NSF.L Regulatory News (NSF)

Non-Standard Finance plc

('Non-Standard Finance', 'NSF', the 'Company' or the 'Group')

Unaudited Half Year Results to 30 June 2022

28 September 2022

Key points

· The Group continued to face significant regulatory challenges in the current period and on 15 March 2022, the Group's home credit division was placed into administration.

· It has not been possible to reach agreement with the FCA regarding a voluntary redress scheme in respect of the Group's guarantor loans division. The Directors have therefore decided to pursue the use of a court-based process (the 'Process'), such as a scheme of arrangement or restructuring plan, in relation to its redress liabilities. A successful Process is intended to provide certainty as to the total liability arising from redress liabilities, thereby allowing the Group to proceed with its planned capital raise (the 'Capital Raise'). If successful, the proceeds of the Capital Raise will be used to fund a cash pot which will be available to finance the payment of redress liabilities to affected customers and to strengthen the Group's balance sheet and underpin future growth.

· Although it is not expected that the Process will provide for the redress claims to be paid in full, the Directors believe that the Process is in the best interests of customers with redress claims. Without the Process, the Directors believe insolvency is the most likely outcome, in which there would likely be no payment of redress liabilities.

· A key objective of the Process will be to treat all affected customers equally. Although the independent review of the Group's branch-based lending division carried out in 2021 identified no systemic issues requiring redress, as this division and the guarantor loans division trade out of the same legal entity, the Process will encompass potential claims from both divisions in order to ensure equitable treatment of customers.

· The Group is engaging with the FCA, the FOS, as well as Alchemy and the Group's lenders, regarding the Process. It has appointed an independent chairperson to chair a committee of customers with redress claims, who will review the terms of the Process on behalf of affected customers.

· Further details of the Process will be announced in due course. The Process will be subject to satisfying the statutory creditor approval requirements and the sanction of the Court.

· We are engaging with the FCA with respect to the business' plan to rely on DISP 1.6.2R(2), pursuant to which, the business is entitled to place a temporary hold on the processing of customer complaints.

· Plans for the Capital Raise remain subject to, inter alia, successful completion of the Process and the continued support of Alchemy and other key shareholders as well as the Group's lenders.

· Without the successful completion of the Capital Raise, the Group remains balance sheet insolvent and the Group's ability to remain a going concern is subject to material uncertainties. However, the Directors continue to believe there is a reasonable prospect of resolving this position through the Process and the Capital Raise.

· The Directors of NSF plc are working with key stakeholders on an alternative transaction to be implemented in the event that the Process is completed but the Capital Raise is unsuccessful which would preserve the branch-based lending business as a going concern. In this scenario, it is expected that the same cash pot would be available to finance the payment of redress liabilities as if the Capital Raise had completed. However, there would be a material risk of the Company and certain other members of the Group entering insolvency and as a result there would be no recovery for the Company's shareholders. 

· The Group's ongoing operational performance in the first six months of this year has been better than expected and current trading including impairment levels also remain positive. Whilst Group revenue was down 17% following the administration of the home credit division, revenues at branch-based lending were up 11% to £43.8m (2021: £39.4m).

· Despite the pleasing operational performance, for the March 2022 and June 2022 quarter, the Group's loan to value ratio was higher than the level permitted under its loan to value covenant. The Group, through negotiations with its lenders, has obtained a short-term waiver which means the loan to value covenant will not be formally tested, and no covenant breach or event of default will arise, until the Group provides its compliance certificates for the March 2022 and June 2022 quarter dates. The date on which the Group is required to supply these compliance certificates has been extended until 5 October 2022, with a mechanism for this date to be extended further with lender support. Further waivers are likely to be dependent on positive progress of the Process.

· Net loan book at branch-based lending remains slightly below prior year at £160.4m (2021: £163.8m) as the business continues to build the loan book back up following the impact of the pandemic.

· The Group's guarantor loans division remains in managed run-off and has been performing ahead of expectations, with a much reduced loan book of £17.3m at the end of June 2022 (2021 £41.4m).

· Exceptional charges of £24.9m (2021: £4.0m) includes £5.7m additional costs in respect of the anticipated Process, £5.5m in relation to the losses on derecognition of the home credit division in administration and £13.7m of impairments recognised in relation to unsecured receivable balances held with the home credit division.

· No half year dividend per share is being declared (2021: 0.0p per share).

Financial summary

1 Normalised figures are before exceptional items. Operating profit/(loss) is before finance costs. See glossary of alternative performance measures and key performance indicators in the Appendix.

2  After exceptional costs.

3 Normalised loss per share in 2022 is calculated as normalised loss after tax of £11.3m divided by the weighted average number of shares of 312,437,422. The normalised earnings per share in 2021 is calculated as normalised loss after tax of £3.5m, divided by the weighted average number of shares of 312,437,422.

Jono Gillespie, Group Chief Executive Officer, said

"The Group delivered an improved operational performance in the first half in branch-based lending, despite the difficult macro-economic environment.

Due to the need to resolve the material uncertainties faced by the Group, the Board of the Everyday Loans trading entity, supported by the Non-Standard Finance plc Board, has determined that a court-based process, such as a scheme of arrangement or a restructuring plan, is required to reach a resolution regarding the outstanding regulatory issues faced by the Guarantor Loan Division (which trades through the same legal entity as Everyday Loans). This process is now being actively pursued, with the timescale for its completion being determined by engagement with the FCA and the Group's key stakeholders, and the requirements of the legal process. In order to ensure equitable treatment of creditors within the Everyday Loans trading entity, this process will encompass all eligible customers of branch based lending as well as the guarantor loan division. We are engaging with the FCA with respect to the business' plan to rely on DISP 1.6.2R(2), pursuant to which, the business is entitled to place a temporary hold on the processing of customer complaints.

Assuming the successful completion of the legal process, the Board anticipates being in a position to execute a substantial capital raise which, whilst ensuring the future for the Group, will materially dilute the interests of existing equity holders, most likely to negligible value unless they choose to participate in the planned Capital Raise. The proceeds of the Capital Raise will be used to fund a cash pot which will be available to finance an agreed portion of redress liabilities to affected customers (as determined by the court) and, crucially, to strengthen the Group's balance sheet and underpin a return to profitable growth through significant investment in our branch-based lending business. Although it is not expected that the cash pot will be sufficient to allow for redress liabilities to be paid in full, my fellow Directors and I believe that the legal process is in the best interests of customers with redress claims, as well as the Group's other stakeholders.

I would like to thank all our colleagues for their tireless work and continued dedication through these uncertain times for the business and look forward to leading the Group through the development and implementation of the legal process, the planned Capital Raise and beyond."

The tables below provide an analysis of the normalised results (excluding exceptional items) for the Group for the six month period to 30 June 2022 and 30 June 2021 respectively.

4 Excludes exceptional items

5 The home credit division was placed into administration on 15 March 2022, its results are therefore to the period ended 14 March 2022.

4 Excludes exceptional items

The administration of the home credit division on 15 March 2022 combined with a robust collections performance at the remaining divisions has led to a 15% fall in the net loan book compared to 31 December 2021 as summarised in the table below:

1 Home credit division placed into administration on 15 March 2022 and therefore derecognised from the Group.

Investor presentation

The investor presentation will be available on the Group's website www.nsfgroupplc.com.

For more information:

Group Chief Executive's statement

Introduction

Against a changing macroeconomic environment and despite a number of operational, regulatory and financial challenges, the Group has performed ahead of management's expectations in the past six months and delivered a positive normalised operating profit of £2.8m (2021: £9.4m), mainly thanks to an encouraging performance by the Group's remaining operating division: branch-based lending, which trades as Everyday Loans ("ELL"). Whilst encouraging, this positive operating profit remains some way short of the level required to cover the finance costs of the Group, resulting in a normalised loss before tax of £11.3m. The business clearly needs to grow in order to resolve this situation, and is very well placed operationally to do so, with an established branch network and experienced central team who have proven historically that they can achieve sustainable and profitable growth. Indeed, recent months have seen an encouraging return to loan book growth.

