TSC5.L Regulatory News (TSC5)

Tesco Personal Finance plc

Publication of Annual Report and Financial Statements for the year ended 29 February 2020

In accordance with Listing Rule 17.3.1, a copy of the above document for Tesco Personal Finance plc has been submitted to the UKLA document viewing facility and will shortly be available for inspection at:

https://data.fca.org.uk/#/nsm/nationalstoragemechanism

The document is also available on the Company's website at: www.corporate.tescobank.com 

This announcement also contains additional information for the purposes of compliance with the Disclosure and Transparency Rules, including principal risks and uncertainties, details of related party transactions and a responsibility statement.

Reference to pages and numbers refer to page numbers and notes to the annual accounts in the Annual Report and Financial Statements 2020.

Enquiries:

08 April 2020

TESCO PERSONAL FINANCE PLC

ANNUAL REPORT AND FINANCIAL STATEMENTS

FOR THE YEAR ENDED 29 FEBRUARY 2020

Company Number SC173199

TESCO PERSONAL FINANCE PLC

CONTENTS

1

TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT

The Directors present their Strategic Report for the year ended 29 February 2020.

The Annual Report and Financial Statements comprises the Strategic Report, the Directors' Report and the Company and Consolidated Financial Statements and accompanying notes. In the Annual Report and Financial Statements, unless specified otherwise, the 'Company' means Tesco Personal Finance Plc and the 'Group' means the Company and its subsidiaries and joint venture included in the Consolidated Financial Statements. The Group operates using the trading name of Tesco Bank.

Tesco Personal Finance Plc is a wholly owned subsidiary of Tesco Personal Finance Group PLC (TPFG), the share capital of which is wholly owned by Tesco PLC (Tesco). A reconciliation of the results contained within this Strategic Report to the Tesco Bank results presented in the Tesco preliminary results 2019/20 can be found on the Tesco internet page https://www.tescoplc.com/media/755583/brokerpack_2020.pdf.

Business Model

The core objective of the Board is to create and deliver the long-term sustainable success of the Company, generating value for the Group's shareholder and contributing to wider society. It sets the Group's purpose, strategy and values and is accountable to the Group's shareholder for ensuring that the Group is appropriately managed and achieves its objectives in a way that is supported by the right culture and behaviours.

The Group provides financial services and products to personal customers in the United Kingdom (UK). The Company is incorporated and registered in Scotland. The Company owns 49.9% of Tesco Underwriting Limited (TU), an authorised insurance company. TU is accounted for as a joint venture of the Group.

Covid-19

Since the year end significant economic and social disruption has arisen from the Covid-19 pandemic. The Group has invoked business continuity plans, as it seeks to serve and support its customers throughout the pandemic while maintaining the safety and well-being of staff. The Group is providing support to those customers who are experiencing financial difficulty as a result of Covid-19, for example by offering to delay borrowing repayments and waiving certain fees. It is also closely monitoring that critical functions remain resilient and as part of this is engaging with suppliers to ensure that service levels can continue to be maintained throughout a prolonged pandemic.

As a result of the pandemic, the Group is expected to be impacted in the year ahead by a reduction in income from all activities, including Credit Cards, Loans and Travel Money. This, together with increased expected credit losses (ECLs)for potential bad debts,  is likely to result in a loss for the Bank in the year ending February 2021. Notwithstanding this, the Group's capital and liquidity ratios, which are set out on page 7, are expected to remain strong. As the situation rapidly evolved since the reporting date, the Group sourced revised economic forecasts from its third party supplier, reflecting current economic developments as at the date of signing these Financial Statements. The estimate of ECLs at 29 February 2020 was based on the Group's conclusion that the significant socioeconomic disruption, the necessity for large scale Government interventions and the related impact on the wider economy as a result of Covid-19 had a low probability of crystallising at 29 February 2020 based on the reasonable and supportable information available at that date. The impact of the current economic outlook on ECLs is set out at note 48.

The Board considered in depth the impact of Covid-19 on the Group's viability and going concern status. The relevant disclosures are set out on pages 21 to 22 and 25 to 26.

Sale of the Group's Mortgage Business

In accordance with the requirements of International Financial Reporting Standard (IFRS) 5 'Non-current assets held for sale and discontinued operations', the Group has classified its Mortgage business as a discontinued operation at 29 February 2020.

Amounts recognised in the Consolidated Income Statement in respect of the Mortgage business are presented as a single line item after profit after tax from continuing operations. The prior year has been restated to present this on a consistent basis with the current year. Interest expense of £37.5m (2019: £52.1m) in respect of the Group's cost of funding the Mortgage business continues to be presented within net interest income of continuing operations. As this cost cannot be directly attributed to liabilities of the Group entered into specifically to fund the Group's Mortgage business, as required by IFRS 5, it has not been possible to present this cost within statutory profit for the year after tax from discontinued operations for the current or prior year. Assets and liabilities of the disposal group representing the Mortgage business are presented separately in the current year Company and Consolidated Statements of Financial Position, with no requirement to restate the prior year.

Following the Group's decision to sell its Mortgage business, with effect from 1 September 2019 the Group's business model under IFRS 9 'Financial instruments' in respect of its Mortgage business changed from being solely to collect contractual cash flows from the Mortgage business to being to collect cash flows arising from the sale of the Mortgage business. As a result, the Group has accounted for its Mortgage business at fair value through profit or loss (FVPL) from that date. The Mortgage business was previously accounted for at amortised cost. The Group recognised a fair value measurement gain after tax of £16.7m at 1 September 2019 following this change in business model.

2

TESCO PERSONAL FINANCE PLC

STRATEGIC REPORT (continued)

Sale of Mortgage Business (continued)

The Group completed the sale of the majority of its Mortgage business to Bank of Scotland PLC (part of the Lloyds Banking Group) on 27 September 2019 for cash consideration of £3,694.6m. After settling transaction and other costs associated directly with the sale amounting to £4.5m, the Group's after-tax gain on sale was £20.7m. Immediately following derecognition of the majority of the Group's Mortgage business, the Group entered into a series of receive-fixed interest rates swaps to economically neutralise the effect of its existing pay-fixed interest rate swaps used to hedge the interest rate risk inherent in the Mortgage business. The inception value of these swaps was an after-tax gain of £5.0m.

As is customary in such a transaction, the Group continued to recognise a small element of the Mortgage business, representing new advances to existing Mortgage customers, until migration of all Mortgage accounts to the purchaser, which took place on 30 March 2020. The Group received cash consideration of £53.8m in respect of this element of the Mortgage business, resulting in an after-tax gain on sale of £0.4m.

Further information on the Group's discontinued operations is set out at notes 2, 5, 15 and 48.

Impact of Adoption of New Accounting Standards

The Group adopted IFRS 16 'Leases' with effect from 1 March 2019. This was adopted fully retrospectively and prior years have been restated.

The adoption of IFRS 16 resulted in the recognition of right-of-use assets with a net book value of £16.7m at 1 March 2018. The net impact on lease liabilities, after the release of a previously held operating lease accrual, was to increase lease liabilities by £22.8m. The overall impact on equity, net of a deferred tax asset of £1.6m, was a decrease of £4.5m at 1 March 2018.

Further details of the transitional impact of the adoption of IFRS 16 are set out at note 2.

3

Headlines

Income Statement

· Profit before tax from continuing operations is 43.7% lower at £79.2m (2019: £140.7m)1,2.

· Underlying profit before tax from continuing operations, which excludes items which are not reflective of ongoing trading performance, is 1.3% higher at £227.8m (2019: £224.8m)1,2. A reconciliation of statutory to underlying profit for the current and prior year is set out at note 5.

· Profit after tax from discontinued operations has increased by 34.4% to £56.7m (2019: £42.2m).

· Profit before tax from continuing operations

The key drivers of the decrease in profit before tax from continuing operations are:

o a 10.1% increase in net interest income to £517.4m (2019: £470.0m)1,2, reflecting an improved net interest margin of 4.4% (2019: 4.3%)1,2. Net interest income includes interest expense of £37.5m (2019: £52.1m) in respect of the Group's cost of funding its Mortgage business. As this cost cannot be directly attributed to liabilities of the Group entered into specifically to fund the Group's Mortgage business, as required by IFRS 5, it has not been possible to present this cost within profit after tax from discontinued operations;

o a 6.4% decrease in net fees and commission income to £309.7m (2019: £331.0m)2. Within this, a focus on retention led to a reduction in Motor and Home insurance commissions in the year while lower ATM income reflected the continued gradual decline in cash usage. Offsetting these was an increase in Travel Money and a credit of £9.5m (2019: credit of £13.2m) in relation to Pet insurance commissions under IFRS 15 'Revenue from contracts with customers';

o a loss on financial instruments at FVPL of £4.0m (2019: loss of £1.2m)2;

o a loss on disposal of investment securities of £0.2m (2019: gain of £8.4m);

1 The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.

2 The prior year has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 15 for further details.

· Profit before tax from continuing operations (continued)

o an increase of 12.5% in operating expenses to £575.3m (2019: £511.5m)1,2. This includes an additional payment protection insurance (PPI) charge of £45.0m (2019: £16.0m) recognised during the year, further detail on the drivers of which is set out in note 31, and a restructuring charge of £65.8m, comprising accelerated amortisation of £55.0m and other restructuring costs of £10.3m, relating to the Group's strategic review (2019: credit of £1.6m relating to the early exit from the Group's offices in central Edinburgh). The prior year also includes a regulatory charge of £16.4m relating to the November 2016 fraud incident. There was no such charge in the current year. Cost control remains a key focus of the Group and is reflected in the £16.2m decrease in underlying costs to £464.5m (2019: £480.7m)1,2;

o a 9.0% increase in ECL charges to £178.6m (2019: £163.9m). The impact of the Financial Conduct Authority's (FCA) Persistent Debt rules has been a significant contributor to the increased charge across the Group's Credit Cards and Loans products. The bad debt:asset ratio (BDAR) in respect of continuing operations increased to 1.6% (2019: 1.3%)2, predominantly reflecting the impact on the BDAR of the sale of the Group's Mortgage business in September 2019, resulting in a significant reduction in the Group's average balances used in the BDAR calculation over the course of the year ended 29 February 2020; and

o a 29.1% increase in the Group's share of profit from its joint venture, TU to £10.2m (2019: £7.9m). This includes a credit of £3.7m (2019: £nil), representing the Group's share of credits recognised by TU during the year relating to the impact on TU's insurance reserves of a change to the Ogden tables, which are used to calculate future losses in personal injury and fatal accident cases.

· Income tax charge on profit from continuing operations

Income tax on the Group's profit from continuing operations for the year is a charge of £32.4m (2019: £40.0m)1,2. The Group's current year effective tax rate is higher than the statutory rate principally due to the non-deductibility of the additional PPI charge recognised during the year.

4

· Profit after tax from discontinued operations

The increase in profit after tax from discontinued operations predominantly reflects the overall gain on sale of disposal of £43.0m. Excluding this gain, the profit after tax from discontinued operations decreased by 67.5% to £13.7m (2019: £42.2m). This largely reflects a decrease in net interest income to £41.3m (2019: £76.3m), reflecting a reduction in interest income following the sale of the majority of the Group's Mortgage business in September 2019; an increase in losses on financial instruments held at FVPL to £6.6m (2019: £3.0m); and an accelerated amortisation charge of £6.6m (2019: £nil) recognised during the year.

Following the classification during the year of the Group's Mortgage business as a discontinued operation, the Group has reassessed the useful life of certain of its intangible fixed assets, reducing the expected life to a maximum of one year and resulting in the accelerated amortisation charge of £6.6m referred to above. As this represents a change in accounting estimate, no prior year adjustment is required.

In arriving at the profit after tax from discontinued operations for the current and prior year, it has not been possible under IFRS 5 to allocate any of the Group's cost of funding the Mortgage business to discontinued operations as the related liabilities were not entered into specifically to fund the Group's Mortgage business. After including the Group's notional cost of funding of £37.5m (2019: £52.1m) in respect of the Mortgage business, the loss after tax from discontinued operations was £13.7m (2019: profit of £4.2m). The loss for the year ended 29 February reflects the fact that the Mortgage business only generated income for the Group until the majority of the business was sold in September 2019 while the Group continued to incur interest expense in respect of the excess funding position following the sale of the Mortgage book. In the prior year, the profit reflects a full year of income generation from the Mortgage business, offset by the Group's cost of funding that business.

Balance Sheet

· Loans and advances to customers have decreased by 32.0% to £8.5bn (2019: £12.4bn). This reflects the sale during the year of the Group's £3.7bn (2019: £3.8bn) Mortgage business. Reflecting the impact of this sale on the prior year, loans and advances to customers have reduced slightly to £8.5bn (2019: £8.7bn). Credit Card balances have reduced by 6.3%, while Personal Loans have grown by 1.8%.

· Customer deposits, which continue to be the Group's main source of funding, have decreased by 26.3% to £7.7bn (2019: £10.5bn) as the Group reduced its Savings balances in response to the sale of its Mortgage business. Deposits from banks at 29 February 2020 totalled £500.0m (2019: £1,663.2m). At the year end, the Group had entered into repurchase transactions of £nil (2019: £324.2m) and accessed £500.0m of funds from the Bank of England's (BoE) Term Funding Scheme (TFS) (2019: £1,339.0m), with £839.0m (2019: £nil) of TFS borrowings being repaid following the sale of the Mortgage business.

