PFG.L Regulatory News (PFG)

P1. Credit risk

Description

The risk of unexpected credit losses arising through either adverse macroeconomic factors or parties with whom the Group has contracted fail to meet their financial obligations.

Mitigating activities

· Credit risk appetite established in all divisions, with metrics included in the Group risk appetite to ensure focus.

· The Group operates credit scoring methodologies led by credit specialists in all of its businesses and these are well maintained and monitored on a regular basis.

· The credit scoring methodologies are supported by clearly defined credit policies to restrict certain types of lending, credit scoring methodologies and also manual underwriting support processes in many parts of the business, particularly home credit.

· The Group operates in the non-standard lending sector and as such credit default levels are higher, but all indicators confirm the risk profile is within expected ranges.

· Each division has reviewed its respective credit profiles and has undertaken selective tightening to ensure any higher than desired risk segments have been addressed.

· Macroeconomic downturn risks are assessed through stress testing as part of the ICAAP processes and these confirm the Group can comfortably withstand the impact of a material stress, as defined by the PRA.

· The Group is reliant upon third-party data from credit bureaus and, as such, is dependent upon the accuracy of this data.

Stable

P2. Capital risk

Description

The risk that the Group has insufficient capital to either meet regulatory requirements or to sustain the long-term viability of the business.

Mitigating activities

· Capital risk appetite established at Group and Vanquis Bank level, with thresholds reported to and monitored by Group and Vanquis Bank boards.

· The ICAAP process has confirmed that the Group is projected to have sufficient capital resources even under a severe stress environment.

· Vanquis Bank has undertaken its own ICAAP process with this ring-fenced from the Group.

· The resolution of the FCA investigation into ROP at Vanquis Bank has now been completed.

· The FCA investigation into forbearance and termination options at Moneybarn has now been finalised. The specific customer remediation activities have been completed and were within existing provisions.

Stable

P3. Liquidity and funding risk

Description

The risk that the Group has insufficient liquidity to meet its obligations as they fall due, or is unable to maintain sufficient funding for its future needs.

Mitigating activities

· Liquidity and funding risk appetite established at Group and Vanquis Bank level, with thresholds reported to and monitored by Group and Vanquis Bank boards.

· The Group seeks to maintain a secure funding structure by:

o maintaining borrowing facilities to fund growth and contractual maturities outside of Vanquis Bank over the next 12 months; and

o maintaining diversified funding sources.

· During the year, the Group refinanced the revolving credit facility.

· Good progress has been made to establish alternative funding sources, including the signing of the bilateral facility with NatWest Markets to securitise Moneybarn receivables.

· In addition, Vanquis Bank accepts retail deposits and, in line with its regulatory requirements, maintains liquid resources to meet certain stress events as stipulated within its Internal Liquidity Adequacy Assessment Process (ILAAP). The Group and Vanquis Bank also monitor and report their liquidity coverage ratios (LCR) on a consolidated and individual basis to the PRA.

Stable

P4. Operational risk

Description

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

Operational risk more broadly covers a wide range of different categories including specific event risk, fraud, IT/systems risk, business continuity, AML, etc.

Mitigating activities

· Each division has its own operational risk frameworks in place which include risk identification, assessment and control remediation.

· Risk registers are in place across the Group with primary focus on future embedding of control self-assessment across the divisions which are at various levels of maturity.

· The 3LOD model throughout the Group ensures there are clear lines of accountability between management who own the risks, oversight by the risk function and independent assurance provided by Internal Audit.

· The CCD recovery plan has been delivered with focus now on continued embedding of the new control framework.

· Given the importance of the outsource arrangements, the supplier management framework is being further developed to drive greater consistency and improved oversight in how we manage our suppliers.

Stable

P5. Information and data security risk

Description

Sensitive data faces the threat of misappropriation or misuse. Failure to identify or prevent a major security-related threat or attack, or react immediately and effectively, could adversely affect the trust of our current or future customers in the services we provide, our reputation and our operational or financial performance.

Mitigating activities

· Established a Group data privacy governance framework at Group and divisional level, with regular metrics to ensure ongoing focus on personal data privacy risks.

· Appointed a Group Data Protection Officer to ensure alignment of data management policies (including compliance with article 38 of GDPR and mandatory requirements of article 39).

· Embedded key processes and procedures to manage privacy by design tools, data breach management and correct consent capture where required.

· Agreed standard Group-wide Data Retention Policy.

Stable

P6. Regulatory risk

Description

The risk that the Group is exposed to financial loss, fines, censure or enforcement action due to failing to comply with regulations (including handbooks, codes of conduct, financial crime, etc.).

Mitigating activities

· The Group operates in a highly regulated environment and in an industry sector where customers are potentially more vulnerable and need careful management.

· We remain mindful that the regulatory landscape is continually evolving and regularly assess our risks through horizon scanning and regulatory impact assessment across the Group.

· At all levels, the Group has worked hard to build and maintain positive relationships with our key regulators including the PRA, FCA, CBI and FOS. Any regulatory actions are managed and monitored closely to ensure these are delivered fully and within the spirit of any feedback received.

· All regulatory interactions are recorded and tracked, with regular reporting through our executive and Board Committees to ensure consistency and read across through a Group lens.

· The Group engages with regulatory authorities and industry bodies on forthcoming regulatory changes, market reviews and investigations, ensuring programmes are established to deliver new regulation and legislation.

· Financial crime improvement programme has been initiated in Vanquis Bank to further enhance onboarding and transaction monitoring controls through new systems and upgraded operating model.

Improving

P7. Conduct risk

Description

The risk of customer detriment due to poor design, distribution and execution of products and services or other activities which could lead to unfair customer outcomes or regulatory censure.

Mitigating activities

· Conduct risk appetite established at Group and divisional level, with metrics included in the Group risk appetite to ensure ongoing focus.

· Conduct policies and procedures in place at a divisional level to ensure appropriate controls and processes that deliver fair customer outcomes.

· Cultural transformation initiated through launch of the Group Blueprint centred around our customer purpose and colleague behaviours.

· Newly formed Customer, Culture and Ethics Committee to provide specific oversight on embedding of Group Blueprint and how we deliver the Group's customer-focused purpose.

· Review of responsible lending processes and outcomes across all our divisions to provide assurance to the Board on our past and current affordability processes and outcomes.

· Enhanced complaints management through effectively responding to, and learning from, root causes of complaint volumes and FOS change rates.

· Monitoring and testing of customer outcomes to ensure the Group delivers fair outcomes for customers whilst making continuous improvements to products, services and processes.

· Ongoing review of product governance to ensure existing products or changes continue to meet the needs of our customers.

Stable

P8. Business resilience risk

Description

The risk of unexpected outages around key critical business activities resulting in potential poor customer outcomes, regulatory sanction, reputational damage and financial loss.

Mitigating activities

· Business resilience risk appetite established at Group and divisional level, with metrics included in the Group risk appetite to ensure ongoing focus.

· Overall accountability for business continuity management, business resilience and crisis management now resides with the Group Chief Information Officer (CIO).

· Detailed assessments are being completed across the divisions on current business continuity and resilience capabilities, alongside robustness of IT legacy systems.

· Based on the above, detailed continuity plans, impact assessments and testing arrangements will be completed in 2020.

Stable

P9. People risk

Description

The risk that the Group fails to provide an appropriate colleague and customer-centric culture, supported by robust reward and wellbeing policies and processes; effective leadership to manage colleague resources; effective talent and succession management; and robust controls to ensure all colleague-related requirements are met.

Mitigating activities

· A new Cultural Blueprint has been developed and is being embedded across the organisation.

· A Group Head of Human Resources has recently been recruited to lead our people strategy across our combined businesses.

· Priority focus is around development of leadership strength, alongside future succession planning, diversity performance, retention and engagement.

· Balanced scorecards are being rolled out for all leadership roles which provide appropriate incentives between financial and non-financial objectives.

Stable

P10. Model risk

Description

The risk of financial losses where models fail to perform as expected due to poor governance (including design and operation).

(Within the context of PFG this includes credit acquisition, underwriting, financial and regulatory reporting and capital management.)

Mitigating activities

· Model risk appetite established at Group and divisional level, with metrics included in the Group risk appetite to ensure ongoing focus.

· New Model Risk Policy developed within the bank, which is currently being amended for roll-out Group wide.

· Model inventories are being developed at Group and divisional level to enable prioritised focus on independent validation of these models which could have critical impact on business activities.

Stable

E1. Threats to our sector and business plans

Description

There is a risk that the non-standard credit sector in which we operate will continue to face considerable macroeconomic, regulatory and political challenges resulting in a material effect on the Group's costs of compliance (investment and run rate) and its future revenue streams (e.g. through reduced credit interest, increase in impairments, operating restrictions and price capping).

Mitigating activities

· The Group continues to lobby its regulators (the FCA, PRA, CBI and FOS) and other key stakeholders so that it is taking an active and positive role in influencing future changes aligned to our Group Blueprint.

· The Group is working closely with its main shareholders to improve their understanding of the changing regulatory environment and its impact on future revenue streams and profitability.

· The Group is driving a number of changes to pricing models, product strategies and processes as a pre-emptive move to likely changes in the regulatory environment, e.g. the Gambling Commission credit card payments and Satsuma manual affordability checks.

· Through our improved horizon scanning we continue to monitor forthcoming regulatory changes so that these are planned for accordingly.

· We have evaluated the potential impacts of Brexit and believe this to be small across each of our divisions.

Stable

E2. Risk governance and culture

Description

There is a risk that the Group's culture and supporting risk governance arrangements inhibit effective enterprise risk oversight, potentially resulting in poor risk management practices andcontrol failures.

Mitigating activities

· The Consumer Credit Division has made extensive progress in addressing control issues underpinned by process risk and control self-assessment.

· Vanquis Bank has conducted an enterprise-wide review of all operational areas to determine any specific vulnerabilities and has already commenced a programme of control enhancement.

· A new GERC has been established which provides more focused discussions on the major risks we face as an organisation including the effectiveness of any remedial action plans.

