Tesco Regulatory News (TSCO)

Tesco Personal Finance plc

Publication of Interim Financial Report for the six months ended 31 August 2018

In accordance with Listing Rule 9.6.1, 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: www.Hemscott.com/nsm.do

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 and a responsibility statement.

Reference to pages and numbers refer to page numbers and notes to the half year accounts in the Interim Financial Report

To view images associated with this announcement please click on the PDF link.

For any media enquiries please contact Chris Sibbald (Head Of Communications, Tesco Bank) on 07855 955531.

3 October 2018

TESCO PERSONAL FINANCE PLC

INTERIM FINANCIAL REPORT

FOR THE SIX MONTHS ENDED 31 AUGUST 2018

COMPANY NUMBER SC173199

TESCO PERSONAL FINANCE PLC

CONTENTS

TESCO PERSONAL FINANCE PLC

INTERIM MANAGEMENT REPORT

This Interim Financial Report comprises the Interim Management Report and the Interim Condensed Consolidated Financial Statements and accompanying notes. In the Interim Financial Report, 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 Interim Condensed Consolidated Financial Statements. The Group operates using the trading name of Tesco Bank. Interim Financial Report comprises the Interim Management Report and the Interim Condensed Consolidated Financial Statements and accompanying notes. In the Interim Financial Report, 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 Interim Condensed 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 Limited, the share capital of which is wholly owned by Tesco PLC. A reconciliation of the results contained within the Interim Financial Report to the Tesco Bank results presented in the Tesco PLC Interim Results 2018/19 can be found on the Tesco PLC internet page: https://www.tescoplc.com/media/475075/brokerpack_31082018.pdf

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 Interim Condensed Consolidated 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 6 and 7 of this Interim Management Report.

Business Model

The Group provides financial services and products to personal customers in the United Kingdom (UK). 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. The Company is incorporated and registered in Scotland.

Adoption of IFRS 9 and IFRS 15

The Group adopted both International Financial Reporting Standard (IFRS) 9 'Financial Instruments' and IFRS 15 'Revenue from Contracts with Customers' with effect from 1 March 2018.

IFRS 9 has been applied retrospectively at 1 March 2018 by adjusting the opening balance sheet at that date, with no requirement to restate comparative periods. IFRS 15 has been applied fully retrospectively and prior period comparatives have been restated.

The adoption of IFRS 9 resulted in a decrease in the Group's and Company's total financial assets of £223.5m, with a related deferred income tax asset of £57.0m. The overall impact on equity was therefore a reduction in equity of £166.5m at 1 March 2018.

The adoption of IFRS 15 resulted in the earlier recognition of certain insurance renewal commission income, amounting to £18.5m at 1 March 2017, as well as the reclassification of the provision for insurance refunds of £4.2m from provisions for liabilities and charges to other liabilities. A related increase of £5.0m in the deferred income tax liability was also recognised at 1 March 2017.

Further details of the transitional impact of the adoption of IFRS 9 and IFRS 15 are set out at note 2.

1

TESCO PERSONAL FINANCE PLC

INTERIM MANAGEMENT REPORT (continued)

Headlines

Income Statement

· Profit before tax is 24.8% lower at £83.0m (August 2017: £110.4m)1. The key drivers of the decrease in profit before tax are:

o a 9.8% increase in net interest income to £267.4m (August 2017: £243.6m), reflecting higher interest earnings on the back of lending growth. Net interest margin has decreased slightly to 3.8% (August 2017: 4.0%), reflecting the impact of growth in the lower margin Mortgage book as a percentage of the Group's overall lending portfolio;

o a 6.5% reduction in fee and commission income to £170.8m (August 2017: £182.7m)1. This predominantly reflects continued pressure on insurance retention rates due to a highly competitive environment, leading to a reduction in insurance commission income, and a reduction in ATM income as a result of the downward trend in ATM transactions being seen across the market as customers move towards contactless and other card payments;

o a loss on financial instruments at fair value through profit or loss (FVPL) of £3.5m (August 2017: gain of £1.5m);

o a gain on disposal of investment securities of £8.4m (August 2017: £nil);

o an increase of 7.4% in operating expenses to £274.0m (August 2017: £255.1m). This includes a charge of £16.4m in respect of a regulatory provision relating to the November 2016 fraud incident and an additional payment protection insurance (PPI) charge of £7.0m (August 2017: £nil) recognised during the period, offset by a restructuring credit of £1.6m (August 2017: £nil) relating to the early exit from the Group's offices in central Edinburgh; and

o a 29.0% increase in impairment charges to £90.2m (August 2017: £69.9m)2. This reflects balance growth and the implementation of a number of credit initiatives in recent years, which have been targeted at supporting the borrowing needs of Tesco customers in a profitable and controlled manner and also a lower gain on sale of non-performing debt, with £4.5m realised in the period (August 2017: £9.6m). The bad debt:asset ratio (BDAR) increased to 1.5% (August 2017: 1.3%)3.

· Underlying profit before tax, which excludes items which are not reflective of ongoing trading performance, is 0.6% lower at £108.3m (August 2017: £108.9m)1. A reconciliation of statutory to underlying profit for the current and prior period is set out on page 5.

