group continues to benefit from favourable markets which we think are likely to persist on a 6-12 month view. We do, however, face headwinds in the form of major regulatory change which is driving additional IT and process change costs and, in recent months, from lower than expected commission income. We will therefore need either a higher level of trading activity or other revenue increases to be generated in the second half in order to meet current market expectations.

Notwithstanding this note of caution, we remain confident about the long-term prospects for Charles Stanley as the benefits from the detailed execution of the third leg of our strategy begin to bear fruit."

For further information, please contact: 

Notes to editors:

Charles Stanley traces its origins back directly to 1792 and is one of the oldest firms on the London Stock Exchange. Charles Stanley today provides holistic wealth management services to private clients, charities and smaller institutions. These are delivered by over 400 professionals located in 24 offices throughout the UK, both direct to clients and to intermediaries. Our services include investment portfolio management and financial planning, supported by in-house administration to enhance the quality of service provided. In addition, Charles Stanley Direct provides an award-winning, direct-to-customer execution-only dealing platform for equities and funds.

Financial highlights:

Business highlights:

Core Business revenue by division:

Financial calendar:

1The Core Business figures represent the results of the Group's four main operating divisions, being Investment Management Services, Asset Management, Financial Planning and Charles Stanley Direct. They exclude held for sale activities and one-off items.

2Funds under Management and Administration.

Interim management report

The Group has continued to make good progress during the first half of the financial year, with growth in Discretionary funds of 6.1% to £12.1 billion and a Core Business profit before tax of £5.4 million, representing a year-on-year increase of 28.6%.

First half review

During the first half, we finalised the disposal of our only remaining non-core activity, EBS Management PLC. That marked the completion of Charles Stanley's initial turnaround, a two-year initiative which has returned the Group to profitability by focusing on core wealth management activities.

Our unique proposition is a full-service, holistic offering provided through an autonomous investment manager model. The structure for delivering this on a profitable basis is in place. Consequently we are now focused on invigorating our sales channels, both external and internal, and on improving productivity throughout the business.

Revenue growth

Charles Stanley has a strong reputation for client satisfaction, exemplified by a recent independent survey confirming that 58% of our clients would recommend us to a family member, friend or colleague, compared to an industry average of 43%.

That reputation has underpinned the Group's annualised revenue growth. In the first six months that rate was 5% after taking account of losses associated with investment managers who departed following last year's variable remuneration restructuring. Much of this growth continues to be generated directly by our investment managers but an increasing proportion is beginning to be derived from our Intermediary Sales Team who accounted for £81 million, or 10%, of new funds during the period.

In addition to securing new FuMA we have a number of other initiatives in train to increase revenue. First, we are implementing new charging structures arising from a firm-wide pricing review. Second, we continue to promote our discretionary investment management services where it is appropriate for existing clients. We expect regulatory requirements will accelerate the shift from advisory to discretionary services. Third, we are devoting more resource to growing and integrating our financial planning proposition. Fourth, we are widening our distribution network by building links with external independent financial advisers (IFAs).

Elsewhere, and with a focus on cross-divisional cooperation, the Asset Management division has launched the Personal Portfolio Service. This service is designed for smaller clients and provides a range of risk-rated open-ended investment companies (OEICs) supported by a suitability overlay. Charles Stanley Direct has assisted this launch by promoting the range on its platform. Both Asset Management and Charles Stanley Direct continue to achieve good growth in revenue, 25.8% and 23.8% respectively.

Operational efficiency

Alongside our revenue-generating activities, we are seeking to improve our operating model in order to create capacity in the front office and efficiencies throughout our Support Functions. To that end, we have recently appointed a highly experienced Transformation Director to oversee the redesign and automation of end-to-end processes. His work will complement process change already being implemented within each division. Currently this includes upgrading systems in the Asset Management and Financial Planning divisions and seeking to standardise tools used by the Investment Management Services division.