Loans at Home ("LAH"), the Group's home credit division, was placed in administration on 15 March 2022. While this was deeply disappointing for all of us, it was clear that administration was the only option available in order to preserve value for creditors. The first half results include a contribution from LAH to that date.

The guarantor loans division remains in managed run-off however strong collections performance has resulted in a £1.6m (2021: £0.8m) contribution to the Group's normalised operating profit for the six months ended 30 June 2022.

The Board of the Everyday Loans trading entity has decided to actively pursue a court-based process (the 'Process') to address the outstanding regulatory issue in the guarantor loans division (which trades through the same legal entity as Everyday Loans), using either a scheme of arrangement or a restructuring plan. The Non-Standard Finance plc Board is in agreement with the Everyday Loans Board that this is an appropriate course of action. A key objective of the Process will be to treat all affected customers equally. In order to ensure equitable treatment of creditors within the Everyday Loans trading entity, and notwithstanding the fact that the independent review of Everyday Loans carried out in 2021 identified no systemic issues requiring redress, the Process will encompass all eligible Everyday Loans customers of the branch-based lending division as well as the guarantor loan division.

The Group is engaging with the FCA, the FOS, as well as Alchemy and the Group's lenders, regarding the Process. It has appointed an independent chairperson to chair a committee of customers with redress claims, who will review the terms of the Process on behalf of affected customers. Further details of the Process will be announced in due course. The Process will be subject to satisfying the statutory creditor approval requirements and the sanction of the Court.

The Board, whilst recognising that court-based processes are complex, time consuming and not guaranteed to be successful, believe that there is a reasonable chance of success and that the Process is necessary to provide certainty as to the total liability arising from redress liabilities. They further expect that the successful completion of the Process will, along with the continued support of Alchemy and other key shareholders and the Group's lenders (including to agree an extension of the lending facilities), allow the Group to proceed with its planned Capital Raise which, if successful, will strengthen the Group's balance sheet and underpin future growth. The Company is in discussions with its lenders regarding a potential extension of the lending facilities and other measures to support the business going forwards, which are likely to be linked to completion of the Capital Raise.

The proceeds of the planned Capital Raise will be used, among other things, to fund a cash pot which will be available to finance an agreed portion of redress liabilities to affected customers and reduce debt gearing levels. Although it is not expected that the cash pot will be sufficient to allow for redress liabilities to be paid in full, the Board believe that the Process is in the best interests of customers with redress claims, as well as the Group's other stakeholders. Without the Process there is a material risk of the Group entering an insolvency process in which there would be no payment of redress liabilities.

If the Capital Raise (which is dependent upon successful completion of the Process) is not achieved within the required timeframe, it is expected that the Group would not be capable of meeting its liabilities as they fall due, and under this scenario, the Group's lenders would be entitled to enforce their security and there would be a material risk of the Group entering insolvency.

The Directors of NSF plc are working with key stakeholders on an alternative transaction to be implemented in the event that the Process is completed but the Capital Raise is unsuccessful which would preserve the branch-based lending business as a going concern. In this scenario, it is expected that the same cash pot would be available to finance the payment of redress liabilities as if the Capital Raise had completed. However, there would be a material risk of the Company and certain other members of the Group entering insolvency and as a result there would be no recovery for the Company's shareholders. 

We are engaging with the FCA with respect to the business' plan to rely on DISP 1.6.2R(2), pursuant to which, then business is entitled to place a temporary hold on the processing of customer complaints. This pause will ensure that all customers can be treated equally and fairly.

2022 half year - review of operations

Branch-based lending

The Group's branch-based lending division performed ahead of expectations during the first half of 2022. The volume of leads received was higher compared to the same period last year which meant that the net loan book returned to growth, ending the period 2% higher than 31 December 2021. In addition, collections performance in the six months ended 30 June 2022 has been positive with impairment performance returning to more normalised levels. Despite this increasing costs of living remains a risk to collections performance for the remainder of the year.

The business continues to invest in the enhancement of technology and embedding of its strengthened creditworthiness process which will ensure that the business continues to meet the highest standards of responsible lending, ensuring we continue to deliver good outcomes for all customers.

The Board continues to believe that the branch-based lending division has significant potential for future growth once the Group has resolved its outstanding regulatory issues and completed the planned Capital Raise.

Although the independent review of the Group's branch-based lending business carried out in 2021 identified no systemic issues requiring redress, since this business and the guarantor loans division trade out of the same legal entity, the Process will encompass potential claims from both businesses in order to ensure equitable treatment of customers.

Home Credit

The Group's home credit division, which traded as Loans at Home ("LAH"), was placed into administration on 15 March 2022. In the first two and a half months of the year the division performed ahead of budget although it delivered a negative contribution with a normalised operating loss of £0.5m (2021: normalised operating profit £1.5m).

In the current period, exceptional items of £5.5m in relation to losses on derecognition of the home credit division were recognised as well as an additional £13.7m (2021: £nil) of impairments of related receivable balances held with the division in order to reflect the fact that these may not be recovered directly by the Group. Whilst the Group does not expect to recover the balances held directly with LAH following the conclusion of the administration, as LAH remains a guarantor of the Group's financing facilities, it is anticipated that the proceeds from the administration would be paid directly to its secured lenders, thereby reducing the external debt balance held by the Group at that point.

Guarantor loans

The Group's guarantor loans division was placed in a managed run-off on 30 June 2021. Since then, the Group has continued to collect out its loan book balance with the result that the division delivered a positive contribution of £1.6 million to normalised operating profits in the half year.

The loan book, net of provisions, has now fallen to £17.3 million (2021: £41.4m) and the Group continues to focus on collecting out the remaining book. It has not been possible to reach agreement with the FCA regarding a voluntary redress scheme in respect of guarantor loans and therefore the Group is now actively pursuing a legal resolution to the regulatory difficulties faced by the division through the Process which will provide certainty as to the total liability arising from redress liabilities. This, in turn, will allow the Group to proceed with its planned Capital Raise and therefore fund a cash pot which will be available to finance an agreed portion of redress liabilities to affected customers. It is not expected that the cash pot will be sufficient to allow for redress liabilities to be paid in full, although this is dependent on the final size of the cash pot (which remains subject to discussion with the Group's key stakeholders) and the costs of the Process.

Liquidity, funding and going concern

As at 30 June 2022 the Group had cash at bank of £111.5m (31 December 2021: £114.5m) and gross borrowings of £330.0m (31 December 2021: £330.0m). Prior to its August 2022 maturity date, the Group repaid its £45m RCF facility in full on 8 July 2022. In addition, on 26 August 2022 a part repayment of £5m was made to the Group's term loan facilities from the proceeds of the LAH administration. As at 31 August 2022 cash at bank was £56.7m while the level of gross borrowings reduced to £280.0m (comprised of a term loan facility that matures in August 2023). The Group is in discussions with its lenders regarding extensions to the term of the existing facilities and other support that might be provided by lenders. It is likely that any extension would be conditional upon successful completion of the Process and the Capital Raise.

For the March 2022 and June 2022 quarter, the Group's loan to value ratio was higher than the level permitted under its loan to value covenant. The Group, through negotiations with its lenders, has obtained a short-term waiver which means the loan to value covenant will not be formally tested, and no covenant breach or event of default will arise, until the Group provides its compliance certificates for the March 2022 and June 2022 quarter dates. The date on which the Group is required to supply these compliance certificates has been extended until 5 October 2022, with a mechanism for this date to be extended further with lender support. Further waivers are likely to be dependent on positive progress of the Process.

At 30 June 2022 the Group also had a multi-year £200m securitisation facility which remained undrawn and due to the current balance sheet position could not be used. On 14 September 2022, the Group closed the facility. 

The Directors acknowledge the considerable challenges which continue to impact the Group and the material uncertainties which may cast significant doubt on the ability of both the Group and the Company to continue to adopt the going concern basis of accounting. However, despite these challenges, it is the Directors' reasonable expectation that the Group and Company will resolve its regulatory issues through the Process which will provide certainty as to the total liability arising from redress liabilities, raise sufficient capital in the timeframe required and will continue to operate and meet its liabilities as they fall due for at least the next 12 months and therefore it has concluded the business is a going concern.