· Income tax on the Group's profit for the period is a charge of £26.4m (August 2017: £27.5m)1. 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 and regulatory provision recognised during the period.

Balance Sheet

· Loans and advances to customers have increased by 5.4% to £12.1bn (February 2018: £11.5bn). Mortgage balances reached £3.5bn (February 2018: £3.0bn) as the Mortgage product range continues to expand into the intermediary broker channel, and the Group has also seen growth in both Credit Cards and Personal Loan balances of 3.2% and 5.5% respectively.

1 The prior period has been restated following the retrospective adoption of IFRS 15 in the current period. Refer to note 2 for further details.

2 The impairment charge for the half-year ended 31 August 2018 reflects impairment charges on an expected loss basis in accordance with IFRS 9. The comparative figure reflects impairment charges on an incurred loss basis, as previously reported under IAS 39.

3 The BDAR for the half-year ended 31 August 2018 reflects impairment charges on an expected loss basis in accordance with IFRS 9. The comparative figure reflects impairment charges on an incurred loss basis, as previously reported under IAS 39.

2

TESCO PERSONAL FINANCE PLC

INTERIM MANAGEMENT REPORT (continued)

Balance Sheet (continued)

· Customer deposits have increased by 8.9% to £10.1bn (February 2018: £9.2bn), and continue to be the main source of the Group's funding. Deposits from banks at 31 August 2018 totalled £1,813.2m (February 2018: £1,539.0m). At the period end, the Group had entered into repurchase transactions of £474.2m (February 2018: £200.0m) and accessed £1,339.0m of funds from the Bank of England's (BoE) Term Funding Scheme (TFS) (February 2018: £1,339.0m). The lower cost of funding provided by the TFS is reflected in competitive offers for the Group's borrowing customers.

· The balance sheet remains strong and well positioned to support future lending growth from both a liquidity and capital stand point. At 31 August 2018, the total capital ratio was 18.2% (February 2018: 19.4%)1 and net stable funding ratio (NSFR) was 117.7% (February 2018: 118.1%)1. The decrease in the NSFR over the period reflects the relative movements in the Group's available and required funding, with additional customer deposits resulting in increased available funding of £0.8bn, offset by a £0.6bn increase in the Group's required funding, arising from the growth in customer lending referred to above.

Strategic Priorities

The vision of Tesco Bank is to 'be the bank for people who shop at Tesco'. In order to further the Group's pursuit of this vision, the Group continues to seek opportunities to make it easier for Tesco customers to bank and insure with the Group through targeted investment in technology and data, making life simpler for both customers and colleagues and driving efficiency 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.

Use of the Group's mobile banking App continues to expand, and the App has now been downloaded by more than one million users. Changes to the App in April 2018 simplified the registration journey, enhancing the customer experience by allowing customers to register for the Mobile App without having to set up online banking security beforehand.

In May 2018, the Group launched a new online banking experience, to improve how the Group's customers view their banking products, making it easier to see what matters most, at first glance. The Group's Personal Current Account customers can now see a balance beside each of their transactions, helping customers to better manage their money.

The Group's Tesco Pay+ service continues to grow, offering Tesco's shoppers the ability to pay and collect Clubcard points with one simple and convenient scan of their phone. The App now has over 600,000 registered users.

The Group continues to deliver value to its Mortgage customers and improve the customer experience. In the period, the Group launched a new Broker Product Switch Portal, which allows the Group's panel of Mortgage intermediaries to select new remortgage deals on behalf of existing customers.

The Group now has 323 Travel Money bureaux across the UK, and provided customers with over £1 billion in currency in the 12 months to 31 August 2018.

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 Variable Rate Mortgage Provider' at the 2018 Moneyfacts Awards, 'Best Direct Lender' at the What Mortgage Awards 2018, and 'Best Online Pet Insurance Provider' and 'Best Direct Car Insurance Provider' at the Your Money Awards 2018.

During the period, colleagues raised over £48,000 for the Group's charity partners and volunteered over 800 hours to their local communities. In April 2018, the Group marked its first 'Tesco Bank Turns Pink' event, showing the Group's commitment and support to Cancer Research UK's Race for Life.

In August 2018, Gerry Mallon joined the Group as Chief Executive.

1 The prior period has been restated following the retrospective adoption of IFRS 15 in the current period. Refer to note 2 for further details. 3

TESCO PERSONAL FINANCE PLC

INTERIM MANAGEMENT REPORT (continued)

Regulatory Developments

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

Three major components of regulatory reform relating to data regulation came into force during 2018. These are Open Banking, the second Payment Services Directive (PSD2) and the new General Data Protection Regulation (GDPR), all of which are focused on innovation, competition and consumer protection.

PSD2, the first phase of which took effect from 13 January 2018, together with Open Banking, allows customers to choose to share data from 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, providing potential opportunities for the Group to attract new customers as well as potentially increased competition from traditional banking businesses and new providers of financial services, including technology companies with strong brand reputation. The Group continues to monitor and review the 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 new General Data Protection Regulation came into effect on 25 May 2018, providing new and enhanced rights for individuals in respect of their personal information. The Group has undertaken a business-wide review in order to ensure the clear control and management of customer data and that compliant data retention policies are in place and adhered to.