· The balance sheet remains well positioned to support future lending growth from both a liquidity and capital standpoint. At 29 February 2020, the total capital ratio was 23.1% (2019: 18.3%)1 and net stable funding ratio (NSFR) was 129.3% (2019: 123.1%)1. The increase in the NSFR over the year reflects a greater proportion of the Group's assets being held as cash, instead of Loans and Advances to Customers, following the sale of its Mortgage business.

1 The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.

2 The prior year has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 15 for further details.

5

Customer Developments

Given the unprecedented fall in demand for Travel Money, the Group suspended its in-store and online Travel Money service from 24 March 2020. The Group will continue to monitor Covid-19 developments in order to reinstate this service to its customers as soon as possible. The IT systems of Travelex, the Group's Travel Money provider, were recently compromised by ransomware meaning that Travelex had to suspend the services offered through its online channel. Throughout the incident, the Group provided assistance to customers on its website and via a dedicated telephone number at Travelex. The Group's network of in-store bureaux remained open throughout the incident. The Group is closely monitoring developments around the Travelex business.

The Group's commitment to offering attractive products and good service for customers has been rewarded with recognition as 'Best Card Provider (Standard Rate)' and 'Best Card Provider (Balance Transfer Rate)' at the 2019 Moneyfacts Awards and 'Best Travel Money Provider' at the 2019/20 Money Pages Personal Finance Awards.

In November 2019 Tesco launched Clubcard Plus, a brand-new innovative subscription service bringing together Tesco Bank, Tesco Stores and Tesco Mobile, enabling customers and colleagues to get even more value from Tesco for only £7.99 a month. From January 2020, Clubcard Plus subscribers have been able to apply for a new Clubcard Plus Credit Card, benefitting from no foreign exchange fees wherever customers spend, no over limit fees if the Credit Card limit is accidentally exceeded, no late payments fees if customers forget to make a payment on time and no returned item fees.

Regulatory Developments

The Group continues to monitor and prepare for a number of regulatory changes taking effect over the next few years.

The Second Payment Services Directive (PSD2), the first phase of which took effect from 13 January 2018, together with Open Banking, allows customers to choose to share data relating to their banking products with third-party providers (TPPs) and bring together all of their financial relationships and data in one place, potentially leading to a fundamental change in how customers manage both their money and data over the longer term. The aim of these changes is to promote competition and enhance customer choice. They provide opportunities for the Group to attract new customers, as well as potentially increasing competition from traditional banking businesses and new providers of financial services, including technology companies. The Group continues to monitor and review the opportunities and risks associated with the introduction of PSD2, including the need to ensure that there is appropriate control and ownership of sensitive and confidential customer data as the use of TPPs becomes more widespread.

The second phase of PSD2 was launched during the year. Open Banking, which is supported by a secure technology standard, is a change for the whole UK banking sector and is designed to give customers more control over their financial data and money. Customers will also be able to more easily compare accounts from different providers, understand features, service quality and pricing, and be able to select which offers best value. Using Open Banking, the Group's customers can choose to connect their Personal Current Accounts, Credit Cards, Instant Access Savings Accounts or Internet Saver accounts to TPPs. TPPs will provide a range of different applications and websites offering new ways for customers to manage money and make payments.

Amendments to the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD) were published in the Official Journal of the European Union (EU) on 7 June 2019. The majority of the CRR amendments will apply from 28 June 2021 and the CRD amendments from 28 December 2020. The impact of these amendments continues to be assessed. Uncertainty remains around the implementation and impact of further regulatory developments arising from the finalisation of Basel III, which will be subject to EU and UK implementation. It was announced in March 2020 that the implementation date of Basel III has been delayed by one year to 1 January 2023.

In addition, the Group became subject to the minimum requirements for own funds and eligible liabilities (MREL) on an interim basis from 1 January 2020, with full implementation from 1 January 2022. The requirements are factored into the Group's funding and capital plans. TPFG undertook an initial £250.0m issuance of MREL-compliant debt in July 2019 in support of the interim requirements and subsequently invested the proceeds in the Company via an intercompany subordinated loan. Further issuances may be required to support end-state requirements. 

6

Regulatory Developments (continued)

MREL will, on full implementation, be set on a bank-specific basis and calculated as the sum of two components: a loss absorption amount, being the amount needed to absorb losses up to and in resolution; and a recapitalisation amount, which reflects the capital that a firm is likely to need post-resolution.

The Group has identified climate change as a risk on which there is growing regulatory focus. During the year, the Prudential Regulation Authority (PRA) issued a Supervisory Statement which set out its expectations in relation to how banks should manage the financial risks of climate change.

The Group has designated the Chief Risk Officer (CRO) as the Senior Management Function holder responsible for embedding climate change risk into the Group's Risk Management Framework (RMF) and a plan to achieve this has been initiated. The Group has conducted a review of its exposure to climate change risk and a number of enhancements have been made to support the identification and impact assessment of climate change risk across the organisation. Climate change risk is subject to at least annual review by the Group's Board Risk Committee (BRC). 

Key Performance Indicators

The Directors consider the following to be Key Performance Indicators for the Consolidated Income Statement:

1 The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.

2 The prior year has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 15 for further details.

Capital and Liquidity Ratios

The Directors consider the following to be Key Performance Indicators for capital and liquidity reporting:

The Group's total capital ratio remains above internal targets and regulatory requirements at 23.1% (2019: 18.3%)1 and leaves the Group well placed to support future growth.

On 1 March 2018, IFRS 9 came into force and a transitional period was introduced, allowing the Company (being the regulated entity) to phase in the IFRS 9 impact on capital over a period of 5 years.

Under the transitional provisions, the impact as at 29 February 2020 on common equity tier 1 is £22.8m (2019: £7.8m). Common equity tier 1 is expected to reduce from inception to end point by approximately 164 basis points (unaudited). The Group's common equity tier 1 capital is disclosed in note 43.

An interim MREL ratio requirement of 18% of risk-weighted assets has been set from 1 January 2020 to 31 December 2021. At 29 February 2020 the ratio was 26.1%.

The NSFR, a measure of the Group's liquidity position, is within appetite at 129.3% as at 29 February 2020 (2019: 123.1%)1. The Group maintains a liquid asset portfolio of high quality securities of £2.5bn (2019: £2.1bn).

1 The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.

2 The prior year has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 15 for further details.

7 

Risk Management

Risk Management Approach

The Board of Directors has overall responsibility for determining the Group's strategy and related Risk Appetite. The Board's Risk Appetite comprises a suite of Risk Appetite statements, underpinned by corresponding measures with agreed triggers and limits. The Risk Appetite framework defines the type and amount of risk that the Group is prepared to accept to achieve its objectives and forms a key link between the day-to-day risk management of the business, its strategic objectives, long-term plan, capital plan and stress testing. The Risk Appetite is formally reviewed by the Board on at least an annual basis.

The Board is also responsible for overall corporate governance, which includes overseeing an effective system of risk management and that the level of capital and liquidity held is adequate and consistent with the risk profile of the business. To support this, a RMF has been embedded across the Group, creating an integrated approach to managing risk. The RMF brings together governance, Risk Appetite, the three lines of defence, the Policy Framework and risk management tools to support the business in managing risk as part of day-to-day activity, and is underpinned by governance, controls, processes, systems and policies within the first line business areas and those of the second line Risk Management Function (RMFu). Further information on the Group's RMF is set out on pages 14 to 21.

The CRO performs a strategic risk management role and is responsible for managing and enhancing the RMF. The CRO is independent from any commercial function, reports directly to the Chief Executive Officer (CEO) and can only be removed from his position with the approval of the Board.

The Group is exposed to a variety of risks through its day-to-day operations. The Board undertakes a robust review of principal risks and areas of emerging risks at least annually. The following table sets out the principal risks and uncertainties and how they are managed within the RMF. These risks do not comprise all of the risks associated with the business and are not set out in priority order. Additional risks not presently known to Management, or currently deemed to be less material, may also have an adverse effect on the business. All business areas and functions in the Group are required to maintain and actively manage a risk register. In addition, the BRC oversees a Strategic and Horizon Risks process which focuses on emerging risks.

8 

Principal risks and uncertainties Key controls and mitigating factors

Credit risk

Liquidity and funding risk

10

Market risk

Insurance risk

Regulatory risk

Capital risk

12 

Brexit

LIBOR rate replacement

The following pages provide a more granular overview of the operational control processes and risk mitigants adopted by the Group.

A fuller description of these risks and controls can also be found in the Pillar 3 Disclosure Statements of TPFG for the year ended 29 February 2020. These disclosures will be published in the Financial Information section of the Group's corporate website in due course.

13 

Risk Management Framework (RMF)

The Group has a formal structure for reporting, monitoring and managing risks. This comprises, at its highest level, the Group's Risk Appetite, approved by the Board, which is supported by the RMF.

The key components of the RMF are as follows:

Governance Structure

The Group has established a governance structure which is appropriate for the business in terms of its level of complexity and risk profile. This structure is reviewed periodically so that it remains suitable to support the business. During the year, a review of the governance structure in place was carried out. As a result, the number of sub-committees reporting to the ExCo has been rationalised to provide clear alignment between the Senior Executives and their Senior Manager Regime responsibilities. The governance structure set out in these disclosures describes the structure that was in place as at 29 February 2020.

The Board

The Board is the key governance body and is responsible for overall strategy, performance of the business and ensuring appropriate and effective risk management, in line with the approved Risk Appetite.

The Board approves the Group's business plans, budget, long-term plan, ICAAP, ILAAP and any material changes to product lines in line with the approved Risk Appetite. The Board also monitors the Group's risk profile and capital adequacy position. The Group employs hedging and mitigation techniques defined within the Group's policies to ensure risks are managed within Risk Appetite.

14 

The Board (continued)

The Board has delegated responsibility for the day-to-day running of the business to the Chief Executive who has in turn established the ExCo to assist in the management of the business and to deliver the strategy in an effective and controlled way. The Board has established Board committees and the executive has established Senior Management committees to:

· oversee the RMF;

· identify the key risks facing the Group; and

· assess the effectiveness of the risk management actions.

The Board has overall responsibility for the management of the business and acts as the main decision-making forum. It sets the Risk Appetite and strategic aims for the business, in some circumstances subject to shareholder approval, within a control framework which is designed to enable risk to be assessed and managed. The Board satisfies itself that financial controls and systems of risk management are appropriate through the reporting provided to it and provides feedback where necessary to ensure that reporting remains fit for purpose.

Gender Diversity at Board Level

The Group has a formal, Board approved Policy on Diversity and Inclusion and is fully committed to creating an inclusive culture where everyone is made to feel truly welcome regardless of age; disability; gender; gender reassignment; marital and civil partnership status; pregnancy and maternity; race; religion or belief, or absence of religion or belief; sexual orientation or trade union affiliation. The overall objective of the Policy is to ensure that there is a fair process to attract, develop and retain talent and ensure that all colleagues are afforded equal opportunities regardless of protected characteristics or background, creating a diverse and inclusive workplace that reflects the customers the Group serves.

The Group is a Women in Finance Charter signatory, supporting the progression of women into senior roles in the financial services sector, championing the benefits of greater diversity within businesses through setting a variety of targets regarding female representation. Signatories are required to publicly report on progress to deliver against these internal targets in support of the accountability and transparency needed to drive change. In the last year, the Group made positive progress in improving female representation and is focused on building a sustainable talent pipeline to ensure that it continues to develop diverse talent throughout all levels of the organisation. Details of the Group's targets and progress can be found at https://corporate.tescobank.com/.

The Group appointed an Executive Sponsor for Inclusion who is also accountable for progress towards the Women in Finance Charter targets. Sandy Begbie, who has a CBE for services to business and social inclusion, leads the Inclusion agenda for the Group and chairs the Inclusion Network, which consists of Sponsors and Chairs of colleague networks, the Director of Colleague Experience and the Inclusion Team.

Further information on the role of the Group's Nomination Committee (NC) in reviewing the diversity of the Board, and the Group's Senior Management, is set out on page 18.

15 

The Board (continued)

Board and Committee Attendance

The Board and its Committees held regular meetings throughout the year, excluding meetings held to consider matters of a time-sensitive or ad-hoc nature. Directors are expected to attend all Board and relevant Committee meetings. The table below shows the attendance at the scheduled Board and Committee meetings1:

1 Attendance recorded is of Committee members only and does not reflect Directors' attendance as observers.

2 Sir John Kingman was appointed to the Board on 1 November 2019. 

16 

The Board (continued)

Board Evaluation

In accordance with the requirements of the Corporate Governance code, the Board carries out a review of the effectiveness of its performance and that of its Committees and Directors every year and the evaluation is facilitated externally every third year.

An externally facilitated review was carried out and presented in 2018/19, with facilitation provided by Boardroom Dialogue. The review concluded that the performance of the Board, its Committees and each of the Directors continues to be effective. No conflicts of interest exist between Boardroom Dialogue and any members of the Board.

The evaluation highlighted a number of strengths, including a breadth of skills across the Board, a clear focus on strategy and an effective definition of roles across various Committees.