Should the Process and subsequent Capital Raise be unsuccessful, it is expected that the Group would not be capable of meeting its liabilities as they fall due, and under this scenario, the Group's lenders would be entitled to enforce their security and there would be a material risk of the Group entering insolvency.  The Directors are working with key stakeholders on an alternative transaction to be implemented in the event that the Process is completed but the Capital Raise is unsuccessful which would preserve the branch-based lending business as a going concern. In this scenario, the same cash pot would be available to finance the payment of redress liabilities as if the Capital Raise had completed. However, there would be a material risk of the Company and certain other members of the Group entering insolvency and as a result there would be no recovery for the Company's shareholders. 

Refer to note 2 of the financial statements for further detail.

Outstanding regulatory issues

Court-based process (the 'Process')

The Group announced on 3 August 2020 that, following its multi-firm review of the guarantor loans sector, the FCA had raised some concerns regarding certain processes and procedures at the guarantor loans division ("GLD") and a programme of redress would be required for those customers deemed to have suffered harm as a result. 

It has not been possible to reach agreement with the FCA regarding a voluntary redress scheme in respect of guarantor loans which the Group believes it could fund in its current position, and therefore the Group is now actively pursuing a legal resolution to the ongoing regulatory uncertainty within GLD through the Process which will provide certainty as to the total liability arising from redress liabilities. Pending the conclusion of the Process, the Group continues to maintain the exceptional provision for redress in relation to the estimated costs of redress to GLD customers, with a total estimated cost of £17.5m at the period end (31 December 2021: £16.9m). The increase from 2021 reflects additional interest accrued over the period. The independent review of the branch-based lending business carried out in 2021 identified no systemic issue regarding redress. However, since GLD trades through the same legal entity as branch-based lending, in order to ensure a fair outcome to all customers, the Process will also encompass all eligible Everyday Loans customers as well as GLD customers. Whilst the amount which might be paid as part of the Process in relation to branch-based lending customers is uncertain given no systemic issues were identified in the independent review carried out in 2021, in its ordinary course of business the Group does uphold a small number of complaints each month for non-systemic reasons. The Group recognises that the Process may pull forward such complaints from future years and has therefore recognised an exceptional charge of £4.5m in the branch-based lending division based on management's best estimate of the future value of such complaints. Whilst the provisions have been calculated assuming that eligible customers are paid in full, given the cost of the Process (which will be deducted from the cash pot that will be available to finance the payment of redress liabilities) and the increased number of complaints which may be made as part of the Process, it is expected that those customers who suffered harm would not receive 100p/£1.  We are engaging with the FCA with respect to the business' plan to rely on DISP 1.6.2R(2), pursuant to which, the business is entitled to place a temporary hold on the processing of customer complaints.

Capital Raise

It is expected that the planned Capital Raise will involve a firm placing and open offer. The Directors recognise that the Capital Raise is dependent on a number of material uncertainties including (i) a successful Process, including positive creditor votes and the court sanction of the Process within the timeframes required; (ii) the redress liability under the Process being within levels acceptable to investors; (iii) the Group's lenders continuing to grant appropriate extensions to the testing dates or other forms of waivers for covenant breaches prior to the Capital Raise completing; (iv) the Group's lenders providing the necessary waivers to implement the Process; (v) the Group obtaining extensions to the term of its existing debt facilities on terms acceptable to investors; and (vi) the underlying assumptions in relation to the regulatory environment, macro-economic environment and business performance not varying materially from the base case. The Directors continue to maintain a regular dialogue with key stakeholders including the FCA, Alchemy and the Group's lenders regarding the above matters.

Other regulatory developments

In addition to the matters outlined above, there have been a number of other regulatory developments in late 2021 and in 2022 that have been particularly relevant to the Group's business. They are summarised below: 

Climate related disclosures - In November 2021, the FCA sought views on their 'Sustainability Disclosure Requirements' which will principally affect investment firms, and forms part of a wider body of ESG-orientated work as promised in the Business Plan. ESG is an important topic for the regulator, who seeks to build on five key themes: Transparency; Trust; Tools; Transition; and Team. Whilst regulated firms like Everyday Loans are yet to be incorporated into ESG plans, their views have been solicited, despite new rules being aimed at LLCs and investment firms. The FCA's direction of travel reflects the fact that four out of five respondents to the Financial Lives Survey felt that environmental issues are important, and believe that businesses have a wider responsibility than simply to make a profit.

Cost-of-living crisis - The cost of living crisis continues to unfold across the UK, with huge spikes in energy, transport, food and housing, against a backdrop of wages that are falling in real terms and benefits that are failing to keep up with rampant inflation. The FCA has launched a website on the same topic, which details relevant publications, letters, updates, news and speeches that pertain to the ongoing crisis. The long running Borrowers in Financial Difficulty ('BiFD') project is of particular interest as it contains some insightful and comprehensive feedback from borrowers across the spectrum. A 'Dear CEO' letter has been issued to all firms about helping customers through the cost-of-living scenario in June 2022.

Vulnerable customers - Echoing the sentiments from the BiFD project, the FCA has been reiterating its stance on vulnerable customers and their associated treatment in nearly every speech that has been made by its stakeholders over the last six months. Final guidance was released last year, and the FCA released an update on progress in this area in June 2022. Regulated entities are being urged to adopt 'tell us once' strategies and to utilise complaints insights as learning opportunities, as well as to ensure that their senior management staff are setting the tone from the top. According to the most recent communication on the matter, around half of retail banks are unable to demonstrate that they have implemented strategies that ensure consistently fair outcomes across their consumer portfolios, and so the FCA is keen to see clear lines of accountability and that the concept has been fully embedded.

Operational resilience - Following the publication of the Operational Resilience Policy Statement in March 2021, the firms within the FCA's perimeter will have until March 2025 to exemplify its principles, though they should do so as soon as reasonably practicable. Mapping and testing for impact tolerances and investments that are necessary to remain within them must be in place by the new deadline. As part of this work, the regulator is also reviewing the practice of critical third parties, such as datacentre providers, having released a Discussion Paper with the PRA in July 2022.

Consumer Duty - The final rules have been released for the new Consumer Duty project ('CD'), without much significant deviation from the proposal of 2021. The implementation time has been extended by three months to July 2023, and for closed products the deadline is now July 2024. Whilst they are only recommendations, the FCA has provided deadlines for a Board report on CD (October 2022) and, for manufacturers, a deadline of April 2023 for product & services reports has been provided so as to allow other parties in the chain time to absorb and apply the information within them, which should pertain to target markets. Views were solicited from across the financial landscape about the final wording of the Duty, which has been settled at "act to deliver good outcomes for retail customers," and the three cross-cutting rules and four principles remain unchanged with their original wording.

Future Regulatory Framework - Following the conclusion of the Brexit transition period, ministers have been promising a review of the UK's financial regulatory framework via reform of the Financial Services and Markets Act ('FSMA'), which is being managed by HM Treasury. However, as much of our regulatory law and principles intersect, much of the work recommended by the Woolard review which was aimed at reforming the Consumer Credit Act of 1974 ('CCA') has come within HMT's remit. The Government has committed to reviewing the CCA, not least because some of the existing obligations are not wholly compatible with the incoming CD - the Credit Services Association posited that a firm can follow the letter of the old law or the spirit of the new regulations, but not both. This position is not accepted by the FCA but the disconnect remains apparent, and the reform of a 50-year-old statute is potential for further uncertainty and disruption to regulation and legislation alike.

We continue to monitor all regulatory developments closely so that we can anticipate and, if necessary, engage with the relevant authorities, either directly or through industry associations. 

Dividend

As a result of the significant reported losses over the last two years and during the first half of 2022, the Company does not have any distributable reserves and is therefore not in a position to declare a half year dividend (2021: £nil per share). As part of any future capital raise, the Board is committed to completing a process, subject to shareholder and Court approval, to create sufficient distributable reserves so that the Company is able to resume the payment of cash dividends to shareholders when it is appropriate to do so.