Uncertainty remains around the implementation and impact of some regulatory developments, including the finalisation of Basel III, which will be subject to European Union (EU) and UK implementation. In addition, the Group will be subject to the minimum requirements for own funds and eligible liabilities (MREL) on an interim basis from 1 January 2020, with full implementation applicable from 1 January 2022. The requirements are factored into the Group's funding and capital plans.

Business Review

During the period, the business continued to deliver growth across its primary products (Credit Cards, Personal Loans, Mortgages, Personal Current Accounts and Savings).

Mortgage balances grew by 16.8% in the period, reaching £3,504.4m (February 2018: £3,000.7m), while Credit Card balances increased by 3.2% and Personal Loans by 5.5%.

Customer deposits of £10,073.2m (February 2018: £9,248.0m) continue to be the Group's primary source of funding. The Group's customer deposits grew by 8.9% in the period, reflecting the value offered to customers.

During the period, the Group maintained its funding from the BoE's TFS at £1,339.0m (February 2018: £1,339.0m) in order to support future lending growth.

Money Services products have performed well overall as the Group continues to enhance the product range and expand the customer base. A reduction in ATM transaction volumes, due to the declining use of cash as customers move towards contactless and other card payments, was partially offset by growth in other products, including Travel Money.

A significant and ongoing investment has been made in Motor insurance pricing in the period, across both new business and renewal policies, in response to price deflation, supporting the Group's commitment to offering value to Tesco customers. This has driven improved Motor insurance retention rates year-on-year, although the total number of in-force policies has fallen, driven by the impact of overall market price deflation on Motor insurance premiums.

4

TESCO PERSONAL FINANCE PLC

INTERIM MANAGEMENT REPORT (continued)

Financial Performance

The Group's financial performance is presented in the Interim Condensed Consolidated Income Statement on page 8. A summary of the Group's financial performance on an underlying basis, excluding items which are not reflective of ongoing trading performance, is presented below.

TESCO PERSONAL FINANCE PLC

INTERIM MANAGEMENT REPORT (continued)

Key Performance Indicators

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

1 The prior period has been restated following the retrospective adoption of IFRS 15 in the current period. Refer to note 2 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 18.2% (February 2018: 19.4%)1 and leaves the Group well placed to support future growth.

The increase in impairment provisions as a result of the adoption of IFRS 9 reduced the Group's common equity tier 1 capital ratio by 164 basis points on an end point basis. The adoption of the regulatory capital transition arrangements allow the Group to spread the expected increase in provision over a 5 year period from 1 March 2018. The impact of IFRS 9 at 31 August 2018 under the transitional provisions was to reduce common equity tier 1 capital by £7.9m. The Group's common equity tier 1 capital is disclosed in note 14.

The NSFR, a measure of the Group's liquidity position, is within appetite at 117.7% as at 31 August 2018 (February 2018: 118.1%)1. The Group maintains a liquid asset portfolio of high quality securities of £1.9bn (February 2018: £2.2bn).

1 The prior period has been restated following the retrospective adoption of IFRS 15 in the current period. Refer to note 2 for further details.

Principal risks and uncertainties

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 a robust and 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 Risk Management Framework (RMF) has been embedded across the Group 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. 6

TESCO PERSONAL FINANCE PLC

INTERIM MANAGEMENT REPORT (continued)

Principal risks and uncertainties (continued)

The Chief Risk Officer (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 and can only be removed from his position with the approval of the Board

The principal risks and uncertainties faced by the Group remain unchanged from those set out in the Group's Annual Report and Financial Statements for the year ended 28 February 2018 (pages 7 to 11).

7

TESCO PERSONAL FINANCE PLC

FOR THE SIX MONTHS ENDED 31 AUGUST 2018

1 The prior period has been restated following the retrospective adoption of IFRS 15 in the current period (refer to note 2 for further details) and a reclassification between interest and similar income and interest expense and similar charges (refer to note 1 for further details).

8

TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE SIX MONTHS ENDED 31 AUGUST 2018

1 The prior period has been restated following the retrospective adoption of IFRS 15 in the current period. Refer to note 2 for further details.

9

TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)

AS AT 31 AUGUST 2018

1 The prior period has been restated following the retrospective adoption of IFRS 15 in the current period. Refer to note 2 for further details.

10

TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

FOR THE SIX MONTHS ENDED 31 AUGUST 2018

1 The prior period has been restated following the retrospective adoption of IFRS 15 in the current period. Refer to note 2 for further details.

11

TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED 31 AUGUST 2018

1 The prior period has been restated following the retrospective adoption of IFRS 15 in the current period. Refer to note 2 for further details.

2 Cash and cash equivalents comprise cash and balances with central banks, excluding mandatory reserve deposits of £26.5m (August 2017: £15.2m).

12

TESCO PERSONAL FINANCE PLC

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Interim Condensed Consolidated Financial Statements for the six months ended 31 August 2018 were approved by the Board of Directors on 1 October 2018.