Whilst no fundamental changes were proposed in the evaluation, it also highlighted a number of opportunities for improvement, including changes to the number of Board meetings and further progress to be made on gender and ethnic diversity.

In 2019/20, an internal evaluation has been carried out in order to assess the Board's and Directors' collective progress against the Group's objectives. The output of the evaluation identified opportunities to further improve the Board and its Committees' effectiveness.

Sub-committees

In order to support effective governance and management of the wide range of responsibilities, the Board has established the following five sub-committees:

· Audit Committee (AC)

The AC comprises James McConville (Chair), Robert Endersby, Simon Machell and Jacqueline Ferguson.

The role of the AC is to review the Financial Statements; review accounting policies and practices for compliance with relevant standards; examine the arrangements made by Management regarding compliance with regulations and standards; review the scope and results of the annual external audit; oversee the process for selecting the external auditor and make recommendations to the Board in relation to the appointment, re-appointment and removal of the external auditor; consider the effectiveness of the external auditor and their independence; review reports covering anti-money laundering and compliance, in particular the Money Laundering Reporting Officer annual report and Risk Assurance Report; maintain a professional relationship with the external auditor; oversee the Internal Audit (IA) function and review the IA programme; work closely with the BRC to avoid as far as possible any overlap or gap in the overall risk and assurance activities of the two committees; carry out such investigations or reviews as shall be referred to it by the Board; review the Group's plans for business continuity; approve the annual plan of Risk Assurance activity within the Group; receive and review reports, findings and recommendations from Risk; review and consider the adequacy of any follow up action, and any relevant investigation work, carried out by or on behalf of Risk; review and monitor Management's response to findings and recommendations following investigations carried out by Risk; and review the findings of external assurance reports provided by outsourced providers.

Further detail on the AC is included within the AC section of the Directors' Report.

· Board Risk Committee (BRC)

The BRC comprises Robert Endersby (Chair), James McConville, Graham Pimlott, Amanda Rendle, Alan Stewart, James Willens, Jacqueline Ferguson and Sir John Kingman.

The role of the BRC is to oversee that a culture is appropriately embedded which recognises risk and encourages all employees to be alert to the wider impact on the whole organisation of their actions and decisions; take a forward-looking view of possible economic trends and risks, informed by analysis of appropriate information, and consider their potential impact on the business; consider, and recommend to the Board the Group's Risk Appetite and seek to ensure that overall business strategy is informed by and remains aligned with it; and review and challenge all major risks, controls, actions and events in the business, alerting the Board to any areas of concern.

17 

The Board (continued)

· Remuneration Committee (RC)

The RC comprises Amanda Rendle (Chair), Graham Pimlott, James Willens, Robert Endersby and Sir John Kingman.

The role of the RC is to monitor compliance with regulatory requirements relating to remuneration, specifically the approval and identification of Material Risk Takers (MRTs); oversee the establishment and implementation of a remuneration policy for all colleagues within the Group (including specific arrangements for MRTs); provide performance and risk assessment in the determination of pay outcomes, including the oversight of pay outcomes for MRT colleagues; and ensure that the levels and structure of remuneration are designed to attract, retain and motivate the management talent needed to run the business in a way which is consistent with the Risk Appetite and ongoing sustainability of the business and is compliant with all applicable legislation, regulation and guidelines.

· Disclosure Committee (DC)

The DC comprises Graham Pimlott (Chair), Robert Endersby, Richard Henderson, Declan Hourican, James McConville and James Willens.

The DC reviews, on behalf of the Board, formal company documents which are either destined for publication or which, due to their size or complexity, are better reviewed in detail in a smaller group, to ensure the Group's compliance with relevant statutory and regulatory obligations.

· Nomination Committee (NC)

The NC comprises Graham Pimlott (Chair), Simon Machell, James Willens, Amanda Rendle and Sir John Kingman.

The NC has responsibility for reviewing the structure, size and composition (including the skills, knowledge, experience and diversity) of the Board and making recommendations with regard to any changes required, including the nomination of candidates to fill Board vacancies as and when they arise; considering succession planning for Directors and other senior executives, taking into account the challenges and opportunities facing the Group, and the skills and expertise needed in the future; and keeping under review the leadership needs of the organisation, both executive and non-executive, with a view to safeguarding the continued ability of the organisation to compete effectively in the marketplace by keeping up-to-date and fully informed about strategic issues and commercial changes affecting the Group and the market in which it operates.

Additionally, the NC is responsible for the evaluation of Board members' performance and appointment of new Board members. The NC establishes the requirements and profile of the candidate required and then engages with third-party recruitment firms to find the appropriate individual. During the year, Korn Ferry Hay Group, Ridgeway Partners and Lygon Group were engaged to support recruitment to the Board. No conflict of interest exists between these firms and any members of the Board.

The Group is committed to promoting a diverse and inclusive workplace, which is reflected in the work of the NC. The Group's diversity policy is discussed in further detail on page 15.

The gender balance of the Group's Board of Directors is disclosed on page 15.

Executive Committee (ExCo)

The Group's Board has delegated the day-to-day running of the business to the CEO. The CEO has established the ExCo to provide oversight and challenge in the management of the business, to deliver against strategy in an effective and controlled way and to set out a framework of reporting to the Board that is sufficient to enable the Board to fulfil its responsibilities. The ExCo supports the CEO, who has responsibility for the executive management of the business, by reviewing and overseeing the performance of the business and critical developing matters in the areas of responsibility of each member. Each ExCo member is accountable to the CEO and to the Board for managing performance in line with the Group's Risk Appetite, long-term plan, strategy and annual budget. To support this, the ExCo receives and considers customer matters, where these are deemed material to the Group; provides review and challenge that delivers good customer outcomes across the business activities the Group undertakes; oversees and monitors trade and financial performance; reviews the ongoing material operations of the Group; reviews the overall management and monitoring of risk; reviews colleague experience, performance, development and succession planning of Senior Management; considers the colleague experience agenda; and reviews the organisational design of the Group. 

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Executive Committee (ExCo) (continued)

The ExCo has established four sub-committees to support the relevant ExCo members and receives reports on any material matters and minutes from those sub-committees to monitor key activities.

In addition, in order to support their own decision-making, the ExCo has established four sub-committees which report directly to it. The ExCo receives and considers regular reports from each sub-committee on delegated matters and receives the minutes from those sub-committees to monitor key activities.

· Assets and Liabilities Management Committee (ALCo)

The ALCo has been established to support the Chief Financial Officer by providing oversight and challenge in relation to the optimisation of the Group's balance sheet structure, within Board approved risk appetite for liquidity, capital and market risk. This includes defining strategic balance sheet structural objectives for liquidity, funding and capital which align with the Board's stated Risk Appetite, the regulatory obligations of the Group and the commercial and business objectives set out in the Long Term Plan as approved by the Board; recommending to the Board any changes to the amount or composition of the Group's capital base; providing oversight of the Group's continuous compliance with all internal and regulatory limits relating to liquidity, capital and market risk; and undertaking periodic reviews of Treasury policies and key regulatory documents for approval by the Board. The ALCo minutes are circulated to the ExCo, with any material matters being escalated as appropriate.

The ALCo has one sub-committee: the Treasury Committee.

· Executive Risk Committee (ERC)

The ERC has been established to support the CRO by providing oversight and challenge in relation to the effective implementation of the RMF across the Group's business. This includes overseeing that the Three Lines of Defence model is operating effectively; the appropriateness of, and adherence to, the Risk Appetite; providing oversight of material risks facing the Group; and assessing whether appropriate arrangements are in place to manage and mitigate those risks effectively. In addition, the ERC supports the monitoring of the status of regulatory compliance; considers the impact of regulatory initiatives and upstream regulatory risk on the current and future state of compliance; and provides oversight and challenge on conduct risks and customer outcomes. The ERC reviews key policies and provides agreement for onward submission to the Board for final approval. The ERC minutes are circulated to the ExCo, with any material matters being escalated as appropriate.

The ERC has five sub-committees: Operational Risk Committee; Executive Credit Committee; Models and Ratings Systems Oversight Committee; Financial Crime Committee; and the Compliance and Conduct Risk Committee.

· Investment Review Committee (IRC)

The IRC has been established to support the Chief Transformation Officer by providing oversight and challenge of the effective delivery of the Group's change portfolio. This includes the planning, objectives and strategy of the change portfolio in relation to customer outcomes, business and financial performance, operational matters, risk management and resourcing. The IRC minutes are circulated to the ExCo, with any material matters being escalated as appropriate.

· Operating Executive Committee (OEC)

The OEC has been established to support the Chief Customer Officer, Chief Operating Officer and the Insurance Director, providing oversight and challenge in relation to the effective running of the Banking and Insurance businesses by supporting and enabling an end-to-end operating model across the Group. This includes reviewing customer-related activities (including customer outcomes); business and financial performance (including pricing plans and customer impact of pricing decisions); operational matters; change initiatives; risk management; and colleague experience. The OEC minutes are circulated to the ExCo, with any material matters being escalated, as appropriate.

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Three Lines of Defence

The Three Lines of Defence model is a widely recognised, best practice approach to ensuring that the risks within a financial institution are appropriately managed and are subject to effective oversight and challenge. Clearly defined roles and responsibilities help to drive effective risk management.

· First Line of Defence

Senior Management within each business area is responsible for managing the risks that arise from the activities in which it is engaged in accordance with the Group's RMF and policies. The role of the first line of defence is to adhere to the Group's RMF, policies, standards and processes; identify, assess, own and manage risks that arise from the activities in which it is engaged; design, implement, own, check and operate management controls; identify and manage risk events, including the delivery of remedial actions and performance of root cause analysis; operate within Risk Appetite and any and all related limits which the second line establish; comply with risk reporting standards established by the second line; perform risk aggregation, analysis and reporting within their business line; maintain appropriate awareness of external and future risk to support effective management; and ensure compliance with all relevant regulation and codes.

· Second Line of Defence

The RMFu operates under the leadership of the CRO. Risk teams reporting to the CRO are the second line of defence and are resourced by people with expertise in each of the principal risks faced by the Group. This enables appropriate analysis, challenge, understanding, oversight and assurance of each of the principal risks.

The role of the second line of defence is to own, develop, communicate and provide advice on the Group's RMF and policies; provide risk-based oversight and assurance of the first line's implementation of, and adherence to, the RMF and policies; provide risk-based oversight and assurance of first line risk management and control, including challenging the completeness of risk identification and assessment, which can take a variety of forms including active involvement in committees and meetings, analysis of Management information and data and providing an independent perspective on topics of significant interest; own the Risk Appetite framework on behalf of the Board and oversee implementation of Risk Appetite in the first line of defence; design and deliver standards for risk reporting and escalation; perform Group-wide risk aggregation and analysis; and deliver and co-ordinate specific regulatory returns.

· Third Line of Defence

This comprises the IA function, which is responsible for providing independent assurance to the Board and Senior Management on the adequacy of the design and operational effectiveness of internal control systems and measures across the business. The IA function has an independent reporting line to the Chair of the AC and is resourced by individuals with relevant experience and professional qualifications. In addition, IA resources are supplemented across a range of audits by external support to provide additional subject matter expertise when required.

Independent assessment is provided through the execution of an agreed plan of audits, through attendance at relevant governance committees and through stakeholder management meetings.

The primary role of IA is to provide independent assurance on the effectiveness of governance, risk management and control across the first and second lines. The IA function achieves this through its core responsibilities, which include proposing an annual audit plan based on its assessment (after discussion with Management) of the significant potential risks to which the organisation could be exposed; carrying out audits of functions and processes in accordance with the annual audit plan and any additional special investigations requested by Management, the Board, the AC or the regulators; assessing the adequacy and effectiveness of the controls in the functions and processes audited, and issuing recommendations where improvement is required based on the results of work carried out; verifying compliance with those recommendations; reporting to the AC in relation to internal audit matters; and providing input to the Tesco IA department's reporting to the Tesco AC.

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Three Lines of Defence (continued)

Group Policies

The Group has a framework of key policies in place which are approved at Board and Executive level committees. Each policy is owned by a specific individual who is responsible for developing and maintaining the policy, including gaining approval for the policy at the requisite level; communicating the policy, ensuring it is embedded so that those affected by it have sufficient information/understanding to comply; undertaking suitable assurance work to monitor compliance across the business; and reviewing non-compliance/policy waiver requests and agreeing suitable actions.

Each policy must be reviewed on at least a bi-annual basis, or earlier if there is a trigger for policy review such as a regulatory change, to ensure its continued effectiveness and applicability in line with changing risks. The RMFu provides tracking and oversight of the Policy Framework and is responsible for undertaking assurance and providing reports to the Board on its effectiveness.

· Stress Testing

Stress testing is the process by which the Group's business plans are regularly subjected to severe but plausible scenarios to assess the potential impact on the business, including projected capital and liquidity positions. The scenarios adopted are subject to a rigorous selection process and include hypothetical operational failures, macro-economic stress events and customer behaviour impacts. The results, along with proposed actions, are reported to the ALCo, BRC and the Board. These are captured in both the ILAAP and the ICAAP.

