TIDM71XN
RNS Number : 1895I
Tesco Personal Finance Group PLC
13 April 2022
Tesco Personal Finance Group plc
Publication of Annual Report and Financial Statements for the
year ended 28 February 2022
In accordance with Listing Rule 17.3.1, a copy of the above
document for Tesco Personal Finance Group 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: https://bank.tescoplc.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 2022.
Enquiries:
Investors Chris Griffith (Tesco PLC) 01707 940 900
Media Simon Rew (Tesco PLC) 0330 678 0639
Barry Cameron (Tesco Bank) 07841 192 899
13 April 2022
TESCO PERSONAL FINANCE GROUP PLC
ANNUAL REPORT AND FINANCIAL STATEMENTS
FOR THE YEARED 28 FEBRUARY 2022
Company Number SC173198
TESCO PERSONAL FINANCE GROUP PLC
CONTENTS
Directors and Advisers 1
Strategic Report 2
Directors' Report 28
Consolidated Income Statement 38
Consolidated Statement of Comprehensive Income 39
Consolidated and Company Statements of Financial Position 40
Consolidated Statement of Changes in Equity 41
Company Statement of Changes in Equity 43
Consolidated and Company Cash Flow Statements 44
Notes to the Financial Statements 45
Independent Auditor's Report 165
Abbreviations 179
Glossary of Terms 180
Directors: Sir John Kingman Non-Executive Chairman
Elizabeth Buckley Independent Non-Executive Director
Julie Currie Independent Non-Executive Director
Robert Endersby Independent Non-Executive Director
Jacqueline Ferguson Senior Independent Non-Executive
Director
Richard Henderson Chief Financial Officer
Simon Machell Independent Non-Executive Director
Gerard Mallon Chief Executive Officer
Adrian Morris Non-Executive Director
Tikendra Patel Independent Non-Executive Director
Amanda Rendle Independent Non-Executive Director
Deborah Walker Chief Risk Officer
Company Secretary: Fiona Burden
Registered Office: 2 South Gyle
Crescent
Edinburgh
EH12 9FQ
Independent Auditor: Deloitte LLP
1 City Square
Leeds
LS1 2AL
Bankers: The Royal Bank of Scotland plc
36 St Andrew Square
Edinburgh
EH2 2YB
HSBC Bank plc
8 Canada Square
London
E14 5HQ
Bank of New York Mellon, London Branch
1 Canada Square
London
E14 5AL
Elavon Financial Services DAC UK
5th Floor
125 Old Broad
Street
London
EC2N 1AR
1
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT
The Directors present their Strategic Report for the year ended
28 February 2022.
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 Group plc (TPFG) and the
'Group' means the Company and its subsidiaries (in the prior year,
the Company and its subsidiaries and joint venture) included in the
Consolidated Financial Statements. Tesco Personal Finance plc (TPF)
operates using the trading name of Tesco Bank.
TPFG is a wholly owned subsidiary of Tesco PLC (Tesco). Tesco
results can be found on the Tesco internet page
https://www.tescoplc.com.
Business Model
The core objective of the Board is to create and deliver the
long-term sustainable success of the Group, generating value for
the Group's shareholder and contributing to wider society. The
Board 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 the entire issued
share capital of TPF, which is engaged in the provision of banking
and general insurance services. Previously, the Group owned 49.9%
of Tesco Underwriting Limited (TU), an authorised insurance
company, which was accounted for as a joint venture of the Group.
On 4 May 2021 TPF purchased the remaining 50.1% share capital of TU
from Ageas (UK) Limited (Ageas), its joint venture partner. TU is
now accounted for as a subsidiary of the Group.
Economic environment
The Group returned to profitability during the year ended 28
February 2022 but continued to be impacted by ongoing economic
uncertainty. Customer and colleague practices developed through the
Covid-19 pandemic have transitioned to a business-as-usual
environment, enabling the Group to focus on supporting its
customers through continued uncertainty.
The Covid-19 pandemic created significant economic and social
disruption, and the Group's macro-economic forecasts had projected
a large drop in gross domestic product (GDP) and a corresponding
sharp rise in unemployment. This led to an increase in expected
credit losses (ECLs) in the prior year. However, due to the
extension of unprecedented government support measures such as
furlough, coupled with the granting of payment holidays and other
customer support measures by the industry and the Group, the impact
on unemployment was not as severe as had been anticipated.
