Mortgage Advice Bureau Regulatory News (MAB1)

23 April 2020

MORTGAGE ADVICE BUREAU (HOLDINGS) PLC.

("MAB", or "the Company", or "the Group")

Final Results for the year ended 31 December 2019

Further to the trading update announced on 24 March 2020, Mortgage Advice Bureau (Holdings) PLC (AIM: MAB1.L) is pleased to announce its final results for the year ended 31 December 2019.

Financial highlights

Operational highlights

Post period end

Peter Brodnicki, Chief Executive, commented on the 2019 results:

"I am pleased to report this strong set of results. Although the political uncertainty persisted throughout 2019, we achieved strong revenue growth of 17% to £143.7m and strong earnings growth, with adjusted EPS up 17% to 30.1 pence per share. The Board had intended to propose an increased final dividend of 12.8 pence per share, making total dividends for the year of 23.9 pence per share, up 2.6% on the previous year, in line with our policy of paying out a minimum of 75% of adjusted earnings as announced on the acquisition of First Mortgage Direct ("First Mortgage"). However, in view of the severity of the Coronavirus pandemic, we now propose a final dividend of 6.4 pence per share, with the intention to pay a further 6.4 pence when the Board considers it prudent to do so.

MAB has always had a clear strategy of pursuing and delivering long-term sustainable growth in market share, regardless of mortgage and housing market conditions. In 2019 we increased our market share of new mortgage lending to 5.7%, a strong increase of 20% versus the prior year. Mortgage completions from MAB advisers grew by 20% to £16.7bn.

I am particularly pleased with our growth in new advisers over the last year, especially since as predicted, the subdued housing market led to very limited growth from the circa 40% of our AR firms that are linked to estate agents. Adviser numbers grew 20% to 1,457 (2018: 1,213) at the year end, and 13% excluding the 82 Advisers at First Mortgage.

Technology continues to be an important growth enabler for MAB. We started piloting the first part of our new platform at the end of 2019 and we have now commenced a programme of implementation of new technology-led processes.

I am also very pleased with the acquisition of First Mortgage, which is now fully integrated into the Group. First Mortgage is a business of exceptional quality which is highly complementary to MAB, and we look forward to enhancing its strong growth track record through the deployment and rollout of our technology platform and our support structure."

Current trading and outlook

A clear change in customer sentiment following the General Election in early December 2019 led to much improved activity in the housing market from the start of 2020, giving our AR firms and their advisers a strong start to the year in terms of new business levels and productivity. This marked increase in activity remained strong up to the end of March 2020, despite increasing concerns about the Coronavirus pandemic.

The Government imposed lockdown has had the effect of calling a halt on most house purchase transactions, with key elements such as physical viewings and valuations ruled out for the period of the lockdown. Consequently, after the strong start to the year, we have seen a significant reduction in purchase related activity. This has already impacted both Adviser numbers and productivity.

MAB's growth in Adviser numbers started to slow down from early March 2020, as Appointed Representative ("AR") firms temporarily put their recruitment plans on hold. As at 17 April 2020, Adviser numbers were 1,473, including 196 Advisers currently furloughed. The furloughed Advisers relate mostly to ARs that have strong links to estate agencies or the new build sector. Some adviser attrition has also occurred among the lower performing Advisers and it is unlikely any of those advisers will be replaced until the purchase market fully recovers.

As expected, focus and demand has increased in the re-mortgage and product transfer markets, which together represented around 65% of the value of all UK mortgage transactions last year. The MAB team and our ARs have prioritised resources to optimising opportunities in this sector and early results are very encouraging. Re-mortgage opportunities cannot be fully optimised at present due to loan to value restrictions that are currently in place as a result of many lenders experiencing processing capacity issues and the limitations of automated valuations in higher loan to value mortgages, but product transfers have significantly increased in recent weeks. By the time Government restrictions are lifted, our typically purchase focused AR firms will have improved their procedures for servicing existing clients in this sector, and we expect that increased efficiency to be maintained once purchase activity starts to return.

Although we expect protection sales to reduce in line with purchase activity, the escalation of the Coronavirus pandemic has resulted in a heightened awareness of the importance of such products amongst customers. Alongside our realignment of resources to re-mortgage and product transfer transactions, is our immediate opportunity to have a meaningful impact on the lower protection attachment rates seen on non-purchase mortgages. Plans are already in place to ensure the improvements we are seeing are maintained and built upon when advisers become busier again.

All elements of the mortgage and protection advice process can be transacted by telephone. Over the last month or so this has become the only option for our customers. Telephone advice was already a fast-growing area of our business, both through strong growth in specialist telephone advisers, as well as an increasing number of telephone appointments being conducted by traditionally face-to-face advisers. MAB has been providing new guidance and tools to support a seamless transition to telephone advice across our distribution network, ensuring business continuity for advisers and customers across all purchase, product transfer and re-mortgage transactions.

All our systems and processes were robustly tested pre lockdown to allow MAB's head office and field-based teams to work effectively from home, ensuring continued and tailored support for our distribution channels. We have also reviewed our cost base to a level where it is now appropriate for the current circumstances, and importantly we have ensured that our ARs and Advisers are fully supported through this very difficult time in their new ways of working, including redirecting certain allocated budgets to other areas of spend where it is optimal to do so.

In response to the challenging environment, MAB, our AR firms and their advisers have a heightened focus on business efficiency and ensuring no opportunities are missed. We have commenced the implementation of new technology-led processes and efficiencies to optimise working practices, customer engagement and income generation, which we expect to deliver long lasting benefits.

The changes in the circumstances and priorities for consumers has led us to design new campaigns and initiatives as part of our communication strategy. These include a free mortgage support helpline dedicated to the financial wellbeing of homeowners worried about paying their mortgage. In addition, all our online, social media, and existing client communications, which now feature in this free service, have also been tailored to reflect a heightened awareness of protection and refinancing.

The Government has announced a strong package of measures to ensure lenders can continue to lend to mortgage borrowers as usual, including access to new, significant and cost-effective funding and reduced regulatory capital buffer requirements in this period of exceptional challenge. As referenced above, there are however some loan to value restrictions currently in place.

In addition, the Bank of England recently reduced its base rate to a record low of 0.1%, allowing the cost of mortgages to be reduced even further. This has triggered a higher level of interest in re-mortgages and product transfers as well as benefited all those buying a new house or moving home when restrictions are lifted and they are able to proceed with their transactions. Wider measures, including increased investment in all types of housing, should ensure the medium to long term outlook for our market remains very positive.

MAB is also actively engaged in lobbying key stakeholders in the Government for specific actions to be taken to ensure a speedier recovery in the UK housing market when restrictions are lifted.

Over 20 years we have built a high-quality distribution network, a leading consumer brand, and an exceptional management team that continues to adapt quickly and efficiently to our new ways of working. The Group has a strong balance sheet, is cash generative and enjoys a healthy surplus over its regulatory capital requirement. To give ourselves additional flexibility to capitalise on potential opportunities quickly, we drew down our full £12m Revolving Credit Facility on 20 March 2020. We are in a stronger position than many to deal with the challenges that we face over the coming months and are confident in our ability to continue growing our market share, with a specific additional focus on re-mortgages and product transfers.

MAB has a clear strategy and we continue to strengthen our proposition. During this pandemic our priority is to redeploy our resources where possible to focus on lead generation, telephone advice and remote working. It is too early to predict the extent of the disruption to trading in the coming months and the associated impact on our results for the full year, though we do expect to see a reduction in revenue and profit. However, we remain very optimistic about MAB's growth prospects. The quality and level of support that MAB provides is really standing out at a time when our AR firms and advisers need that support more than ever. In the months ahead, AR firms will look back at how their network supported them during these times and this will be a great opportunity for MAB to capitalise upon as we look to resume our growth plans and build on the positives that have come from these challenging times.

1Costs associated with the acquisition of First Mortgage, including £0.4m of one-off acquisition costs, £0.2m amortisation of acquired intangibles and £0.4m of additional non-cash operating expenses relating to the put and call option agreement to acquire the remaining 20% of First Mortgage.

 2Adjusted cash conversion is headline cash conversion adjusted for increases in restricted cash balances of £2.2m in 2019 (2018: £1.0m) as a percentage of adjusted operating profit.

3 Profit after tax adjusted for non-cash exceptional items of £0.6m

4 Based on Average number of Advisers. Underlying basis excludes a one-off adjustment in H1 2018 of £1.7m for procuration fees awaiting processing.