· Monitoring and Reporting

The Group monitors and tracks current exposures against limits defined in the agreed Risk Appetite and by the regulators. Exceptions are reported on a monthly basis to the ALCo and ERC and to each meeting of the BRC. Adherence to these limits is independently monitored, measured and reported using a suite of key indicators defined by each risk team responsible for managing the major specific risk categories faced by the Group. Decisions made at subordinate risk committees and forums are reported to senior committees as appropriate.

Viability Statement

· Assessing the Group's Longer-Term Prospects and Viability

The Directors have based their assessment of viability on the Group's current strategic plan, which is updated and approved annually by the Board and sets out how the Group will achieve its purpose of 'helping Tesco customers manage their money a little better every day'.

To be a viable business, there should be a high level of confidence that both solvency and liquidity risks can be managed effectively, meaning that the Group must successfully fund its balance sheet and hold adequate capital and liquidity over the entire period covered by its Viability Statement.

The Group's Viability Statement is considered over a three-year period, as this horizon most appropriately reflects the environment in which the Group operates.

· Current Position

The Group is subject to regulatory requirements in respect of the amount of capital it holds and the quality of that capital. The capital the Group is required to hold comprises a TCR of which at least 75% must be held as common equity tier 1, a capital conservation buffer (CCB) and a countercyclical capital buffer (CCyB). The CCB and CCyB are designed to ensure the Group meets its TCR at all points in the economic cycle. A bank may utilise its CCB in times of stress and the BoE's Financial Policy Committee may reduce the CCyB buffer to zero. 

The TCR is the key capital requirement for the Group and it is the Group's intention to maintain a surplus over its TCR for the foreseeable future. Based upon the latest Capital Plan, the Group is projected to have capital headroom over the assessment period.

The Group's liquidity position is described in note 39 and its capital position is set out at note 43.

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Viability Statement (continued)

· Longer-term Prospects

The following factors are considered both in the formulation of the Group's Strategic Plan, and in the longer-term assessment of the Group's prospects:

· The principal risks and uncertainties faced by the Group, as well as emerging risks as they are identified, and how these can be addressed;

· The prevailing economic climate and global economy, competitor activity, market dynamics and changing customer behaviours; and

· The potential short and longer-term economic impact of Brexit and the Covid-19 pandemic.

The Group's principal risks and policies and processes for managing those risks are set out on pages 9 to 13.

· Assessing the Group's Viability

The viability of the Group has been assessed, taking into account the Group's current financial position, including external funding in place over the assessment period, and after modelling the impact of certain scenarios arising from the principal risks which have the greatest potential impact on viability in that period.

Certain scenarios, considered severe but plausible, have been modelled which encompass these identified risks. Stress testing has been performed for each principal risk.

The assessment reflected the additional liquidity being held by the Group as a result of the sale of its Mortgage business, which also had a positive impact on capital from the resulting reduction in risk-weighted assets.

An additional key assessment was the Group's viability through the Covid-19 pandemic. As part of this assessment the Board considered:

· The impact on the Group's profits from an expected reduction in income on Credit Cards, Loans and Travel Money, combined with increased ECL charges. As part of this, the Board considered revised macro-economic scenarios which were received from the Group's third-party supplier. These are discussed in note 48;

· The sufficiency of the Group's capital base throughout the pandemic. The revised macro-economic scenarios received were significantly less severe than those used in the ICAAP reverse stress test;

· The adequacy of the Group's liquidity as the Group supports customers through a period of financial stress;

· The operational resilience of the Group's critical functions including call centres, mobile and online channels and the Group's ability to provide continuity of service to its customers throughout a prolonged stress;

· The resilience of the Group's IT systems;

· A detailed assessment of the Group's supplier base, considering any single points of failure and focussing on suppliers experiencing financial stress. This included consideration of contingency plans should suppliers be deemed at risk;

· The regulatory and legal environment and any potential conduct risks which could arise;

· Any potential valuation concerns in respect of the Group's assets as set out in the Company and Consolidated Statements of Financial Position;

· The impact of the pandemic on TU, the Group's joint venture insurance company; and

· The structural protections of the Group's securitisation vehicles.

The Board also considered the results of stress testing which is performed as an integral part of both the ICAAP and ILAAP, with the Group having sufficient capital and liquidity to fund the balance sheet in each scenario.

Viability Statement

Based on these scenarios, the Directors have a reasonable expectation that the Group will continue in operation and meet its liabilities as they fall due over the three-year period considered.

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S172 Statement by the Directors

S172 Companies Act 2006 requires a director of a company to act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In doing so, s172 requires a director to have regard, amongst other matters, to the:

· likely consequences of any decisions in the long-term;

· interests of the company's employees;

· need to foster the company's business relationships with suppliers, customers and others;

· impact of the company's operations on the community and environment;

· desirability of the company maintaining a reputation for high standards of business conduct; and

· need to act fairly between members of the company.

In discharging its s172 duties, the Board has regard to the factors set out above. The Board also has regard to other factors which it considers relevant to the decisions it makes. The Board acknowledges that not every decision it makes will necessarily result in a positive outcome for all of the Group's stakeholders. By considering the Group's purpose, vision and values together with its strategic priorities and having a process in place for decision-making, the Board does, however, aim to make sure that its decisions are consistent.

The Board delegates authority for the day-to-day running of the business to the CEO and, through him, to Senior Management to set, approve and oversee execution of the Group's strategy and related policies. The Board reviews matters relating to financial and operational performance; business strategy; key risks; stakeholder-related matters; compliance; and legal and regulatory matters, over the course of the financial year. This is supported through the consideration of reports and presentations provided at Board meetings and reviewing aspects of the Group's strategy at least twice a year.

Engaging with the Group's stakeholders is key to the way the Group runs its business and is an important consideration for the Directors when making relevant decisions. Details of how the Directors engage with colleagues and have regard to the need to foster relationships with suppliers, customers and other key stakeholders can be found in the Directors' Report on pages 26 to 28.

The Board has made some key strategic decisions during the year ended 29 February 2020 where due consideration was given to the Group's key stakeholders, including:

· Organisational design changes and implementation of the Group's transformation programme

Following the conclusion of a strategic review carried out during the year ended 28 February 2019, it was identified that there was a need for the Group to change its culture and business priorities to become a truly customer-centric business, and to operate more closely with Tesco to better provide Tesco customers with financial services and products.

The organisational design changes involved implementing a new operating model and structure to remove duplication, increase efficiency and enable clear lines of accountability aligned with commercial, customer and colleague objectives. The Board was committed to being open and transparent about the timings of the process, with relevant consultation taking place with workforce unions. As a result of these changes, a number of roles were made redundant. However, there was commitment to ensure those colleagues impacted were treated fairly and were provided with the necessary support.

The transformation programme is a significant multi-year programme with changes continuing to be made to product propositions; overall customer experience and product journeys; the Group's business operating model; and data and information technology enabling projects, to bring closer alignment to Tesco, engaging with the Group's colleagues and putting the needs of Tesco shoppers at the forefront of everything the Group does. This investment will ultimately result in products and propositions which are better tailored to the needs of Tesco customers.

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S172 Statement by the Directors (continued)

· Taking the decision to sell the Group's Mortgage business

The Board decided there was limited future potential to achieve sufficient scale in its Mortgage business and, reflecting intensifying competition in the marketplace for residential mortgages, that the Group was unlikely to be able to compete profitably in that marketplace given its funding costs. The Group therefore announced in May 2019 that it had ceased new Mortgage lending and was actively exploring options to sell its existing Mortgage business, including the complete transfer of related balances and ongoing administration of all accounts.

The Group's priority throughout the sale was to select a purchaser who would continue to serve the Group's customers well, whilst achieving a commercially acceptable transaction. The existing outsourced provider, who was providing the Mortgage business service to customers on behalf of the Group, was fully engaged in the discussions and opportunities of employment within the Group were offered to colleagues employed to support the Mortgage business. Bank of Scotland PLC (part of the Lloyds Banking Group) was selected as the purchaser after full consideration by the Board and taking into account the interests of customers. Customers' Mortgage terms and conditions are unaffected by the sale of the Mortgage business. As a gesture of goodwill, the Board agreed to make a one-off award of Clubcard points to eligible customers.

Further information on the sale of the Group's Mortgage business is set out on page 3.

· Closing the Group's Personal Current Account (PCA) product to new customers

The Group's PCA product was not attracting the level of customer demand that the Board had predicted and, as a result, the Group took the strategic decision to focus on products that will help Tesco shoppers manage their money a little better every day. By removing the Group's PCA product from sale, the Board will ensure that the Group's resources are concentrated on new developments which are better aligned to the Group's vision and purpose. The Group's existing PCA customers are unaffected and will continue to be able to use their accounts as normal. There was limited impact on existing colleagues, who were informed of the plan to remove the product from sale, as a result of this decision.

· Taking the opportunity to participate in the new Clubcard Plus product, introduced by Tesco PLC during the year

This allowed the Group to participate in a proposition which offers a series of services from across the Tesco Group, designed to help customers to get more value from their shopping. Additional information on the Clubcard Plus product is set out on page 6.

The Strategic Report was approved by the Board of Directors and signed by order of the Board.

Michael Mustard

Company Secretary

7 April 2020

24

TESCO PERSONAL FINANCE PLC

DIRECTORS' REPORT

The Directors present their Annual Report, together with the Company and Consolidated Financial Statements and Independent Auditor's Report, for the year ended 29 February 2020.

Compliance with the UK Corporate Governance Code

The Group applied the main principles and complied with the relevant provisions set out in the UK Corporate Governance Code 2018 (2018 Code) throughout the year under review, with the exception of provision 41. Provision 41 relates to disclosures in respect of the RC and how it conducts its business in line with the 2018 Code. The Group has not included a full Remuneration Report within the Annual Report as it does not have listed equity and, as such, is not required to comply with this provision.

Information demonstrating how the main principles and relevant provisions of the 2018 Code have been applied can be found throughout the Directors' Report and the Strategic Report.

The primary responsibility of the Board in complying with the 2018 Code is to provide effective leadership to ensure that it promotes the long-term success of the Group for the benefit of its members as a whole.

Monitoring compliance with the 2018 Code is the responsibility of the Board.

The Financial Reporting Council (FRC) is responsible for the publication and periodic review of the UK Corporate Governance Code and this can be found on the FRC website http://www.frc.org.uk.

Business Review and Future Developments

The Group's business review and future developments are set out in the Strategic Report on pages 2 to 7.

Risk Management

The Group's risk management disclosures are set out in the Strategic Report on pages 8 to 21.

Financial Instruments

The Group's policies for hedging each major type of transaction are discussed in notes 1 and 19 to the Financial Statements.

Capital Structure

The Group's capital structure is discussed in notes 35 and 43 to the Financial Statements.

Events after the Reporting Date

Details of events occurring after the reporting date are discussed in note 48 to the Financial Statements.

Going Concern

The Directors have made an assessment of going concern, taking into account both current performance and the Group's outlook, which considered the impact of the Covid-19 pandemic, and including consideration of projections incorporating the impact of the Covid-19 pandemic for the Group's capital and funding position.

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Going Concern (continued)

As part of this assessment the Board considered:

· The impact on the Group's profits from an expected reduction in income on Credit Cards, Loans and Travel Money combined with increased ECL charges. As part of this, the Board considered revised macro-economic scenarios which were received from the Group's third-party supplier. These are discussed in note 48;

· The sufficiency of the Group's capital base throughout the pandemic. The revised macro-economic scenarios received were significantly less severe than those used in the ICAAP reverse stress test;

· The adequacy of the Group's liquidity as the Group supports customers through a period of financial stress;

· The operational resilience of the Group's critical functions including call centres, mobile and online channels and the Group's ability to provide continuity of service to its customers throughout a prolonged stress;

· The resilience of the Group's IT systems;

· A detailed assessment of the Group's supplier base, considering any single points of failure and focussing on suppliers experiencing financial stress. This included consideration of contingency plans should suppliers be deemed at risk;

· The regulatory and legal environment and any potential conduct risks which could arise;

· Any potential valuation concerns in respect of the Group's assets as set out in the Company and Consolidated Statements of Financial Position;

· The impact of the pandemic on TU, the Group's joint venture insurance company; and

· The structural protections of the Group's securitisation vehicles.

The Board also considered the results of stress testing which is performed as an integral part of both the ICAAP and ILAAP, with the Group having sufficient capital and liquidity to fund the balance sheet in each scenario.

As a result of this assessment, the Directors consider that it is appropriate to adopt the going concern basis of accounting in preparing the Company and Consolidated Financial Statements. Further information on the sensitivity of the Group's ECL allowance to reasonably possible changes in these assumptions over the next 12 months as at 29 February 2020 and at 7 April 2020 are set out at notes 39 and 48, respectively.

Engaging with stakeholders

The Group has a number of key stakeholder groups with whom it actively engages. Listening to, understanding and engaging with these stakeholder groups is an important role for the Board in setting strategy and decision-making. The Group recognises its obligations and requirements to be a well-controlled financial services business, compliant with regulation and delivering good customer outcomes. The Regulators are consulted and kept closely informed in relation to key decisions made by the Board, as appropriate.

Details of some of the key strategic decisions made during the year ended 29 February 2020 can be found in the Strategic Report on pages 23 to 24.

· Our Customers

As a customer-centric business and in line with the Tesco purpose to serve shoppers a little better every day, the Group's vision is to help Tesco shoppers manage their money a little better every day.