Current trading and outlook

Since the end of June 2022, we have continued to trade ahead of budget. Given the current macroeconomic environment as well as some of the structural changes in the market regarding both potential customer population and also companies operating in the market, we expect demand for our products to increase. However, future growth plans will require the Group to complete the Process and the Capital Raise, but once achieved, the business will be well placed to realise that vision.

Jono Gillespie

Group Chief Executive Officer

28 September 2022

Financial review

1 Normalised figures, adjusted to exclude exceptional items

2 Refer to note 6 in the notes to the financial statements for further detail

Following the relaxation of COVID-19 restrictions, the macro environmental landscape has remained unstable throughout the first half of 2022. A number of factors have contributed to uncertainty, including the ongoing economic consequences of COVID, post-Brexit economic turmoil and the Russian invasion of Ukraine. These events have, in turn, contributed to a cost-of-living crisis affecting households across the UK, which is likely to get worse before it gets better. Against this external 'backdrop' the Group's core business has performed better than anticipated, however normalised revenue remained down year on year by 16.5% at £56.6m (2021: £67.8m). This performance reflects the decline in loan books of both the guarantor lending division, which moved into managed run-off in June 2021 and also the administration of the Group's home credit division, where any activity post 15 March 2022 is no longer included within the Group's financial results. The Group's core branch based lending business has generated an increase in normalised revenue year on year of 11.1%, with £43.8m in normalised revenue in 2022 (2021: £39.4m)

Administration costs were 26.1% lower at £35.6m (2021: £48.2m) primarily driven by overall reduced costs in the home credit division due to the administration and removal from the Group financial results, offset by higher levels of complaints year on year, driven by certain claims management companies ('CMCs'). Impairment and modification costs were higher year on year, mainly due to 2021 seeing lower impairment in line with lower levels of lending. 

The Group's finance costs remained high due to the rising interest rate environment and with the facilities remaining fully drawn as at 30 June 2022. This in turn has contributed significantly to the increase in normalised post tax loss which was £11.3m (2021: £3.5m loss)

Exceptional charges totalling £24.9m (2021: £4.0m) comprised predominantly of: the impairment of receivables held with Loans at Home following the administration of the business (whilst the Group does not expect to recover the balances held directly with LAH following the conclusion of the administration, as LAH remains a guarantor of the Group's financing facilities, it is anticipated that the proceeds from the administration would be paid directly to its secured lenders, thereby reducing the external debt balance held by the Group at that point), the derecognition of assets related to the division, and increased provisions associated with the Process. The net result was an increased reported loss before tax of £36.2m (2021: loss before tax of £7.5m) and normalised loss per share was 3.63p (2021: loss per share of 1.12p). Accounting for exceptional items meant that the Group's reported loss per share was 11.59p (2021: loss per share of 2.41p).

The Group continues to consolidate and regroup post pandemic and whilst the material uncertainties remain, the business remains confident that there are reasonable prospects outlined in the court-based solution above, that will resolve the material uncertainties, raise the substantial capital required and facilitate the growth of the core branch-based lending business.

Impairment provisioning - coverage ratios

Coverage ratios across the two remaining divisions remained generally in line with the ratios as at 31 December 2021 whilst the group coverage ratio fell 5.5% as a result of the home credit division no longer being part of the Group.

Divisional review

Branch-based lending

Financial results

The business saw an increase in the volume of leads and qualifying 'applications to branch' ('ATBs') during the first half of 2022 versus the prior year. This drove an increase in the total number of loans booked, with new money lent to customers increasing 22% in comparison to the first half of 2021. While the impact of the pandemic on lending volumes meant that the net loan book declined in both 2020 and 2021, the positive recovery in lending volumes has resulted in the net loan book returning to growth in H1 2022 and it ended the period at £160.4m (December 2021: £157.2m). The number of active customers has seen a small increase to 66,400 at June 2022 (December 2021: 66,000).

We continually look to enhance our lending processes, including the assessment of creditworthiness. Whilst acutely cognisant of the cost-of-living crisis, the collections performance of the business remains ahead of expectation with customer payment levels particularly strong, whilst early settlements continue below pre-pandemic levels. Delinquency and impairment performance has returned to historically normal levels. The nature of IFRS 9 accounting meant that lower lending volume in the prior years also helped to reduce impairment charges however, as lending volumes have continued to recover over H1 22, impairment rates are gradually returning to historic norms. 

7 All definitions are as per glossary. 2021 has been recalculated to ensure like-for-like comparative to 2022.

Revenues increased 11% to £43.8m (2021: £39.4m) despite lower average receivables due to a higher revenue yield. Yields reduced during 2020 and 2021 following an increase in the number of customers utilising forbearance measures during the pandemic. Modification losses were lower at £0.4m (2021: £1.3m) with the prior year seeing increased level of deferred and rescheduled loans as the business utilised forbearance measures as a result of the pandemic. Impairments were higher in the current period at £14.8m (2021: £4.0m) due to 2021 benefitting from lower lending volumes (whereby the nature of IFRS 9 means lower lending helps reduce impairment charges). Despite the higher impairment costs, collections performance remained strong in H1 22, helping to drive a reduction in the level of impairment and modifications as a percentage of revenue from 39.2% to 32.5% on a rolling 12-month basis. As a percentage of average net receivables, it was also improved at 15.6% (2021: 17.4%).

Increased spend on employee costs as vacancies were filled and the return to bonus payments for staff since June 2021 has resulted in administrative expenses increasing by 8% to £25.0m (2021: £23.2m). The net impact of all of these factors was that normalised operating profit fell to £3.7m (2021: £9.5m).

As detailed above, the Group is now actively pursuing a legal resolution to its regulatory issues through the Process which will provide certainty as to the total liability arising from redress liabilities. Although the independent review of the Group's branch-based lending business carried out in 2021 identified no systemic issues requiring redress, since this business and the guarantor loans division trade out of the same legal entity, the Process will encompass potential claims from both businesses in order to ensure equitable treatment of customers. Whilst the amount which might be paid as part of the Process in relation to branch-based lending customers is uncertain given no systemic issues were identified in the independent review carried out in 2021, in its ordinary course of business the Group does uphold a small number of complaints each month for non-systemic reasons. The Group recognises that the Process may pull forward such complaints from future years and has therefore recognised an exceptional charge of £4.5m in the branch-based lending division based on management's best estimate of the future value of such complaints.

Strong cash generation meant that finance costs fell by 7% to £6.9m (2021: £7.4m), however due to the reasons noted above, the business produced a normalised pre-tax loss of £3.1m (2021: normalised pre-tax profit of £2.1m).

In branch-based lending, the key performance drivers that underpin the operational and financial performance of the business include network capacity, lead volume and quality, network productivity and impairment management. A summary of how these factors were affected during the first half of 2022 is summarised below:

Network capacity - Given the steady increase in application levels seen through the second half of 2021 and continuing into 2022, the recruitment of in-branch employees has increased alongside this to take advantage of the return to growth, with in-branch FTE increasing to 355 at the end of June 2022 (June 2021: 303 in-branch FTE). Three branches originally planned to be opened in late 2020 and deferred by the pandemic, are now to be opened in 2022. Eccles branch was opened in May, St. Helens in July and Chester-Le-Street due to be opened in September. All three branches will split larger branches in the North West and North East conurbations and will take the total number of branch locations to 78.

Lead volumes - New borrower qualified applications have increased by 25%, compared to the first half of 2021. As a result and coupled with a more cautious approach to lending post-pandemic, new borrower conversion rates dipped slightly to 6.2% (2021: 6.5%). We received 1.3 million new borrower applications in the six months to June 2022 (2021: 0.9 million) of which 235,000 (2021: 188,000) applications passed our screening criteria to qualify as applications to branch (ATBs).

Productivity and quality - The total number of loans issued in H1 2022 reached 18,955 (2021:17,577) an 8% increase over prior year. The focus on better quality customers led to new cash issued increasing 22% to £58.9m compared to £48.3m in 2021. We continue to invest in the enhancement of our technology. A new integrated telephony solution was implemented in the current year, this alongside continued strengthening of our creditworthiness process and open banking improvements will drive efficiencies in our lending processes whilst continuing to deliver good customer outcomes and improved customer journeys.