5 Headline cash conversion is cash generated from operating activities adjusted for movements in non-trading items, including loans to Appointed Representative firms ("ARs") and loans to associates, totalling £0.9m in 2019 (2018: £2.2m) as a percentage of adjusted operating profit.

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 ("MAR").

For further information please contact:

Numis Securities Limited Tel: +44 (0)20 7260 1000

Stephen Westgate / Hugo Rubinstein / Laura White (Corporate Finance)

Analyst presentation

There will be an analyst presentation via conference call to discuss the results at 9:30am today.

Those analysts wishing to attend are asked to contact investorrelations@mab.org.uk

Copies of this announcement are available at www.mortgageadvicebureau.com/investor-relations.

Chief Executive's Review

Overview of 2019

This has been a particularly strong performance from MAB given the reduced level of consumer confidence that we have seen, caused by the protracted political uncertainty with regard to Brexit and the General Election at the end of 2019.

Our revenue and profits have continued to increase, building on our consistent track record of delivering growth.

Our growth in mortgage completions is set out below:

MAB's total gross mortgage completions (including Product Transfers) increased by 20% to £16.7bn (2018: £14.0bn). Gross mortgage completions through new lenders(1) increased by 20% to £15.2bn (2018: £12.7bn). This growth in purchase and re-mortgage lending takes our overall share of UK new mortgage lending up 20% to 5.7%, from 4.7%.

This growth was achieved in a slightly softer housing transaction and mortgage lending market. Hence, our full year 2019 results, as with previous years, represent a clear outperformance against both the overall UK housing and the new mortgage lending markets.

1 "Gross mortgage completions through new lenders" means either a new mortgage in connection with a house purchase or a re-mortgage with a different lender to the customer's existing lender

Market environment

Housing transactions by volume overall for 2019 were 1% below 2018, which had also been a relatively subdued year. Overall house moves in 2019 continued to be muted compared to longer-term average levels. In all likelihood this was because many consumers were not sufficiently confident to commit to larger transactions such as moving home given the wider political uncertainty. In addition there continued to be multiple factors that contributed to a quieter market, including affordability, the increases in stamp duty and lower levels of housing stock available for sale.

Overall, the new mortgage market was generally flat. The number of First Time Buyers (FTBs) showed a modest increase as they benefitted from record low mortgage rates, and purchase finance assistance from the Help-to-Buy Equity Loan scheme and Shared Ownership scheme, and as low property price inflation offset affordability and moderate wage inflation. The number of home-movers continued to be broadly flat.

New mortgages for buy to let purchases continued to fall, carrying on a downward trend seen over recent years as taxation changes impacted the activity in the market.

The re-mortgaging market remained steady, although owner occupier re-mortgaging activity showed a slight decline year-on-year, with buy to let re-mortgages partly countering this.

Mortgage rates again remained at or near record lows, as the Base Rate remained at 0.75% though 2019. The low cost of borrowing, the Help to Buy Equity Loan and Shared Ownership schemes, and a highly competitive lending market supported activity in the mortgage market.

The £267.6bn UK Finance gross new mortgage lending figure for 2019 excludes product transfers. In 2019, product transfers represented £167bn of mortgage lending, a 5% increase compared to 2018. The latest UK Finance statistics indicated that the product transfer market is likely to increase slightly from current levels, but flatten off in the medium term. These have not as yet been updated since the start of the Coronavirus pandemic.

The first quarter of 2020 saw a strong pick-up in activity in the housing market. The February 2020 RICS Residential Market Survey pointed to a lift in new buyer enquiries, agreed sales and new listings across all regions. However, the Coronavirus pandemic and the Government imposed lockdown has changed this significantly in the short term. The period for which these restrictions will remain in place and the impact on consumer confidence and market activity are currently uncertain.

Delivering our strategy 

Growth in Advisers

2019 was again a strong year for our adviser growth, with our adviser base growing by 20% to 1,457 (13% to 1,375 excluding First Mortgage). This is especially pleasing given how uncertain the economic and political climate was throughout the year and reflects our success at attracting new Advisers and AR firms into MAB. This was achieved in a year where approximately 40% of our total AR firms (mostly those with direct links to estate agents) did not recruit new advisers due to the subdued housing market.

Despite the impact of the Coronavirus pandemic on current Adviser numbers, we expect our market share to continue to grow, and this will be assisted by continued momentum in the rollout of our technology developments through 2020 and beyond. Technology developments are important both in optimising customer experience and enhancing our Adviser proposition. We are committed to ensuring that technology becomes a differentiating factor for MAB and contributes to attracting and retaining ARs, Advisers and customers.

Acquisition of First Mortgage Direct Limited ("First Mortgage")

On 2 July 2019, MAB acquired an 80% stake in First Mortgage for a consideration of £16.5m. First Mortgage is one of the UK's leading mortgage brokers, employing 82 highly productive mortgage and protection advisers as at 31 December 2019.

First Mortgage's strong presence in Scotland, as well as its omni‐channel growth strategy, particularly in telephony, are highly complementary to MAB's offering. As a result of the acquisition, MAB is now strongly represented through the two leading mortgage intermediary brands in Scotland.

Like MAB, First Mortgage focuses on ensuring that it meets customers' protection needs and approximately half of its revenues are derived from protection products, hence driving strong margins.

Under the direction of its highly regarded management team, First Mortgage has developed strong direct to consumer lead generation expertise. The business also acquires over half of its new customers via referrals from its existing customer base and enjoys outstanding repeat business levels. Both factors have driven its highly reputable brand presence which is substantiated by very impressive customer reviews.

First Mortgage contributed revenues of £8.1m and profit before tax of £1.9m (including £0.5m of revenue synergies) to the Group for the period from 2 July 2019 to 31 December 2019. We are very pleased with this acquisition, and the business is now fully integrated into MAB. We look forward to leveraging the strengths of the business and further enhancing its strong growth track record through the planned deployment and rollout of our technology platform and our support structure.

Technology developments: the transformation programme has commenced

Technology is integral to our business, and we believe it plays a key role in helping customers to move home and re-mortgage more expediently. Importantly, we are building our technology platform specifically to help with the following:

- Customers - deliver more choice and convenience for our customers in terms of how they research, receive advice and transact. 

- Lead Generation - capture and nurture customers at an earlier point in their home-moving process, and optimise the ingestion, management and distribution of lead sources.

- Advisers - enhance Adviser experience, efficiency and performance through simplifying and shortening the advice and mortgage application process.

- MAB / our AR Firms - optimise business efficiency and profitability for our AR firms and the Group.

- Lenders - deliver seamless two-way integration to ensure simplified application and faster mortgage approvals.

We believe that advice should and will remain of paramount importance to customers who are looking to make significant life decisions such as buying a home or protecting their home and family. 

Looking at the future and new models that may emerge in the mortgage market, we have deliberately built our technology platform to be agile, enabling us to continually evolve its overall shape, design and performance driven by customer behaviour and expectations. Our objective is to ensure we have a future-proof business model that stays relevant to all customers regardless of how they want to research, receive advice and transact.

We will further develop all parts of the new platform through 2020 and continue our planned rollout, paying special attention to customer interaction and process efficiencies.

Customer interaction

In February 2020 MAB's principal regulator, The Financial Conduct Authority (FCA), issued its final rules relating to the Mortgages Market Study and its revision of Mortgage Advice and Selling Standards. One change implemented by the FCA aims to make it easier for lenders to offer "execution only" sales channels.

We already provide our customers with a tailored and value-added advice service, by giving them autonomy and the ability to choose how and when to interact with our Advisers depending on their confidence and circumstances. We have been deliberately building our technology platform to enhance customer engagement in the expectation that regulation would make execution only faster and easier for customers.

Lenders value the advice given to customers as this assists them in their underwriting process. Moreover, not all lenders will want to take part in execution only developments which will likely result in more limited choices for consumers. As a result, we can deliver both convenience and speed of execution without sacrificing choice and invaluable advice.

Process efficiencies

We have been focusing on this area most recently (with our mortgage technology partner Twenty7Tec) through opening up connectivity directly to our lending partners. This will remove elements of keying and duplication, thereby improving Adviser productivity and ensuring a faster and more seamless application process.

We have now established seven direct to lender submission routes for mortgage applications and are delighted to report that we have been piloting this with one of the UK's largest lenders. This first group of lenders have set the agenda for others to follow. Whilst these developments have taken longer to put in place than lenders originally anticipated due to the magnitude of technology development required within lenders, there is now a firm commitment across the lending industry to deliver this.

