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Provident Financial PLC  -  PFG   

Annual Financial Report

Released 12:20 02-Apr-2013

RNS Number : 3336B
Provident Financial PLC
02 April 2013

2012 Annual Financial Report Announcement


Provident Financial plc announces that its Annual Report and Financial Statements 2012 and Notice of 2013 Annual General Meeting are available on its website and that these documents have been posted to shareholders who elected to receive them in hard copy form.


Pursuant to Paragraph 9.6.1 of the Listing Rules, a copy of each of the above documents has been submitted to the National Storage Mechanism and is available for inspection at


Attached to this announcement is the additional information for the purposes of compliance with the Disclosure and Transparency Rules including disclosure on risks, related party transactions and a responsibility statement.


The preliminary announcement of the group's 2012 results was issued on 26 February 2013. The preliminary announcement was prepared in accordance with the Listing Rules of the Financial Services Authority and was based on the 2012 financial statements which have been prepared under International Financial Reporting Standards (IFRS) as adopted by the European Union and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The disclosures made in the preliminary announcement met the requirements of IAS 34 'Interim Financial Reporting'. A copy of the preliminary announcement can be found on the group's website at







The group has a rigorous risk management framework which ensures that adequate controls and procedures are in place to manage our risks in line with the group's strategic objectives and risk appetite. The framework incorporates a five-stage process comprising identification of risks, establishing risk appetite, risk and control assessments, development of action plans and ongoing monitoring and reporting.


The group's principal risks, together with the controls and procedures in place to mitigate the risks, are as follows:






Regulatory risk



The risk of loss arising from a breach

of existing regulation or regulatory

changes in the markets within which

the group operates.


Increased focus on regulation, particularly non-standard lenders.


Potential read-across from any legislation or regulatory measures introduced to address the practices of payday lenders.


The Financial Conduct Authority will replace the Office of Fair Trading (OFT) as the regulatory body for credit businesses in 2014 and there remains uncertainty as to the exact form of regulation.



• A central in-house legal team is in place which

monitors legislative changes and supports divisional compliance functions.

• Expert third-party legal advice is taken where necessary.

• Divisional compliance functions are in place which monitor compliance and report to divisional boards.

• Long relationship and developed credibility with key regulators who recognise the different dynamics of the home credit and credit card sectors compared with the payday lending model.

• There is constructive dialogue with regulators.

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

Credit risk


The risk that the group will suffer

unexpected losses in the event of

customer defaults.


Defaults in the non-standard market

are typically higher than in more mainstream markets.


Continued pressure on customers' incomes from inflation together with a fragile employment market could increase the level of defaults.

• The Consumer Credit Division (CCD) and Vanquis Bank credit committees set policy and regularly review credit performance.

• Credit risk is subject to ongoing review in the current

economic climate and management continues to maintain its tight underwriting stance.

• Comprehensive daily, weekly and monthly reporting on KPIs.

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

• Vanquis Bank - uses highly bespoke underwriting including full external bureau data; a telephone interview is conducted prior to issuing credit; initial credit lines are low (typically £250); customers are re-scored monthly; an intensive call centre-based operation focuses on collections.


Business risk


The risk of loss arising from the

failure of the group's strategy or

management actions over the planning horizon.


Continued pressure on customers' incomes from rises in fuel, food and utility costs and a protracted period

of weak or negative growth in the UK economy could impact the demand for credit, impairments and the group's growth plans.


Potential increased competition from competing formats such as direct mail and rent to own may restrict the ability of CCD to grow its customer base.


Increased marketing activity from existing competitors may impact Vanquis Bank's growth rates.


• A clear board strategy is in place.

• A corporate planning conference (CPC) is held annually.

• Central resource is in place to develop the corporate strategy.

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

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

• Robust business change functions oversee change programmes.

• The group has comprehensive monthly management

accounts, a monthly rolling forecast and a biannual budgeting process.

• Loans are short term in nature and, in CCD, agents visit customers in their homes and are therefore able to stay up to date with customer circumstances.

• The group has demonstrated the ability to manage the business through many cycles including the deterioration seen in the UK economy and employment market during 2008 and 2009.





The risk that an event or circumstance could adversely impact on the group's reputation, including

adverse publicity from the activities

of legislators, pressure groups and the media.


Media and pressure group activity

increases during an economic downturn or when the company is performing well.


There is currently significant media

interest in the non-standard sector primarily focused on the activities of the fast-growing payday lending sector.


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

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

• Regular customer satisfaction surveys are undertaken in both businesses.

• The group invests in a centrally coordinated community programme.

• Specialist in-house teams, external advisers and established procedures are in place for dealing with media issues.

• A proactive communication programme is targeted at key opinion formers and is coordinated centrally.

• 130 year old home credit business is well understood and has been subject to regular regulatory review and scrutiny.

Operational risk


The risk of loss resulting from IT systems failure.


Vanquis Bank is reliant on third-party IT application and systems providers:


• FDI for its core customer credit card platform; and


• Newcastle Building Society (NBS) for its retail deposit platform.


IT systems in CCD are hosted by an external third-party provider (Node4).


IT systems continue to be developed to meet business demands.


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

• There is significant experience of managing third party IT arrangements within the businesses.