Board changes and governance

During the first half, we welcomed Hugh Grootenhuis and Marcia Campbell to our Board as independent Non-executive Directors. Both have considerable experience and knowledge in contemporary wealth management practices and business operations. Together they will offer constructive scrutiny and challenge to the executive team.

These appointments mark the completion of the Board restructure which has been undertaken as part of a wider governance refresh. In part that has been done in anticipation of the Senior Managers and Certification Regime (SMCR), but it will also improve our operational efficiency and risk management.

Outlook

With global growth improving, the main threat to financial markets is inflation and higher interest rates. However, we are not seeing the effects of this trend yet so we forecast a supportive market backdrop for the next 6-12 months.

That said, in recent months, we have faced various headwinds. First, there is an unusually high level of regulatory change being introduced in 2018 which is expected to give rise to an additional IT and process change cost in the second half of approximately £0.9 million. Secondly, although overall share trading volumes have been in line with our expectations, the commission income generated from it in recent months has been lower because of mix variances. We will therefore need either a higher level of trading activity or other revenue increases to be generated in the second half in order to meet current market expectations.

Notwithstanding the note of caution, we remain confident about the long-term prospects for Charles Stanley. We are growing organically and have a fully engaged team in place working towards one clear objective: to be the UK's leading wealth manager.

Paul Abberley

Chief Executive Officer

Ben Money-Coutts

Chief Financial Officer

21 November 2017

First half financial review

The Group continued to make good progress during H1 2018. Overall FuMA grew 1.3% to £24.3 billion, with Discretionary funds up 6.1% to £12.1 billion. The growth in funds and improved mix resulted in revenue of the Core Business increasing 9.8% and an improved profit before tax of £5.4 million (H1 2017: £4.2 million), an increase of 28.6%. The operating margin of our Core Business has also increased from 6.2% in the prior year to 7.3% this. The Board has declared an interim dividend of 2.5 pence per share (September 2016: 1.5 pence per share), an increase of 67%, payable on 19 January 2018.

Funds under Management and Administration

FuMA reached £24.3 billion at 30 September 2017, representing a 1.3% increase from the £24.0 billion position at 31 March 2017. During the same period the markets remained relatively flat, with the FTSE UK Private Investor Balanced Index down 0.1%.

Discretionary funds increased by £0.7 billion or 6.1% in H1 2018. Advisory Managed and Advisory Dealing funds reduced as efforts continued to upgrade existing clients from these services into discretionary services where appropriate. Execution-only funds fell by 1.2% overall comprising an increase of 8.7% (£0.2 billion) in Charles Stanley Direct funds offset by a reduction in the voice-brokered Execution-only book (£0.3 billion).

The £0.3 billion net increase in FuMA comprised of inflows from new (£0.8 billion) and existing (£0.1 billion) clients, offset by £0.6 billion of lost clients, of which £0.3 billion (50%) was accounted for by clients of departed investment managers. Adjusting for these, the underlying annualised rate of growth of FuMA was 5%.

The new inflows in the period were equally split across Discretionary and Execution-only services, whereas outflows were predominantly Execution-only funds relating to departed investment managers. 

Results and performance

The Group's financial performance for the six months ended 30 September 2017 and the comparative period to 30 September 2016 is summarised in the tables below. These tables show the results of the Core Business (comprising the Investment Management Services, Asset Management, Financial Planning and Charles Stanley Direct divisions), the held for sale activities (EBS Management PLC, disposed of on 31 May 2017), and various adjusting items.

The held for sale figures for the period ended 30 September 2016 have been restated to bring them in line with the current period disclosures where the results of EBS Management PLC are excluded from the Core Business and shown separately.

In addition, so as to conform with the accounting treatment of the dilapidations arising in respect of the Group's London headquarters adopted for the year ended 31 March 2017, the charge of £0.9 million recognised in respect of leasehold dilapidations in the prior year has been retrospectively capitalised on the balance sheet in the form of leasehold improvements and depreciated over the remaining life of the lease. Consequently, the adjusting items and reported performance numbers contained within the Interim report and accounts for the six months ended 30 September 2016 have been restated by this amount. The Core Business comparative results were not impacted by this accounting restatement.