Driving income opportunities

Broadening our addressable market

Older and younger customers

Currently MAB typically interacts with customers aged between 35 and 65 whilst they are buying their first homes and then moving and/or re-mortgaging. The proportion of first time buyers living in privately rented accommodation continues to increase (from 39% in 1995-96 to 66% in 2015-16(1)). Through our extensive estate agency and lettings relationships we intend to nurture these future home buyers from a younger age. We also offer protection solutions to tenants who rent pre home ownership, as well as to those renting on a permanent basis.

We have also been looking at ways to better serve our customers who are aged 60 or over, or the so-called "Later Life Lending" market. Typically these customers want to use mortgages to release equity to boost their retirement income or pay for a better lifestyle, to help their children through university, buy a home or pay for weddings, or to roll over an interest only mortgage for a longer term. Other reasons also include avoiding downsizing, carrying out home improvements and discharging any remaining unsecured or other secured debt.

The most specialist part of this market is Lifetime Mortgages where no repayments of capital or interest are made. Both lenders and the regulator are responding to the innovation required in this market and some lenders have already expanded their mortgage portfolios to also include interest only products that help customers to borrow money at older ages, and, also to borrow that money until they are much older. This innovation is in response to demand from an ageing population.

It is estimated that the Later Life Lending market will almost double over the next decade, from about £295bn in 2019 to £548bn in 2029(2). It is also estimated that the housing wealth of the 'over-55s' is worth £2.5 trillion(3). Again, the anticipated growth in this market presents MAB with incremental opportunities, as a direct result of a new and growing market segment which will be highly intermediated, with customers very much relying on advice.

This is a highly intermediated and growing sector and over the last year we have been developing a leading proposition to enter this market. We look forward to announcing our launch into this market as soon as it is appropriate to do so.

1 English Housing Survey 2015 to 2016: first time buyers

2 Centre for Economics and Business Research and more 2 life, 2019

3 Swiss Re Term and Health Watch 2017

Expanding into the broader home-moving process

We have continued to explore and introduce solutions that provide more assistance and value to our customers in the home moving process. We have now successfully piloted with a number of our AR firms a process for helping mortgage customers with a wider range of services including energy and other utilities. We have proven the concept and demonstrated that MAB is well positioned to help busy mortgage customers in organising their wider home-moving products and services. We intend to extend this pilot once the current Government restrictions are lifted and the conditions have started to normalise, and enhance this new development via technology in 2021.

Protection

We take pride not just in helping customers with securing their new mortgage borrowing, but importantly we seek to provide customers with appropriate and adequate protection and insurance against both unforeseen and tragic circumstances. Protection is becoming increasingly a more specialist area thereby delivering consistency of offerings and optimal customer outcomes.

Over the course of the last year we have successfully embedded protection more deeply into our technology driven processes and have built such processes to help ensure that protection opportunities are not missed. These initiatives are in addition to our centralised internal outsourcing solutions for our customers where their needs are best served by a specialist protection adviser. Many of our protection initiatives have helped to increase protection attachment rates despite our lending mix being less in favour of purchase business over the last three years.

Lead generation

A key part of our current focus is continuing to leverage our unique business model and digital expertise to secure new lead sources so that we can capture and nurture customers earlier in the home moving process.

We have over the last year successfully built the technology that enables us to receive, ingest, distribute, fulfil and report on new customer-led introductions from a wide variety and scale of business and affinity partners.

This new capability, along with our omni-channel choice for customers and fully national scale, means we are very well placed to win new customer leads into MAB.

This has been a deliberate part of our technology and proposition design, and represents a real value add in terms of our proposition in what we can offer our existing and prospective AR firms, thus further enhancing our offering to both consumers and our AR partners.

The partnership announced with Charles Cameron in 2019 is expected to gain good momentum this year, and other lead generation activity is progressing well.

Summary

Our 2019 performance was very strong despite our continued investment in our team and technology. Our Adviser base and market share grew steadily despite a subdued housing market. Growing our market share in all market conditions remains an integral part of the strategy that we have continued to successfully deliver.

The acquisition of First Mortgage, our first substantial transaction since listing in 2014, brings many exciting opportunities to MAB as a Group. We are really pleased with how well their entire team has worked with MAB to become successfully integrated into our Group as an AR firm. We look forward to leveraging the strengths of the business and further enhancing its strong growth track record through MAB's technology platform and support structure.

Broadening our addressable market and becoming more involved in the home-moving process means we will reach new customers and help them in more ways than we have previously, thereby ensuring we continue to grow and diversify as a Group, and become more prominent and relevant in home-moving generally.

In terms of employees and culture, we successfully completed our initial pre-deadline work under the new Senior Managers & Certification Regime (SM&CR). This new FCA regulatory requirement changes the way that financial services firms are regulated. MAB has always operated with the highest integrity. We embrace this new regulation and are pleased that improved quality control will be enforced across the whole mortgage intermediary sector. Ultimately, this new way of working has been embedded into MAB to further strengthen our culture and integrity, and to ensure that we always strive to do the right thing, thereby minimising or ideally eliminating any potential customer harm or detriment.

We will roll out the various changes through 2020 and also continue to work on our company values and culture, well beyond the minimum standards that regulation enforces.

We will strive to continue to develop the best technology in our sector, thereby driving efficiencies and growth across the business and ensuring that we can achieve all of our objectives, including adviser productivity gains, lead generation, and customer retention.

Whilst, with the exception of First Mortgage, our investments to date have been relatively modest in size, we will continue to consider investments into larger and more profitable companies to help accelerate our growth plans or bring additional skills into the Group, and ensure we remain highly competitive and at the forefront of the changing intermediary landscape.

Following clear evidence of market improvement in the first quarter of 2020, the Coronavirus pandemic has created significant disruption, particularly in the purchase market with key elements such as physical viewings and valuations ruled out for the period of the Government imposed lockdown. It is too early to predict the extent of the disruption to trading in the coming months and the associated impact on our results for the full year, though we do expect to see a reduction in revenue and profit.

We have reacted quickly and efficiently to the pandemic, by redeploying the Group's resources to focus on telephone advice and remote working, as well as driving lead generation opportunities available in the current market.

We do note positively the package of measures announced in the March budget. These measures, along with the reduction in base rate, have reduced the cost of mortgage borrowing most likely to record lows and boosted the availability of funding for all mortgage lenders. This, combined with the additional funding dedicated to long term increases in the construction of new houses, should ensure the medium to long term outlook for our market remains very positive.

MAB has a very clear strategy, and we continue to invest significantly in our proposition and team. We are in a stronger position than many to deal with the current environment and are confident in our ability to continue growing our market share with a specific focus on re-mortgages and product transfers. We remain very optimistic about our growth prospects.

Business Review of the year

I am pleased to report further strong growth in revenue of 17% to £143.7m with profit before tax and exceptional costs relating to the acquisition of First Mortgage rising by 19% to £18.7m. MAB's gross mortgage lending (including product transfers) increased by 20% to £16.7bn in 2019 (2018: £14.0bn). MAB's overall share of UK gross new mortgage lending increased by 20% to 5.7% (2018: 4.7%).

Industry data and trends

Gross new mortgage lending activity in 2019 was broadly flat year-on-year at £267.6bn (2018: £268.7bn(1)). The Intermediary Mortgage Lenders Association's (IMLA) current estimates (published post the General Election and pre Coronavirus pandemic) are £268bn for gross new mortgage lending in 2020, indicating the market was anticipated to be broadly similar in the near term. The UK Finance industry data on gross new mortgage lending excludes Product Transfers. The latest UK Finance statistics indicate that the product transfer market is likely to continue to slightly increase from current levels, but flatten off in the medium term, much as anticipated. These have not as yet been updated since the start of the Coronavirus pandemic.

UK property transactions by volume for 2019 were 1% lower than in 2018, with monthly transactions shown in the graph below.

http://www.rns-pdf.londonstockexchange.com/rns/5714K_3-2020-4-22.pdf

Source: HM Revenue and Customs

Low property inflation(2) of c.1% during 2019 did not quite offset the slight reduction in volumes across all new mortgage lending in the year, leading to a reduction in UK gross new mortgage lending for the year of 1%, as set out in the graph below.

http://www.rns-pdf.londonstockexchange.com/rns/5714K_2-2020-4-22.pdf

Source: UK Finance Regulated Mortgage Survey (excludes product transfers with the same lender), Bank of England, UK Finance BTL data (used for further analysis)

1 UK Finance regularly updates its estimates. MAB previously reported £268bn for 2018 but this figure has slightly increased since.

