CAY.L Regulatory News (CAY)

This announcement constitutes Inside Information within the meaning of article 7 of the EU Market Abuse Regulation

24 November 2016

Charles Stanley Group PLC (the Company)

Proposed Share Award Scheme

Charles Stanley concludes consultation with Investment Managers and agrees new remuneration arrangements.

The Board of Charles Stanley Group PLC is pleased to announce that its remuneration consultation with the Group's investment management teams, both employed and self-employed associates, has been successfully concluded. Investment managers representing approximately 90% of funds under management and administration have currently accepted the proposals, further detail about which is set out below.

 The principal benefits of the new remuneration arrangements are that they:

· harmonise the incentive schemes for employed and associate investment managers whilst recognising the differences inherent between both groups;

· are based on profit contribution rather than revenue and therefore more aligned with the interests of shareholders;

· encourage behaviours that will drive positive client outcomes; and

· lower the ratio of compensation paid as a percentage of revenues, though the potential remains for investment managers to increase their total compensation subject to profit contribution.

Paul Abberley, Chief Executive Officer, commented:

"The conclusion of this agreement marks a major milestone in the continued turnaround of the Group.

It has been important for us to work collaboratively with our Investment Managers to create a solution that works in the best interests of us all and which is right for the long term. I would like to thank all our stakeholders for their patience during this important time and I am delighted that the conclusion of the process will enable all our staff to come together to work toward delivering sustainable profits, with a focus on enhancing the customer experience, growing revenues and improving operating efficiencies."

As partial consideration for the employed investment managers agreeing to enter into less attractive contractual terms than previous, and in part to align their interests more fully with those of shareholders in achieving profitable growth for the Group, a condition of the proposals is the making of certain share awards to such investment managers. These will be for up to 5% of the Group's issued share capital and will be facilitated via a new employee share plan to be created for this purpose; the Charles Stanley Employed Investment Managers Share Plan (the "Share Plan").

Establishment of the Share Plan is subject to shareholder approval (as required by the Listing Rules). Approval is being sought for the proposed 5% maximum dilution under the Share Plan to be in addition to the aggregate 10% dilution in respect of existing share schemes. Consequently, the Group is also proposing related changes to the dilution limits in both the Group's Performance Share Plan (the "PSP") and Save As You Earn Plan (the "SAYE Plan") to accommodate the introduction of the Share Plan. Although the Group anticipates that awards under the Share Plan will be satisfied through the issue of new ordinary shares, the Group has the flexibility to purchase shares in the market to satisfy the awards.

Background to, and reasons for, the introduction of the Share Plan

Charles Stanley's investment management services division has been built up over many years through a combination of organic growth, acquisition and recruitment of investment management teams. Some of these investment managers have been recruited as employees and others as self-employed associates. This has resulted in the Group having a wide range of remuneration arrangements in place with its investment managers and the Board considers these arrangements are no longer entirely aligned with the interests of shareholders. This is substantially a result of a number of the arrangements focusing on revenue rather than profit-contribution. The Board believes that a focus on profits rather than revenue generation will help to return the Group to a position of sustainable profitability.

The Group therefore engaged in a consultation process with both its employed and associate investment management teams to seek to rebalance the variable element of their compensation. The principal objectives of this process were to:

1. harmonise their respective incentive schemes whilst recognising the differences inherent between employed and self-employed models;

2. make all incentive schemes profit-based and therefore more aligned with the interests of shareholders;

3. ensure all incentive schemes are structured to ensure they encourage behaviours that will drive positive client outcomes; and

4. lower the ratio of compensation paid as a percentage of revenues.

The first stage of the consultation was concluded in March 2016 when the investment managers agreed to interim measures that subsist solely for the current financial year. The second stage of the consultation, covering all of the items highlighted above, have just concluded. Whilst the detail of the terms are commercially sensitive, the substance is as follows:

1. the new remuneration terms will take effect from 1 April 2017, being the beginning of the Group's next financial year;

2. the number of schemes in existence will be rationalised and the Group will operate two schemes: one for employed investment managers and one for self-employed associates;

3. both schemes will be profit-based, taking into account all direct costs and some allocated costs. Key distinctions between the two schemes will be that:

a. whereas employed investment managers will receive a salary, self-employed associate teams will be paid a base amount derived as a percentage of revenue;

b. in addition to their direct costs, employed investment managers will be charged a per account levy to cover the cost of various central services. By comparison, self-employed associate teams will be charged a straight percentage of revenue for the same services.

After taking account of these costs, variable remuneration will be calculated based on hurdled net pre-tax profit margins achieved;

4. an element of the variable remuneration under both schemes will be governed by conduct measures; and

5. Investment managers, whether employed or self-employed, can earn more under the new remuneration schemes than the old schemes if they grow their business profitably. Nevertheless, it is anticipated that the overall remuneration of investment managers as a proportion of revenue will be reduced.

As part of the arrangements with employed investment managers, the Board has agreed to create the Share Plan. This is part in consideration for them voluntarily agreeing to amend their employment contracts with less generous remuneration terms and part to align their interests more closely with those of Shareholders and incentivise them to grow managed funds in a profitable fashion.

Awards under the Share Plan will also act as a retention mechanism during this period of change.