The Group interacts with its customers across a wide variety of contact channels. The Group uses a range of methods to involve and engage with customers, which includes inviting customers into its offices, with project teams spending time with them to explore something they are working on. Doing this regularly, and in conjunction with other activities, helps to deepen the understanding of customer needs. In addition, to allow the Group to understand its customers' needs and develop insights, its teams spend time with customers, observing them in their homes, whilst they shop and when they are weighing up money decisions. The Board values feedback from customers to ensure the Group is providing them with what they want and need. A variety of customer surveys are also carried out on a regular basis to gather feedback from customers when they have an interaction with the Group. Bespoke research is undertaken, as required, to help the Board understand customers and their needs.

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The Group continues to seek opportunities to make it easier for Tesco customers to bank with and insure through the Group through targeted investment in technology and data, making life simpler for both customers and colleagues and driving efficiency gains that can be reinvested in the customer offer. The Group's strategy is to bring the best of Tesco to financial services, offering customers great value across the range of products and earning customer trust through the Group's actions.

Consideration of the Group's vulnerable customers is important and, working with the Money Advice Trust, the Group's Vulnerable Customers programme aims to identify vulnerable customers and enhance support for them. Support is given to colleagues to identify and record customers with vulnerabilities and to equip them to have more personalised and consistent support conversations with vulnerable customers, focusing on those who are impacted by life events, addictions or ill health.

· Our Colleagues

The Group has over 3,500 colleagues and is committed to promoting a diverse and inclusive workplace, reflective of the communities in which it does business. It approaches diversity in the broadest sense, recognising that successful businesses flourish through embracing diversity into their business strategy and developing talent at every level in the organisation.

The Group's selection, training, development and promotion policies are designed to provide equality of opportunity for all colleagues, regardless of age; disability; gender; gender reassignment; marital and civil partnership status; pregnancy and maternity; race; religion or belief, or absence of religion or belief; sexual orientation or trade union affiliation. Decisions are based on merit.

The Group works with colleagues, including those with disabilities, to adapt work practices where necessary in order to help them work effectively within the business.

The Group is committed to developing the skills and knowledge and supporting the wellbeing of its colleagues in order to help achieve its objectives and create a great place to work. It ensures that the Tesco Values are reflected within its

employment policies and practices to encourage engagement, enabling colleagues to be their best and able to contribute to the delivery of the Group's core purpose.

The Group's Code of Business Conduct, which defines the standards and behaviours expected of colleagues, supports its core values. The Code of Business Conduct is supported by Group policies and mandatory training which includes anti-bribery and corruption, competition law, data protection and whistleblowing. Colleagues are required to complete mandatory training to reinforce the importance of these standards. For new colleagues, there is a requirement to complete the suite of mandatory training within 30 days of joining the Group. Refresher training is required on an annual basis. The Board and Senior Management are responsible for ensuring that their activities reflect the culture they wish to instil in the Group's colleagues and other stakeholders and drive the right behaviours. They have a responsibility to ensure that the Group's colleagues do the right things in the right way by setting the tone from the top and leading by example.

Working closely with Tesco, the Group is committed to actively supporting its colleagues to live healthier lives and make healthier choices around their physical and emotional wellbeing. Through its health and wellness strategy, which has recently moved to a more cyclical and always-on approach, the Group aims to help colleagues be at their best both at work and at home. The Group's colleagues have the support of a diverse community of Mental Health First Aiders, located across its offices, who play a key role at the point of colleague need and help signpost the most suitable or relevant services for ongoing support. Through the Group's Employee Assistance Programme, Health Assured, colleagues also have access to online content, webinars and over the phone support. This is an independent and unlimited 24/7 telephone support line should colleagues be feeling anxious, concerned or in need of some extra support or guidance.

There are processes in place for understanding and responding to colleagues' needs through surveys and regular performance and development reviews. Business developments are communicated frequently to keep colleagues well informed about the progress of the Group. Ongoing training programmes also seek to ensure that colleagues understand the Group's objectives and the regulatory environment in which it operates.

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· Our Colleagues (continued)

In September 2019, the Group's colleagues elected a representative from the workforce to be part of the Tesco Colleague Contribution Panel (CCP). The CCP is a panel of elected colleagues from all across the Tesco group who will meet with a Non-Executive Director (NED) from Tesco twice a year to discuss experiences of working at Tesco and give the NED an opportunity to inform the activities of the Group's Board and its Committees. This will enable the Tesco Board to hear views of colleagues from across the business. The Group's Director of Colleague Experience provides feedback from the CCP to the ExCo and works directly with the Tesco Board to respond to CCP outputs relevant to the Group.

The Board is responsible for reviewing the annual report on whistleblowing, in compliance with the Whistleblowing Policy. The Group's independent and confidential whistleblowing service, 'Protector Line', provides colleagues with the ability to raise concerns regarding misconduct and breach of the Code for Business Conduct.

Colleagues are encouraged to become involved in the financial performance of the wider Tesco Group through a variety of schemes, principally the Tesco savings related share option scheme (Save As You Earn) and the partnership share plan (Buy As You Earn).

· Our Suppliers

The Group engages with around 900 active suppliers, who play an important role in the operation of the Group's business to enable the delivery of an effective and efficient business model. During the year ended 29 February 2020 several material contracts were presented to the Board for approval, covering both new relationships and contract renewals. In approving these contracts, the Board considered the strategic value of the relationships as well as looking at the customer impacts, risk exposure, legal and compliance considerations and financial implications. The Group has a framework in place which provides a consistent and proportionate approach to the procurement and management of suppliers to ensure that it can effectively engage, manage and terminate, where appropriate, supplier relationships. To support regulatory reporting requirements, the Board expects its suppliers to monitor their own supply chain and be able to provide the Board with appropriate evidence and assurance of compliance, as required.

· Our Shareholder

As the Group's only shareholder, the Board relies on its relationship with Tesco and the differentiating factors of having rich customer data, a strong brand and a Clubcard loyalty programme to better serve customers. The Group has a strong relationship with Tesco, with regular updates and meetings taking place in relation to performance and strategy.

· Our Community

Alongside its commercial activities, the Group has a focus on the wider community, supporting Tesco's chosen charity partners and events. In addition, the Group's three office sites raise funds for local charity partners selected by colleagues at each site. During the year, colleagues raised over £88,000 for the Group's charity partners. Additionally, colleagues made use of volunteering days to provide help to the Group's charity partners and wider community. In May 2019, the Group marked its second 'Tesco Bank Turns Pink' event, showing the Group's commitment and support to Cancer Research UK's Race for Life.

· Climate Change

The Board is aware of the potential impacts of climate change risk, recognising its importance, and supporting the CRO in discharging his responsibilities for ensuring the risk framework considers the risks associated with climate change, and has agreed to undertake an annual assessment of climate change risk and its impact.

Dividends

An interim dividend of £50.0m (2019: £60.0m) in respect of ordinary share capital was paid to TPFG on 24 February 2020.

Treating Customers Fairly

Treating Customers Fairly is central to the FCA's principles for businesses and remains central to the Tesco Values which sit at the heart of the business. These Values are designed to ensure that customer outcomes match their understanding and expectations.

28

Directors Report (Continued)

Directors

The present Directors and Company Secretary, who have served throughout the year and up to the date of signing the Financial Statements, except where noted below, are listed on page 1.

Since 1 March 2019 to date the following changes have taken place:

· Audit Committee (AC)

Introduction from the AC Chair

The Group operates in a demanding environment, particularly with regard to economic, reputational, political and regulatory factors. The role of the AC is critical in reviewing the effectiveness of the Group's internal control framework and assurance processes and in assessing and acting upon findings from both external and internal audit. The AC keeps the current internal control framework and assurance processes under review to ensure that they adapt to the changing environment and remain appropriate for the Group.

AC composition, skills and experience

The AC acts independently of Management. This ensures that the interests of shareholders are properly protected in relation to financial reporting and internal control.

As detailed in the section of the Strategic Report on the Board, the AC comprises four Independent Non-Executive Directors.

James McConville is a Chartered Accountant and has significant financial and banking experience gained from over 30 years in the financial services sector, thus enabling him to fulfil the role as AC Chair.

James is currently Group Finance Director at Phoenix Group Holdings PLC, with responsibility for Finance, Treasury and Investor Relations. James is due to retire from Phoenix Group Holdings PLC during May 2020. Previous appointments include Chief Financial Officer of Northern Rock plc and a variety of senior finance and strategy related roles for Lloyds Banking Group plc, including Finance Director of the Scottish Widows Group.

Robert Endersby has spent over 30 years working in the financial services sector, both within the UK and internationally and is an Associate of the London Institute of Banking and Finance.

Robert's previous key appointments included Chief Risk Officer and member of the Executive Board of Danske Bank A/S, Vice Chair of Danske Bank Oyj and senior risk management positions in Barclays, The Royal Bank of Scotland and ING Group.

Simon Machell has worked in financial services for over 30 years and has experience in both general and life insurance in the UK, Europe and Asia. The majority of Simon's experience was gained from a range of roles with Aviva, including Chief Executive of the RAC, Chief Executive of the general insurance business in the UK and running the insurance businesses in 14 markets across Eastern Europe and Asia. Simon holds Non-Executive roles with Pacific Life Re, Prudential Corporation (Asia), Suncorp Group and TU.

29

Directors Report (Continued)

AC composition, skills and experience (continued)

Jacqueline Ferguson is an experienced Chief Executive from the technology industry. Jacqueline is the former Chief Executive of Hewlett Packard Enterprise Services UK, Ireland, Middle East, Mediterranean and Africa and has extensive global experience including living and working in Silicon Valley, California for 3 years with Hewlett Packard. Prior to Hewlett Packard Jacqueline worked for Electronic Data Systems and KPMG.

Jacqueline is also a Non-Executive Director of Wood PLC and Croda PLC, a Trustee of Engineering UK and a member of the Scottish First Minister's Advisory Board for Women and Girls, aimed at tackling Gender Inequality. Jacqueline chaired the public services strategy board for the Confederation of Business and Industry and was a member of the Tech Partnership, the industry body aimed at UK technology skills.

The Chair, Chief Executive, Chief Financial Officer, Chief Risk Officer, Internal Audit Director, Director of Financial Control and Tesco Internal Audit Director attend committee meetings. The external auditor also attends.

AC responsibilities

The key responsibilities of the AC are set out in the Strategic Report on page 17.

During the year, the AC received reports from a number of business areas including Finance in relation to financial reporting and Risk in relation to regulatory compliance, fraud, bribery and corruption and integrated assurance. The AC also considered a variety of matters including the internal financial control framework, data leakage prevention, supplier assurance and business continuity arrangements.

Financial Statements and related financial reporting

In relation to the Financial Statements, the AC reviewed and recommended approval of the half-yearly results and annual Financial Statements and provided oversight of the statutory audit process.

During the year ended 29 February 2020, the AC considered the following matters:

· Consistency and appropriateness of, and any changes to, significant accounting policies

The AC considered and accepted Management's review of the Group's accounting policies. In particular, the AC has received reports from Management on the Group's transition to IFRS 16, which came into force for annual periods beginning on or after 1 January 2019.

· The methods used to account for significant transactions

The AC reviewed and supported proposals from Management on the accounting for the sale of the Group's Mortgage business, the redemption of debt securities in issue in relation to securitisation transactions and retail bond issuance, the issuance by TPFG of MREL-compliant debt and the acceleration of amortisation in respect of the Group's PCA intangible fixed assets following the Group's announcement in January 2020 that it had closed its PCA offering to new customers.

· Going concern assessment

The AC considered Management's approach to, and the conclusions of, the assessment of the Group's ability to continue as a going concern.

The going concern assessment period covers the period to April 2021, 12 months subsequent to signing the Annual Report and Financial Statements for the year ended 29 February 2020. The assessment considered the current capital position of the Group and liquidity requirements covering the going concern assessment period, including consideration of the impact of the Covid-19 pandemic. These were then subject to stress testing based on various scenarios, including scenarios incorporating the impact of the Covid-19 pandemic. The detailed considerations taken by the Board in arriving at its going concern assessment are set out on pages 25 and 26.

The AC recommended that the Board supported the conclusion that it remained appropriate to adopt the going concern basis in preparing the Financial Statements.

· Review of Financial Statements

The AC considered Management's approach to, and governance arrangements over, the preparation of the half-yearly results and annual Financial Statements and recommended to the Board that these should be approved.

30

Directors Report (Continued)

AC responsibilities (Continued)

· Appropriate critical accounting estimates and judgements

The AC reviewed the nature, basis for and the appropriateness of the estimates and judgements proposed by Management in the Financial Statements.

The key estimates and judgements reflected in the Group's Financial Statements for the year ended 29 February 2020 are:

o Expected credit loss provision (ECL) (Refer to note 18)

At 29 February 2020, the Group's ECL provision was £488.4m.

The AC received regular reports from Management on provisioning, which assessed the adequacy of provisioning based on a number of factors. These included levels of arrears, collateral, past loss experience, defaults based on portfolio trends, and expected loss rates.

The AC concluded that an appropriate governance framework existed to monitor provision adequacy and that the assumptions and judgements applied by Management were appropriate.

o Provision for customer redress (Refer to note 31)

The Group has a provision for potential customer redress in relation to PPI.