Delinquency management - Increasing costs of living are the primary risk to collections performance, and although no significant impacts have been yet observed, action has been, and continues to be, taken both on new originations and the existing loan book, to mitigate the impact which is expected to materialise in the second half of the year, failing further government intervention. As such collections performance in the period was ahead of expectations, remaining at the more normal levels observed towards the end of 2021, following the historically low delinquency earlier in 2021. Rescheduled and deferred loans continued a strong reducing trend, following the increases during COVID-19.

Plans for the rest of 2022

We remain focused on our commitment to servicing the needs of those consumers that may have been excluded from mainstream lenders, through the use of our face-to-face lending model. We continue to evolve our credit risk assessment processes in order to maintain the highest standards of responsible lending, ensuring that we continue to deliver good customer outcomes for all our customers. The ability to grow the business efficiently and also enhancing the customer journey is a key area of focus in 2022/23, where work is underway to streamline back office tasks, embrace technology opportunities such as 'Open Banking' and reduce waiting time for customers through a smoother application process.

Since the end of June 2022, whilst the summer months are traditionally a softer trading period for the division, we have continued to trade ahead of budget. Our collections performance is also ahead of plan and while we expect to see some impact from the cost of living crisis on impairment, we also expect that an improving yield will help to sustain an attractive risk adjusted margin. We continue to expect that the demand for our products and services will increase given the current macroeconomic environment as well as from some of the structural changes in the market regarding both potential customer population and also companies operating in the market. As a result, and whilst we remain vigilant given the rapidly changing environment, based on our performance to-date and the steps already taken, we plan to focus on operational efficiency and loan book growth for the remainder of this year onwards. Future growth plans will require the Group to complete the Process and the Capital Raise, but once achieved, the business will be well placed to realise that vision.

Home credit

Following extensive discussions with the FCA regarding the conclusions of the review into home credit, the Directors of S.D. Taylor Limited ('Loans at Home') concluded that the Loans at Home business was no longer viable and so the business was placed into administration on 15 March 2022. Whilst deeply saddened and disappointed with this news, the Boards of both Loans at Home and NSF were clear that administration was the only option available in order to preserve value for creditors. As the operations and activities of Loans at Home were separate from the rest of the Group, having received certain waivers from the Group's lenders, the administration of Loans at Home has had minimal impact on the rest of the Group's business.

The results of the home credit division for the period ended 14 March 2022 are shown below:

Financial results

The home credit division contributed a normalised operating loss of £0.5m to the Group (2021: normalised operating profit of £1.5m). An exceptional charge of £5.5m was recognised in 2022 in relation the derecognition of the remaining net assets of the division existing at the date of administration.

Guarantor loans

The Group's guarantor loans division was placed into a managed run-off in June 2021 and so it did not issue any new loans in the six months ended 30 June 2022, therefore the financial performance of the business has been driven by collections from the outstanding loan book.

Financial results

The reduction in the net loan book meant that revenue declined by 47% to £5.5m (2021: £10.4m). Collections performance in the first half of 2022 has remained strong leading to a further reduction in impairments from £1.0m in 2021 to £0.1m. Administration costs fell by 48% to £3.6m (2021: £6.9m) as the division continues to wind down and savings in staff costs, professional fees and complaints costs are realised. The division achieved a normalised operating profit of £1.6m (2021: £0.8m) whilst strong cashflow has contributed to lower finance costs that increased normalised profit before tax to £0.5m (2021: loss before tax of £1.9m). The additional charge in exceptional provision for customer redress of £0.7m (2021: £1.9m) reflects the impact of the delayed start to the redress program thereby increasing the interest accrued and also the amount to be returned to customers from more recent collections.

9 Normalised figures, adjusted to exclude exceptional items

10 All definitions are as per glossary. 2021 has been recalculated to ensure like-for-like comparative to 2022.

Plans for the rest of 2022

The collect-out of the outstanding loan book is progressing well and as planned.

Central costs

11 Adjusted to exclude exceptional items

14 Refer to note 6 in the notes to the financial statements for further detail

Normalised administrative expenses fell by 13% to £2.0m (2021: £2.3m) driven principally by lower staff, rent and professional fees. Finance fees increased as surplus cash was held at Group level, rather than paying down any facilities due to the expectation of the future cash requirements for loan book growth.

An exceptional charge of £14.2m comprised £13.7m of impairments recognised on receivable balances held with the home credit division which was placed into administration on 15 March 2022. Whilst the Group does not expect to recover the balances held directly with LAH following the conclusion of the administration, as LAH remains a guarantor of the Group's financing facilities, it is anticipated that the proceeds from the administration would be paid directly to its secured lenders, thereby reducing the external debt balance held by the Group at that point. The remaining £0.5m relates to professional fees associated with the work undertaken in regards to the Process. Prior year exceptional costs comprised: £1.6m related to professional fees associated with the planned Capital Raise.

Principal risks

The principal risks facing the Group are:Going concern, solvency and liquidity - although as at 31 August 2022 the Group has £56.7m in cash, the Directors note that material uncertainties exist regarding its ability to successfully execute the planned Capital Raise, such uncertainties include: (i) success of the court-based process ('Process'), including positive creditor votes and the court sanction of the Process within the timeframes required; (ii) the redress liability under the Process being within levels acceptable to investors (iii) the Group's lenders continuing to grant appropriate extensions to the testing dates or other forms of waivers for covenant breaches prior to the Capital Raise completing; (iv) the Group's lenders providing the necessary waivers to implement the Process; (v) the Group obtaining extensions to the term of its existing debt facilities on terms acceptable to investors and; (vi) the underlying assumptions in relation to the regulatory environment, macro-economic environment and business performance not varying materially from its base case. The range of assumptions and the likelihood of them all proving correct creates material uncertainty and therefore the impact on liquidity and solvency under both the base case and downside scenarios may cast significant doubt on both the Group's and individual division's ability to continue as a going concern.  In such circumstance, the Group's lenders would be entitled to enforce their security and there would be a material risk of the Group entering insolvency. Refer to the going concern statement in note 2 of the financial statements for further detail on the base and downside case;

Regulation - the Group faces significant operational and financial risk through changes to regulations, changes to the interpretation of regulations or a failure to comply with existing rules and regulations, some of which have crystallised in the year.  Following a multi-firm review, the Group developed a proposed methodology for redress to certain guarantor loans customers and has made a provision totalling £17.5m (31 December 2021: £16.9m) to cover the expected costs (and accrued interest) representing a payment of 100p/£1 for those customers who the Directors believe may have suffered harm. The provisions made represent the Directors' best estimate of the total cost of redress in relation to guarantor loans, based upon a detailed methodology and analyses developed in conjunction with its advisers. Due to the need to bring this uncertainty to a resolution, and since it has not been possible to reach an agreement with the FCA regarding a voluntary redress scheme in respect of guarantor loans, the Group is now actively pursuing a legal resolution to the redress through the Process which will provide certainty as to the total liability arising from redress liabilities. Whilst provisions have been calculated assuming that eligible customers are paid in full, given the cost of the Process (which will be deducted from the cash pot that will be available to finance the payment of redress liabilities) and the increased number of complaints which may be made as part of the Process, it is expected that those customers who suffered harm would not receive 100p/£1 as originally planned. The review into branch-based lending concluded that there was no need for customer redress, however the conclusion of the home credit review resulted in the administration of the business as it was concluded that the business model was no longer viable and that an administration was the only option available to preserve value for creditors. Since the announcement of the potential scheme of arrangement made as part of the 2021 Annual Report, the numbers of complaints received has increased significantly, predominantly driven by what is believed to be an acceleration of claims received by claims management company coordinated activity. The level of complaints at the current trajectory, could have a materially adverse impact on the Group and as such, mitigating action in the form of either a scheme of arrangement or restructuring plan is more likely to ensure the equitable treatment of all customer complaints, whether historic or current.