2 Land Registry House Price IndexUK gross mortgage lending in 2019 for first time buyers and home-owner movers grew by 2% and 1% respectively, whereas home-owner re-mortgages reduced by 2%. UK gross mortgage lending in 2019 for BTL re-mortgages increased by 1%, with BTL purchases reducing by 5%.

Approximately 77% of UK mortgage transactions (excluding buy to let, where intermediaries have a higher market share, and Product Transfers where intermediaries have a lower market share) were via an intermediary in 2019 which is slightly higher than in 2018.

Financial review

We measure the development, performance and position of our business against a number of key indicators.

http://www.rns-pdf.londonstockexchange.com/rns/5714K_1-2020-4-22.pdf

Revenue

Revenue increased by 17% to £143.7m (2018: £123.3m). A key driver of revenue is the average number of Advisers during the period. MAB delivered strong organic revenue growth of 10% (12% on an underlying basis(1)) to £135.6m, driven by a 14% increase (excluding First Mortgage) in the average number of Advisers for the year to 1,293 (2018: 1,130) due to a combination of expansion by existing ARs and the recruitment of new ARs. First Mortgage, which was acquired on 2 July 2019, added another 82 advisers to the Group as at 31 December 2019, and contributed an additional £8.1m of revenue. Our business model continues to attract forward thinking ARs who are seeking to expand and grow their own market share.

The Group generates revenue from three core areas, summarised as follows:

Excluding First Mortgage, MAB generated revenue from three core areas, summarised as follows:

All income sources continued to grow with the average number of Advisers in the period increasing by 14% on last year. Activity in the housing market in 2019 was impacted by the continuing political and economic uncertainties associated with Brexit, particularly in the earlier part of the year. The Group's underlying average revenue per adviser(1) was flat for the year (2% down excluding FMD), and we saw improving productivity through H2 2019 relative to H1 2019.

First Mortgage contributed revenue generated from two core areas summarised as follows:

MAB's revenue, in terms of proportion, is split as follows:

With gross mortgage completions (including Product Transfers) increasing by 20% for the year, mortgage procuration fees increased by 15% (18% on an underlying basis (1)). Excluding FMD, gross mortgage completions (including Product Transfers) increased by 11% for the year, with mortgage procuration fees increasing by 8% (11% on an underlying basis(1)). Protection and general insurance commission increased by 20% (11% excluding FMD), and client fees rose by 10%, in line with expectations. First Mortgage does not charge client fees.

Looking ahead, we continue to expect client fees to become increasingly dependent upon the type and complexity of the mortgage transaction, as well as the delivery channel. This will lead to a broader spread of client fees on mortgage transactions, which, by their nature, are our lowest margin revenue stream.

1 Underlying basis excludes a one-off adjustment in H1 2018 of £1.7m for procuration fees awaiting processing.

Gross profit margin

Gross profit margin for the year was 25.3% (2018: 23.1%) reflecting the anticipated increase due to the acquisition of First Mortgage. First Mortgage naturally has a higher gross margin than MAB of c. 65% as its advisers are directly employed. Excluding FMD, gross profit margin was 23.1% (2018: 23.1%). The Group typically receives a slightly reduced margin as its existing ARs grow their revenue organically through increasing their Adviser numbers. In addition, larger new ARs typically join the Group on lower than average margins due to their existing scale, which therefore impacts upon the Group's gross margin.

Overheads

Overheads as a percentage of revenue were 13.1% (2018: 10.7%). Excluding one-off acquisition costs, additional costs relating to MAB's option to acquire the remaining 20% of First Mortgage and amortisation of acquired intangibles, totalling £1.0m, overheads as a percentage of revenue were 12.4% (2018: 10.7%). This increase in overheads as a percentage of revenue results from First Mortgage having a higher overheads ratio than that of MAB due to its operating model. Excluding FMD, overheads as a percentage of underlying revenue were 10.8% (2018: 10.7%). MAB continues to benefit from the scalable nature of the majority of its cost base as well as our regulatory costs being below that of the prior year due to Pure Protection Intermediation moving from the Life and Pensions Intermediation funding class of FSCS to the General Insurance Distribution funding class, though this has been mostly offset by increased IT costs.

Certain costs, primarily those relating to compliance personnel, are closely correlated to the growth in the number of Advisers, due to the high standards we demand and the requirement to maintain regulatory spans of control. The balance of our compliance costs mainly relate to FCA and FSCS regulatory fees and charges. The majority of the remainder of MAB's costs typically rise at a slower rate than revenue which will, in part, counter the expected erosion of MAB's underlying gross margin as the business continues to grow.

As a result of MAB's IT plans and capital expenditure, as previously indicated, we expect our IT costs and our amortisation on IT capital expenditure to increase by a modest amount. All development work on MIDAS Pro and our new platform technology are treated as revenue expenditure.

Profit before tax and margin thereon

Statutory profit before tax rose by 13% to £17.7m (2018: £15.7m) with the margin thereon being 12.3% (2018: 12.7%). Excluding one-off acquisition costs, additional non-cash costs relating to MAB's option to acquire the remaining 20% of First Mortgage and amortisation of acquired intangibles, totalling £1.0m, adjusted profit before tax was £18.7m with the margin thereon being 13.0% (2018: 12.7%).

Finance income and finance expenses

Finance income of £0.1m (2018: £0.1m) reflects continued low interest rates and interest income accrued on loans to associates. Finance expenses of £0.1m (2018: nil) relate to interest paid on drawdowns and non-utilisation charges on MAB's revolving credit facility with National Westminster Bank Plc that was put in place at the time of the acquisition of First Mortgage to part finance the acquisition (and had been repaid by 31 December 2019) and allow MAB to capitalise on potential opportunities.

Taxation

The effective rate of tax on statutory profit before tax increased slightly to 16.8% (2018: 15.9%) mainly as a result of disallowable expenses incurred in connection with the acquisition of First Mortgage. Going forward we expect our effective tax rate to be marginally below the prevailing UK corporation tax rate subject to tax credits for MAB's research and development expenditure on our continued development of MIDAS Pro, MAB's proprietary software, still being available and further tax deductions arising from the exercise of share options.

Earnings per share and dividend

Basic earnings per share rose by 9% to 28.2 pence (2018: 25.9 pence). Adjusted earnings per share rose by 17% to 30.1 pence (2018: 25.9 pence).

In line with our dividend policy following the First Mortgage acquisition of paying out a minimum of 75% of our adjusted earnings, the Board intended to propose the payment of an increased final dividend of 12.8 pence per share, up 1% from the previous year, making total ordinary dividends for the year of 23.9 pence per share, which would have been up 2.6% from the previous year. However, in view of the severity of the Coronavirus pandemic and the impact of the Government imposed lockdown, we now propose a final dividend of 6.4 pence per share, with the intention to pay a further 6.4 pence per share when the Board considers it prudent to do so. 

The proposed final dividend of 6.4 pence per share represents a cash outlay of £3.3m. Following payment of the dividend, the Group will continue to maintain significant surplus regulatory reserves. This proposed final dividend represents circa 38% of the Group's adjusted(1) post-tax and minority interest profits for H2 2019 and reflects our ongoing intention to distribute excess capital.

The record date for the final dividend will be 1 May 2020 and the payment date 29 May 2020. The ex-dividend date will be 30 April 2020.

1Adjusted for non-cash exceptional items of £0.6m.

Cash flow and cash conversion

The Group's net cash generated from operating activities increased 38% to £20.4m (2018: £14.9m).

Headline cash conversion(1) was:

The Group's operations are capital light with our most significant ongoing capital investment being in computer equipment. Only £0.2m of capital expenditure on office and computer equipment and software licences was required during the period (2018: £0.8m). Group policy is not to provide company cars, and no other significant capital expenditure is foreseen in the coming year. All development work on MIDAS Pro is treated as revenue expenditure.

In connection with the acquisition of First Mortgage, MAB entered into an agreement with NatWest in respect of a new revolving credit facility for £12m. The Group had no bank borrowings at 31 December 2019 (2018: £nil) with unrestricted bank balances of £7.0m (31 December 2018: £13.9m).

The Group has a regulatory capital requirement amounting to 2.5% of regulated revenue. At 31 December 2019 this regulatory capital requirement was £3.1m (31 December 2018: £2.8m), with the Group having a surplus of £11.7m (31 December 2018: £12.0m).

The following table demonstrates how cash generated from operations was applied:

1 Headline cash conversion is cash generated from operating activities adjusted for movements in non-trading items including loans to Appointed Representative firms ("ARs") and loans to associates totalling £0.9m in 2019 (2018: £2.2m) as a percentage of operating profit.

