PFG.L Regulatory News (PFG)

Risk

Description

Risk management

Credit risk

The risk that the group will suffer unexpected losses in the event of customer defaults:

·; Defaults in the non-standard market are typically higher than in more mainstream markets.

·; Current economic conditions remain difficult which has led to pressure on customers incomes and increased levels of unemployment and under-employment.

Customers:

·; CCD and Vanquis Bank credit committees set policy and review credit performance.

·; CCD - Home Credit loans are underwritten face-to-face by agents in the customer's home; agents maintain weekly contact with the customer and stay up to date with their circumstances; agents' commission is based on collections not credit issued; application and behavioural scoring is used to assist agents' underwriting; Home Credit issues short-term, small-sum loans, with average issue values of between £300 and £500 typically repayable over one year; direct repayment loans are underwritten in the home with the use of external bureau data.

·; Vanquis Bank - uses highly bespoke underwriting including full external bureau data; a telephone interview is conducted prior to issuing credit; initial credit lines are low (typically £250); customers are re-scored monthly; an intensive call centre-based operation focuses on collections; underwriting and credit line increase criteria remain unchangedfollowing progressive tightening between 2007 and mid-2009 in light of economic conditions.

·; Comprehensive daily, weekly and monthly reporting on KPIs.

Regulatory risk

The risk of loss arising from a breach of existing regulation or regulatory changes in the markets within which the group operates.

·; The current volatile economic environmenthas resulted in greater focus on regulation.

·; Increased regulator scrutiny of non-standard lenders.

·; HMT/BIS issued a call for evidence in connection with a review of consumer credit and insolvency, the findings of which are expected in 2011.

·; BASEL III regulatory regime for determining regulatory capital and liquidity requirementsto replace current regime in 2015.

·; A central in-house legal team is in place which monitors legislative changes and supports divisional compliance functions.

·; Expert third party legal advice is taken where necessary.

·; Divisional compliance functions are in place which manage compliance and report to divisional boards.

·; There is constructive dialogue with regulators.

·; Full and active participation in all relevant regulatory review and consultation processes in the UK and EU.

Liquidity risk

The risk that the group will have insufficientliquid resources available to fulfil its operational plans and/or meet its financial obligations as they fall due.

·; Credit markets and economic conditions continue to be difficult making it more challenging to obtain funding.

·; Group's credit rating adjusted from BBB+ with a stable outlook to BBB with stable outlook reflecting rating agency concerns over companies with a reliance on wholesale funding in the current economic climate.

·; A board approved policy is in place to maintain committed borrowing facilities which provide funding headroom for at least the following 12 months.

·; Liquidity is managed by an experienced central treasury department.

·; There is daily monitoring of actual and expected cashflows.

·; The group 'borrows long and lends short' meaning that the duration of the receivables book is significantly less than the average duration of the group's funding.

·; Syndicated bank facilities extended in February 2010.

·; Continuing to diversify funding sources away from wholesale bank funding.

- £25.2m retail bond issued in April 2010 (following £250m senior bond issue in October 2009).

- £128.5m of private placements arranged in the first two months of 2011, including a £100m facility with M&G Investments.

- £50m retail bond issued in March 2011 (following £25.2m retail bond issue in April 2010).

- Good progress made in the dialogue with the FSA concerning Vanquis Bank using its banking licence to take retail deposits.

·; Headroom on committed facilities of £184.7m as at 31 December 2010, increased to over £370m at the end of February 2011. Earmarked to meet contractual debt maturities between now and the end of March 2012 totalling £345m.

·; Vanquis Bank has established a liquid assets buffer of £10m, in line with the FSA's recent liquidity guidelines.

Reputational

risk

The risk that an event or circumstance could adversely impact on the group's reputation, including adverse publicity from the activities of legislators, pressure groups and the media.

·; Media and pressure group activity can increase during an economic downturn or when the company is performing well.

·; Credit and collection policies are designed to ensure that both businesses adhere to responsible lending principles.

·; Compliance Committee oversees the application of the FSA's treating customers fairly regime in Vanquis Bank.

·; Regular customer satisfaction surveys are undertaken in both businesses.

·; The group invests in a centrally co-ordinated community programme.

·; Dedicated in-house teams with external advisers and established procedures are in place for dealing with media issues.

·; A proactive communication programme is targeted at key opinion formers and is co-ordinated centrally.

Pension risk

The risk that there may be insufficient assets to meet the liabilities of the group's defined benefit pension scheme.

·; The current economic environment has led to volatile movements in equity markets and corporate bond yields.

·; Improving mortality rates in the UK.

·; The group's pension asset stands at £41.0m as at 31 December 2010.

·; The defined benefit pension scheme was substantially closed to new members from 1 January 2003.

·; Cash balance arrangements are now in place within the defined benefit pension scheme to reduce the exposure to improving mortality rates.

·; The pension investment strategy aims to maintain an appropriate balanceof assets between equities and bonds.

·; New employees are invited to join the group's stakeholder pension scheme which carries no investment or mortality risk for the group.

Operational

risk

The risk of loss resulting from inadequate or failed internal processes, people and systems.

·; Vanquis Bank is reliant on a third party provider (FDI) for its core customer IT platform.

·; IT systems in Home Credit are hosted byan external third party provider (Node4).

·; IT systems continue to be developed to meet business demands.

·; Agents in Home Credit are required to carry cash to operate as agents.

IT systems

·; IT is managed in CCD and Vanquis Bank by experienced teams.

·; There are established disaster recovery procedures which are tested on a regular basis.

·; Specialist project teams are used to manage change programmes.

·; Insurance policies are in place to cover eventualities such as business interruption, loss of IT systems and crime.

Health and safety

·; Significant time and expenditure is invested in ensuring staff are safety conscious.

·; Assistance is given to agents to ensure that they are safety aware.

·; Induction sessions and regular updates are provided on safety awareness.

·; Safety awareness weeks form part of the annual calendar.

Fraud

·; Specialist departments are in place in each business to prevent, detect and monitor fraud.

·; There is regular reporting to divisional boards and the group audit committee.

Key person risk

·; Effective recruitment, retention and succession planning strategies are in place.

·; The group has competitive remuneration and incentive structures.

·; Effective training, development and communication are in place throughout the group.

Business risk

The risk of loss arising from the failure of the group's strategy or management actions over the planning horizon.

·; Continued pressure on customers' incomes in the current economic environment could impact the demand for credit and growth plans.

·; A clear group strategy is in place.

·; A board strategy and planning conference is held annually.

·; A dedicated central resource is in place to develop corporate strategy.

·; New products and processes are thoroughly tested prior to roll-out.

·; There is comprehensive monitoring of competitor products, pricing and strategy.

·; Robust business change functions oversee change programmes.

·; The group has comprehensive monthly management accounts, a monthly rolling forecast and a bi-annual budgeting process.