As a result, there has been a significant reduction in ECLs for
potential defaults in the year, with the Group recognising a credit
for the year of GBP29.9m (2021: charge of GBP359.5m). The credit
for the current year reflects the impact on the Group's ECL
provision of the improving economic outlook, offset by increased
post-model adjustments (PMAs) and increased ECLs in respect of new
business written.
Despite a general improvement in the wider macro-economic
environment, there still remains ongoing economic uncertainty, and,
as such, Management has applied a number of PMAs to the Group's
modelled ECL provision. In particular, the Group is monitoring the
impact on its customers of the rising cost of living, with
inflation expected to continue to rise and increases in National
Insurance expected to put significant strain on households over the
next financial year, a situation exacerbated by the ongoing
conflict in Ukraine. The Group continues to prioritise helping
customers and colleagues through the many challenges created by the
prevailing economic environment. Further information in respect of
these adjustments, along with the impact of the current economic
outlook on ECLs, is set out at note 45.
The Group has reviewed its stress testing scenarios to ensure it
has sufficient capital and liquidity to trade through a plausible
range of economic outcomes. In addition, the Board has received
frequent operational, financial and colleague updates from the
Executive team throughout the year and provided challenge and
support. There has also been a focus on both conduct and prudential
impacts and close tracking of all government and regulator
correspondence to gauge the potential impact on the Group of the
economic environment, now and in the future.
2
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
Economic environment (continued)
Notwithstanding the impact of the economic environment on the
Group, its capital and liquidity ratios, which are set out on page
9, remain above regulatory requirements over the periods used by
Management to monitor these ratios. The Board has also considered
in depth the impact of the economic environment on the Group's
going concern status. The relevant disclosures are set out on pages
23 to 24 and 28 to 29.
Acquisition of Tesco Underwriting Limited
On 4 May 2021 the Group acquired the remaining 50.1% ordinary
share capital of its joint venture entity, TU, from its joint
venture partner, Ageas, following regulatory approval received in
March 2021. TU is an authorised insurance company which provides
the insurance underwriting service for a number of the Group's
general insurance products.
The acquisition is in line with the Group's strategy of focusing
on propositions which better meet the needs of Tesco customers. The
investment significantly enhances the Group's insurance capability
and enables the Group to create an insurance business that is
uniquely positioned to help Tesco customers manage their money a
little better every day.
The transaction has been accounted for as an acquisition of a
business in accordance with International Financial Reporting
Standard (IFRS) 3 'Business Combinations'. Total cash consideration
of GBP89.7m has been paid to date, with an additional deferred
payment of GBP5.0m due to be paid on expiry of the exit period,
subject to the fulfilment of Ageas' obligations in relation to the
migration and transition of the TU business to the Group. Payment
is expected to be made in May 2022.
In line with the requirements of IFRS 3, the existing equity
interest in TU held by the Group immediately before the acquisition
date was remeasured to a fair value of GBP89.4m in the Consolidated
Statement of Financial Position. This resulted in a consolidated
remeasurement gain for the Group of GBP4.6m, which is included in
other income in the Consolidated Income Statement. In line with the
requirements of IFRS 3, the Group also recognised a consolidated
gain of GBP5.0m, representing the Group's share of TU's
available-for-sale (AFS) reserve immediately prior to acquisition,
which is also included in other income in the Consolidated Income
Statement.
In addition to the purchase of the ordinary share capital of TU,
the Group also acquired the holding of GBP21.2m in TU subordinated
debt from Ageas on the same date. Further information in respect of
the impact on the Group of the acquisition of TU is set out at note
2.
Following the acquisition of TU, the Group has brought in-house
the writing of those Home and Motor Insurance policies which were
previously underwritten through its broker panel, furthering the
Group's objective to build a world class insurance proposition.
Closure of Personal Current Accounts
The Group closed its Personal Current Account (PCA) product to
its existing customers with effect from 30 November 2021, enabling
it to focus on new propositions that are specifically designed to
meet the everyday needs of Tesco customers. The Group wrote to
customers explaining their options and provided support to
customers using their PCA as their primary current account during
the process of switching or closing their accounts, paying
particular attention to supporting vulnerable customers and those
in need of financial assistance. For customers who had been using
their PCA as a savings product, the Group provided information on
its tailored savings products for customers to consider as an
alternative to their PCA. Further information on the closure of the
Group's PCA product is set out on page 25 to 26.