2Adjusted cash conversion is headline cash conversion adjusted for increases in restricted cash balances of £2.2m in 2019 (2018: £2.3m) as a percentage of operating profit.

Post period end

The Group is financially very resilient, with a strong balance sheet, a healthy surplus capital over its regulatory capital requirement and a robust model generating strong cash flows, enabling us to deal with the impact of the current Government lockdown on property and lending markets during the Coronavirus pandemic. The Group has implemented cost cutting measures, including the furloughing of some staff, and all remaining staff are currently working remotely on a reduced salary. In order to give ourselves additional flexibility to react quickly in this environment and capitalise on potential opportunities, we have drawn down the full amount on our Revolving Credit Facility with National Westminster Bank Plc on 20 March 2020, amounting to £12m.

Dividends paid in prior years

Whilst the individual entity of Mortgage Advice Bureau (Holdings) plc has always had sufficient reserves to pay its dividends, the Company has not filed interim balance sheets as required under s838 of the Companies Act 2006. A resolution will be put to shareholders at the AGM to release current and past directors and shareholders from any liabilities potentially resultant from this inadvertent and technical infringement in relation to prior dividends. More details will be set out in the notice of AGM. 

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF MORTGAGE ADVICE BUREAU (HOLDINGS) PLC

Opinion

We have audited the financial statements of Mortgage Advice Bureau (Holdings) plc (the "parent company") and its subsidiaries (the 'group') for the year ended 31 December 2019 which comprise the consolidated statement of comprehensive income, consolidated and parent company statement of financial position, consolidated and company statement of changes in equity, consolidated statement of cash flows, notes to the financial statements and notes to the company statement of financial position, including a summary of significant accounting policies.

The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 The Financial Reporting Standard in the United Kingdom and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice).

In our opinion:

• the financial statements give a true and fair view of the state of the group's and of the parent company's affairs as at 31 December 2019 and of the group's profit for the year then ended;

• the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;

• the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and

• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report. We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Conclusions relating to going concern

We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:

• the directors' use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or

• the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group's or the parent company's ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Our application of materiality

We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements.

We determined materiality for the parent company to be £285,000 (2018: £218,000) which represents 5% of net assets. We have used net assets as the parent company acts as a holding company only. We have then set the performance materiality at 75% (2018:75%) due no identified misstatements in the past.

We agreed with the audit committee that we would report to the committee all individual audit differences identified during the course of our audit in excess of £17,000 (2018: £15,000) for the group and £5,000 (2018: £4,000) for the parent company. We also agreed to report differences below these thresholds that, in our view, warranted reporting on qualitative grounds

An overview of the scope of our audit

Our audit approach was scoped by obtaining an understanding of the Group's activities, the key functions undertaken by the Board and the overall control environment. Based on this understanding we assessed those aspects of the Group's transactions and balances which were most likely to give rise to a material misstatement at a Group level.

The audit of the group was conducted by BDO LLP directly at Group level as all transactions are recorded in a common accounting system, except for those of First Mortgage Direct Limited, which has been consolidated within the Group and was identified as a significant component. The materiality used for the audit of First Mortgage Direct Limited as a component of the Group has been set at £140,000.The audit of the Group and all entities were conducted by BDO LLP.

The audit of the Group, including First Mortgage Direct Limited, accounted for 100% of the Group's net assets, 100% of the Group's revenue and 100% of the Group's profit before tax.

Other information

The directors are responsible for the other information. The other information comprises the information included in the report and financial statements, other than the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Opinions on other matters prescribed by the Companies Act 2006

In our opinion, based on the work undertaken in the course of the audit:

• the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

• the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.

Matters on which we are required to report by exception

In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors' report.

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:

• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or

• the parent company financial statements are not in agreement with the accounting records and returns; or

• certain disclosures of directors' remuneration specified by law are not made; or

• we have not received all the information and explanations we require for our audit.

Responsibilities of directors

As explained more fully in the directors' responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the group's and the parent company's ability to continue 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 parent company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's 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 reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.

Other matters which we are required to address

Following the recommendation of the Audit Committee, we were appointed by the Board of directors during 2014 to audit the financial statements for the year ending 31 December 2014 and subsequent financial periods. The period of total uninterrupted engagement is 6 years, covering the year ended 31 December 2019.

The non-audit services prohibited by the FRC's Ethical Standard were not provided to the Group and we remain independent of the Group in conducting our audit.

Our audit opinion is consistent with the additional report to the Audit Committee.

Use of our report

This report is made solely to the parent company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the parent company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the parent company and the parent company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Ariel Grosberg (Senior Statutory Auditor)

For and on behalf of BDO LLP, Statutory Auditor

London

22 April 2020

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

Consolidated statement of comprehensive incomefor the year ended 31 December 2019

All amounts shown relate to continuing activities

The notes that follow form part of these financial statements

Consolidated statement of financial positionas at 31 December 2019

The notes that follow form part of these financial statements.

The financial statements were approved by the Board of Directors on

P Brodnicki L TilleyDirector Director

Consolidated statement of cash flowsfor the year ended 31 December 2019

The notes that follow form part of these financial statements

Notes to the consolidated financial statementsfor the year ended 31 December 2019

1 Accounting policies

Basis of preparation

The principal accounting policies adopted in the preparation of the consolidated financial statements are set out below. The policies have been consistently applied to all the years presented.

The consolidated financial statements are presented in Great British Pounds, which is also the Group's functional currency. All amounts are rounded to the relevant thousands, unless otherwise stated.

These financial statements have been prepared under the historical cost convention and in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRSs) issued by the International Accounting Standards Board (IASB) as adopted by the European Union (EU) (EU "adopted IFRSs") and with those parts of the Companies Act 2006 that are applicable to companies that prepare financial statements in accordance with IFRSs.

The preparation of financial statements in compliance with adopted EU IFRS requires the use of certain critical accounting estimates. It also requires Group management to exercise judgement in applying the Group's accounting policies. The areas where significant judgements and estimates have been made in preparing the financial statements and their effect are disclosed in note 2.

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report as set out earlier in these financial statements. The financial position of the Group, its cash flows and liquidity position are described in these financial statements.

The Group made an operating profit of £17.6m during 2019 (2018: £15.6m) and had net current assets of £1.3m at 31 December 2019 (31 December 2018: £10.3m) and equity attributable to owners of the Group of £25.6m (31 December 2018: £20.7m).

The Directors have assessed the Group's prospects until the end of 2021, taking into consideration the current operating environment, including the impact of the Government imposed 'lockdown' due to the coronavirus pandemic on property and lending markets. To give the Group additional flexibility to react quickly in this environment and capitalise on potential opportunities the Group drew down its Revolving Credit Facility of £12m in full in March 2020. The Group has implemented cost cutting measures, including the furloughing of some staff, and all remaining staff are currently working remotely on a reduced salary. The Directors' financial modelling considers the Group's profit, cash flows, regulatory capital requirements, borrowing covenants and other key financial metrics over the period. These metrics are subject to sensitivity analysis, which involves flexing a number of key assumptions underlying the projections, including the duration of the Government imposed lockdown and its impact on the UK property market and the Group's revenue mix, which the Directors consider to be severe but plausible stress tests on the Group's cash position, banking covenants and regulatory capital adequacy. The Group's financial modelling shows that the Group should continue to be cash generative, maintain a surplus on its regulatory capital requirements and be able to operate within its current financing arrangements. Based on the results of the financial modelling, the Directors expect that the Group will be able to continue in operation and meet its liabilities as they fall due over this period. Accordingly, the Directors continue to adopt the going concern basis for the preparation of the financial statements.

Changes in accounting policies

New standards, interpretations and amendments effective for the year ended 31 December 2019

New standards, interpretations and amendments applied for the first time

The Group applied IFRS 3 (amendment) and IFRS 16 for the first time. The nature and the effect of the changes as a result of adoption of these new accounting standards are described below.

Several other standards and interpretations apply for the first time in 2019 but do not have an impact on the consolidated financial statements of the Group. The Group has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective.

· IFRS 16 Leases. The scope of IFRS 16 includes leases of all assets, with certain exceptions. A lease is defined as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for leases - leases of "low-value" assets (e.g. personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right of use asset). Lessees will be required to separately recognise the interest expenses on the lease liability and the depreciation expense on the right of use asset.

Lessees will also be required to remeasure the lease liability upon the occurrence of certain events (e.g. a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.

Lessor accounting under IFRS 16 is substantially unchanged from today's accounting under IAS 17. Lessors will continue to classify all leases using the same classification principles as in IAS 17 and distinguish between two types of leases: operating and finance leases.