The AC reviewed the key assumptions made in arriving at each element of the provision, with particular focus given to claims settled and the average amount of redress per claim.

The AC is satisfied that the provisions and related disclosures in the Financial Statements in respect of PPI and other customer redress provisions are appropriate.

o Effective interest rate (Refer to note 3)

IFRS 9 requires the Group to measure the interest earned on its Credit Cards portfolio by applying the EIR methodology.

The AC received regular reports from Management summarising its approach, with particular focus given to reviewing the expected attrition rate of balances drawn, including the pay rates assumption used by Management.

The AC is satisfied that the carrying value of the assets and the associated income recognition is appropriate.

o Investment in joint venture (Refer to note 24)

The Group holds an investment in a joint venture, TU, an authorised insurance company, and recognises the carrying value of its investment and the Group's share of TU's results using the equity method of accounting.

TU's results are sensitive to changes in the insurance reserves it recognises in respect of insurance policies written, net of reinsurance. Consequently, material increases in these reserves could have an impact on the carrying value of the investment in the Company and Consolidated Statements of Financial Position.

The AC reviewed the key judgements and estimates made by TU in determining the level of reserves held at the reporting date.

The AC is satisfied that the carrying amount of the Group's investment in TU is appropriate.

· IT controls

The Group utilises a range of information systems to support its ongoing operations and financial reporting.

During the year, the AC received a number of reports on the Group's information systems, including the effectiveness of access rights to certain operating systems and applications used in the financial reporting process.

While improvements to access controls have been made, it remains an area of ongoing focus and the AC will receive further reports on the effectiveness of access controls during the next financial year.

31

Directors Report (Continued)

Performance and Effectiveness of IA

The IA function supports the AC in providing an independent assessment of the adequacy and effectiveness of internal controls and the system of risk management. The function has the necessary resources and access to information to enable it to fulfil its mandate, and is equipped to perform in accordance with the Institute of Internal Auditors' International Standards of the Professional Practice of Internal Auditing.

It is essential for the AC to be able to have an honest and open relationship with both its external and internal auditors. This relationship is developed and maintained through private meetings with both Deloitte and the IA Director.

In compliance with the above standards, the AC assessed the effectiveness of the IA function with the results of the annual assessment for 2019 assessment being positive.

Performance and Effectiveness of AC

The AC assesses the need for training on an ongoing basis and the annual agenda provides time for technical updates, which are provided by both internal and external experts. During the year, the AC received specific training on accounting and reporting developments. Training is also provided on an ongoing basis to meet the specific needs of individual committee members.

The effectiveness of the AC was reviewed as part of the wider Board effectiveness review which included interviews with all AC members. It was concluded that the AC continued to be effective.

32

Directors Report (Continued)

Risk Management and Internal Controls

The Board and its committees are responsible for ensuring the effective implementation and ongoing monitoring of the RMF. A detailed overview of the responsibilities of the ERC is set out on page 19.

Key controls are recorded within an internal database and regular controls testing takes place to ensure they remain effective. Additionally, the ERC regularly reviews the RMF to ensure it remains relevant and appropriate to the risk profile of the Group.

No material deficiencies in internal controls have been identified in the year.

Non-audit Fees

Deloitte contributes an independent perspective, arising from its work, on certain aspects of the Group's internal financial control systems, and reports to the AC. The independence of the external auditor in relation to the Group is considered annually by the AC.

The Group has a non-audit services policy for work carried out by its external auditor. This is split into three categories as follows:

1. Pre-approved for the external auditor - audit-related in nature;

2. Work for which AC approval is specifically required - transaction work and corporate tax services, and certain advisory services; and

3. Work from which the external auditor is prohibited.

The AC concluded that it was in the best interests of the Group for the external auditor to provide a limited number of non-audit services during the year due to their experience, expertise and knowledge of the Group's operations. Auditor objectivity and independence was considered for each engagement and the AC was satisfied that audit independence was not, at any point, compromised.

Deloitte follows its own ethical guidelines and continually reviews its audit team to ensure its independence is not compromised. The fees paid to the external auditor in the year are disclosed in note 10 to the Financial Statements.

Directors' Indemnities

In terms of Section 236 of the Companies Act 2006, all Executive and Non-Executive Directors have been issued a Qualifying Third-Party Indemnity Provision by TPFG. All Qualifying Third-Party Indemnities were in force at the date of approval of the Financial Statements and shall remain in force without any limit in time. This will not be affected by the expiration or termination of a Director's appointment, however it may arise.

Cautionary Statement Regarding Forward-looking Information

Where this document contains forward-looking statements, these are made by the Directors in good faith based on the information available to them at the time of their approval of this report. These statements should be treated with caution due to the inherent risks and uncertainties underlying any such forward-looking information. The Group cautions users of these Financial Statements that a number of factors, including matters referred to in this document, could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, those discussed under 'Principal risks and uncertainties' on pages 9 to 13.

33

Directors Report (Continued)

Statement of Directors' Responsibilities

The following should be read in conjunction with the responsibilities of the independent auditor set out in their report on page 169.

The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare such financial statements for each financial year. Under that law the Directors have prepared the Group and Company Financial Statements in accordance with IFRSs as adopted by the EU. Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that year. In preparing these Financial Statements, the Directors are required to:

· properly select and apply accounting policies;

· present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

· provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's and Company's financial position and financial performance; and

· make an assessment of the Group's and Company's ability to continue as a going concern.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the Group's website. Legislation in the UK governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names are listed on page 1 of the Annual Report and Financial Statements, confirms that to the best of their knowledge:

· the Financial Statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group;

· the Strategic Report contained in the Annual Report includes a fair review of the development and performance of the business and the position of Group, together with a description of the principal risks and uncertainties that it faces; and

· the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for the Company's shareholders to assess the Group's and Company's position, performance, business model and strategy.

34

Directors Report (Continued)

Disclosure in Respect of the Independent Auditor

So far as each Director is aware at the date of approving this report, there is no relevant audit information, being information needed by the auditor in connection with preparing this report, of which the auditor is unaware. All of the Directors have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information.

External Audit Partner

The external audit partner for the year to 29 February 2020 was Stephen Williams ACA who has fulfilled this role since Deloitte LLP's appointment as external auditor on 30 June 2015. The audit tender process is conducted by Tesco on behalf of the entire Tesco group.

Approved by the Board of Directors and signed by order of the Board.

Michael Mustard

Company Secretary

7 April 2020

35

1 The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.

2 The prior year has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 15 for further details.

36

1 The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.

37

TESCO PERSONAL FINANCE PLC

CONSOLIDATED AND COMPANY STATEMENTS OF FINANCIAL POSITIONFor the Year Ended 29 February 2020

Company number SC173199

Profit for the year of £93.0m (2019: £135.1m)1 is attributable to the Company.

The Consolidated and Company Financial Statements on pages 36 to 158 were approved by the Board of Directors and authorised for issue on 7 April 2020 and were signed on its behalf by:

Declan Hourican

Director

1 The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.

38

1 The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.

39

TESCO PERSONAL FINANCE PLC

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)For the Year Ended 29 February 2020

1 The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.

40

1 The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.

41

TESCO PERSONAL FINANCE PLC

COMPANY STATEMENT OF CHANGES IN EQUITY (continued)For the Year Ended 29 February 2020

1 The prior year has been restated following the retrospective adoption of IFRS 16 in the current year. Refer to note 2 for further details.

42

43

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS

1. Accounting Policies

Basis of Preparation

The Company and Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and interpretations issued by the International Financial Reporting Interpretations Committee of the International Accounting Standards Board (IASB) as endorsed by the European Union (EU), and those parts of the Companies Act 2006 applicable to companies reporting under IFRSs.

In these Financial Statements the 'Company' means Tesco Personal Finance Plc and the 'Group' means the Company and its subsidiaries and joint venture. Details of these subsidiaries and joint venture are provided in notes 23 and 24. These Consolidated Financial Statements comprise the Financial Statements of the Group. The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the Income Statement and Statement of Comprehensive Income of the Company.

The Company and Consolidated Financial Statements have been prepared under the historical cost convention as modified by the revaluation of derivative financial instruments, investment securities and assets of the disposal group held at fair value.

The Company and Consolidated Financial Statements are presented in Sterling, which is the functional currency of the Group. The figures shown in the Financial Statements are rounded to the nearest £0.1 million unless otherwise stated.

New and amended accounting standards adopted by the Group in the year are detailed in notes 2 and 47.

Going concern

The Directors have made an assessment of going concern, taking into account both current performance and the Group's outlook, which considered the impact of the Covid-19 pandemic, and including consideration of projections incorporating the impact of the Covid-19 pandemic for the Group's capital and funding position. As part of this assessment the Board considered:

· The impact on the Group's profits from an expected reduction in income on Credit Cards, Loans and Travel Money combined with increased ECL charges. As part of this, the Board considered revised macro-economic scenarios which were received from the Group's third-party supplier. These are discussed in note 48;

· The sufficiency of the Group's capital base throughout the pandemic. The revised macro-economic scenarios were significantly less severe than those used in the ICAAP reverse stress test;

· The adequacy of the Group's liquidity as the Group supports customers through a period of financial stress;

· The operational resilience of the Group's critical functions including call centres, mobile and online channels and the Group's ability to provide continuity of service to its customers throughout a prolonged stress;

· The resilience of the Group's IT systems;

· A detailed assessment of the Group's supplier base, considering any single points of failure and focussing on suppliers experiencing financial stress. This included consideration of contingency plans should suppliers be deemed at risk;

· The regulatory and legal environment and any potential conduct risks which could arise;

· Any potential valuation concerns in respect of the Group's assets as set out in the Company and Consolidated Statements of Financial Position;

· The impact of the pandemic on TU, the Group's joint venture insurance company; and

· The structural protections of the Group's securitisation vehicles.

The Board also considered the results of stress testing which is performed as an integral part of both the ICAAP and ILAAP, with the Group having sufficient capital and liquidity to fund the balance sheet in each scenario.

As a result of this assessment, the Directors consider that it is appropriate to adopt the going concern basis of accounting in preparing the Company and Consolidated Financial Statements. Further information on the sensitivity of the Group's ECL allowance to reasonably possible changes in these assumptions over the next 12 months at 29 February 2020 and at 7 April 2020 are set out at notes 39 and 48, respectively.

44

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1. Accounting Policies (continued)

Principal accounting policies

A summary of the Group's accounting policies is set out below. These policies have been consistently applied to all of the years presented, unless otherwise stated.

(a) Basis of consolidation

The Consolidated Financial Statements of the Group comprise the Financial Statements of the Company and all consolidated subsidiaries, including certain securitisation structured entities, and the Group's share of its interest in a joint venture, as at 29 February 2020.

Investment in Group undertakings

Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The results of subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases. The Company's investments in its subsidiaries are stated at cost less any impairment.

Intragroup balances, and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the Consolidated Financial Statements.

Securitisation structured entities

The Group enters into securitisation transactions in which it assigns Credit Card receivables to a securitisation structured entity which supports the issuance of securities backed by the cash flows from the securitised Credit Card receivables. Although none of the equity of the securitisation structured entities is owned by the Company, the nature of these entities means that the Group has the rights to variable returns from its involvement with these securitisation structured entities and has the ability to affect those returns through its power over them. As such they are effectively controlled by the Group and are consolidated on a line by line basis in the Consolidated Financial Statements.

Investment in joint venture

A joint arrangement is an arrangement over which the Group has joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. A joint venture is a joint arrangement whereby the Group has rights to a share of the net assets of the joint arrangement.

The Group's share of the results of a joint venture is included in the Consolidated Income Statement using the equity method of accounting. The Group's investment in a joint venture is carried in the Consolidated Statement of Financial Position at cost plus post-acquisition changes in the Group's share of the net assets of the entity, less any impairment.

If the Group's share of losses in a joint venture equals or exceeds its investment in the joint venture, the Group does not recognise further losses, unless it has incurred obligations to do so or made payments on behalf of the joint venture.

The Company's investment in a joint venture is stated at cost less any impairment.

45 

1. Accounting Policies (continued)

(b) Revenue recognition

Net interest income recognition

Interest income and expense for all financial instruments measured at amortised cost are recognised using the effective interest rate (EIR) method.

The EIR method is a method of calculating the amortised cost of a financial asset or financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the expected life of the financial asset or financial liability. The EIR is the rate that exactly discounts estimated future cash flows to the instrument's initial carrying amount.

Calculation of the EIR takes into account fees receivable that are an integral part of the instrument's yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. All contractual and behavioural terms of a financial instrument are considered when estimating future cash flows.

Interest income is calculated on the gross carrying amount of a financial asset unless the financial asset is impaired, in which case interest income is calculated on the net carrying amount, after allowance for ECL.

Net fees and commissions income recognition

The Group generates fees from banking services, primarily Credit Card interchange fees. Fees in respect of banking services are recognised in line with the satisfaction of performance obligations. This can be either at a point in time or over time, in line with the provision of the service to the customer.

The majority of banking services are performed at a point in time and payment is due from a customer at the time a transaction takes place. For services performed over time, payment is generally due monthly in line with the satisfaction of performance obligations.