Core Business revenue

Revenue from the Core Business increased by 9.8% (£6.6 million) to £74.0 million in the period. Fee income increased by £7.7 million compared to prior year. This was driven by an increase in fee margins following a gradual introduction of new fee structures, growth in assets from new business, clients migrating to our discretionary services and an improvement in markets since the prior period. This positive movement was partly offset by the impact of lost clients from departed investment managers and a reduction in commission and interest income.

 Core Business expenditure

Core Business expenditure increased by £5.1 million (8.0%) on prior year to £69.0 million. An increase in variable remuneration of £3.6 million was primarily driven by the increase in revenue noted above, along with the expense for the new employed investment managers' share option arrangements granted in June 2017 (£0.8 million). Fixed employment costs remained flat on prior year as savings resulting from a 2.4% reduction in headcount were offset by costs for termination payments and temporary contractors following the restructure of certain departments.

Marketing costs increased by £0.5 million compared to H1 2017, representing additional spend on marketing campaigns and brand awareness initiated by the Group to promote new business. Higher professional fees (£0.5 million) and IT & communications costs (£0.2 million) were also incurred during H1 2018 primarily in connection with the implementation of new regulatory requirements.

Core Business profit

The Core Business profit before tax of £5.4 million was ahead of prior year by £1.2 million, showing continued progress as the Board's strategy is implemented. The Core Business operating margin for H1 2018 was 7.3% (H1 2017: 6.2%, FY 2017: 7.1%).

Divisional review

The table below shows the H1 2018 results at a divisional level, with the H1 2017 comparatives restated for the exclusion of EBS Management PLC's results so as to present performance on a like-for-like basis.

Investment Management Services

The Investment Management Services division provides personal investment services to individuals, companies, trusts and charities and includes dealing, custody and administration services.

The financial performance of the Investment Management Services division is largely driven by the value and mix of FuMA, the revenue margin earned on these assets and the operating costs associated with managing them.

FuMA increased from £20.3 billion at 31 March 2017 to £20.5 billion during the period. The biggest increase was in Discretionary funds which grew by £0.6 billion (5.8%) as a result of new client inflows (£0.4 billion) and from upgrades out of the Advisory Managed service (£0.2 billion). The division also transferred £0.05 billion of assets primarily from the Execution-only book to the Charles Stanley Direct platform as Investment Management Services focuses increasingly on discretionary services.

Revenue for the division grew by 8% compared to prior year. The growth was primarily in fee income which increased by £6.5 million. This was driven by a combination of higher FuMA, new fee structures and more clients electing for a clean, fee-only charge in preference to fees plus commission. For the same reason, commission income reduced by £1.1 million.

The division's direct expenditure base increased by £4.1 million or 13.4% on prior year. The key contributors to this increase were higher variable compensation (£2.0 million) as a result of revenue growth, the accounting charge for the investment managers' share options granted in June 2017 (£0.8 million), increased spend on marketing (£0.4 million), and higher project-related costs (£0.5 million). The costs allocated from Support Functions remained stable compared to the prior period.

The Investment Management Services division continues to be restructured to ensure underlying processes are streamlined and each team is best placed to better serve clients and grow new business. Business development activity is focussed both internally, through cross-selling with the other divisions, and externally by enhancing intermediary sales and investing in marketing events and prospects.

The regional network of offices continues to perform well and consolidation of offices is being carried out in certain locations where appropriate. We are currently preparing for the Reading and Oxford teams to move into one building and similarly for Wimborne, Isle of Wight and Southampton to consolidate into a new, larger office in Southampton.