This amendment has been applied to new leases in the year. There were no other leases held recently by the Group.

· IFRS 3 Business Combinations. The amendments clarify that, when an entity obtains control of a business that is a joint operation, it applies the requirements for a business combination achieved in stages, including remeasuring previously held interests in the assets and liabilities of the joint operation at fair value. In doing so, the acquirer remeasures its entire previously held interest in the joint operation.

An entity applies those amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early application permitted. These amendments will apply on all business combinations of the Group.

New standards with no impact on the Group

· IFRIC Interpretation 23. Uncertainty over income tax treatments. The interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 (Income taxes) and does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The interpretation specifically addresses the following:

§ Whether an entity considers uncertain tax treatments separately

§ The assumptions an entity makes about the examination of tax treatments by taxation authorities

§ How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates

§ How an entity considers changes in facts and circumstances.

An entity must determine whether to consider each uncertain tax treatment separately or together with one or more uncertain tax treatments. The approach that better predicts the resolution of the uncertainty should be followed.

· IFRS 11 Joint Arrangements. A party that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the activity of the joint operation constitutes a business as defined in IFRS 3. The amendments clarify that the previously held interests in that joint operation are not remeasured.

An entity applies those amendments to transactions in which it obtains joint control on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early application permitted. These amendments are currently not applicable to the Group but may apply to future transactions.

· IAS 12 Income Taxes. The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Therefore, an entity recognises the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognised those past transactions or events.

An entity applies those amendments for annual reporting periods beginning on or after 1 January 2019, with early application permitted. When an entity first applies those amendments, it applies them to the income tax consequences of dividends recognised on or after the beginning of the earliest comparative period. Since the Group's current practice is in line with these amendments, there has been no effect on its consolidated financial statements.

New standard, interpretations and amendments not yet effective

The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group's financial statements are disclosed below. The Group intends to adopt these standards, if applicable, when they become effective.

· Amendments to IFRS 10 and IAS 28: Sale or contribution of Assets between an investor

and its Associate or Joint Venture. The amendments address the conflict between IFRS 10, Consolidated Financial Statements and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that the gain and loss resulting from the sale or contribution of assets that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture, is recognised in full. Any gain or loss resulting from the sale or contribution of assets that do not constitute a business, however, is recognised only to the extent of unrelated investors' interest in the associate or joint venture. The IASB has deferred the effective date of these amendments indefinitely, but an entity that early adopts the amendments must apply them prospectively. The Group will apply these amendments when they become effective

· Amendments to IFRS 3: Definition of a business. The IASB issued amendments to the definition of a business in IFRS 3 Business Combinations to help entities determine whether an acquired set of activities and assets is a business or not. They clarify the minimum requirements for a business, remove the assessment of whether market participants are capable of replacing any missing elements, add guidance to help entities assess whether an acquired process is substantive, narrow the definitions of a business and of outputs, and introduce an optional fair value concentration test.  The amendments clarify that to be considered a business, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. They also clarify that a business can exist without including all of the inputs and processes needed to create outputs. That is, the inputs and processes applied to those inputs must have 'the ability to contribute to the creation of outputs' rather than the ability to create outputs.

The amendments must be applied to transactions that are either business combinations or asset acquisitions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020. Consequently, entitles do not have to revisit such transactions that occurred in prior periods. Earlier application is permitted and must be disclosed.

· Amendments to IAS I and IAS 8: Definition of material.  In October 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 to align the definition of 'material' across the standards and to clarify certain aspects of the definition. The new definition states that, 'Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.' The amendments clarify that materiality will depend on the nature or magnitude of information, or both. An entity will need to assess whether the information, either individually or in combination with other information, is material in the context of the financial statements.

An entity must apply these amendments for annual reporting periods beginning on or after 1 January 2020. The amendments must be applied prospectively. Early application is permitted and must be disclosed.

· The Conceptual Framework of Financial Reporting. The revised Conceptual Framework for Financial Reporting (the Conceptual Framework) is not a standard, and none of the concepts override those in any standard or any requirements in a standard. The purpose of the Conceptual Framework is to assist the Board in developing standards, to help preparers develop consistent accounting policies if there is no applicable standard in place and to assist all parties to understand and interpret the standards. Effective immediately for the IASB and the IFRS IC. For preparers who develop accounting policies based on the Conceptual Framework, it is effective for annual periods beginning on or after 1 January 2020.

Current versus non-current classification

The Group presents assets and liabilities in the statement of financial position based on current/non-current classification. An asset is current when it is:

· Expected to be realised or intended to be sold or consumed in the normal operating cycle

· Held primarily for the purpose of trading

· Expected to be realised within twelve months after the reporting date.

All other assets are classified as non-current.

Assets included in current assets which are expected to be realised within twelve months after the reporting date are measured at fair value which is their book value. Fair value for investments in unquoted equity shares is the net proceeds that would be received for the sale of the asset where this can be reasonably determined.

Basis of consolidation

Where the company has control over an investee, it is classified as a subsidiary. The company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

The consolidated financial statements present the results of the company and its subsidiaries ("the Group") as if they formed a single entity. Intercompany transactions and balances between group companies are therefore eliminated in full.

The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date on which control ceases.

Associates

Where the Group has the power to participate in, but not control the financial and operating policy decisions of another entity, it is classified as an associate. Associates are initially recognised in the consolidated statement of financial position at cost. Subsequently associates are accounted for using the equity method, where the Group's share of post-acquisition profits and losses and other comprehensive income is recognised in the consolidated statement of profit and loss and other comprehensive income (except for losses in excess of the Group's investment in the associate unless there is an obligation to make good those losses).

Profits and losses arising on transactions between the Group and its associates are recognised only to the extent of unrelated investors' interests in the associate. The investor's share in the associate's profits and losses resulting from these transactions is eliminated against the carrying value of the associate.

Any premium paid for an associate above the fair value of the Group's share of the identifiable assets, liabilities and contingent liabilities acquired is capitalised and included in the carrying amount of the associate. Where there is objective evidence that the investment in an associate has been impaired the carrying amount of the investment is tested for impairment in the same way as other non-financial assets.

Joint ventures

The Group accounts for its interests in joint ventures in the same manner as investments in Associates (i.e. using the equity method).

Any premium paid for an investment in a joint venture above the fair value of the Group's share of the identifiable assets, liabilities and contingent liabilities acquired is capitalised and included in the carrying amount of the investment in the joint venture. Where there is objective evidence that the investment in a joint venture has been impaired the carrying amount of the investment is tested for impairment in the same way as other non-financial assets.

Property, plant and equipment

Items of property, plant and equipment are initially recognised at cost. As well as the purchase price, cost includes directly attributable costs.

Depreciation is provided on all items of property, plant and equipment at rates calculated to write off the cost of each asset on a straight line basis over their expected useful lives, as follows:

Freehold land not depreciated

Freehold buildings 36 years

Fixtures and fittings 5 years

Computer equipment 3 years

Gains and losses on disposal are determined by comparing the proceeds with the carrying amount and are recognised in the income statement. The Directors reassess the useful economic life of the assets annually.

Goodwill

Goodwill represents the excess of a cost of a business combination over the Group's interest in the fair value of identifiable assets under IFRS 3 Business Combinations.

Goodwill is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated statement of comprehensive income. Where the fair value of identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the consolidated statement of comprehensive income on the acquisition date.

Other intangible assets

Intangible assets other than goodwill acquired by the Group comprise licences, the website and software and are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the statement of comprehensive income within administrative expenses on a straight line basis over the period of the licence agreements or expected useful life of the asset and is charged once the asset is in use. Assets are tested annually for impairment or more frequently if events or circumstances indicate potential impairment.

Amortisation, which is reviewed annually, is provided on intangible assets to write off the cost of each asset on a straight- line basis over its expected useful life as follows:

Licences 6 years

Website and Software 3 years

Customer contracts 9 years

Trademarks 10 years

Impairment of non-financial assets

Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually at the financial year end. Other non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of the asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly.

Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the smallest group of assets to which it belongs for which there are separately identifiable cash flows, its cash generating units ('CGUs'). Goodwill is allocated on initial recognition to each of the group's CGUs that are expected to benefit from the synergies of the combination giving rise to the goodwill.

Impairment charges are included in profit or loss except to the extent that they reverse gains previously recognised in other comprehensive income. An impairment loss for goodwill is not reversed.