1. Basis of Preparation

The Interim Condensed Consolidated Financial Statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority (FCA) and with International Accounting Standard (IAS) 34 'Interim Financial Reporting' as endorsed by the European Union (EU).

Unless otherwise stated, the accounting policies applied are consistent with those described in the Consolidated Financial Statements of the Group for the year ended 28 February 2018. The Interim Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Group for the year ended 28 February 2018, which have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) of the International Accounting Standards Board (IASB) as endorsed by the EU.

In preparing these Interim Condensed Consolidated Financial Statements, the estimates, judgements and assumptions involved in the Group's accounting policies were the same as those which applied to the Consolidated Financial Statements for the year ended 28 February 2018, except as set out below.

These Interim Condensed Consolidated Financial Statements have been reviewed, not audited, and do not constitute Statutory Financial Statements as defined in section 434 of the Companies Act 2006. The Consolidated Financial Statements for the year ended 28 February 2018 were approved by the Board of Directors on 9 April 2018 and have been filed with the Registrar of Companies. The report of the auditors on those Financial Statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

Going concern

The Directors have completed an assessment of the Group's going concern status, taking into account both current and projected performance, including projections for the Group's capital and funding position and having regard to the Group's risk profile. As a result of this assessment, the Directors consider the Group to be in a satisfactory financial position and have a reasonable expectation that the Group has adequate resources to continue in business for the foreseeable future. Accordingly, the Directors continue to adopt the going concern basis in preparing the Interim Condensed Consolidated Financial Statements.

Adoption of new and amended IFRS

There are a number of new accounting standards which will impact the Group in future reporting periods. Further details of these are included in the Consolidated Financial Statements of the Group for the year ended 28 February 2018.

During the period to 31 August 2018, the Group has adopted the following new accounting standards and amendments to standards which became effective with relevant EU endorsement for annual periods beginning on or after 1 January 2018:

IFRS 9 'Financial instruments'

IFRS 9 is a replacement for IAS 39 'Financial instruments: Recognition and measurement', excluding the part of IAS 39 related to macro hedge accounting. Macro hedge accounting requirements are out of the scope of IFRS 9 and instead the IASB is developing a separate model. Entities are therefore permitted to continue accounting for macro hedge portfolios in line with IAS 39. In line with Tesco PLC policy, the Group has adopted IFRS 9 in respect of its micro hedge accounting from 1 March 2018. The Group continues to apply the existing hedge accounting requirements of IAS 39 for its portfolio hedge accounting until the new macro hedge accounting standard is implemented.

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TESCO PERSONAL FINANCE PLC

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

1. Basis of Preparation (continued)

IFRS 9 'Financial instruments' (continued)

The classification and measurement and impairment requirements of IFRS 9 have been applied retrospectively at 1 March 2018 by adjusting the opening balance sheet, with no requirement to restate comparative periods. Hedge accounting relationships within the scope of IFRS 9 have transitioned prospectively.

Further details on the impact of adoption of IFRS 9 are included in note 2.

IFRS 15 'Revenue from contracts with customers'

IFRS 15 introduces a performance-based approach to revenue recognition and is applicable to all contracts with customers, with certain exceptions. Both the Group's interest income and fee income integral to financial instruments fall outside the scope of IFRS 15 and are accounted for in line with the other applicable standards, predominantly IFRS 9 from 1 March 2018 (refer above). All other fees and commissions income falls within the scope of IFRS 15.

In accordance with the transitional provisions in IFRS 15 the new rules have been applied fully retrospectively and comparatives for the 2018 financial year have been restated.

Further details on the impact of adoption of IFRS 15 are included in note 2.

Amendments to IFRS 15 'Clarifications to IFRS 15, 'Revenue from contracts with customers'

These amendments clarify how the principles of IFRS 15 should be applied in determining recognition of contract revenue and provide transitional relief on modified and completed contracts for entities implementing the standard.

The impact of these amendments is included in the details on the full adoption of IFRS 15 above.

Amendments to IFRS 4 'Applying IFRS 9, 'Financial instruments', with IFRS 4, 'Insurance contracts'

These amendments permit insurance entities to adopt certain transitional arrangements to address the temporary accounting consequences of the different effective dates of IFRS 9 and IFRS 17, 'Insurance contracts'. These amendments have impacted the Group's share of results from its joint venture, Tesco Underwriting Limited (TU). As permitted by these amendments, TU has deferred the adoption of IFRS 9 until 2021. Additional disclosures for TU required as a result of this will be included in the year end financial statements of the Group at 28 February 2019.

Amendments to IAS 28 'Measuring an associate or joint venture at fair value'

These amendments are part of the Annual Improvements 2014-2016 process. They clarify that the option for a venture capital organisation and other similar entities to measure investments in associates and joint ventures at fair value through profit and loss is available separately for each associate or joint venture, and that election should be made at initial recognition. There has been no impact on the Group of the adoption of these amendments.

Amendments to IFRS 2 'Classification and measurement of share-based payment transactions'

These amendments clarify how to account for certain types of share-based payment transactions. There has been no impact on the Group of the adoption of these amendments.