Asset Management

The Asset Management division provides specialist asset management services through a range of funds, active and passive model portfolios, and an Inheritance Tax Portfolio Service. It also provides fiduciary advisory services to smaller defined benefit pension funds.

The division's total FuM increased by 6.4% to £1.3 billion. This helped to drive an increase in revenue of £0.8 million compared to the first half of the prior financial year.

A major initiative by the division during the period was the launch of a range of risk-rated multi-asset OEICs to provide a solution for our smaller clients. The funds, which are branded as the Personal Portfolio Service, were soft-launched in April 2017 and currently have £34.1 million invested by clients who have transferred across. The launch of this service contributed to the year-on-year increase in the division's direct costs.

In the first instance the operation of the Personal Portfolio Service is a loss leader because the costs of the underlying OEICs are currently being subsidised to keep them at an acceptable level for investors. Once the OEICs reach critical mass, estimated to be approximately £100 million, they are expected to become profitable for the Group. A print and digital marketing campaign is planned for these funds during the second half of the financial year to attract further inflows.

The division's fiduciary management business continues to win new business and has a strong pipeline. Similarly, active and passive model portfolios are both growing, with further growth to come from a new arrangement with a major national firm of IFAs and a marketing campaign focused on the IFA industry.  

Financial Planning

The Financial Planning division provides financial planning and advice. The comparative figures shown below have been restated to exclude EBS Management PLC's results which were previously reported as part of this division's results.

Over the past twelve months, the Financial Planning division has been reorganised with additional high-calibre individuals recruited. This has helped increase revenue but has also led to an increase in direct costs including redundancy payments and recruitment costs.

In conjunction with hiring new planners, marketing activity has been stepped up, both externally and within Charles Stanley, to increase awareness of the services provided. This will take time to gain momentum but the early signs are encouraging.

During the past six months the division has undergone a major project to replace its operating system with Intelliflo. This system, once fully operational, is expected to support better the division's increased level of business and result in improved efficiencies.

For the longer term the provision of financial planning advice alongside investment management services will be a key component to delivering value to customers and growth for the Group. To deliver this the division intends to recruit more financial planners so long as candidates meet strict quality criteria. Such recruitment may act as a short-term drag on profitability but is intended to accelerate growth and the quality of the division's earnings over the medium to longer term. The division is currently engaged in conversations with a number of candidates.

Charles Stanley Direct

Charles Stanley Direct provides direct-to-client online and telephone-based dealing services within general investment accounts and tax-efficient wrappers.

Charles Stanley Direct's assets under administration grew by 8.7% to £2.5 billion during the period. This growth has been achieved both as a result of the division continuing to win new clients (£0.2 billion) and through encouraging smaller Execution-only clients of the Investment Management Services division, who can benefit from Charles Stanley Direct's lower charging structure, to transfer across (£0.05 billion).

The division is also supporting the recent launch of the Charles Stanley Multi Asset OEIC Fund range and the Monthly High Income Fund by offering these direct to clients online.

In recent months, the principal focus of Charles Stanley Direct has been the launch of new iOS and Android mobile applications. Development continues apace with a release schedule throughout 2018 aimed at repositioning the app from being a retention feature for existing clients to an acquisition tool for the next generation. Near-term upgrades will introduce account opening, full registration, deposit-taking and trading.

Support Functions

The costs incurred by the Group's Support Functions are either charged directly to the four main operating divisions, for example market data costs, or recharged as an allocated cost. Ongoing costs for all Support Functions reduced marginally by 1.5% to £26.8m compared to H1 2017. General savings achieved from the introduction of operational efficiencies across the back office functions during the period were largely offset by an increased spend on compliance-related projects and higher regulatory fees.

 Adjusting items

The Board considers the Core Business profit before tax and earnings per share to be a better reflection of underlying business performance than the statutory figures reported in the financial statements. To calculate the Core Business results the Board has excluded certain adjusting items totalling a net credit of £1.5 million. An explanation of these adjusting items, together with a reconciliation of profits, is provided below:

1Included an adjustment of £0.9 million in the H1 2017 Interim report and accounts which has been restated in line with the accounting treatment and disclosure contained within the Annual report and accounts 2017.