Financial assets

In the consolidated statement of financial position, the Group classifies its financial assets as loans, trade receivables and cash and cash equivalents. The classification depends on the purpose for which the financial assets were acquired. Loans and trade receivables are non-derivative financial assets with fixed or determinable payments which arise principally through the Group's trading activities, and these assets arise principally to collect contractual cash flows and the contractual cash flows are solely payments of principal and interest. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment.

Impairment provisions for trade receivables are recognised based on the simplified approach within IFRS 9 using the lifetime expected credit losses. During this process the probability of the non-payment of the trade receivables is assessed. This probability is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for the trade receivables. For trade receivables, which are reported net, such provisions are recorded in a separate provision account with the loss being recognised within cost of sales in the consolidated statement of comprehensive income. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

Impairment provisions for loans to associates are recognised based on a forward looking expected credit loss model. The methodology used to determine the amount of the provision is based on whether there has been a significant increase in credit risk since initial recognition of the financial asset. For those where the credit risk has not increased significantly since initial recognition of the financial asset, twelve month expected credit losses along with gross interest income are recognised. For those for which credit risk has increased significantly, lifetime expected credit losses along with the gross interest income are recognised. For those that are determined to be credit impaired, lifetime expected credit losses along with interest income on a net basis are recognised.

Cash and cash equivalents include cash in hand and deposits held at call with banks with an original maturity of three months or less.

Financial liabilities

Trade and other payables are recognised initially at fair value and subsequently carried at amortised cost.

Leases

The Group's leasing activities and how they are accounted for

The Group leases a number of properties from which it operates. Rental contracts are typically made for fixed periods of five to ten years, with break clauses negotiated for some of these.

Contracts may contain both lease and non-lease components. The Group allocates the consideration in the contract to the lease and non-lease components based on their relative stand-alone prices.

Until the end of 2018, leases of property, plant and equipment were classified as either finance leases or operating leases. Under the transitional approach the comparatives have not been adjusted. Therefore, the Group has adopted the modified retrospective transition approach.

From 1 January 2019, all leases are accounted for by recognising a right of use asset and a corresponding liability at the date at which the leased asset is available for use by the Group, except for:

· Leases of low value assets; and

· Leases with a duration of 12 months or less

Under the transitional approach the comparatives have not been adjusted. Therefore, the Group has adopted the modified retrospective transition approach.

Payments associated with short-term leases and leases of low value assets will continue to be recognised on a straight-line basis as an expense in the statement of comprehensive income. Low-value assets within the Group comprise of IT equipment.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

· fixed payments (including in-substance fixed payments), less any lease incentives receivable

· variable lease payments that are based on an index or a rate, initially measured using the

index or rate as at the commencement date; and

· payments of penalties for terminating the lease, if the lease term reflects the Group exercising

that option.

Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Group, the Group's incremental borrowing rate is used, being the rate that the Group would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions.

To determine the incremental borrowing rate, the Group:

· where possible, uses recent third-party financing received by the individual lessee as a

starting point, adjusted to reflect changes in financing conditions since third party financing was received

· where it does not have recent third party financing, the Group uses a build-up approach that

starts with a risk-free interest rate adjusted for credit risk for leases held by the Group, and

· makes adjustments specific to the lease, e.g. term, country, currency and security.

Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

Right of use assets are measured at cost comprising the following:

· the amount of the initial measurement of lease liability,

· any lease payments made at or before the commencement date less any lease incentives

received, and

· any initial direct costs.

Right of use assets are depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. The Group does not revalue its land and buildings that are presented within property, plant and equipment, and has chosen not to do so for the right of use buildings held by the Group.

Variable lease payments

The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right of use asset.

Some property leases contain variable lease payments linked to current market rental from August 2023. A 1% fluctuation in market rent would impact total annual lease payments by approximately £16,000. 

Extension and termination options

Termination options are included in a number of the leases across the Group. These are used to maximise operational flexibility in terms of managing the assets used in the Group's operations. The majority of termination options held are exercisable only by the Group and not by the respective lessor.

In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated).

For leases of property, the following factors are normally the most relevant:

· If there are significant penalties to terminate, the Group is typically reasonably certain not to

terminate

· If any leasehold improvements are expected to have a significant remaining value, the Group

is typically reasonably certain to not terminate.

· Otherwise, the Group considers other factors including historical lease durations and the costs

and business disruption required to replace the leased asset. Most extension options in offices have not been included in the lease liability, because the Group could replace the assets without significant cost or business disruption.

At 31 December 2019, the carrying amounts of lease liabilities are not reduced by amount of payments that would be avoided from exercising a break clause because it was considered reasonably certain that the Group would not exercise its right to break the lease. Total lease payments of £0.6m are potentially avoidable were the Group to exercise break clauses at the earliest opportunity.

Business Combinations and Goodwill

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree's identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.

Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IFRS 9 Financial Instruments, is measured at fair value with the changes in fair value recognised in the statement of profit or loss in accordance with IFRS 9. Other contingent consideration that is not within the scope of IFRS 9 is measured at fair value at each reporting date with changes in fair value recognised in profit or loss.

Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests and any previous interest held over the net identifiable assets acquired and liabilities assumed). If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognised in profit or loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units).

Where goodwill has been allocated to the Group's cash-generating unit (CGU) and part of the operation within the unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained.

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer's previously held equity interest in the acquiree is remeasured to fair value at the subsequent acquisition date. Any gains or losses arising from such remeasurement are recognised in profit or loss.

Where a business combination is for less than the entire issued share capital of the acquiree and there is an option for the acquirer to purchase the remainder of the issued share capital of the business and/or for the vendor to sell the rest of the entire issued share capital of the business to the acquirer, then the acquirer will assess whether a non-controlling interest exists and also whether the instrument(s) fall within the scope of IFRS 9 Financial Instruments and is/are measured at fair value with the changes in fair value recognised in the statement of profit or loss in accordance with IFRS 9. Options that are not within the scope of IFRS 9 and are linked to service will be accounted for under IAS 19 Employee Benefits and/or IFRS 2 Share Based Payments as appropriate.

Retirement benefits: Defined contribution schemes

Contributions to defined contribution pension schemes are charged to the consolidated statement of comprehensive income in the year to which they relate.

Provisions

A provision is recognised in the statement of financial position when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation.

Share capital

Financial instruments issued by the Group are treated as equity only to the extent that they do not meet the definition of a financial liability. The Company's ordinary shares are classified as equity instruments. Incremental costs directly attributable to the issue of new shares are shown in share premium as a deduction from the proceeds.

Revenue

Revenue comprises commissions, client fees and other income. Commissions and client fees are included at the gross amount's receivable by the Group in respect of all services provided. Commissions payable to trading partners in respect of their share of the commissions earned are included in cost of sales.

Commissions and client fees earned are accounted for when received or guaranteed to be received, as until received it is not possible to be certain that the transaction will be completed. When commissions and client fees are received this confirms that the performance obligation has been satisfied. In the case of life commissions there is a possibility for a four year period after the inception of the policy that part of the commission earned may have to be repaid if the policy is cancelled during this period. A clawback provision is made for the expected level of commissions repayable.

Other income comprises income from ancillary services such as survey and conveyancing fees and is credited to the statement of comprehensive income when received or guaranteed to be received. 

Finance income

Finance income comprises interest receivable on cash at bank and interest recognised on loans to associates. Interest income is recognised in the statement of comprehensive income as it accrues.

Foreign exchange

Transactions entered into by Group entities in a currency other than the currency of the primary economic environment in which they operate (their "functional currency") are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are recognised immediately in profit or loss.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of the gain or loss on the change in fair value of the item (i.e., translation differences on items whose fair value gain or loss is recognised in OCI or profit or loss are also recognised in OCI or profit or loss, respectively).

Taxation

Income tax comprises current and deferred tax. Income tax is recognised in profit or loss other than if it relates to items recognised in other comprehensive income in which case it is recognised in other comprehensive income.

Current tax is the expected tax payable on the taxable income for the year using tax rates enacted or substantively enacted by the statement of financial position date and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.

Deferred tax assets and liabilities are recognised for all taxable temporary differences, except for when;

· The difference arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.

•  In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that enough taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are re-assessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

Deferred tax relating to items recognised outside profit or loss is recognised outside profit or loss. Deferred tax items are recognised in correlation to the underlying transaction either in OCI or directly in equity.

Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, are recognised subsequently if new information about facts and circumstances change. The adjustment is either treated as a reduction in goodwill (as long as it does not exceed goodwill) if it was incurred during the measurement period or recognised in profit or loss.

Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either:

• the same taxable group company, or

• different company entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets and liabilities are expected to be settled or recovered.