Summary Terms of the Share Plan

It is proposed that the Share Plan will be divided between two pools, Pool A and Pool B. Pool A will represent up to 40% of the total ordinary shares available under the Share Plan. Pool B will be for the balance. Key aspects of Pool A and Pool B are summarised below:

Pool A

· Awards under Pool A will only be made to employed investment managers entering into revised contracts.

· Pool A awards will in the ordinary course vest when the Group publishes its audited accounts for the year ending 31 March 2020.

· There are no performance conditions attaching to the Pool A awards. This is because they are being awarded in consideration for the employed investment managers agreeing to less generous contractual terms.

Pool B

· Awards under Pool B will only be made to members of employed investment management teams ("Employed Teams").

· Pool B awards will entitle participants to receive ordinary shares if the audited net pre-tax margin of the employed investment management teams collectively is 15% or more for the financial year ending 31 March 2022 (the "Margin Condition"). Ordinary shares will be distributed earlier if the Margin Condition is satisfied in respect of the financial years ending 31 March 2020 or 31 March 2021. If the Margin Condition is not met, the awards will lapse.

· For the financial year ended 31 March 2016, the pre-tax profit margin for the investment management division was 7.8%. This is compared to a margin of 11.8% for the six months ended 30 September 2016.

· The number of Pool B awards made to investment management teams will be determined based upon the growth in their weighted managed assets between 1 April 2017 and the vesting date relative to that of all Employed Teams. For the purposes of the calculation, managed assets will be weighted both according to whether they are discretionary or advisory managed assets and by the revenue margin achieved. To illustrate, if a team contributes 10% of the total growth of weighted managed assets over the vesting period, they will be awarded 10% of ordinary shares available for Pool B awards.

· The number of ordinary shares received pursuant to any award under Pool B may be reduced if the FUM of the Employed Teams declines (disregarding market movements) between 1 April 2017 and the date of vesting.

Participation in the Share Plan will not be open to individuals who are currently executive directors of Charles Stanley Group plc. The only way in which an executive director of Charles Stanley Group plc could receive ordinary shares under the Share Plan is if a member of an Employed Team is promoted to become an executive director of Charles Stanley Group plc between the date of this circular and the delivery of ordinary shares under the Share Plan.

The principal grant of awards to subscribe for ordinary Shares under Pool A will, if the Share Plan is approved by the shareholders, be made as soon as possible after the Group announces its results in respect of the financial year ending 31 March 2017. 

Following vesting, the net number of ordinary shares received by participants will also be subject to a one year holding period.

Risk Factors

The Board considers that if the Share Plan is not approved, or if the amendments to the PSP and SAYE Plan are not approved, and the Group is unable to grant the intended awards to employed investment managers, there is a significant risk that the investment managers will not accept the proposed reduced remuneration and contract terms and will terminate their employment with the Group. In the event that this happens there is a risk that the Group could experience a significant outflow of funds under management and administration from clients associated with those investment managers. Whilst the Board has made contingency arrangements for this possible outcome, it could lead to a material reduction in profitability.

The issue of ordinary shares under the Share Plan may lead to the dilution of existing shareholders' interests in the Group of up to 5%. The Group currently anticipates that awards under the Share Plan will be satisfied through the issue of new ordinary shares (to the extent they vest), however the scheme allows for the awards to be satisfied by market purchases. The Board believes that the benefits arising from investment managers accepting the change in remuneration terms and anticipated improvement in profitability, together with the benefit of aligning the interests of the investment managers more closely with those of shareholders, will outweigh the cost of dilution if it arises.

Extraordinary General Meeting

A general meeting of the Group will be convened to seek shareholder approval for resolutions to put the Share Plan and related amendments to the Group's Employee Share Plans into effect. A circular containing the notice of meeting will be sent to shareholders shortly.

Irrevocable undertakings and expressions of intent

The Group has received irrevocable undertakings to vote in favour of the resolutions to be proposed at the General Meeting from certain shareholders and Directors amounting, in aggregate, to 10,142,619 Ordinary Shares, representing approximately 20.0% of the Group's existing issued share capital as of 23 November 2016.

The Company has also received non-binding letters of intent to vote in favour of the resolutions to be proposed at the General Meeting from the Shareholders in respect of 10,796,394 Ordinary Shares, representing approximately 21.3% of the Company's existing issued share capital as of 23 November 2016.

Recommendation

The Directors are of the opinion that the proposals to be considered at the General Meeting are in the best interests of the Group and its members as a whole and are most likely to promote the success of the Group for the benefit of its members as a whole. Accordingly, the Directors unanimously recommend that shareholders vote in favour of the resolutions to be proposed at the General Meeting.

Ben Money-Coutts

Chief Financial Officer

For further information, please contact: 

Notes to editors:

Charles Stanley traces its origins 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 450 professionals located in 25 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 and custody for investment portfolios, SIPPs and ISAs 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.

Forward looking statements

Certain information contained in this announcement constitutes forward looking information. This information may relate to future events or the Company's future performance. All information other than information of historical fact is forward looking information. The use of any of the words "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "should", "believe", "predict" and "potential" and similar expressions are intended to identify forward looking information. This information involves known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward looking information. No assurance can be given that this information will prove to be correct and such forward looking information included in this announcement should not be unduly relied upon. This information speaks only as of the date of this announcement. The Company does not undertake any obligation to publicly update or revise any forward looking information except as required by applicable securities laws.