IFRIC 22 'Foreign currency transactions and advance consideration'

This IFRIC clarifies the accounting for advance consideration in a transaction that is denominated in a foreign currency. There has been no impact on the Group of the adoption of this IFRIC.

14

TESCO PERSONAL FINANCE PLC

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

1. Basis of Preparation (continued)

Change in presentation

During the period, the Group reclassified interest expense and similar charges relating to derivative financial instruments to interest and similar income. This reclassification more appropriately reflects within the Consolidated Income Statement the net impact of hedging activity on the interest income or expense of the hedged item. Prior period comparatives have been restated to align to the current period approach. The impact on the Consolidated Income Statement is as follows:

2. Transition to IFRS 9 and IFRS 15

On 1 March 2018 the Group adopted both IFRS 9 and IFRS 15. Full transition disclosures and details of the new accounting policies applied since this date are set out below.

IFRS 9 'Financial instruments'

a) Accounting policies

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 determine 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 at FVPL.

15 

TESCO PERSONAL FINANCE PLC

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

2. Transition to IFRS 9 and IFRS 15 (continued)

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.

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 impairment loss allowance recognised and measured as described below.

Financial assets at FVOCI

Financial assets that are held for collection of contractual flows and for selling the assets, where those cash flows represents solely payment of principal interest, and that are not designated at 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 at FVOCI are taken through OCI, except for the recognition of impairment gains or losses, interest revenue using the effective interest rate (EIR) method and foreign exchange gains and losses, which are recognised through the Consolidated Income Statement. When these debt securities are derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to the Consolidated Income Statement.

The Group also holds an investment in equity securities which has been irrevocably designated by Management at FVOCI at original recognition. Movements in the carrying amount of these equity securities are taken through OCI and are not subsequently reclassified to the Consolidated Income Statement, including on disposal. Impairment 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 expected credit losses (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 section (b) below for further details on the calculation of the allowance for ECLs.

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TESCO PERSONAL FINANCE PLC

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

2. Transition to IFRS 9 and IFRS 15 (continued)

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 below.

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.

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 expected credit losses on the undrawn commitment component from those on the loan component, the expected credit losses on the undrawn commitment are recognised together with the loss allowance for the loan.

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. From 1 March 2018, the Group has implemented IFRS 9 hedge accounting requirements in respect of its fair value hedges of the Group's existing portfolio of 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 IAS 39 for its portfolio hedge accounting until the new macro hedge accounting standard is implemented.

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2. Transition to IFRS 9 and IFRS 15 (continued)

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 cash flows associated with inflation risk on an index linked issued bond or the foreign currency risk on certain foreign currency invoices.

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.

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 OCI and the ineffective portion is recognised immediately in the Consolidated Income Statement. Amounts recognised in OCI are recycled to the Consolidated Income Statement when equivalent amounts of the hedged item are recognised in the Consolidated Income Statement.

When the hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time is recognised immediately in the Consolidated Income Statement.

b) Expected credit loss measurement

ECLs

ECLs are calculated in line with the requirements of IFRS 9 using the three stage model for impairment:

The measurement of ECLs is dependent on the classification stage of the financial asset. For financial assets in Stage 1, loss allowances are calculated based on ECLs arising from default events that are possible within 12 months from the reporting date. For financial assets in Stages 2 and 3, loss allowances are calculated based on lifetime ECLs.

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. A number of significant judgements are also required in applying the accounting requirements for measuring ECLs.

The sections below provide further explanations of the factors taken into account in the measurement of ECLs.

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2. Transition to IFRS 9 and IFRS 15 (continued)

Significant increase in credit risk

At each reporting date, the change in credit risk of the financial asset is observed using a set of quantitative and qualitative criteria, together with a backstop based on arrears status.

Quantitative criteria:

For each financial asset, the lifetime probability of default (PD) at the reporting date has increased by more than a predetermined threshold set by the Group relative to the lifetime PD as expected at initial recognition.

Qualitative criteria:

A number of qualitative criteria are in place such as:

· Forbearance offered to distressed borrowers;

· Risk based pricing post-origination;

· Credit limit decrease; and

· Pre-delinquency information.

Backstop

As a backstop, the Group considers that if an account's contractual payments are more than 30 days past due then a significant increase in credit risk has taken place.

The Group has used the low credit risk exemption in respect of its portfolio of investment securities in the period ended 31 August 2018.

Definition of default

An account is deemed to have defaulted when it meets one or more of the following criteria:

Quantitative criteria:

An account's contractual payments are more than 90 days past due.

Qualitative criteria:

There are indications that the customer is in significant financial difficulty as they meet unlikeliness to pay criteria. These are instances where:

· The customer is insolvent;

· It has become probable the customer will become bankrupt; or

· The customer is deceased.

An instrument is considered to no longer be in default when it no longer meets any of the default criteria and has remained up-to-date on its contractual payments for a period of at least three months.

Inputs, assumptions and techniques used for estimating impairment

ECLs are determined by multiplying together the Probability of Default (PD), exposure at default (EAD) and loss given default (LGD) for the relevant time period and for each collective segment and by discounting back to the balance sheet date. Each of these inputs is explained further below.