Gain on disposal of EBS Management PLC: (£0.7 million credit)

On 31 May 2017, the Group completed the disposal of EBS Management PLC to Embark Group Limited for initial cash consideration of £2.0 million and deferred consideration of up to £2.0 million payable on the first and second anniversary of the completion date. A profit on disposal of £0.7 million was recognised.

Gain on part-sale of shares held in Euroclear PLC: (£1.9 million credit)

In April 2017, the Group participated in a share buyback tender offer by Euroclear PLC. This resulted in the sale of approximately 60% of the Group's holding in Euroclear PLC, giving rise to a profit on disposal of £1.9 million.

Accelerated depreciation of leasehold improvements: (£0.6 million expense)

Following the recognition of leasehold dilapidations in respect of the Group's London headquarters in the year ended 31 March 2017, the Group undertook a review of its branch network and obligations for dilapidations arising therefrom. Consequently, a provision of £0.9 million for leasehold dilapidations in respect of the Group's branch network was recognised in the statement of financial position, with a corresponding amount shown as an addition to leasehold improvements. The charge of £0.6 million recognised in H1 2018 represents the accelerated depreciation of these leasehold improvements for the expired portion of the branches' leases and is therefore shown as an adjusting item.

Amortisation of client relationships: (£0.5 million expense)

Payments made for the introduction of customer relationships that are deemed to be intangible assets are capitalised and amortised over their useful life, which has been assessed to be 10 years. This amortisation charge is excluded from the Core Business profit on the basis that it is a significant non-cash item.

Taxation

The tax charge for the period was £1.3 million (H1 2017: £1.3 million) representing an effective tax rate of 19.6% (H1 2017: 29.0%). Excluding the adjusting items, the effective tax rate is around 26%. The prior year effective tax rate was significantly higher due to the disposal of fixed assets not allowable for tax purposes following the London office relocation. A detailed reconciliation between the standard and effective rate of UK corporation tax is provided in note 9 of the Interim report and accounts for the six months ended 30 September 2017.

Financial position and regulatory capital

Charles Stanley & Co. Limited, the Group's main operating subsidiary, is an IFPRU 125k Limited Licence Firm regulated by the UK's Financial Conduct Authority. In view of this, the Group is classified as a regulated group and subject to the same regime.

The Group monitors a range of capital and liquidity statistics on a daily, weekly and monthly basis. At 30 September 2017, the Group had regulatory capital resources of £65.0 million (H1 2017: £53.4 million).

As required under FCA rules, the Group maintains an Internal Capital Adequacy Assessment Process (ICAAP), which includes performing a range of stress tests to determine the appropriate level of regulatory capital and liquidity that the Group needs to hold. The Group's ICAAP was last reviewed and approved by the Board in November 2017.

Earnings per share

The Group's reported basic earnings per share for the first half was 10.87 pence (H1 2017: 6.30 pence). The Core Business earnings per share increased to 7.75 pence from 7.06 pence in the prior year.

Dividends

The Board has declared an interim dividend of 2.5 pence per share (September 2016: 1.5 pence per share) which will be paid on 19 January 2018 to shareholders on the register on 15 December 2017.

Condensed consolidated income statement

Six months ended 30 September 2017

Condensed consolidated statement of comprehensive income

Six months ended 30 September 2017

Condensed consolidated statement of financial position

Six months ended 30 September 2017

The financial statements were approved and authorised for issue by the Board of Charles Stanley Group PLC (company number 48796) on 21 November 2017.