The costs of providing these banking services are incurred as the services are rendered. The price is usually fixed and always determinable.

The Group also generates commission from the sale and service of Motor and Home insurance policies underwritten by Tesco Underwriting Limited (TU) or, in a minority of cases, by a third-party underwriter. This is based on commission rates which are independent of the profitability of underlying insurance policies. Similar commission income is also generated from the sale of white label insurance products underwritten by other third-party providers. This commission income is recognised on a net basis as such policies are sold, in line with the satisfaction of performance obligations to customers.

In the case of certain commission income on insurance policies managed and underwritten by a third-party, the Group recognises commission income from policy renewals as such policies are sold. This is when the Group has satisfied all of its performance obligations in relation to the policy sold and it is considered highly probable that a significant reversal in the amount of revenue recognised will not occur in future periods. This calculation takes into account both estimates of future renewal volumes and renewal commission rates. A contract asset is recognised in relation to this revenue. This is unwound over the remainder of the contract with the customer, the customer in this case being the third-party insurance provider.

The end policyholders have the right to cancel an insurance policy at any time. Therefore, a contract liability is recognised for the amount of any expected refunds due and the revenue recognised in relation to these sales is reduced accordingly. This contract refund liability is estimated using prior experience of customer refunds. The appropriateness of the assumptions used in this calculation is reassessed at each reporting date.

46 

1. Accounting Policies (continued)

Customer loyalty programmes

The Group participates in the customer loyalty programme operated by Tesco Stores Limited (TSL). The programme operates by allowing customers to accumulate Clubcard points on purchases for future redemption against a range of Tesco products. Revenue in respect of these points is recognised at the time of the customer transaction as the Group has no obligation to customers in respect of Clubcard points once the points are allocated to a customer account. The revenue is recognised net of the cost of providing Clubcard points to customers, which is recharged by TSL to the Group.

Dividend income

Dividends are recognised in the Consolidated Income Statement when the entity's right to receive payment is established.

(c) Taxation

The tax charge or credit included in the Consolidated Income Statement consists of current and deferred tax. Tax is recognised in the Consolidated Income Statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised in other comprehensive income or equity, respectively.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted by the reporting date.

Deferred tax is provided using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Company and Consolidated Financial Statements. Deferred tax is calculated at the tax rates that have been enacted or substantively enacted by the reporting date.

Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be realised.

Deferred tax assets and liabilities are offset against each other when there is a legally enforceable right to set-off current tax assets against current tax liabilities and it is Management's intention to settle these on a net basis.

(d) Foreign currency translation

Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transaction.

Monetary items denominated in foreign currency are translated at the closing rate as at the reporting date.

Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Consolidated Income Statement, except when deferred in equity as gains or losses from qualifying cash flow hedging instruments. All foreign exchange gains and losses recognised in the Consolidated Income Statement are presented net in the Consolidated Income Statement within the corresponding item. Foreign exchange gains and losses on other comprehensive income items are presented in other comprehensive income within the corresponding item.

47 

1. Accounting Policies (continued)

In the case of changes in the fair value of monetary assets denominated in foreign currency classified at FVOCI, a distinction is made between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation differences related to the changes in the amortised cost are recognised in the Consolidated Income Statement, and other changes in the carrying amount, except impairment, are recognised in equity.

(e) Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and demand deposits with banks together with short-term highly liquid investments with short-term maturities.

(f) Financial instruments

The Group classifies a financial instrument as a financial asset, financial liability or an equity instrument in accordance with the substance of the contractual arrangement. An instrument is classified as a liability if it creates a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities on potentially unfavourable terms. An instrument is classified as equity if it evidences a residual interest in the assets of the Group after the deduction of liabilities.

Financial assets

Classification and measurement

The Group classifies its financial assets in the following categories:

· Fair value through profit or loss (FVPL);

· Fair value through other comprehensive income (FVOCI); and

· Amortised cost.

Management determines the classification of the Group's financial assets at initial recognition. Purchases and sales of financial assets are recognised on the trade date - the date on which the Group commits to purchase or sell the asset.

All financial assets are measured at initial recognition at fair value, plus transaction costs for those classified as FVOCI and amortised cost. Transaction costs on financial assets classified as FVPL are recognised in the Consolidated Income Statement at the time of initial recognition.

Classification and subsequent measurement of financial assets depend on:

· The Group's business model for managing the financial asset; and

· The cash flow characteristics of the financial asset.

The business model reflects how the Group manages its financial assets in order to generate cash flows and is determined by whether the Group's objective is solely to collect contractual cash flows from the assets or to collect both contractual cash flows and cash flows arising from the sale of assets. If neither of these models applies, the financial assets are classified as FVPL.

In determining the business model, the Group considers past experience in collecting cash flows, how the performance of these financial assets is evaluated and reported to Management and how risks are assessed.

Where the business model is to hold financial assets to collect contractual cash flows or to collect contractual cash flows and sell the assets, the Group assesses whether the financial asset's cash flows represent solely payments of principal and interest (the SPPI test). When making this assessment, the Group considers whether the contractual cash flows are consistent with a basic lending arrangement.

48 

1. Accounting Policies (continued)

Financial assets at amortised cost

Financial assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest, and that are not designated as FVPL, are classified and subsequently measured at amortised cost. The carrying value of these financial assets is adjusted by any ECL allowance recognised and measured as described below.

Financial assets at FVOCI

Financial assets that are held for collection of contractual cash flows and for selling the assets, where those cash flows represent solely payments of principal and interest, and that are not designated as FVPL, are classified and subsequently measured at FVOCI. The Group holds investments in debt securities which are classified as FVOCI. Movements in the carrying amount of debt securities classified as FVOCI are taken through other comprehensive income, except the recognition of impairment gains or losses, interest revenue using the EIR method and foreign exchange gains and losses, which are recognised through the Consolidated Income Statement.

The Group also holds an investment in equity securities which has been irrevocably designated by Management as FVOCI at original recognition. Movements in the carrying amount of these equity securities are taken through other comprehensive income and are not subsequently reclassified to the Consolidated Income Statement, including on disposal. Expected credit losses on these securities are not recognised separately from other changes in fair value.

For financial assets at FVOCI which are in fair value hedge relationships, the element of the fair value movement which relates to the hedged risk is recycled to the Consolidated Income Statement.

Financial assets at FVPL

Financial assets that do not meet the criteria for recognition at amortised cost or at FVOCI are measured at FVPL.

Impairment

The Group assesses on a forward-looking basis the ECLs associated with its financial assets carried at amortised cost and FVOCI, and with the exposure arising from loan commitments. The Group recognises a loss allowance for such losses at each reporting date. The measurement of ECLs reflects:

· An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes;

· The time value of money; and

· Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.

Refer to note 39 for further details on the calculation of the allowance for ECLs.

Financial liabilities

Classification and measurement

All of the financial liabilities held by the Group, other than derivative financial liabilities, are classified and measured at amortised cost using the EIR method, after initial recognition at fair value. Fair value is calculated as the issue proceeds, net of premiums, discounts and transaction costs incurred. For financial liabilities in fair value hedge relationships, the carrying value is adjusted by the hedged item (the fair value of the underlying hedged risk) through the Consolidated Income Statement.

Derivative financial liabilities are classified and measured at FVPL. Further information on the classification and measurement of derivative financial instruments is set out at policy 1(g).

Derecognition

Financial assets are derecognised when the contractual rights to receive cash flows have expired or where substantially all of the risks and rewards of ownership have been transferred and the transfer qualifies for derecognition. Financial liabilities are derecognised when they have been redeemed or otherwise extinguished.

49 

1. Accounting Policies (continued)

Collateral furnished by the Group under standard repurchase agreements is not derecognised because the Group retains substantially all the risks and rewards of ownership on the basis of the predetermined repurchase price, therefore the criteria for derecognition are not met. Credit Card receivables assigned by the Group to a securitisation structured entity do not qualify for derecognition as the Group retains substantially all the risks and rewards of ownership of the securitised Credit Card receivables.

Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount reported in the Company and Consolidated Statements of Financial Position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise an asset and settle a liability simultaneously.

Loan commitments

All loan commitments provided by the Group are as part of contracts that include both a loan and an undrawn commitment. As the Group cannot separately identify the ECLs on the undrawn commitment component from those on the loan component, the ECLs on the undrawn commitment are recognised together with the loss allowance for the loan. Any excess of the ECLs over the gross carrying amount of the loan is recognised as a separate provision within provisions for liabilities and charges.

(g) Derivative financial instruments and hedge accounting

The Group uses derivative financial instruments for the purpose of providing an economic hedge to its exposures to interest rate and foreign exchange risks as they arise from operating, financing and investing activities. The Group does not hold or issue derivative financial instruments for trading purposes. Derivative financial instruments are initially recognised at fair value on the contract date and are remeasured at fair value at subsequent reporting dates.

Hedge accounting

The Group designates certain hedging instruments as either fair value hedges or cash flow hedges, where it is efficient to do so and the relevant criteria are met. The Group has implemented IFRS 9 hedge accounting requirements in respect of its fair value hedges of the Group's investment securities and its cash flow hedges. As permitted under IFRS 9, the Group has elected to continue to apply the existing hedge accounting requirements of International Accounting Standard (IAS) 39 'Financial instruments: Recognition and measurement' for its portfolio hedge accounting until the new macro hedge accounting standard is implemented.

The Group applies hedge accounting as follows:

· Hedge relationships are classified as fair value hedges where the derivative financial instruments hedge the change in the fair value of fixed rate financial assets or financial liabilities due to movements in interest rates.

· Hedge relationships are classified as cash flow hedges where the derivative financial instruments hedge the interest rate risk and foreign currency risk on US Dollar notes issued by one of the Group's securitisation entities or the foreign currency risk on certain foreign currency invoices. Hedge relationships were also classified as cash flow hedges where the derivative financial instruments hedged the cash flows associated with inflation risk on an index linked issued bond which was redeemed during the year.

To qualify for hedge accounting, the Group documents, at the inception of the hedge: the hedging risk management strategy; the relationship between the hedging instrument and the hedged item or transaction; and the nature of the risks being hedged. The Group also documents the assessment of the effectiveness of the hedging relationship, to show that the hedge has been, and will be, highly effective on an ongoing basis.

Fair value hedges

Changes in the fair value of derivative financial instruments that are designated as fair value hedges are recognised in the Consolidated Income Statement. The hedged item is also adjusted for changes in fair value attributable to the hedged risk, with the corresponding adjustment made in the Consolidated Income Statement.

If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item is amortised to the Consolidated Income Statement over the remaining period to maturity.

50 

1. Accounting Policies (continued)

Cash flow hedges

Changes in the fair value of the derivative financial instruments that are designated as hedges of future cash flows are recognised directly in other comprehensive income and accumulated in the cash flow hedge reserve and the ineffective portion is recognised immediately in the Consolidated Income Statement. Amounts recognised in other comprehensive income are recycled to the Consolidated Income Statement when equivalent amounts of the hedged item are recognised in the Consolidated Income Statement. Any costs of hedging, such as the change in fair value related to currency basis adjustment, is separately accumulated in the currency basis reserve.

When the hedging instrument expires or is sold, terminated or exercised, hedge accounting is discontinued. Any cumulative gain or loss existing in the cash flow hedge reserve and/or currency basis reserve at that time remains until the forecast transaction occurs or the original hedged item affects the Consolidated Income Statement. At that point, the cumulative gain or loss is also recognised in the Consolidated Income Statement. If a forecast hedged transaction is no longer expected to occur, the cumulative gain or loss in the cash flow hedge reserve or currency basis reserve is reclassified to the Consolidated Income Statement.

(h) Derivative financial instruments not in hedge accounting relationships

Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the Consolidated Income Statement as they arise.

(i) Impairment of non-financial assets

Non-financial assets are reviewed for impairment when there are indications that the carrying value may not be recoverable. In the event that an asset's carrying amount is determined to be greater than its recoverable amount, an impairment loss is recognised immediately in the Consolidated Income Statement and the carrying value of the asset is written down by the amount of the loss. The recoverable amount is the higher of the asset's fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets for which an impairment loss has been recognised are reviewed for possible reversal of the impairment at each reporting date.

(j) Property, plant and equipment

Items of property, plant and equipment are stated at historical cost less accumulated depreciation and any impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent expenditure is included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group. All other repairs and maintenance costs are charged to the Consolidated Income Statement in the period in which they are incurred.

Depreciation is charged to the Consolidated Income Statement on a straight-line basis so as to allocate the costs less residual values over the lower of the useful life of the related asset and, for leasehold improvements, the expected lease term. Depreciation commences on the date that the assets are brought into use. Work-in-progress assets are not depreciated until they are brought into use and transferred to the appropriate category of property, plant and equipment.

Estimated useful lives are:

· Plant and equipment 2 to 8 years

· Fixtures and fittings 4 to 10 years

· Computer hardware 3 to 10 years

· Freehold buildings 40 years

· Leasehold improvements 15 to 20 years

· Right-of-use assets 15 to 20 years

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in administrative expenses in the Consolidated Income Statement.

51

1. Accounting Policies (continued)

(k) Intangible assets

Acquired intangible assets

Intangible assets that are acquired by the Group are stated at historical cost less accumulated amortisation and any impairment losses. Amortisation is charged to the Consolidated Income Statement on a straight-line basis over the estimated useful lives. The Group's intangible assets are computer software, for which the estimated useful lives are 3 to 10 years.