Conduct - risk of poor outcomes for our customers or other key stakeholders as a result of the Group's actions;

Credit - risk of loss through poor underwriting or a diminution in the credit quality of the Group's customers;

Business strategy - risk that the Group's strategy fails to deliver the outcomes expected;

Business risks:

operational - the Group's activities are large and complex and so there are many areas of operational risk that include technology failure, fraud, staff management and recruitment risks, underperformance of key staff, the risk of human error, taxation, increasing numbers of customer complaints, health and safety as well as disaster recovery and business continuity risks;

reputational - a failure to manage one or more of the Group's principal risks may damage the reputation of the Group or any of its subsidiaries which in turn may materially impact the future operational and/or financial performance of the Group;

cyber - increased connectivity in the workplace coupled with the increasing importance of data and data analytics in operating and managing consumer finance businesses means that this risk has been identified separately from operational risk;

aftermath of pandemic - a large pandemic such as COVID-19, coupled with the possibility of the return of restrictions on face-to-face contact by HM Government, may cause significant disruption to the Group's operations and severely impact the supply and level of demand for the Group's products. As a result, any sustained period where such measures are in place could result in the Group suffering significant financial loss; and

cost of living crisis - the significant pressure of the cost of living at the current time increases the risk of delinquency for some customers, whilst also presenting an opportunity for the business in terms of those potential customers who may previously have been served by the prime financial services sector.

On behalf of the Board of Directors

Jono Gillespie

Group Chief Executive Officer

28 September 2022

Statement of Directors' responsibilities

The Directors confirm that, to the best of their knowledge, the unaudited condensed interim financial statements have been prepared in accordance with IAS 34 as adopted by the United Kingdom, and that the interim report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:

· An indication of important events that have occurred during the first six months of the financial year and their impact on the unaudited condensed interim financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

· Material related party transactions that have occurred in the first six months of the financial year and any material changes in the related party transactions described in the last annual report and financial statements.

The current Directors of Non-Standard Finance plc are listed in the 2021 Annual Report & Financial Statements, with the exception of Sarah Day, who was appointed to her role as Group Chief ESG Officer on 27 May 2022. A list of current Directors is also maintained on the Non-Standard Finance website: www.nsfgroupplc.com.

The maintenance and integrity of the Non-Standard Finance website is the responsibility of the Directors.

Legislation in the United Kingdom governing the preparation and dissemination of unaudited condensed interim financial statements may differ from legislation in other jurisdictions.

On behalf of the Board of Directors

Jono Gillespie

Group Chief Executive Officer

28 September 2022

Financial Statements

Condensed consolidated statement of comprehensive income for the six months ended 30 June 2022

Loss per share

There are no recognised gains or losses other than disclosed above and there have been no discontinued activities in the period.

Condensed consolidated statement of comprehensive income for the six months ended 30 June 2021

Loss per share

There are no recognised gains or losses other than disclosed above and there have been no discontinued activities in the period.

Condensed consolidated statement of financial position as at 30 June 2022

Condensed consolidated statement of changes in equity for the six months ended 30 June 2022

Condensed consolidated statement of cash flows for the six months ended 30 June 2022

As at 30 June 2022 the Group had cash of £111.5m (30 June 2021: £103.7m) with gross debt of £330.0m (30 June 2021: £330m).

Notes to the preliminary announcement

1. General information

Non-Standard Finance plc is a public limited company, limited by shares, incorporated and domiciled in the United Kingdom. The address of the registered office is Unit 26/27 Rear Walled Garden, The Nostell Business Estate, Wakefield, West Yorkshire, United Kingdom, WF4 1AB.

The unaudited condensed interim financial statements do not constitute the statutory financial statements of the Group within the meaning of section 435 of the Companies Act 2006. The statutory financial statements for the year ended 31 December 2021 were approved by the Board of Directors on 29 April 2022 and have been delivered to the Registrar of Companies. The report of the auditor was unqualified and did not contain a statement under section 498(2) or (3) of the Companies Act 2006, but did include a section highlighting a material uncertainty that may cast significant doubt on the Group and Company's ability to continue as a going concern. The Group notes this material uncertainty continues to exist as at 30 June 2022 as a result of the reasons outlined in note 2.

The unaudited condensed interim financial statements for the six months ended 30 June 2022 have been reviewed, not audited, and were approved by the Board of Directors on 28 September 2022.

2. Basis of preparation

The condensed consolidated financial statements for the six months ended 30 June 2022 have been prepared in accordance with International Accounting Standard 34: Interim Financial Reporting, as adopted by the UKEB, and the requirements of the Disclosure and Transparency Rules ('DTR') of the Financial Conduct Authority ('FCA') in the United Kingdom as applicable to interim financial reporting. The unaudited condensed interim financial statements should be read in conjunction with the statutory financial statements for the year ended 31 December 2021 which have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and UK-adopted International Accounting Standards.

On 15 March 2022, the Directors of the Company's indirect subsidiary S.D Taylor Limited (trading as 'Loans at Home' and forming the home credit division of the Group) reluctantly concluded that the Loans at Home business was no longer viable, leading to the business being placed into administration. As a result, the financial statements of the home credit division for the year ended December 2021 were prepared on a basis other than going concern. This required the carrying value of the assets to be at the amounts they are expected to realise and the liabilities include any amounts for onerous contracts as a result of the administration. The financial statements were prepared in all respects in accordance with the accounting framework.

The appointment of an administrator on 15 March 2022 represents a loss of control by Non-Standard Finance plc, and as such, the home credit division has been derecognised from this date and the effect of this reflected in the Group's financial statements. 

There are no new standards adopted by the Group from 1 January 2022. There are no new standards not yet effective and not adopted by the Group from 1 January 2022 which are expected to have a material impact on the Group.

Going concern

As part of its going concern assessment for the six months ended 30 June 2022, the Directors reviewed both the Group's access to liquidity and its future balance sheet solvency for at least the next 12 months.

Background

As noted in the 2021 Annual Report and Accounts, the Group commissioned an independent review of its home credit business to ensure that there were no implications for the division as a result of the multi-firm review into guarantor loans, or from recent decisions at the Financial Ombudsman Service. The conclusion from this review was that there may have been harm to certain customers. Following extensive discussions with the FCA about how harm should be defined and the implications for future lending, the Directors of S.D Taylor Limited (trading as 'Loans at Home') reluctantly concluded that the Loans at Home business was no longer viable, leading to the business being placed into administration on 15 March 2022. It was clear to the boards of Loans at Home and of NSF that administration was the only viable option to preserve value for creditors. As the operations and activities of Loans at Home were separate from the rest of the Group, having received certain waivers from the Group's lenders, the administration of Loans at Home has had minimal impact on the existing funding arrangements of the Group.

For the quarters ended 31 March 2022 and 30 June 2022, the Group's loan to value (LTV) ratio was higher than the level permitted under its LTV covenant. The LTV covenant will not be formally tested, and no covenant breach or event of default will arise, until the Group provides its compliance certificates for the March 2022 and June 2022 quarter dates. The date on which the Group is required to supply these compliance certificates has been extended until 5 October 2022, with a mechanism for this date to be extended further with lender support.

The Directors have decided to pursue the use of a court-based process such as a scheme of arrangement or restructuring plan in relation to its redress liabilities, so as to allow it to proceed with its planned capital raise, the proceeds of which will be used, among other things, to fund a cash pot which will be available to finance an agreed portion of redress liabilities to affected customers and to strengthen the Group's balance sheet to underpin future growth.

Going concern assessment

In light of the above, the Group has produced two reasonably possible scenarios as part of its going concern assessment:

(i) the base case scenario assumes:

· the proposed court-based process to compromise liabilities ('Process') is successful;

· the Process is completed within a time frame acceptable to the Group's lenders and potential investors

· the estimated amount of redress payable under the Process is at a level acceptable to potential investors;

· a substantial equity injection is received in 2023 ( 'Capital Raise');

· the Group has obtained extensions to the testing dates and/or other forms of waivers from its lenders for potential covenant breaches to enable it to proceed with the Capital Raise;

· the extension of the Group's debt facilities on terms acceptable to investors; and

· the guarantor loan division remains in managed run-off.