Sales taxes

Sales tax expenses and assets are recognised net of the amount of sales tax, except:

• When the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case, the sales tax is recognised as part of the cost of acquisition of the asset or as part of the expense item, as applicable.

•  When receivables and payables are stated with the amount of sales tax included

The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position.

Segment Reporting

An operating segment is a distinguishable segment of an entity that engages in business activities from which it may earn revenues and incur expenses and whose operating results are reviewed regularly by the entity's chief operating decision maker (CODM). The Board reviews the Group's operations and financial position as a whole and therefore considers that it has only one operating segment, being the provision of financial services operating solely within the UK. The information presented to the CODM directly reflects that presented in the financial statements and they review the performance of the Group by reference to the results of the operating segment against budget.

Operating profit is the profit measure, as disclosed on the face of the combined income statement that is reviewed by the CODM.

Dividends

Dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when they are paid. In the case of final dividends, this is when they are approved by the shareholders.

Share-based payments

Where equity-settled share options are awarded to employees, the fair value of the options at the date of grant is charged to the statement of comprehensive income over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each reporting date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Non-vesting conditions and market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition or where a non-vesting condition is not satisfied.

Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the statement of comprehensive income over the remaining vesting period.

Where options are granted to persons other than employees, the statement of comprehensive income is charged with the fair value of the options at the date of the grant over the vesting period.

2 Critical Accounting Estimates and Judgements

The Group makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The Directors consider that the estimates and judgements that have the most significant effect on the carrying amounts of assets and liabilities within the financial statements are set out below.

(a) Impairment of goodwill

The Group is required to test, on an annual basis, whether goodwill has suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a discount rate in order to calculate the present value of the cash flows. Actual outcomes may vary. More information including carrying values is included in note 13.

(b) Impairment of trade and other receivables

Judgement is required when determining if there is any impairment to the trade and other receivable balances, and the Group is using the simplified approach for trade receivables within IFRS 9 using the lifetime expected credit losses. During this process judgements about the probability of the non-payment of the trade receivables are made.

In considering impairment provisions for loans to associates the forward looking expected credit loss model used. In determining the lifetime expected credit losses for loans to associates, the Group has had to consider different scenarios for repayments of these loans and have also estimated percentage probabilities assigned to each scenario for each associate where applicable. More information is included in note 17.

(c) Clawback Provision

The provision relates to the estimated value of repaying commission received up front on life assurance policies that may lapse in a period of up to four years following inception. The provision is calculated using a model that has been developed over several years. The model uses a number of factors including the total unearned commission at the point of calculation, the age profile of the commission received, the Group's proportion of any clawback, likely future lapse rates, and the success of the Group's team that focuses on preventing lapses and/or generating new income at the point of a lapse. More information is included in note 21.

(d) Freehold building

The freehold building is depreciated over its useful life. The useful life is based on management's estimate of the period that the asset will generate revenue and will be reviewed annually for continued appropriateness. The carrying value will be tested for impairment when there is an indication that the value of the asset might be impaired. When carrying out an impairment test this would be based on future cash flow forecasts and these forecasts would be based on management judgement. No such indication of impairment has been noted.

(e) Deferred tax assets

Deferred tax assets include temporary differences related to the issue and exercise of share options. Recognition of the deferred tax assets assigns an estimate of proportion of options likely to vest, an estimate of share price at vesting and assumes share options will have a positive value at the date of vesting, which is greater than the exercise price. The carrying amount of deferred tax assets relating to share options at 31 December 2019 was £1.5m (2018: £0.8m).

3 Revenue

The Group operates in one segment being that of the provision of financial services in the UK. Revenue is derived as follows:

4 Cost of sales

 Costs of sales are as follows:

5 Profit from operations

Profit from operations is stated after charging the following:

Other administrative expenses are incurred in the ordinary course of the business and in 2019 include £1.0m of costs relating to the acquisition of First Mortgage Direct Limited, of which £0.4m is non-recurring.

Profits from associates are disclosed as part of the operating profit as this is the operational nature of the Group.

6 Staff costs

Staff costs, including executive and non-executive directors' remuneration, were as follows:

Included within share based payments is £0.2m relating to the option to purchase the remaining 20% of First Mortgage Direct Ltd (see note 29).

Key management compensation

Key management are those persons having authority and responsibility for planning, directing and controlling the activities of the Group. These are the directors of Mortgage Advice Bureau (Holdings) plc.

During the year retirement benefits were accruing to 2 directors (2018: 2) in respect of defined contribution pension schemes.

The total amount payable to the highest paid director in respect of emoluments was £666,835 (2018: £498,834). The value of the Group's contributions paid to a defined contribution pension scheme in respect of the highest paid director amounted to £nil (2018: £nil).

7 Finance income and expense

8 Income tax

For the year ended 31 December 2019 the deferred tax charge relating to unexercised share options, recognised in equity was (£544,179) (2018: £184,671).

9 Earnings per share

Basic earnings per share are calculated by dividing net profit for the year attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year.

The share data used in the basic and diluted earnings per share computations are as follows:

Adjusted earnings per ordinary share is also presented to eliminate the effects of acquisition costs, £374,000 of which are non-recurring costs. This presentation shows the trend in earnings per ordinary share that is attributable to the underlying trading activities of the Group.

The reconciliation between the basic and adjusted figures is as follows:

The Group uses adjusted results as key performance indicators, as the Directors believe that these provide a more consistent measure of operating performance. Adjusted profit is therefore stated before one-off acquisition costs.

10 Dividends

The record date for the final dividend is 1 May 2020 and the payment date is 29 May 2020.The ex-dividend date will be 30 April 2020. The Company statement of changes in equity shows that the Company has positive reserves of £414,000. There are sufficient distributable reserves in subsidiary companies to pass up to Mortgage Advice Bureau (Holdings) plc in order to pay the proposed final dividend.

Prior to the payment of previous dividends since listing, reserves have been passed up from subsidiary companies which ensured that the Company had sufficient distributable reserves to pay these dividends at the relevant time. However, due to an administrative oversight interim accounts showing that there were sufficient distributable reserves in the Company were not filed with the Register of Companies as required by s838(6) Companies Act 2006 and, as a result these dividends could be considered to have been unlawful distributions.

On becoming aware of this technical failure, the Board has taken steps to rectify this position and at the forthcoming Annual General Meeting on 26 May 2020, shareholders will be asked to consider a special resolution which, if passed, will:

a) Release shareholders from claims by the Company in relation to the unlawful dividends and direct the Company to enter into a deed poll in respect of the same;

b) Release past and present Directors from claims in relation to the unlawful dividends and direct the Company to enter into a deed of release in respect of the same.

The Directors have no reason to believe that the above resolution will not be passed at the Annual General Meeting.

11 Property, plant and equipment

12 Right of use assets

Leases

This note provides information for leases where the group is a lessee.

The balance sheet shows the following amounts to leases:

All additions during 2019 related to the acquisition of First Mortgage Direct Ltd

The present value of the lease liabilities is as follows:

The statement of comprehensive income shows the following amounts relating to leases:

13 Intangible assets

The goodwill relates to the acquisition of Talk Limited in 2012, and in particular its main operating subsidiary Mortgage Talk Limited and the acquisition of First Mortgage Direct Limited ("FMD") in the year (see note 29). The goodwill is deemed to have an indefinite useful life. It is currently carried at cost and is reviewed annually for impairment.

Under IAS 36, "Impairment of assets", the Group is required to review and test its goodwill annually each year or in the event of a significant change in circumstances. The impairment review conducted at the end of 2018 concluded that there had been no impairment of goodwill.

The Board considers that it has only one operating segment and following the acquisition of FMD, now has two cash-generating units (CGUs). Goodwill arose on the acquisition of Mortgage Talk Limited and has since been allocated to the CGU of the Group excluding FMD. Impairment testing for this CGU is carried out by determining recoverable amount on the basis of a value in use, which is then compared to the carrying value of the assets of the CGU including goodwill. The value in use that has been determined exceeds the carrying value of this CGU and therefore no impairment of goodwill is required. Management has estimated future cash flows over a five year period and applied a discount rate of 11% and then applied a terminal value calculation, which assumes a growth rate of 5% in future cashflows, in order to estimate the present value of those cash flows in determining the value in use. Management believes that any possible changes to any of the key assumptions applied in determining the value in use would not cause the carrying amount of goodwill to exceed the present value of the estimated future cashflows.

14 Investments in associates and joint venture

The Group holds investments in associates and a joint venture, all of which are accounted for under the equity method, as follows: