PFG.L Regulatory News (PFG)

P1. Capital risk

Risk description

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

Mitigating activities and other considerations

- The Group and bank operate within a defined capital risk appetite, with thresholds reported to and monitored by Group and bank boards.

- The Board's current view on risk appetite is to maintain a capital buffer of more than 5% of risk-weighted exposures due to market uncertainties. The Group has also refined the capital buffer it maintains to be proportionate to the risk-weighted exposures and thus reflect the current and expected state of the balance sheet.

- Preservation of capital and supporting business stability via the cancellation of the 2019 dividend in line with industry practice. The Group's capital review (C-SREP) with the PRA concluded in July 2020. The Group's Pillar 2A capital requirement has been lowered from 20.65% to 18.33% during 2020 and the fixed monetary add-on in respect of pension risk has been removed.

- As previously reported, the Group has elected to phase in the impact of adopting IFRS 9 over a five-year period. The PRA ratified additional capital mitigation proposed by the Basel Committee, in response to Covid-19, with these measures coming into force from 27 June 2020 and which the Group has fully adopted to maintain a robust regulatory capital position in light of the increased impact of IFRS 9 in the current macroeconomic environment.

- The Group and bank regularly monitor the internal assessment of capital adequacy in line with the capital adequacy rules.

- The Group has continued to actively explore a number of options to improve capital efficiency. These include, but are not limited to, supplementing the existing capital base made up entirely of core equity tier 1 with tier 2 debt capital to support growth and improved return on equity.

P2. Liquidity and funding risk

Risk description

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

Mitigating activities and other considerations

- Liquidity and funding risk appetite established at Group and bank level, with thresholds reported to and monitored by Group and bank boards.

- The Group's current funding strategy seeks to maintain a secure funding structure by maintaining committed facilities to meet contractual maturities and fund growth for at least the following 12 months and maintain access to four main sources of funding comprising: (i) the syndicated revolving bank facility; (ii) market funding, including retail bonds, institutional bonds and private placements; (iii) securitisation; and (iv) retail deposits.

- In January 2020, the Group successfully completed a bilateral securitisation facility to fund Moneybarn business flows, establishing and developing the securitisation capabilities within the Group.

- The Group also delivered on a number of its other funding objectives: (i) repaid early the remaining M&G loan facility of £25m on 14 February 2020; (ii) in line with its contractual maturity, repaid a £25m bond on 14 April 2020; and (iii) secured intra-group funding through Vanquis Bank.

- In June 2020, a waiver was agreed up to (but excluding) 31 December 2020. In addition, an amendment was made to the interest cover covenant as part of the revolving credit facility (RCF) with the lending banks. This was in response to the pandemic's impact on the Group's performance.

- Consistent with the Group's strategy of cost-effective management of its liabilities and in light of the contraction of the balance sheet in response to the pandemic in August 2020, the Group successfully completed a tender offer for £75m of senior bonds due to mature in 2023.

- 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 bank also monitors and reports its liquidity coverage requirements (LCR) on a consolidated basis to the PRA and has reported LCR far in excess of the 100% minimum during 2020.

- The flow of retail deposits within Vanquis Bank has continued to be strong. In 2020, Vanquis Bank increased its retail deposit funding to bolster liquidity in response to Covid-19 and has maintained surplus liquidity against its internal requirements (which exceed requirements in satisfaction of the Overall Liquidity Adequacy Rule) throughout 2020.

- In 2021, Vanquis Bank has issued secured notes collateralised by a portion of the credit card receivables book with the intention to use the notes as collateral which will be placed with the Bank of England to support borrowings against the Sterling Monetary Framework (SMF) facilities. These include the Discount Window Facility (DWF), Liquidity Support Operations (ILTRO), and the Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises (TFSME). This structure will offer three primary liquidity and funding benefits to Vanquis Bank: (i) diversification of funding; (ii) access to Bank of England facilities; and (iii) creation of contingent liquidity.

P3. Credit risk

Risk description

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

Mitigating activities and other considerations

- The Group has faced increased credit risk through the period as a result of the pandemic and the delayed impacts of government support schemes including furlough and payment deferrals.

- In response to the pandemic, each division has reviewed its respective credit profiles and has undertaken selective tightening of scorecards to ensure any higher than desired risk segments have been addressed.

- Credit risk appetite has been refreshed to focus more on early warning indicators (EWIs) of customer stress and predictive performance of scorecards.

- Test and learn strategies implemented in Vanquis with down-sampling of lower scoring customers to enable data gathering without generating significant, unquantifiable risk exposure.

- Prompt adjustments incorporated into rebuilds of models to support greater confidence in booking larger volumes of business.

- Selective plans being developed to supplement existing data sources to enhance both credit and affordability risk, i.e. open banking.

P4. Strategy and governance

Risk description

The risk of making poor strategic decisions related to acquisitions, products, distribution, etc. as a result of ineffective governance arrangements, processes and controls.

Mitigating activities and other considerations

- Detailed business review undertaken within each division to rebase financial and operational plans as a result of the pandemic (under 1PFG strategy).

- Operational review of CCD in progress to realign activities with the changing regulatory environment, overseen by the Group Board.

- Scheme of Arrangement announced to cap potential liabilities in CCD back book.

- Board governance manual and Delegated Authorities Matrix (DAM) in place to provide framework for key decision making at all levels across the Group and divisions.

- Executive director scorecards in place with reward incentives based on a combination of financial and non-financial measures.

- Group risk appetite framework in place with agreed measures and thresholds approved by the Group Board.

- Strategic and emerging risks reported to the GERC and GRC on any areas of concern.

- Risk overlay completed annually by the Group CRO on behalf of the Remuneration Committee (RemCo) to provide recommendations on adjustments to variable reward where governance has failed.

- Independent internal audit assurance provided on a risk assessed basis, with agile plan executed to reflect the pandemic.

P5. Legal and 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 and other considerations

- The Group operates in a highly regulated environment and in a sector where its customers are 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.

- Any regulatory actions are managed and monitored closely to ensure these are delivered fully and within the spirit of any feedback received.

- During the pandemic, the Group and divisions have ensured very close contact with the regulators keeping them apprised of our contingency plans, and how we are managing capital and liquidity and ensuring our customers continue to receive appropriate support.

- 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, e.g. the Woolard Review and investigations, ensuring programmes are established to deliver new regulation and legislation.

- Financial crime improvement programme largely completed in Vanquis, closing down previous control issues.

- Further detail covering specific changes in our regulatory environment is included on page 62 including the recent notification by the FCA of an investigation into affordability and sustainability of lending to customers in CCD (February 2020-February 2021).

P6. 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 and other considerations

- Conduct risk appetite refreshed providing greater focus on outcome measures.

- New conduct outcomes framework is being developed to provide improved monitoring of customer outcomes across all high-risk interactions including lending, forbearance, vulnerability and complaints.

- New Group Responsible Lending Policy being developed providing overarching principles for all the divisions in response to the changing regulatory environment and sustainable lending.

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

- During the pandemic, we have ensured throughout that our customers continue to receive the service they need during these difficult times, and in particular the provision of payment deferrals in line with FCA guidance.

- Establishment of Group complaints forum and reporting to ensure we are learning from complaints trends across the divisions, including any FOS referrals or upholds and actions of claims management companies. This has resulted in a number of strategic changes outlined in our emerging risks 'Threats to our business model' and 'Responsible lending'.

P7. 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 and other considerations

- Our people strategy continues to be refined with alignment of key HR processes across the Group including performance management.

- Succession plans completed and in place for all executive and senior management.

- Balanced scorecards introduced and aligned across the Group and divisions with clear frameworks and evaluation criteria established through RemCo for variable pay.

- Led by Group HR and supported by the divisional HR teams, colleague guides have been developed to raise awareness and understanding, covering important safety and wellbeing measures that needed to be implemented through the pandemic.

- A number of ongoing communications have and continue to be shared with colleagues at a Group and divisional level to keep them apprised of business changes to support wellbeing.

- We are currently formulating our Return to Work strategy which will define our future working arrangements incorporating the learnings from the pandemic including flexible working.

- Full health and safety risk assessment completed of all our key work locations with mitigating actions completed.

P8. Information security and data protection

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 and other considerations

- Consolidated Group Data Protection Policy, maturity framework and reporting developed and embedded.

- Data Protection Office (DPO) reporting transferred to the Group Risk function to reinforce independence of office covering oversight arrangements.

- New data protection software rolled out across the business to enhance operational control effectiveness.

- Group-wide internal assessment completed on information security mapping capabilities against the ISO 27001 framework.

- Based on the above, an action plan has been developed and will be agreed with the Group Board in May, with Internal Audit providing assurance over its implementation through 2021.

P9. 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 and other considerations

- The three lines of defence model throughout the Group ensures there are clear lines of accountability between management which owns the risks, oversight by the Risk function and independent assurance provided by Internal Audit.

- Group business continuity plan invoked in response to the pandemic.

- New operating arrangements in place including home working for non-essential workers, and deployment of new technology to serve our customers and support colleague collaboration.

- Full operating assessment completed covering home working to ensure key controls around information security, data protection and colleague health and safety meet policy requirements.

- Risk harmonisation programme launched to build out single enterprise risk management framework including control self-assessment, consolidated risk policy taxonomy and risk reporting.

- Vanquis Control Enhancement Programme completed with attestation provided to the PRA on risk maturity and control effectiveness.

- Central transformation and programme management capabilities being developed alongside investment prioritisation criteria.

P10. Model

Risk description

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

Mitigating activities and other considerations

- Group Head of Model Risk recruited with resourcing plan in place to build out team.

- New Group model risk management framework developed including Model Risk Policy.

- Model inventory compiled with materiality thresholds in place to drive prioritised independent model validation plan.

- Critical IFRS 9 models externally validated within Vanquis and Moneybarn.

- Group model risk forum established to drive standardised approach to model development including minimum control standards.

E1. Threats to our business model

Risk description

There is a risk that the non-standard credit sector in which we operate will continue to face considerable macroeconomic, Covid-19, regulatory and political headwinds resulting in material threats to our business model.

Mitigating activities and other considerations

- There are a number of strategic initiatives across the Group to reshape our business model reflecting the changing regulatory environment and associated impacts on our customer propositions, revenue and costs.

- Within CCD we have chosen to exit the home credit business in the UK and ROI, and are implementing a robust operational strategy to optimise collection performance of existing lending.

- In parallel, we are developing our market and product propositions in CCD and Vanquis to better serve the evolving needs of our customer base. This includes new loan products in both CCD and Vanquis which will make greater use of our digital capabilities, while ensuring effective customer touch points in managing the suitability, affordability and sustainability of our lending.

- Through our 1PFG model, we are reviewing our existing functional and operational structures across the divisions to seek ways to drive alignment and where appropriate consolidating structures to improve efficiency and harness the scale of the Group.

- Together these initiatives are providing the foundations for our future business model. These changes will be supported through the refresh of our risk management framework as well as significant enhancements including building our transformation and programme management capabilities.

E2. Responsible lending

Risk description

There is a risk that the Group will be susceptible to claims of irresponsible lending as a result of past business practices, leading to widespread remedial activities as well as a significant increase in the level of complaints from CMCs.

Mitigating activities and other considerations

- The Group and divisions have worked continuously with the FCA and FOS to seek alignment on interpretation of CONC rules and their application to our current and historical lending business.

- We have made a number of changes to our lending processes in response to new regulatory guidance, further enhancing the robustness of customer creditworthiness assessments, e.g. repeat lending.

- Within CCD we have established a model office which provides clear triggers where customer complaints may warrant specific investigation and redress. This approach is being leveraged in our other divisions as appropriate.

- We have recently announced plans for a Scheme of Arrangement within CCD which caps future liabilities around past lending to £65m (including costs). Under the scheme, customers who have complaints under the agreed scheme rules may be entitled to redress.

- We have established a Group complaints forum chaired by the Group CRO to share insights and learn about any emerging trends related to irresponsible lending across the divisions.

- Group responsible lending forum established to assess any future proposed changes to lending policies and rules in response to regulatory guidance and FOS adjudications.

- Customer outcomes framework being developed to provide assurance over lending decisions at various stages of the customer journey.

E3. Pandemic (Covid-19)

Risk description

There is a risk that the pandemic (Covid-19) will have a long-term impact on our future business performance and prospects.

Mitigating activities and other considerations

- Pandemic contingency plan instigated across the Group and divisions, which has stabilised the business.

- New value creation plans (1PFG) have been developed for each of the divisions which set out the future strategic options as we face into the 'new world'.

- Enhanced risk assessment and audit reviews conducted over key processes to ensure controls continue to operate effectively during our recovery phase.

- Payment holiday strategies have been developed and rolled out to our most vulnerable customers in line with regulatory guidance.

- Return to Work (RTW) risk assessments have been completed for each of our main sites, home workers and agents in line with government guidance and existing work arrangements.

- Numerous other actions are in place which are captured and monitored as part of individual business plans and remediation efforts, e.g. tightening of credit criteria for new business.

E4. Challenge to agent self-employed status

Risk 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 historical employment status of the Group's home credit agents in the UK and the employment status of agents in the Republic of Ireland (ROI).

Were the Group to be unsuccessful in defending such claims, it may be required to make payments to agents and pay additional taxes, in particular National Insurance contributions, to the relevant authorities.

Mitigating activities and other considerations

- 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 Republic of Ireland 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 Republic of Ireland to ensure that the relationship between the business and the agents it engages is such that self-employed status is maintained. Compliance with policies was also routinely evidenced and tested.

- To date the Group has successfully defended claims and challenges against the employment status of its home credit agents, although there is no guarantee that this will also be the case with future claims and challenges.

- It is understood from discussions with HMRC that they have commenced 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 it is expected that the review could continue for at least another year.

- HMRC has raised protective assessments which have been appealed but these are purely a procedural matter to ensure that, in the event the review concludes that taxes are payable, HMRC can recover such amounts in respect of the oldest year that would otherwise drop out due to the lapse of statutory time limits.

- The Group has worked with HMRC over many years to manage employment status risk and it remains confident based on advice received that agents were self-employed as a matter of law throughout their engagement by the home credit business.

E5. Risk culture and governance

Risk description

There is a risk that our culture and supporting risk governance arrangements (risk frameworks, reporting and structures) inhibit effective risk oversight leading to poor risk practices and control failures across the Group.

Mitigating activities and other considerations

- A new Group Executive Risk Committee (GERC) has been established from January 2020 which is providing more focused discussions on the major risks we face as an organisation.

- Led by the Group CRO, we have started our risk harmonisation programme. A detailed approach has been developed with the delivery plan in progress with regular updates on progress provided to the GERC and GRC.

- A refreshed Group risk appetite was approved by the Group ExCo and GRC in October 2020 reflecting the impact of Covid-19 and our 1PFG 'value creation plans'.

- Specifically, within Vanquis Bank, the Risk Enhancement Programme is driving a number of improvements in control design and operating effectiveness with an attestation provided to the PRA at the end of 2020.

- The Group Blueprint launched in 2019 is now being embedded to reflect the new customer culture.

E6. Return to Work strategy

Risk description

There is a risk that the Group and its divisions are subject to significant people risk as a result of a prolonged period of working remotely.

Mitigating activities and other considerations

- A preliminary analysis has been completed of a future model which supports increased remote working.

- While this has flagged some potential risks, e.g. productivity, mental wellbeing and the home working environment, the overall benefits significantly outweigh these and have been benchmarked against other similar organisations.

- Based on the analysis, the Group Executive has provided a mandate to mobilise a 'Future of Work' programme which will shape the Return to Work strategy. This covers a number of important areas including people and culture, IT enablement, health and safety and operating environment.

- Any changes will be implemented on a transitional basis over the next 12 months. Work on our longer-term property strategy is ongoing.

Patrick Snowball

Chairman

Malcolm Le May

Chief Executive Officer

Neeraj Kapur

Chief Finance Officer

Andrea Blance

Senior Independent Director

Angela Knight

Non-Executive Director

Elizabeth Chambers

Non-Executive Director

Margot James

Non-Executive Director

Paul Hewitt

Non-Executive Director

Graham Lindsay

Non-Executive Director

Robert East

Non-Executive Director