Condensed consolidated statement of changes in equity

Six months ended 30 September 2017

Condensed consolidated statement of changes in equity

Six months ended 30 September 2016

Condensed consolidated statement of changes in equity

Year ended 31 March 2017

Condensed consolidated statement of cash flows

Six months ended 30 September 2017

1. General information

The condensed set of financial statements included in this Interim financial report has been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting (IAS 34), as adopted by the European Union, and with the Disclosure and Transparency Rules (DTR) of the UK Financial Conduct Authority. The information in this Interim financial report does not constitute statutory accounts as defined in section 434 of the Companies Act 2006.

The condensed set of financial statements included in this Interim financial report for the period ended 30 September 2017 should be read in conjunction with Charles Stanley Group PLC's Annual report and accounts for the year ended 31 March 2017. A copy of the statutory accounts for that period has been delivered to the Registrar of Companies. The auditor reported on those accounts. Their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The Interim report and accounts for the six month ended 30 September 2017 is available from the registered office of the Company at 55 Bishopsgate, London, EC2N 3AS and on the Company's website www.charles-stanley.co.uk.

2. Restatement of comparative figures

The financial statements for the six months ended 30 September 2016 have been restated to reclassify a leasehold dilapidations expense of £0.9 million recognised during that period.

The restatement resulted in an increase of £0.9 million in both the carrying value of property, plant and equipment and the profit after tax in the financial statements for the six months ended 30 September 2016. There was no tax impact resulting from the restatement. The retained earnings at this date have therefore been restated from £46.7 million to £47.6 million. The earnings per share and diluted earnings per share reported in the prior year were both 4.44 pence. Following the restatement, these have increased to 6.30 pence and 6.29 pence respectively. This reclassification was reflected in the financial statements for the year ended 31 March 2017, therefore no restatement has been made to comparatives for that year.

3. Significant accounting policies and application of new and revised IFRSs

The accounting policies adopted in the preparation of the condensed consolidated financial statements are consistent with those followed in the preparation of the Group's Annual report and accounts for the year ended 31 March 2017. The Group has not adopted any new accounting standards, amendments to standards or new interpretations during the period.

A number of new standards and amendments to standards and interpretations are effective for periods beginning on or after 1 April 2018. The following new standards are not applicable to these financial statements but are expected to have an impact when they become effective. The Group plans to apply these standards in the reporting period in which they become effective.

3.1 IFRS 9 Financial Instruments

IFRS 9 replaces IAS 39 Financial Instruments: Recognition and measurement. It includes new guidance on the classification, measurement and impairment of financial instruments. IFRS 9 is effective for annual periods commencing on or after 1 January 2018. The Group has not adopted this standard early.

The Group has conducted a preliminary assessment of the impact of adopting IFRS 9 based on its financial instruments at 30 September 2017.

The primary impact on the financial statements is expected to be the change in classification of financial assets. The IAS 39 categories of available-for-sale, loans and receivables and held to maturity no longer exist. Financial assets will fall into one of three categories under IFRS 9: amortised cost, fair value through profit or loss, or fair value through other comprehensive income. The Group is well advanced in its categorisation of financial assets under the new standard.

The Group has not identified any material differences in the measurement of financial assets under IFRS 9. The classification and measurement of financial liabilities remains unchanged from IAS 39, therefore no impact is anticipated on the Group's financial liabilities on adoption of the new standard.

IFRS 9 introduces a new expected credit loss impairment model to replace the incurred loss model in IAS 39. Based on both past experience and an assessment of the Group's credit risk exposures relating to its existing financial instruments, the new impairment model is not expected to have a material impact on the financial statements.

3.2 IFRS 15 Revenue from Contracts with Customers

IFRS 15 outlines a single comprehensive model for revenue arising from contracts with customers and supersedes existing revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. IFRS 15 is effective for periods commencing on or after 1 January 2018. The Group has not adopted this standard early.

The core principle of IFRS 15 is that an entity recognises revenue to reflect the transfer of goods or services to a customer, measured as an amount that the entity expects to be entitled to in exchange for those goods or services. In addition to the guidance on recognising revenue from contracts with customers, IFRS 15 also prescribes the treatment of costs associated with obtaining contracts where they are not within the scope of another standard. The Group has performed an initial review of its existing revenue streams and costs associated with obtaining contracts. Based on this review, the adoption of IFRS 15 is not expected to have a material impact on the financial statements.