Outsourcing of Collections and Recoveries Capability
During the year, the Group announced its decision to outsource
its collections and recoveries capability to a third-party provider
which specialises in providing support for customers in financial
difficulty. This change enables the Group to deliver the necessary
support and flexibility which its customers will need in the future
through a modernised service offering, underpinned by new
technologies. The Group consulted with colleagues in its Financial
Assist team who were transferred to the third-party provider as a
result of outsourcing these activities and supported them
throughout the transition process. The transfer of the Group's
Financial Assist team to the third-party provider was completed in
November 2021. Further information on the outsourcing of support to
customers in financial difficulties is set out on page 26.
3
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
Launch of Clubcard Pay+
During the year the Group launched Tesco Clubcard Pay+, a new
payment and money management offering designed to help Tesco
customers pay, save and collect Clubcard points. The product allows
customers to add their shopping money to their Clubcard Pay+
account using the Group's secure mobile banking app and to see all
of their grocery spending in one place. When customers spend using
their Clubcard Pay+ debit card, the amount may be rounded up to the
nearest pound and the change saved in their Round Up Savings
Account. Further information on Clubcard Pay+ is set out on page
27.
Headlines
The current year financial information presented throughout this
section is not directly comparable with the prior year following
the Group's acquisition of TU during the year.
Income Statement
-- Profit before tax from continuing operations is GBP188.5m (2021: loss of GBP154.9m).
-- Underlying profit before tax from continuing operations,
which excludes items which are not reflective of ongoing trading
performance, is GBP186.4m (2021: loss of GBP152.4m). A
reconciliation of statutory to underlying profit/(loss) for the
current and prior year is set out at note 5.
-- Profit after tax from discontinued operations is GBPnil (2021: GBP0.2m).
-- Profit before tax from continuing operations
The key drivers of the profit before tax from continuing
operations are:
o a 6.2% decrease in net interest income to GBP425.4m (2021:
GBP453.5m). Despite customer lending having increased slightly
since the prior year end, average lending was down on the prior
year given the steady reduction in balances observed over the year
ended 28 February 2021. Also included is an amount of GBP3.4m
(2021: GBPnil) due to a revision during the year of the estimation
of interest earned on the Group's Personal Loans portfolio using
the effective interest rate methodology (refer to note 1 for
further details). Net interest margin has increased to 5.0% (2021:
4.7%(1) ), reflecting lower funding costs as the Group has
continued to reduce its Savings balances to reflect its lending
book profile and accessed cheaper funding through the Bank of
England's (BoE) Term Funding Scheme for Small and Medium Sized
Entities (TFSME};
o a 7.6% increase in net fees and commission income to GBP189.4m
(2021: GBP176.1m). Credit Card fees and ATM income have increased
as the result of increased customer activity as the economy
recovers. Offsetting this, there was a reduction in insurance
commission income earned by the Group, reflecting the acquisition
of TU during the year. Commission previously recognised by the
Group on sale of a TU policy is now eliminated on
consolidation;
o net insurance premium income of GBP133.7m (2021: GBPnil)
relating to Home and Motor Insurance policies underwritten by TU.
The prior year and pre-acquisition equivalents are recorded through
the share of profit of joint venture line;
o a gain on investment securities at fair value through profit
and loss (FVPL) of GBP4.9m (2021: GBPnil). This includes a fair
value gain of GBP4.4m (2021: GBPnil) relating to TU's holding in a
property fund which is now consolidated following the acquisition
of TU on 4 May 2021. Also included is a gain of GBP0.5m (2021:
GBPnil) following the reclassification during the year of the
Group's holding in VISA Inc. shares from fair value through other
comprehensive income (FVOCI) to FVPL (refer to note 1 for further
details);
o a gain on other financial instruments at FVPL of GBP2.1m
(2021: loss of GBP2.6m);
o other income of GBP10.4m (2021: GBPnil), predominantly
representing the consolidated remeasurement gain recognised by the
Group in respect of its existing equity interest in TU immediately
before the Group's acquisition of TU of GBP4.6m, and a consolidated
gain of GBP5.0m representing the Group's share of TU's AFS reserve
immediately prior to acquisition. There was no such other income in
the prior year. Refer to notes 2 and 12 for further details;
o net insurance claims of GBP88.3m, (2021: GBPnil) relating to
Home and Motor Insurance policies underwritten by TU. The prior
year and pre-acquisition equivalents are recorded through the share
of profit of joint venture line;
(1) The prior year net interest margin has been restated from
5.2% to 4.7% following the inclusion of average interest-bearing
balances of GBP892.0m in respect of investment securities at
amortised cost which were previously excluded in calculating the
prior year net interest margin.