Probability of default: Represents the likelihood a customer will default over the relevant period, being either 12 months or expected lifetime.

Exposure at default: Represents the expected amount due from the customer at the point of default. The Group derives the EAD from the current exposure to the counterparty and potential future changes to that exposure to the point of default.

Loss given default: Represents the Group's expectation of the extent of the loss if there is a default. The LGD assumes that once an account has defaulted, the portion of the defaulted balance will be recovered over a maximum period of 60 months from the point of default. LGD models take into account, when relevant, the valuation of collateral, collection strategies and receipts from contracted debt sales.

These inputs are adjusted to reflect forward-looking information as described below.

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2. Transition to IFRS 9 and IFRS 15 (continued)

Expected lifetime

The expected lifetime of a financial asset is the contractual term. In the case of revolving products, the Group measures credit losses over the period that it will be exposed to credit risk. This is estimated using historic customer data.

Incorporation of forward-looking information

The ECLs calculation and the measurement of significant deterioration in credit risk both incorporate forward-looking information using a range of macro-economic scenarios. The key economic variables are based on historic patterns observed over a range of economic cycles.

The Group has engaged a third party supplier to provide relevant economic data for this purpose which, prior to incorporation into the ECL calculation, is subject to internal review and challenge with reference to other publicly available market data and benchmarks. From this data, a base case scenario has been developed, together with two additional scenarios, each of which have been assigned a relative probability. The base case represents an estimate of the most-likely outcome whilst the other scenarios represent more optimistic and more pessimistic outcomes. These have been assigned weightings of 40%, 30% and 30% respectively, which is considered to be appropriate for the calculation of unbiased ECLs.

The economic scenarios used at 31 August 2018 include the following ranges of key indicators:

1 Simple average.

2 Annualised growth rates.

Grouping of instruments for losses measured on a collective basis

For ECL provisions modelled on a collective basis, a grouping of exposures is performed on the basis of shared credit risk characteristics that include instrument type and credit risk gradings. The groupings are subject to regular review to ensure that these remain appropriate.

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2. Transition to IFRS 9 and IFRS 15 (continued)

c) Transition disclosures

Classification and measurement of financial instruments

The measurement category and the carrying amount of financial assets and liabilities in accordance with IAS 39 and IFRS 9 at 1 March 2018 are as follows:

The following explains how applying the new classification requirements of IFRS 9 led to changes in classification of certain financial assets held by the Group as shown in the table above.

(a) Reclassification of cash balances from amortised cost to FVPL

Cash balances relating to the Group's travel money offering have been reclassified at FVPL under IFRS 9 as these are held to earn fee and commission income and not solely to collect payments of principal and interest.

(b) Mandatory reclassification of debt investment securities from AFS to FVOCI

Debt instruments previously classified as AFS under IAS 39 have been reclassified to the FVOCI category under IFRS 9 as the IAS 39 category has been removed. There has been no change in the measurement basis as a result of this reclassification.

(c) Designation of equity investment securities from AFS to FVOCI

The Group has elected to designate equity instruments held in VISA Inc. at FVOCI as permitted by IFRS 9. These securities were previously classified as AFS. There has been no change in the measurement basis as a result of this reclassification. The changes in fair value of these securities will no longer be reclassified to the Consolidated Income Statement on disposal.

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2. Transition to IFRS 9 and IFRS 15 (continued)

Reconciliation of Statement of Financial Position balances from IAS 39 to IFRS 9

The following table reconciles the carrying amount of financial assets from their previous measurement category in accordance with IAS 39 to their new measurement categories upon transition to IFRS 9 on 1 March 2018. There were no changes to the classification and measurement of financial liabilities.

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2. Transition to IFRS 9 and IFRS 15 (continued)

Reconciliation of Statement of Financial Position balances from IAS 39 to IFRS 9 (continued)

The Group recognised a deferred tax asset of £57.0m on 1 March 2018 in relation to the transitional measurement adjustments set out in the above tables.

Reconciliation of impairment allowance balance from IAS 39 to IFRS 9

The following tables reconcile the prior period's closing impairment allowance measured in accordance with the IAS 39 incurred loss model to the new impairment allowance measured in accordance with the IFRS 9 expected loss model at 1 March 2018:

1 The above loss allowance is not recognised in the carrying amount of investment securities as the carrying amount is their fair value.

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2. Transition to IFRS 9 and IFRS 15 (continued)

d) Credit risk management

Maximum exposure to credit risk

The table below provides details of the credit quality of financial assets for which an ECL allowance is recognised. This represents a worst case scenario of credit risk exposure at the half-year end. For financial assets, the balances are based on gross carrying amounts as reported in the Consolidated Statement of Financial Position. For loan commitments, the amounts in the table represent the amounts for which the Group is contractually committed.

1 The loss allowance in respect of loan commitments is included within the total loss allowance for loans and advances to customers as above.

2 The loss allowance for investment securities at FVOCI is not recognised in the carrying amount of investment securities as the carrying amount is their fair value.