Internally generated intangible assets - research and development expenditure

Research costs are expensed in the Consolidated Income Statement as incurred.

Development expenditure incurred on an individual project is capitalised only if all of the following criteria are demonstrated:

· an asset is created that can be identified (such as software);

· it is probable that the asset created will generate future economic benefits; and

· the development cost of the asset can be measured reliably.

Following the initial recognition of development expenditure, the cost is amortised over the estimated useful life of the asset created. Amortisation commences on the date that the asset is brought into use. Work-in-progress assets are not amortised until they are brought into use and transferred to the appropriate category of intangible assets.

During the year, the Group reassessed the useful life of certain of its intangible fixed assets, reducing the expected life to end by 29 February 2020. Refer to note 26 for further detail.

(l) Leases

The Group has entered into leases for office buildings.

Leases are recognised as a right-of-use asset and corresponding lease liability at the date on which the leased asset becomes available for use by the Group.

Right-of-use assets are included within property, plant and equipment in the Company and Consolidated Statements of Financial Position.

Right-of-use assets are measured at cost, which comprises:

· the amount of the initial lease liability;

· any lease payments made at or before the commencement date;

· any initial direct costs; and

· restoration costs.

Right-of-use assets are depreciated over the lease term on a straight-line basis.

Lease liabilities are initially calculated as the net present value of expected lease payments, less any lease incentives receivable. The lease payments are discounted using the interest rate implicit in the lease, if that rate can be determined, or the Group's incremental borrowing rate.

Following initial recognition, lease payments are allocated between the outstanding lease liability and interest expense. The interest expense is charged to the Consolidated Income Statement over the lease period through interest expense and similar charges so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

(m) Employee benefits

The Group accounts for pension costs on a contributions basis in line with the requirements of IAS 19 'Employee Benefits'. The Group made contributions in the year to a funded defined benefit scheme and a funded defined contribution scheme. Both of these schemes are operated by TSL.

52 

1. Accounting Policies (continued)

IAS 19 requires that, where there is no policy or agreement for sharing the cost of a defined benefit scheme across the subsidiaries, the Sponsoring employer recognises the net defined benefit cost of a defined benefit scheme. The Sponsoring employer of the funded defined benefit scheme is TSL and the principal pension plan is the Tesco PLC (Tesco) pension scheme. TSL has recognised the appropriate net liability of the Tesco pension scheme in accordance with IAS 19.

(n) Share based payments

Employees of the Group receive part of their remuneration in the form of share based payment transactions, whereby employees render services in exchange for Tesco shares or rights over shares (equity-settled transactions) or in exchange for entitlements to cash based payments based on the value of the shares (cash-settled transactions).

The fair value of employee share option plans is calculated at the grant date using the Black-Scholes model. The resulting cost is recognised in the Consolidated Income Statement over the vesting period. The value of the charge is adjusted to reflect expected and actual levels of vesting.

The grant by Tesco of options over its equity instruments to the employees of the Group is treated as a capital contribution in equity. The social security contribution payable in connection with the grant of the share options is considered an integral part of the grant itself, and the charge is treated as a cash-settled transaction.

(o) Provisions for liabilities and charges and contingent liabilities

A provision is recognised where there is a present legal or constructive obligation as a result of a past event; it is more likely than not that an outflow of economic resources will be required to settle the obligation; and the amount can be reliably estimated.

Provisions are measured at the present value of the expenditure expected to be required to settle the obligation.

A contingent liability is a possible obligation which is dependent on the outcome of uncertain future events not wholly within the control of the Group, or a present obligation where an outflow of economic resources is not likely or the amount cannot be reliably measured.

Contingent liabilities are not recognised in the Company or Consolidated Statements of Financial Position but are disclosed in the notes to the Financial Statements unless the possibility of an outflow of economic resources is remote.

(p) Dividends paid

Dividends are recognised in equity in the period they are approved by the Group's Board.

(q) Segmental reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. The Group has determined the Board of Directors as its chief operating decision-maker.

(r) Sale and repurchase agreements

Investment securities sold subject to a commitment to repurchase them at a predetermined price are retained on the Company and Consolidated Statements of Financial Position when substantially all of the risk and rewards of ownership remain with the Group. The counterparty liability is included in deposits from banks. Conversely, securities purchased under agreements to resell (reverse repos), where the Group does not acquire substantially all of the risks and rewards of ownership, are recorded as loans and advances from banks.

(s) Encumbered assets

The Group's methodology used to identify encumbered assets is aligned to definitions used in calculating the Group's Pillar 3 encumbrance disclosures.

(t) Non-current assets of the disposal group and discontinued operations

Under IFRS 5 'Non-current assets held for sale and discontinued operations' the Group classifies non-current assets or liabilities (or disposal groups) as assets held for sale when their carrying amount is to be recovered principally through a

sale transaction and a sale is considered highly probable, with the asset available for immediate sale in its present condition.

53

1. Accounting Policies (continued)

Non-current assets (or disposal groups) classified as held for sale are measured under IFRS 5 at the lower of their carrying amount and fair value less costs to sell, with the exception of deferred tax balances and financial assets falling within the scope of IFRS 9. These balances are initially measured in line with their respective accounting policies and subsequently remeasured as part of the overall disposal group, in accordance with the requirements of IFRS 5.

Balances in respect of disposal groups held for sale are presented separately in the Company and Consolidated Statements of Financial Position for the current year, with no requirement to restate the prior year.

The net results of discontinued operations are presented separately in the Consolidated Income Statement where an entity or component of an entity of the Group has been disposed of or is classified as held for sale and:

(a) Represents a separate major line of business or geographical area of operations; or

(b) Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations.

A component of an entity of the Group comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Group´s operations and cash flows. If an entity or a component of an entity of the Group is classified as a discontinued operation, prior years in the Consolidated Income Statement are restated to present these on a consistent basis with the current year presentation of discontinued operations.

(u) Alternative Profit Measures (APMs)

In the reporting of financial information, the Directors have adopted various APMs. These measures are not defined by IFRSs and therefore may not be directly comparable with other companies' APMs, including those in the Group's industry. APMs should be considered in addition to, and are not intended to be a substitute for, or superior to, IFRS measurements.

The Directors believe that these APMs assist in providing additional useful information on the underlying trends, performance and position of the Group. APMs are also used to enhance the comparability of information between reporting periods by adjusting for items which are not reflective of the Group's underlying results or trading performance and which affect IFRS measures, to aid users in understanding the Group's performance.

54

2. Transition to IFRS 16 and Prior Year Restatements

IFRS 16 'Leases'

The Group adopted IFRS 16 on 1 March 2019. IFRS 16 is a replacement for IAS 17 'Leases'. IFRS 16 removes the distinction between finance and operating leases and instead provides a single lessee accounting model. As a result, the Group has recognised right-of-use assets on its balance sheet at the adoption date in respect of property assets previously accounted for as operating leases. A corresponding lease liability has also been recognised, representing the future payments to be made under these leases, discounted at the Group's incremental borrowing rate at lease inception. This replaces a previous operating lease accrual held under IAS 17. A deferred tax asset was also recognised at the adoption date.

The Group has not taken advantage of the practical expedient in IFRS 16 in relation to lease identification and carried out a review of potential leases on transition to the new standard. As a result of this review, the only leases identified as in the scope of IFRS 16 were those previously accounted for as operating leases under IAS 17.

The Group has exercised judgement on transition to IFRS 16 to determine both the lease term and the discount rate used to calculate the lease liability. The Group's property leases contain extension options which, at the commencement of the lease, are not typically considered reasonably certain to be exercised. In the absence of a readily determined interest rate implicit in the lease, the discount rate is taken to be the Group's incremental borrowing rate. The incremental borrowing rate is determined based on a series of inputs appropriate for the related right-of-use assets, including observable market rates and entity specific adjustments.

The Income Statement recognition pattern for the Group's leases has changed from the previous pattern for operating leases, with interest on the liabilities and depreciation expense on the right-of-use assets now recognised separately. In the Cash Flow Statement, lease payments for both interest and principal repayments are categorised within financing activities rather than operating activities.

In accordance with the transitional provisions of IFRS 16, the Group has applied the new requirements fully retrospectively and comparatives for the 2019 financial year have been restated.

The impact of these changes on the relevant Financial Statement lines is as set out below.

IFRS 16 also specifies a comprehensive set of disclosure requirements. These applicable disclosures are included throughout these financial statements, primarily in note 37.

Discontinued operations

Following the Group's announcement during the year of its decision to sell its Mortgage business, the Group has classified transactions in the Consolidated Income Statement relating to its Mortgage business as discontinued operations. Refer to note 15 for further details.

The prior year Consolidated Income Statement has been restated in line with the current year presentation of the Mortgage business.

In arriving at the profit after tax from discontinued operations for the current and prior years, it has not been possible under IFRS 5 to allocate any of the Group's cost of funding the Mortgage business to discontinued operations as the related liabilities were not entered into specifically to fund the Group's Mortgage business. Refer to notes 5 and 15 for further details.

Assets of the disposal group representing the Mortgage business are presented separately in the current year Company and Consolidated Statements of Financial Position, with no requirement to restate prior years.

55 

2. Transition to IFRS 16 and Prior Year Restatements (continued)

Impact of restatements

The impact of these changes on the relevant Financial Statement lines is as follows:

1 These balances as previously reported include the impact of transition to IFRS 9 and IFRS 15 on 1 March 2018.

56

2. Transition to IFRS 16 and Prior Year Restatements (continued)

1 These balances as previously reported include the impact of transition to IFRS 9 and IFRS 15 on 1 March 2018.

57

3. Critical Accounting Estimates and Judgements in Applying Accounting Policies

In the course of preparing the Financial Statements, no judgements have been made in the process of applying the Group's accounting policies, other than those using estimations (which are presented separately below), that have had a significant effect on the amounts recognised in the Financial Statements.

The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its Financial Statements. The Group's principal accounting policies are set out in note 1. United Kingdom (UK) company law and IFRSs require the Directors, in preparing the Group's Financial Statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. Where accounting standards are not specific and Management has to choose a policy, IAS 8, 'Accounting Policies, Changes in Accounting Estimates and Errors', requires Management to adopt policies that will result in relevant and reliable information in the light of the requirements and guidance in IFRSs dealing with similar and related issues and the IASB Framework for the Preparation and Presentation of Financial Statements.

The judgements and estimates involved in the Group's accounting policies that are considered to be the most important to the portrayal of its financial condition are discussed below. The use of estimates, assumptions or models that differ from those adopted by the Group would affect its reported results.

Impairment of financial assets

The measurement of ECLs for financial assets measured at amortised cost and FVOCI is an area that requires the use of complex models and significant assumptions about future economic conditions and credit behaviour, such as the likelihood of customers defaulting and the resulting losses. Further explanation of the inputs, assumptions and estimation techniques used at the reporting date in measuring ECLs, as well as the key sensitivities of ECLs to change in these elements, are set out at note 39.

Since the year end significant economic and social disruption has arisen from the Covid-19 pandemic. The Group considered this to be a non-adjusting event after the reporting date. Further information on the impact of the Covid-19 pandemic on the Group is set out at note 48.

Effective interest rate (EIR)

IFRS 9 requires the Group to measure the interest earned on its Credit Cards portfolio by applying the EIR methodology. The main area of estimation uncertainty in measuring the EIR on the Group's Credit Card portfolio is the expected attrition of the balances drawn at the reporting date.

Management uses a pay rates assumption to determine the expected repayment profile of the balances drawn as at the reporting date to the expected remaining term (capped at a maximum of 5 years from origination).

An increase of the pay rates assumption by 10% will reduce the asset value by £5.5m and a corresponding reduction of the pay rates assumption will increase the asset value by £6.4m.

Provision for customer redress

The Group has a provision for potential customer redress in relation to payment protection insurance (PPI). For further details, including the key assumptions made in arriving at each element of this provision and a sensitivity analysis of key assumptions in the PPI model, refer to note 31.

58 

4. Segmental Reporting

Following the measurement approach of IFRS 8, 'Operating segments', the Group's operating segments are reported in accordance with the internal reporting provided to the Board of Directors, which is responsible for allocating resources to the operating segments and assessing their performance.

As the result of restructuring undertaken during the year, in line with the definition of a reportable segment under IFRS 8, the Group's reportable segments at 29 February 2020 have increased from one to two, being Banking and Insurance. This reflects changes made to the reporting of business results to the Board of Directors, as chief operating decision-maker. Prior year disclosures in this note have been restated accordingly. The Group is primarily focused on providing financial services and products to personal customers in the UK therefore no geographical analysis is presented.

The Group's two operating segments are as follows:

· Banking - incorporating Credit Cards, Personal Loans, Savings, Personal Current Accounts, ATMs and Money Services; and

· Insurance - incorporating Motor, Home and Pet Insurance

There are no transactions between operating segments.

Segmental assets and liabilities comprise operating assets and liabilities, being the majority of the Consolidated Statement of Financial Position, but exclude unallocated reconciling items such as taxation.

Segmental results of continuing operations and a reconciliation of segmental results of continuing operations to the total results of continuing operations are presented below.