(ii) the downside scenario assumes:

· the Process is unsuccessful;

· the Group is unable to complete the Capital Raise;

· no acceptable alternative to the base case is agreed between the Group, its lenders and major shareholder; and

· the Group is not granted extensions to the testing dates and/or other forms of waivers from its lenders of covenant breaches and the Group's lenders become entitled to enforce their security, resulting in a material risk of the Group entering insolvency.

Under the base case scenario and assuming successful completion of the Capital Raise, the Group would be in a net asset position from a balance sheet perspective; achieving this outcome however is dependent upon a number of factors including:

· a successful Process which would be subject to a number of variables, including court sanction, satisfying the statutory creditor approval requirements and the receipt of necessary consents and waivers from lenders to allow the Group to proceed with the Process;

· the Group receiving extensions to the LTV covenant testing dates or other form of waivers from its lenders of covenant breaches beyond 5 October 2022 until the completion of the Process and Capital Raise;

· the Group having raised sufficient additional capital and secured extensions to the term and/or refinancing of the Group's debt facilities;

· no significant further changes in the regulatory environment and/or approach to complaints by FOS;

· the impact of high levels of inflation, increased cost of living, and other macroeconomic uncertainties which have not been accounted for in the base case, on customer behaviour and financial performance; and

· the underlying assumptions in relation to business performance not varying materially from the base case.

The Directors recognise that the Capital Raise is dependent on a number of material uncertainties listed above. The Directors continue to maintain a regular dialogue with key stakeholders including the FCA, Alchemy and the Group's lenders regarding the above matters.

Under the downside scenario, it is expected that the Group will remain in a net liability position, not be able to meet its liabilities (including to redress creditors) as they fall due, the Group's lenders would be entitled to enforce their security and the most likely outcome would therefore be the Group going into insolvency in which there would be no payment of redress liabilities.

The Company is working with key stakeholders on an alternative transaction to be implemented in the event that the Process is completed but the Capital Raise is unsuccessful which would preserve the branch-based lending business as a going concern. It is expected that the same cash pot would be available to finance an agreed portion of redress liabilities as if the Capital Raise had completed. However, in this scenario, there would be a material risk of the Company and certain other members of the Group entering insolvency and as a result there would be no recovery for the Company's shareholders. 

Conclusion

The Directors acknowledge the considerable challenges presented by the uncertainty around the success of the Process, the ability of the Group to raise sufficient capital in the timeframes required, the agreement of extensions to the testing dates and other forms of waivers from lenders in relation to potential future covenant breaches prior to completion of the Capital Raise, the agreement of the necessary waivers to implement the Process, agreement from the lenders to extend the term of existing debt facilities, and the impact of high levels of inflation in the economy and other macroeconomic uncertainties on the financial performance of the Group. They have therefore concluded that there exists a material uncertainty around the going concern status of the Group and Company.

In making their overall assessment, the Directors considered both the balance sheet solvency and the liquidity position of the Group. In connection with the former, the Capital Raise would create a positive net asset position. In connection with the latter the Directors have taken into consideration the impact of the Capital Raise on the existing cash balances which would then be available to the business. This combination would provide sufficient liquidity throughout the going concern period. Whilst essential for the future of the Group, the capital raise would materially dilute the interest of current equity holders, most likely to negligible value unless they chose to participate in the planned Capital Raise. However the Capital Raise is dependent on the factors listed earlier and this dependency creates a material uncertainty. Looking at the generation of future cash, the Directors note that the Group has sufficient cash to continue trading over the next 12 months assuming no change to lending and costs. However, they also recognised that, in the absence of the lenders granting the necessary extensions to the testing dates or other forms of waivers in respect of potential future covenant breaches, cash balances may not be available to the Group or Company. With regard to the balance sheet solvency of the Group, the Directors noted that under the base case scenario, the Group returns to a net asset position and remains there for the going concern period, however this remains dependent on the injection of additional capital into the Group.

As noted above, if the Capital Raise is not achieved within the required timeframe, it is expected that the Group would not be capable of meeting its liabilities as they fall due. Under this scenario, the Group's lenders would be entitled to enforce their security and the most likely outcome would be the Group entering into an insolvency process in which there would be no payment of redress liabilities. The Company is working with key stakeholders on an alternative transaction to be implemented in the event that the Process is completed but the Capital Raise is unsuccessful which would preserve the branch-based lending business as a going concern. It is expected that the same cash pot would be available to fund an agreed portion of redress liabilities to affected customers as if the Capital Raise had completed. However, in this scenario, there would be a material risk of the Company and certain other members of the Group entering insolvency and as a result there would be no recovery for the Company's shareholders.

Despite the material uncertainties associated with the forecast assumptions, the Directors note that Alchemy has indicated its continued support for a Capital Raise (subject to a number of conditions as listed below) and the Group continues to engage with the FCA and the Group lenders in respect of the Process. The Directors believe that if the actual outcomes do not differ materially from the assumptions outlined in the base case, the Group and Company can reasonably expect to continue to operate and meet their respective liabilities as they fall due for at least the next 12 months. The Board has therefore adopted the going concern basis of accounting. The Board's position is, in part, informed by the favourable performance to date against plan and the fact that Alchemy remains supportive of a Capital Raise subject to: an outcome of the Group's engagement with its lenders that is acceptable to Alchemy; Alchemy's analysis of the regulatory position of the Group's divisions and the implications of that on (and Alchemy's assessment of) the Group's business plan and financial projections; and court sanction of the Process.  

The Directors recognise that, whilst court-based processes are complex, time consuming and not guaranteed to be successful, they believe that there is a reasonable chance of success. Therefore, along with the continued support of its lenders and shareholders and extension of the lending facilities, the Process would allow it to proceed with its planned Capital Raise. The proceeds of the planned Capital Raise will be used, among other things, to fund a cash pot which will be available to finance an agreed portion of redress liabilities to affected customers and reduce debt gearing levels, thereby strengthening the Group's balance sheet and laying the foundations for future growth. The Company is in discussions with its lenders regarding a potential extension of the lending facilities and other measures to support the business going forward, which is likely to be linked to the completion of the Capital Raise. Although it is not expected that the cash pot will be sufficient to allow for redress liabilities to be paid in full, the Board believe that the Process is in the best interests of customers with redress claims, as well as the Group's other stakeholders. As mentioned previously, without the Process, there is a material risk of the Group entering an insolvency process in which there would be no payment of redress liabilities.

The Directors note that certainty around the level of potential redress liabilities under the Process is a key factor for Alchemy and other potential investors in assessing whether they will, ultimately, support the Capital Raise As outlined previously, a successful court-based process would also be subject to a number of variables, including court sanction, a positive creditor vote and the receipt of necessary waivers from lenders.

The Directors recognise there are a high number of assumptions and variables in the modelling of the base case which are not directly within the Group's control and that, should the actual outcomes vary materially from the modelled assumptions, any consequent negative impact on the liquidity and solvency under the base case scenario may cast significant doubt on the ability of both the Group and Company to continue as a going concern. Under the downside scenario, there is a material risk of the Group going into insolvency. As noted above, the Company is working on an alternative transaction to preserve the branch-based lending business as a going concern in the event that the Process is completed but the Capital Raise is unsuccessful. However, in this scenario, there would be a material risk of the Company and certain other members of the Group entering insolvency and as a result there would be no recovery for the Company's shareholders.

As the possible outcomes detailed above remain dependent on a number of factors not directly within the Group's control, the Board will continue to monitor the Company and Group's financial position (including access to liquidity and balance sheet solvency) carefully over the coming weeks and months as a better understanding of the impact of these various factors are developed. The Board recognises the importance of the success of the Process and the Capital Raise to mitigate the uncertainties noted above and to support the future growth prospects of the Group.

The Directors will also continue to monitor the Group and Company's risk management and internal control systems. 