4
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
-- Profit before tax from continuing operations (continued)
o an 18.8% increase in operating expenses to GBP521.3m (2021:
GBP438.7m). Operating expenses have increased following the
acquisition of TU and also reflect increased change activity,
higher depreciation and increased bonus costs following the Group's
return to profitability;
o a credit in respect of ECLs on financial assets for the year
of GBP29.9m (2021: charge of GBP359.5m). The credit for the year
reflects the impact on the Group's ECL provision of the improving
economic outlook, historically low defaults and improved
recoveries. Despite a lack of default emergence following the end
of government support measures on 30 September 2021, there remain a
number of downside risks, specifically in respect of cost of living
increases, which could impact the Group's ECL provision. Management
has applied a number of PMAs to the Group's modelled ECL provision.
Further information in respect of these adjustments, along with the
impact of the current economic outlook on ECLs, is set out at note
45; and
o an 84.0% decrease in the Group's share of profit from its
joint venture, TU, to GBP2.6m (2021: GBP16.2m). This reflects the
change in control of TU which took place on 4 May 2021, at which
point TU became a wholly owned subsidiary of the Group, with its
results being fully consolidated from that date.
-- Income tax (charge)/credit on profit/(loss) from continuing operations
Income tax on the Group's profit from continuing operations for
the year is a charge of GBP44.2m (2021: credit of GBP51.2m). The
tax charge for the year is predominantly driven by the Group's
return to profit, together with an increase in the corporation tax
rate from 19% to 25% with effect from 1 April 2023 and its impact
on the Group's deferred tax assets as set out at note 29. The prior
year credit was driven predominantly by increased ECL charges due
to the Covid-19 pandemic.
-- Profit after tax from discontinued operations
Profit after tax from discontinued operations in the prior year
was GBP0.2m, relating to completion of the sale of the Group's
Mortgage business, the majority of which took place in the year
ended 29 February 2020. There were no such discontinued operations
in the current year.
Balance Sheet
-- Loans and advances to customers have increased slightly to
GBP6.5bn (2021: GBP6.4bn) as new business activity and consumer
spending have increased over the prior year.
-- Reinsurance assets of GBP245.1m, insurance funds withheld of
GBP114.8m and insurance contract provisions of GBP650.0m have been
recognised in the Consolidated Statement of Financial Position
following TPF's acquisition of TU on 4 May 2021. Further
information in respect of these balances is set out at notes 38 and
39. There were no such balances in the prior year.
-- Customer deposits, which continue to be the Group's main
source of funding, have decreased by 7.2% to GBP5.3bn (2021:
GBP5.7bn) as the Group has continued to manage its Savings balances
to reflect its lending book profile and accessed funding through
the BoE's TFSME. At 28 February 2022, the Group had accessed
GBP900.0m (2021: GBP100.0m) under the BoE's TFSME. At the prior
year end, the Group had accessed GBP500.0m of funds from the BoE's
Term Funding Scheme (TFS), all of which was repaid by 28 February
2022.
-- The balance sheet remains well positioned to support future
lending growth from both a liquidity and capital standpoint. At 28
February 2022, the total capital ratio was 27.2% (2021: 28.5%(1) )
and the net stable funding ratio (NSFR) was 132.4% (2021:
127.6%).
(1) This ratio has been restated following restatement of the
Company's opening capital position at 1 March 2020. This was in
respect of a GBP7.0m dividend received from TU prior to 1 March
2020, which was recognised as a deduction from the carrying value
of the investment in TPF's Statement of Financial Position rather
than through TPF's retained earnings, which comprise part of the
Company's capital position. Refer to note 50 for further
details.
Regulatory Developments
Onshoring of European Union (EU) Regulations After Brexit
Following the UK's withdrawal from the EU and the ending of the
transition period, any reference to EU regulations and directives
(including technical standards) should be read as a reference to
the UK's version of such regulation or directive, as onshored into
UK law under the European Union (Withdrawal) Act 2018, as
amended.