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2. Transition to IFRS 9 and IFRS 15 (continued)

Credit risk: Loss allowance

The following table explains the movements in the loss allowance in the period:

1 Includes net remeasurement following transfer of stage.

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2. Transition to IFRS 9 and IFRS 15 (continued)

IFRS 15 'Revenue from contracts with customers'

a) Accounting policies

Revenue recognition

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 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, 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.

b) Transition disclosures and restatement

Changes arising from the adoption of IFRS 15

There are two changes for the Group as a result of the adoption of IFRS 15.

(i) Accounting for insurance renewal commission income

Prior to the adoption of IFRS 15, the Group recognised all insurance commission income on policy renewals at the time of the renewal. Under IFRS 15, the Group recognises commission income as policies are sold for a minority of insurance policies managed and underwritten by a third party. This is the point in time at which the Group has satisfied all of its performance obligations in relation to the policies sold and it is considered highly probable that a significant reversal in the amount of revenue recognised will not occur in future periods. A contract asset has been recognised in relation to this revenue and is included within other assets.

(ii) Presentation of insurance refund liability

Contract liabilities in relation to expected refunds to insurance customers were previously presented as provisions for liabilities and charges. These are now included within other liabilities to reflect the terminology and requirements of IFRS 15.

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2. Transition to IFRS 9 and IFRS 15 (continued)

Restatement

In accordance with the transitional provisions of IFRS 15, the new rules have been applied fully retrospectively and comparatives for the 2018 financial year have been restated.

The impact of these changes on the relevant financial statement lines is as follows:

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3. 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.

The Group has one operating segment covering all of the Group's activities, the results of which are set out in the Condensed Consolidated Income Statement and Condensed Consolidated Statement of Financial Position.

There are no significant seasonal fluctuations that affect the Group's results.

4. Net Interest Income

1 The prior period restatement relates to the reclassification of amounts from interest expense to interest income. Refer to note 1 for further details.

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5. Net Fees and Commissions Income

With the exception of other revenue from contracts with customers, all of the above fees and commissions relate to financial assets and financial liabilities measured at amortised cost. These figures exclude amounts incorporated in determining the EIR on such financial assets and financial liabilities.

1 The prior period has been restated following the retrospective adoption of IFRS 15 in the current period. Refer to note 2 for further details.

6. Impairment Loss on Financial Assets

7. Income Tax

The tax charge in the Interim Condensed Consolidated Income Statement is based on Management's best estimate of the full year effective tax rate based on expected full year profits to 28 February 2019.

Income tax on the Group's profit for the period is a charge of £26.4m (2017: £27.5m)1. The Group's current effective tax rate is higher than the statutory rate principally due to the non-deductibility of the additional PPI charge and regulatory provision recognised in the period. No Group Relief is anticipated in the current year.

The March 2016 Budget Statement included an announcement that the standard rate of corporation tax in the United Kingdom (UK) would be reduced to 17% from 1 April 2020. This rate reduction was enacted during the year ended 28 February 2017 and is therefore incorporated in these Financial Statements. The rate change is expected to reduce the Group's effective tax rate in the medium term.

1 The prior period has been restated following the retrospective adoption of IFRS 15 in the current period. Refer to note 2 for further details.

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8. Capital Expenditure and Commitments

In the six months ended 31 August 2018 there were additions to property, plant and equipment and intangible assets of £12.7m (August 2017 £25.5m). Commitments for capital expenditure contracted for but not provided at 31 August 2018 were £nil (February 2018: £nil) on property, plant and equipment and £0.4m (February 2018: £1.1m) on intangible assets.

The Group's Management are confident that future net revenues and funding will be sufficient to cover these commitments.

9. Loans and Advances to Customers

At 31 August 2018, the Group had contractual lending commitments of £12,342.6m (February 2018: £12,225.0m).

Fair value hedge adjustments

Fair value hedge adjustments amounting to £(11.5)m (February 2018: £(16.4)m) are in respect of fixed rate Loans and Mortgages. These adjustments are largely offset by derivatives, which are used to manage interest rate risk and are designated as fair value hedges within loans and advances to customers.

10. Investment in Joint Venture

During the period ended 31 August 2018, the Group's joint venture, TU, completed a share reduction. The Group has recognised its share of this distribution, being £10.3m, through a reduction in the carrying value of its investment in TU. The Group's investment in subordinated debt issued by TU has also decreased by £5.2m, reflecting the Group's share of loan capital repaid in the period.

TU has taken advantage of the optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4 'Insurance Contracts' (the 'deferral approach'). This will remove the impact of potential temporary volatility in reported results for TU until the date of adoption of the new insurance standard IFRS 17 on 1 January 2021.

The Group has similarly elected to take a temporary exemption available from the requirements of IAS 28 'Investments in Associates and Joint Ventures' regarding the use of uniform accounting policies in equity accounting for a joint venture. This exemption allows the Group to equity account for the results of TU without any adjustments to reflect the impact of IFRS 9 within these Financial Statements.

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11. Debt Securities in Issue

All Floating Rate Bonds were issued by Delamare Cards MTN Issuer plc and are listed on the Irish Stock Exchange. All retail bonds are listed on the London Stock Exchange.