Significant judgement

The assumption of a successful Process, shareholder support for the Capital Raise, lender support for waivers and the extension of existing financing facilities on terms acceptable to investors, and the continued performance of the Group and that the ultimate conclusions on those matters are not materially different to that envisaged under the base case, forms a significant judgement of the Directors in the context of approving the Group's going concern status.

3. Accounting policies

The accounting policies used in these condensed consolidated interim financial statements are consistent with those used in the Non-Standard Finance Plc Annual Report 2021 with the addition of:

Derecognition of a subsidiary:

The Group derecognises a subsidiary when it no longer has control. Per IFRS 10 control is defined as an investor holding all of the following:

(a) power over the investee;

(b) exposure, or rights, to variable returns from its involvement with the investee; and

(c) the ability to use its power over the investee to affect the amount of the investor's returns.

When a parent loses control of a subsidiary, it shall:

(a) derecognise: (i) the assets (including any goodwill) and liabilities of the subsidiary at their carrying amounts at the date when control is lost; and (ii) the carrying amount of any non-controlling interests in the former subsidiary at the date when control is lost (including any components of other comprehensive income attributable to them);

(b) recognise: (i) the fair value of the consideration received, if any, from the transaction, event or circumstances that resulted in the loss of control; (ii) if the transaction, event or circumstances that resulted in the loss of control involves a distribution of shares of the subsidiary to owners in their capacity as owners, that distribution; and (iii) any investment retained in the former subsidiary at its fair value at the date when control is lost;

(c) reclassify to profit or loss, or transfer directly to retained earnings if required by other IFRSs, the amounts recognised in other comprehensive income in relation to the subsidiary on the basis described in paragraph B99; and

(d) recognise any resulting difference as a gain or loss in profit or loss attributable to the parent.

Fair values of financial assets and liabilities

Financial assets and liabilities held at fair value are grouped into Levels 1 to 3 of the fair value hierarchy based on the degree to which the fair value is observable: Level 1 - quoted prices for similar instruments; Level 2 - directly observable market inputs other than Level 1 inputs and; Level 3 - inputs not based on observable market data. The Group does not hold any financial assets and liabilities at fair value, however information about the fair values of each class of financial asset and financial liability are made in line with IFRS 7 where applicable Disclosure of fair values is not required when the carrying amount is a reasonable approximation of fair value, such as short-term trade receivables and payables, or for instruments whose fair value cannot be measured reliably. The carrying value of financial assets and liabilities are not materially different to their fair value, except for amounts receivable from customers (refer note 10 for further detail).

4. Critical accounting assumptions and key sources of estimation uncertainty

The preparation of financial statements in conformity with generally accepted accounting practice requires management to make estimates and judgements that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the year-end date and the reported amounts of revenues and expenses during the reporting period.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

Critical accounting judgements:

Amounts receivable from customers - significant increase in credit risk

Expected credit losses (ECL) are measured as an allowance equal to 12-month ECL for stage 1 assets, or lifetime ECL for stage 2 assets or stage 3 assets. An asset moves to stage 2 when its credit risk has increased significantly since initial recognition. IFRS 9 does not define what constitutes a significant increase in credit risk and therefore the Group makes assumptions to determine whether there are indicators that credit risk has increased significantly which indicates that there has been an adverse effect on expected future cash flows. In assessing whether the credit risk of an asset has significantly increased, the Group takes into account qualitative and quantitative reasonable and supportable forward-looking information.

Key sources of estimation uncertainty:

Amounts receivable from customers

The Group assesses its portfolio of amounts receivable from customers for ECL at each balance sheet date. The following are key estimations that the Directors have used in the process of applying the Group's recognition of ECL policy:

· Probability of default (PD): PD constitutes a key input in measuring ECL. PD is an estimate of the likelihood of default over a given time horizon, the calculation of which includes historical data, assumptions and expectations of future conditions.

· Loss given default (LGD): LGD is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive over the life of the loan.

Sensitivity analysis of amounts receivable from customers - key sources of estimation uncertainty:

Probability of default and loss given default

Branch-based lending

The calculation of ECL in branch-based lending uses historical data to forecast future cash flows, discounted at the receivable's EIR. A sensitivity run on collections performance shows that a 5% increase or decrease in expected cash collections would result in a £8.2m increase/decrease in provisions. The suitability of the 5% sensitivity run has been reviewed and considered appropriate based on historical performance.

Guarantor Loans Division

The calculation of ECL in the guarantor loans division uses historical data to forecast future cash flows, discounted at the receivable's EIR. A sensitivity run on collections performance shows that a 10% increase or decrease in expected cash collections would result in a £1.7m increase/decrease in provisions. The suitability of the 10% sensitivity run has been reviewed and considered appropriate based on historical performance.

Provisions for customer complaints and redress

Provisions for customer complaints are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.

Judgement is applied to determine whether the criteria for establishing and retaining a provision have been met. Provisions for customer redress are in respect of complaints where the outcome has not yet been determined. Judgement is applied to determine the quantum of such provisions, including making assumptions regarding the extent to which the complaints received may be upheld, average redress payments and related administrative costs. Past experience is used as a predictor of future expectations with management applying overlays where necessary depending on the nature and circumstances. The cost could differ from the Group's estimates and the assumptions underpinning them and could result in an increased provision being required. There is also uncertainty around the impact of proposed regulatory changes, claims management companies and customer activity.

The key assumptions in these calculations which involve management judgement and estimation relate primarily to the projected costs of existing complaints where it is considered likely that customer redress will be appropriate.

These key assumptions are:

· uphold rate percentage - the expected average uphold rate applied to existing complaint volumes where it is considered more likely than not that customer redress will be appropriate;

· average redress cost - the estimated compensation, inclusive of balance adjustments and cash payments, for upheld complaints included in the provision; and

· customer complaint volumes - the level of claims which would be due remediation in future based on recent experience of valid claims.

These assumptions remain subjective due to the uncertainty associated with future complaint volumes and the magnitude of redress which may be required. Complaint volumes may include complaints under review by the Financial Ombudsman Service, cases received from claims management companies or cases lodged directly by customers.

Branch-based lending

A 50% increase/decrease in customer complaints volumes would result in a £0.5m increase/decrease in the business as usual ("BAU") complaints provision for the Group. A 50% increase/decrease in average claim redress would result in a £0.5m increase/decrease in the BAU complaints provisions for the Group, and a 50% increase/decrease in upheld rate would result in a £0.5m increase/decrease in the BAU complaints provisions for the Group.

Only if any increase/decrease in BAU complaints was considered to reflect an overall increase in the number of potential complainants rather than an acceleration of complaints, would we amend the exceptional future value provision.

Guarantor Loans Division

A 50% increase/decrease in customer complaints volumes would result in a £0.7m increase/decrease in the BAU complaints provisions for the Group, a 50% increase/decrease in average claim redress would result in a £0.7m increase/decrease in the BAU complaints provisions for the Group, and a 50% increase/decrease in upheld rate would result in a £0.7m increase/decrease in the BAU complaints provisions for the Group.

Going concern

Assumptions made in the base case as part of the Group's going concern assessment form a significant judgement of the Directors in the context of approving the Company's going concern status. Refer to note 2 of the financial statements for further detail.

5. Segment information

Management has determined the operating segments by considering the financial and operational information that is reported internally to the chief operating decision maker, the Board of Directors, by management. For management purposes, the Group is organised into four operating segments: branch-based lending (Everyday Loans), guarantor loans (TrustTwo and George Banco), home credit (Loans at Home) and central (head office activities).

The Group's home credit division was placed into administration on 15 March 2022 and therefore its results have only been included in the Group's financial statements up to this date.

The Group's operations are all located in the United Kingdom and all revenue is attributable to customers in the United Kingdom.

1 The home credit division was placed into administration on 15 March 2022, therefore its results reflect the period up to 14 March 2022.

2 Guarantor loans division includes George Banco and TrustTwo. TrustTwo is supported by the infrastructure of Everyday Loans, but its results are reported to the Board separately and have therefore been disclosed within the guarantor loans division above

3 Consolidation adjustments include the elimination of intra-Group balances

4 Refer to note 6 for further details