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

• Specialist project teams are used to manage change programmes.

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

• Rigorous selection processes for third party suppliers to ensure that they are 'best in class'.

Threats to agent safety make it unsafe to operate home collection.


Agents in CCD are required to carry cash to issue credit and they receive cash as a result of their collections activities.

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

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

• Induction sessions and regular updates are provided on safety awareness.

• Safety awareness weeks form part of the annual calendar.

• Safety incidents are monitored closely by management with follow-up actions taken.

• An annual independent audit of health and safety policies and procedures is carried out by the group's insurers, AIG.


The risk of loss resulting from loss or abuse of confidential data or systems.


Both CCD and Vanquis Bank utilise and store sensitive personal data as part of their day-to-day operations.


There continues to be heightened focus and emphasis on data loss by the Information Commissioner's

Office (ICO).


• IT and physical security policies are in place.

• Dedicated resources are in place to support the management of information security.

• Reporting of security-related incidents to divisional risk committees.

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

• There is regular fraud reporting to divisional boards and to the group audit committee.

• Hierarchical field management structure and weekly agent performance reviews ensure a strong controls environment within CCD.

Loss of key management or reduction in staff morale impacts business performance.


The risk of loss of key staff is increased following the group's successful performance over recent years.


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

• The group has competitive remuneration and incentive structures.

• Effective training and personal development plans are in place throughout the group.




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


Wider restriction of credit available from banks and institutional investors.

• The model of 'borrowing long and lending short' results in a positive maturity mismatch, which means the duration of the receivables book is significantly less than the average duration of the group's funding. This profile significantly reduces the liquidity risk for the group.

• A board approved policy is in place to maintain committed borrowing facilities which provide funding headroom for at least the following 12 months, after assuming that Vanquis Bank will fund 90% of its receivables book through retail deposits.

• The group's strategy of maintaining committed facility headroom and diversifying funding sources has resulted in a strong balance sheet position.

• Liquidity is managed by an experienced central treasury department.

• Vanquis Bank maintains a liquid assets buffer in line with the FSA's liquidity guidelines.

• There is daily monitoring of actual and expected cash flows.


Financial risk


The risk that the group suffers

a loss as a result of unexpected tax liabilities.


HMRC is placing greater emphasis on taxation controls in assessing tax risk and the associated level of scrutiny placed on companies.

• The group's approach to tax is embodied in a board-endorsed tax strategy which has also been shared with HMRC. This strategy seeks to ensure that the group complies with tax rules and regulations, pay the tax it is legally required to pay in the territories in which it operates and its reputation as a responsible taxpayer is safeguarded. The strategy also sets out the group's approach for managing tax risk and ensuring tax receives the appropriate consideration at board level.

• An experienced in-house team is responsible for managing the group's tax affairs and advice is sought from external advisors on all material transactions.

• The group is committed to building open and honest relationships in its day-to-day interaction with tax authorities. Management has regular and positive dialogue with HMRC across all UK taxes which includes advance discussion of transactions where the tax treatment is uncertain.

• The group has documented systems, processes and controls to support the UK taxes it pays and the preparation and submission of related tax returns.

• Policies and procedures are in place which support the management of key tax risk areas, including policies and procedures which seek to ensure that the relationship between CCD and the agents it engages is such that self-employed status is maintained.


Pension risk

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


The current economic environment results in increased volatility in equity markets and corporate bond yields.


Improving mortality rates in the UK.


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

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

• The pension investment strategy aims to maintain an appropriate balance of assets between equities and bonds.

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



Related party transactions


There are no related party transactions which have had a material effect on the financial position or performance of the group in the year ended 31 December 2012.



Statement of directors' responsibilities


The directors are responsible for preparing the annual financial report announcement and the preliminary results announcement.


The directors confirm to the best of their knowledge:


The condensed financial statements contained in the preliminary results announcement have been prepared in accordance with IFRS as adopted by the European Union and give a true and fair view of the assets, liabilities, financial position and profit and loss of the group; and

The chairman's statement and financial results commentary contained in the preliminary results announcement together with the additional information on risks contained in the annual financial report announcement comprise a fair review of the development and performance of the business and the position of the group, together with a description of the principal risks and uncertainties faced by the group.


By order of the board


Peter Crook - Chief Executive                                                Andrew Fisher - Finance Director


2 April 2013



Cautionary statement


All statements other than statements of historical fact included in the preliminary announcement and the annual financial report announcement, including, without limitation, those regarding the financial condition, results, operations and business of Provident Financial plc and its strategy, plans and objectives and the markets in which it operates, are forward-looking statements. Such forward-looking statements which reflect the directors' assumptions made on the basis of information available to them at this time, involve known and unknown risks, uncertainties and other important factors which could cause the actual results, performance or achievements of Provident Financial plc or the markets in which it operates to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Nothing in the annual financial report announcement or preliminary results announcement shall be regarded as a profit forecast and the directors of Provident Financial plc accept no liability to third parties in respect of the annual financial report announcement or the preliminary results announcement save as would arise under English law. In particular, section 463 of the Companies Act 2006 limits the liability of the directors of Provident Financial plc so that their liability is solely to Provident Financial plc.

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Annual Financial Report - RNS