3.3 IFRS 16 Leases

IFRS 16 replaces IAS 17 Leases. It eliminates the classification of leases as either operating leases or finance leases. Any leases with more than 12 months' term are to be recognised as a lease asset in the statement of financial position and the related future lease obligations shown as a liability. IFRS 16 is effective for annual periods commencing on or after 1 January 2019. The Group does not intend to adopt this standard early.

The Group has yet to carry out a full review of the impact of IFRS 16. However, based on an initial high-level assessment of the standard, the primary impact will be in respect of the Group's various leasehold offices. These leases will need to be shown in the statement of financial position, with a right of use asset and associated lease liability being recognised. Operating lease expenses currently recognised directly in the income statement will be replaced by depreciation and interest charges, which for individual leases will result in higher interest charges in early years of the lease compared to

later years. These changes are expected to be material to the financial statements of the Group, although the amount of the impact has not yet been quantified.

4. Operating segments

The Group has four operating divisions, representing the Core Business, which are its reportable segments. These segments are the basis on which the Group reports its performance to the Board, which is the Group's chief operating decision-maker.

Note: The operating profit/(loss) per the above table is different to that presented in the divisional analysis within the Interim management report as the table above includes adjusting items which are excluded from the Core Business analysis.

Note: The operating profit/(loss) per the above table is different to that presented in the divisional analysis within the Interim management report as the table above includes adjusting items which are excluded from the Core Business analysis.

Note: The operating profit/(loss) per the above table is different to that presented in the divisional analysis within the Interim management report as the table above includes adjusting items which are excluded from the Core Business analysis.

5. Earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to equity holders of the Parent Company by the weighted average number of ordinary shares in issue during the period. 

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares to assume exercise of all potentially dilutive share options.

The Directors believe that a truer reflection of the performance of the Group's underlying business is given by the measure of Core Business earnings per share, which is presented in the Interim management report. This measure is also followed by the analyst community as a benchmark of the Group's underlying performance.

The earnings and weighted average number of shares used in the calculation of basic and diluted earnings per share is shown below:

6. Share-based payment arrangements

During the period, the Group granted options under the Performance Share Plan and a new Investment Managers Share Plan.

6.1 Performance Share Plan (equity-settled)

The Performance Share Plan is only open to Executive Directors and senior managers. Options are awarded annually under the plan and vest over a period of three years based on specific performance targets. The contractual life of the options is five years.

250,000 options were granted under the scheme on 22 July 2017. As these awards are over nil cost options with an entitlement to dividends during the vesting period, the grant date fair value was deemed to be £3.65, being the share price at that date.

The performance conditions relating to 279,040 options granted during the year ended 31 March 2015 were not met and therefore these options lapsed during the period.

6.2 Investment Managers Share Plan (equity-settled)

The Investment Managers Share Plan is a one-off scheme whereby share options were awarded to investment managers employed by the Group. 2,415,725 options were granted on 15 June 2017, with 966,290 options allocated to Pool A and 1,449,435 allocated to Pool B of the plan.

Pool A options vest after three years, upon publication of the Annual report and accounts for the year ending 31 March 2020, subject to the option holder still being in the Group's employment. There are no attached performance conditions.

Pool B Awards will only vest if the pre-tax profit margin of the employed investment management teams collectively is 15% or more in any of the three years ending 31 March 2020, 2021 and 2022. If the pre-tax margin condition is not achieved by year ending 31 March 2022, the options will lapse.

During the period the Group recognised total share-based payment expenses of £1.0 million (30 September 2016: £0.01 million and 31 March 2017: £0.2 million).