5
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
Regulatory Developments (continued)
Capital Requirements Regulation
On 14 October 2021, the Prudential Regulation Authority (PRA)
published final Rulebook instruments for implementation of Basel
standards in the UK, thereby replacing the relevant parts of the EU
Capital Requirements Regulation (CRR) that had been revoked by HM
Treasury. The onshored rules took effect on 1 January 2022.
Minimum Requirements for Own Funds and Eligible Liabilities
(MREL)
On 1 January 2020, the Group became subject to MREL, with an
interim requirement of 18% of risk-weighted assets until 31
December 2022. In order to meet this requirement, the Company
undertook an initial GBP250.0m issuance of MREL-compliant debt in
July 2019.
From 1 January 2022, following a change in the Company's
resolution strategy confirmed by the BoE in December 2021, the
Company no longer has a requirement to issue MREL-compliant debt
since the MREL requirement is equal to the total capital
requirement (TCR). The MREL-compliant debt issued by the Company in
July 2019 remains in issue.
Countercyclical Capital Buffer (CCyB)
The Financial Policy Committee (FPC) of the BoE is responsible
for setting the UK CCyB, being the rate that applies to relevant
exposures of UK banks, building societies and large investment
firms incorporated in the UK. The rate is currently set at 0%.
However, following its meeting in December 2021, the FPC confirmed
that the rate will increase to 1.0% with effect from 13 December
2022.
Climate Change
-- Overview
The Group's Climate Change programme is led by the Chief Risk
Officer (CRO), who holds the Senior Management Function (SMF)
accountability for climate change risk. The Group's climate
strategy has been updated during the year to reflect the role that
the Group can play in assisting its colleagues and customers in
reducing their carbon footprints. The Group is committed to
understanding and reducing its environmental impact, as well as
assessing and managing the risks arising from climate change. The
Group's ambition is to achieve its target of net zero carbon
emissions from its own operations by 2035 and will seek to provide
support to its colleagues and customers in reducing their carbon
footprints.
The Group continues to work closely with Tesco to ensure that
its approach to tackling climate change is aligned with Tesco's
approach.
-- Governance
The Climate Change programme is overseen by an executive-level
Steering Group. Steering Group members have both ownership and
oversight of the work being undertaken to address climate
change.
Two climate change-specific papers have been reviewed by the
Board Risk Committee (BRC) during the financial year. Furthermore,
a Board training session on climate change was delivered by a
third-party in June 2021.
-- Strategy
The Group's climate change strategy was refreshed during the
year as detailed in the overview section of this update.
The nature of the Group's business model means that Management
believes the direct risks from climate change are lower than for
many other lenders. This is due to the short duration of the
Group's lending and insurance activities and the fact that lending
is not supported by collateral which is more likely to be impacted
by climate change. In addition, the Group is exclusively consumer
focussed in its lending and has processes in place to ensure
liquidity holdings meet defined Environmental, Social and
Governance (ESG) criteria.
6
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
Regulatory Developments (continued)
Climate Change (continued)
A number of areas have been identified where there is exposure,
however these typically represent an indirect or low risk to the
Group. Areas identified include the following:
-- Exposure to customers who work for industries whose business
models may be impacted through transition and, as a result, could
face lower income or the loss of their job;
-- Physical impacts of weather events on the ability of the
Group's colleagues to work in the office, although this has been
significantly mitigated through the move to post-Covid-19 working
practices;
-- Changes to the way the Group's customers shop and behave,
such as reducing travel, which may impact the Group's Travel Money
services;
-- The likelihood of an increased severity and frequency of
weather events, impacting Home insurance claims received by the
Group;
-- Transitional impacts on the motor insurance market, for
example through the move to electric cars, which may impact the
Group's Motor insurance business.
The Group's scenario analysis has looked at two scenarios, one
to model transition risk over a 10-year horizon and the other to
consider physical risk.
The transition risk scenario considered potential macro-economic
effects arising from the introduction of a carbon tax and the
changing shape of employment as some sectors are heavily impacted
by the transition to net zero. The impact on credit losses from
this scenario was not considered significant enough to warrant
further management action at this stage.