· Led by the Group CRO, the Group has started working on greater risk harmonisation initially to move to a single risk appetite framework, risk measurement and reporting at Group level.

· Work has commenced on further simplification of our risk management framework (RMF) and risk operating model.

Stable

E3. Responsible lending and affordability

Description

There is a risk that the FCA will identify PFG or its divisions as non-compliant with responsible lending rules, or the FOS may identify 'precedent cases' that could lead to widespread remedial activities as well as a significant increase in the level of complaints related to irresponsible lending by CMCs.

Mitigating activities

· The Group affordability programme has been completed and outcomes shared with the FCA.

· Closer engagement with the FOS related to its interpretation of regulatory rules around responsible lending. Meetings with the FOS were held to better understand its assessment of sustainable borrowing with a view to building that into our complaints review.

· We are continuing to review the root cause analysis of complaints to enable us to implement enhanced customer facing processes, thus avoiding unnecessary FOS referrals.

· We are continually reviewing our affordability assessments to ensure these remain aligned with our customers' circumstances and any ongoing changes prescribed by the FCA.

· In this respect, we have recently updated our customer journeys and affordability checks in Satsuma. This is in response to recently issued guidance across the high-cost short-term credit sector from the FCA on the use of automated bureau checks (TAC codes) for corroborating customer income.

· A contingent liability is included in the financial statements which states that if the Group was to be unsuccessful in defending certain irresponsible lending complaints, it may lead to a material increase in the cost of settling such complaints.

Stable

E4. Challenge to agent self-employed status

Description

The Group has been, and may continue to be, subject to claims brought against it by either former agents or tax authorities challenging the historic employment status of the Group's home credit agents in the UK and the employment status of agents in the Republic of Ireland (ROI), particularly given recent employment status cases reported in the media.

Were the Group to be unsuccessful in defending such claims, it may be required to make payments to former agents as well as being liable to pay additional taxes, in particular employer's national insurance contributions to the relevant authorities.

Mitigating activities

· In July 2017, the Group changed the operating model of its home credit business in the UK from a self-employed agent model to an employed workforce so as to take direct control of all aspects of the customer relationship. In the ROI the Group continues to operate a self-employed agent operating model.

· Policies and procedures were in place in the UK up to the transition to the new operating model in 2017 and continue to be in place in the ROI which seek to ensure that the relationship between the business and the agents it engages is such that self-employed status is maintained. Compliance with policies has been routinely evidenced and tested.

· To date the Group has successfully defended historical employment status claims brought against it by former agents in the UK and employment status claims brought by agents in the ROI. The Group has also previously agreed the self-employed status of agents with the tax authorities in the UK and the ROI.

· It is understood from discussions with HMRC that it has started undertaking an industry-wide review of the self-employed status of agents in the UK.

· The Group's discussions with HMRC, which are focusing on the period from when the FCA took over responsibility for the regulation of consumer credit in April 2014 to the change of operating model in July 2017, remain in the initial fact finding stages. The Group is working positively and collaboratively with HMRC and HMRC expects that the review could continue for another year.

Stable

E5. Home credit recovery - financial performance UK

Description

There is a risk that the UK business may fail to grow in line with expectations (both home credit and Satsuma) and the cost base may become misaligned to the level of business, resulting in sub-optimal performance.

Mitigating activities

· The plan to breakeven has been developed and has been broken down into a number of workstreams which include cost optimisation, customer growth and effective collections.

· Programme plans presented to the Group Board with governance plan in place to monitor progress with regular review points.

· Balanced scorecard and incentives introduced in field to optimise CEM collection performance and agreed with the FCA.

· Provident Direct being trialled in the field to automate collections alongside enhancements through continuous payment authorities (CPA) and card payments.

Stable

E6. Vanquis Bank - persistent debt

Description

There is a risk that low levels of customer engagement with Vanquis Bank's Persistent Debt (PD) strategy could lead to adverse customer and commercial outcomes.

Mitigating activities

· An increase to the monthly minimum payment due (MPD) as a percentage of principal balance.

· The introduction of a recommended payment amount to encourage customers to pay an amount higher than the MPD.

· Ongoing monthly communications (in addition to the mandatory communications that are sent at months 18 and 27 of the customer's PD journey) outlining what the customer needs to do to exit and remain out of PD.

· To mitigate the risk of customers not engaging with Vanquis Bank following the PD intervention point (from March 2020), management is implementing a communication strategy to continue to encourage the customers potentially affected to engage and enter a pay-down plan.

· While aiming to avoid a 'blanket suspension of cards', our strategy is to prevent further spend where our risk factors clearly indicate that this is the best outcome for our customers who are in PD.

Stable

Patrick Snowball

Chairman

Malcolm Le May

Chief Executive Officer

Simon Thomas

Chief Finance Officer

Andrea Blance

Senior Independent Director

Angela Knight

Non-Executive Director

Elizabeth Chambers

Non-Executive Director

Paul Hewitt

Non-Executive Director

Graham Lindsay

Non-Executive Director

Robert East

Non-Executive Director