7. Employee benefits

7.1 Defined contribution scheme

The Group operates a defined contribution pension scheme. The assets of the scheme are held separately from those of the Group in independently-administered funds.

7.2 Defined benefit scheme

The Group also sponsors the Charles Stanley & Co. Limited Retirement Benefits Scheme, which is a funded defined benefit arrangement. This is a separate, trustee-administered fund holding the scheme assets to meet long-term pension liabilities of the scheme members.

A full actuarial valuation was carried out as at 13 May 2014 in accordance with the scheme funding requirements of the Pensions Act 2004. The next full actuarial valuation as at 13 May 2017 is currently being undertaken. This is due to be completed in early 2018 and will be reflected in the financial statements for the year ending 31 March 2018.

The funding of the scheme is agreed between the Group and the trustees in line with those requirements. There is a particular requirement to calculate the pension surplus or deficit using prudence, as opposed to best estimate actuarial assumptions.

For the purposes of IAS 19, the actuarial valuation as at 13 May 2014, which was carried out by a qualified independent actuary, has been updated on an approximate basis to 30 September 2017. The valuation methodology adopted for the current period disclosures is the same as that used in the prior year.

Amounts included in the condensed consolidated statement of financial position

Defined benefit costs recognised in the condensed consolidated income statement

Defined benefit costs recognised in the condensed consolidated statement of comprehensive income

8. Income taxes

Tax recognised in the condensed consolidated income statement

In addition to amounts charged to the condensed income statement, deferred tax of £0.4 million relating to the revaluation of available-for-sale financial assets has been credited directly to equity (30 September 2016 and 31 March 2017: £0.2 million charge).

Current tax of £0.04 million has been credited directly to equity (30 September 2016: £nil and 31 March 2017: £0.1 million) and deferred tax of £0.2 million has been charged directly to equity (30 September 2016: £1.0 million credit and 31 March 2017: £0.02 million) in respect of the defined benefit scheme.

Legislation to reduce the UK corporation tax rate to 17% from 1 April 2020 was substantively enacted in September 2016. The deferred tax asset at 30 September 2017 has been calculated based on the rate expected to apply when the relevant timing differences are forecast to unwind.

9. Intangible assets

None of the intangible assets have been pledged as security.

Goodwill is allocated to the Group's operating divisions as follows:

9.1 Goodwill

The recoverable amount of goodwill allocated to a cash generating unit (CGU) is determined initially by calculating the CGU's fair value less costs to sell. If this is lower than the carrying amount or is not determinable, a value in use calculation is also prepared.

Fair value less costs to sell is calculated largely based on a percentage of FuMA. Where this approach is not appropriate a turnover multiple is used.

The rates used in the fair value less costs to sell calculations are those implied by recent transactions in the market or, where appropriate, based on publicly available information for similar quoted businesses. When calculating the fair value less costs to sell, key assumptions are stress tested to determine whether the calculations are sensitive to reasonable potential changes in these assumptions.

9. Intangible assets (continued)

At 30 September 2017, fair value less costs to sell was deemed to be higher than carrying value for each CGU. Therefore, no value in use calculations have been prepared.

9.1.1 Investment Management Services

The recoverable amount of goodwill related to Investment Management Services was assessed using fair value less costs to sell for the period ended 30 September 2017. The fair value was determined based on a percentage of FuMA. The recoverable amount was determined to be higher than the carrying amount of the CGU and therefore the goodwill carrying value is adequately supported.

9.1.2 Charles Stanley Direct

The recoverable amount of goodwill relating to Charles Stanley Direct was assessed using fair value less costs to sell for the period ended 30 September 2017. The recoverable amount was determined to be higher than the carrying amount of the CGU and therefore the goodwill carrying value is adequately supported.

9.2 Customer relationships

Purchases of customer relationships relate to payments made to investment managers and third parties for the introduction of customer relationships.

9.3 Internally generated software

Internally generated software is software designed, developed and commercialised by the Group.

10. Property, plant and equipment