1 This bond was issued on 24 February 2011 and was redeemed on its maturity date in August 2019.

2 This bond was issued on 16 December 2011.

3 This bond was issued on 21 May 2012.

4 This Bond was issued on 6 June 2014. The scheduled redemption date of this Bond is May 2019.

5 This Bond was issued on 13 May 2015 and was redeemed on its scheduled redemption date in April 2018.

6 This Bond was issued on 7 November 2017. The scheduled redemption date of this Bond is October 2020.

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12. Provisions for Liabilities and Charges

Customer redress provision - Payment protection insurance

Of the total customer redress provision balance at 31 August 2018, £46.5m (February 2018: £66.8m) has been provided for customer redress in respect of potential customer claims arising from historic sales of PPI.

In March 2017, the FCA issued a Policy Statement (PS17/3, 'Payment protection insurance complaints: feedback on CP16/20 and final rules and guidance') which confirmed a deadline for PPI claims of August 2019, supported by an FCA led communications campaign.

The policy statement also set out rules and guidance on the handling of PPI claims in light of the Supreme Court's decision in Plevin v Paragon Personal Finance Limited (Plevin), confirming that both up-front commission arrangements and profit share arrangements should also be considered in the calculation of total commission for Plevin claims.

The Group increased its PPI provision by £7.0m during the half-year ended 31 August 2018 to reflect an updated assessment of the current claim rate and average redress.

Although a significant degree of uncertainty remains with regard to the ultimate cost of settling PPI claims, in particular the volume of claims arising from customers ahead of the FCA confirmed time bar date of August 2019 and the impact of regulatory changes, the provision balance represents Management's best estimate at the reporting date of that cost. The PPI provision will continue to be monitored as trends in claims volumes and levels of redress develop.

The table below details for each key assumption, actual data to 31 August 2018, forecast assumptions used in assessing the PPI provision adequacy and a sensitivity assessment demonstrating the impact on the provision of a variation in the future experience.

1 The prior period has been restated following the retrospective adoption of IFRS 15 in the current period. Refer to note 2 for further details.

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12. Provisions for Liabilities and Charges (continued)

Customer redress provision - Consumer credit act (CCA)

The Group holds a provision of £0.5m (February 2018: £0.9m) in respect of customer redress relating to instances where certain requirements of the CCA for post-contract documentation were not fully complied with.

In arriving at the provision required, the Group has considered the legal and regulatory position with respect to these matters and has sought legal advice which it took into account when making its judgement. The provision represents Management's best estimate at the reporting date of the cost of concluding the redress programme for Loan and Credit Card customers, and in making the estimate Management have exercised judgement as to both the timescale for completing the redress campaign and the final scope of any amounts payable.

Regulatory provision

In November 2016, Tesco Bank's debit cards were the subject of an online fraudulent attack. The Group's priority throughout was to ensure customers' accounts were protected and that it communicated with customers immediately and transparently, reassuring customers that there was no data loss or breach of systems. The Group undertook immediate remedial action and an independent review of the issue and has worked closely with the authorities and regulators on this incident.

On 1 October 2018, the FCA issued a warning notice to the Group in relation to this incident and the Group has accepted this and agreed to a settlement payment of £16.4m. As a result, the Group has recognised a regulatory provision for this amount at 31 August 2018. Management expect to fully utilise this provision during the year ended 28 February 2019.

Insurance provision

The insurance provision previously disclosed within this note has been reclassified to other liabilities on adoption of IFRS 15. Refer to note 2 for further details.

Restructuring provision

The restructuring provision relates to restructuring costs. Management expect to fully utilise this provision during the year ended 28 February 2019.

Other provisions

Other provisions predominantly reflect:

· a dilapidations provision related to the anticipated costs of restoring leased assets to their original condition. Management expect that the provision will be utilised at the end of the lease terms, the longest of which is due to end in 2029; and

· a warranty provision in respect of debt sales. This represents post-determination date customer receipts payable to debt purchasers and provision for any accounts which may need to be brought back under the terms of the debt sale agreements.

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13. Fair Values

Classification of financial assets and liabilities

Except as detailed in the following table, the Directors consider that the carrying value amounts of financial assets and financial liabilities recorded on the Interim Condensed Consolidated Statement of Financial Position are approximately equal to their fair values.

The only financial assets and financial liabilities which are carried at fair value on the Interim Condensed Consolidated Statement of Financial Position at period end are cash balances relating to the Group's travel money offering, FVOCI investment securities and derivative financial instruments. The valuation techniques and inputs used to derive fair values at the period end are described below.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where an active market is considered to exist, fair values are based on quoted prices. For instruments which do not have active markets, fair value is calculated using present value models, which take individual cash flows together with assumptions based on market conditions and credit spreads, and are consistent with accepted economic methodologies for pricing financial instruments.

In each case the fair value is calculated by discounting future cash flows using benchmark, observable market interest rates.

The table below categorises all financial instruments held at fair value (recurring measurement) and the fair value of financial instruments held at amortised cost according to the method used to establish the fair value disclosed.

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13. Fair Values (continued)