The financial impacts from physical risks considered the
potential increase in the number of Credit Card and Personal Loan
customers who may in the future find themselves residing in higher
flood risk regions as a result of climate change. This showed that
the Group's customer base has a flood risk profile similar to the
national average and is not over concentrated in any areas of high
flood risk. Both these scenarios were reviewed by the Executive
Risk Committee (ERC), BRC and Board and included in the Group's
Internal Capital Adequacy Assessment Process (ICAAP).
Climate scenario analysis is a significant area of focus for the
Group and Management will be performing longer and more granular
scenario analysis in the upcoming year. This will include a 2degC
or lower scenario (a scenario seen as the accepted limitation of
temperature growth to avoid significant and potentially
catastrophic changes to the planet).
The Group's own operations already use 100% green electricity.
Work has been performed during the year with a third-party to
identify ways to reduce energy consumption in the Group's offices.
The Group's facilities workstream is implementing a plan for its
sites to be net zero by 2035.
The Group has made a carbon footprinting platform, Pawprint,
available to all its colleagues to help them to reduce their
personal carbon footprints. Further colleague initiatives are
planned for the upcoming year.
-- Risk Management
Climate change has been identified as a cross-cutting risk, with
operational risk, credit risk and regulatory risk being most
impacted. The areas that have been enhanced to ensure climate risk
is explicitly considered and managed are detailed below:
-- Operational risk (Change, Response and Continuity, Supplier and Customer)
-- Credit risk (retail and wholesale)
-- Business risk
Identification and assessment of climate change risk has been
driven by the Climate Change programme. The above changes are part
of the efforts to ensure that identification, assessment and
management of climate change risk are embedded within the relevant
business areas as a business-as-usual process.
Climate change reporting is incorporated in the CRO report that
is reviewed quarterly at ERC and BRC.
7
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
Regulatory Developments (continued)
Climate Change (continued)
Areas of focus for risk management over the next year are
building climate change into the Group's Risk Appetite, developing
further insightful management information and ensuring business
areas have fully embedded climate change into their risk
identification and controls processes.
-- Metrics and targets
The Group's scope 1 and 2 carbon footprints are disclosed below.
The Group has identified number of tonnes of carbon dioxide
equivalent (tCO(2) e) emissions per full-time equivalent colleague
as the most appropriate intensity factor for its business due to
the majority of carbon emissions produced being closely linked with
the number of colleagues employed.
Work is ongoing to reduce the impact of the Group's offices on
the environment and the Group will provide updates as this work
progresses. This work is, and will be, heavily shaped by the
Group's return to office strategy which, given the ongoing
uncertainties surrounding the Covid-19 pandemic, is not yet
finalised. Further development of the Group's management
information on climate change is planned in the year ahead.
-- Emissions data
28 February 28 February
2022(4) 2021
tCO(2) e emissions (Market-based)(1)
- Scope 1(2) 980 1,315
- Scope 2(3) -- --
Carbon Intensity Factor
tCO(2) e emissions per FTE 0.30 0.39
The Group continues to develop its approach towards the
measurement of its scope 3 emissions. Initial analysis has
indicated that the Group's most significant controllable areas of
scope 3 impacts are purchased goods and services, business travel,
employee commuting and office waste. Work is ongoing to reduce the
Group's impact in all of these areas and further disclosures will
be provided as market practice develops in these areas.
(1) Market-based method of calculation reflects the emissions
from the electricity that the Group is purchasing and includes its
purchase of electricity backed by Renewable Energy Guarantees of
Origin or Renewable Energy Certificates.
(2) Scope 1 emissions are from natural gas used at the Group's
offices.
(3) Scope 2 emissions are from electricity purchased for use at
the Group's offices.
Emissions for both are calculated via industry-standard
conversion factors as published by the UK government.
(4) Emissions are for the Group's Newcastle, Glasgow and
Edinburgh offices only. TU's Reigate office will be included from
next year onwards.
IBOR Reform
The Group transitioned its only remaining London Inter Bank
Offered Rate exposure, relating to TPF's holding in subordinated
debt issued by TU totalling GBP42.3m, to Sterling Overnight Index
Average in October 2021.
Key Performance Indicators
The Directors consider the following to be Key Performance
Indicators (KPIs) for the Consolidated Income Statement and are
quoted in respect of the Group's continuing operations. The
methodology applied in calculating the Group's KPIs is set out in
the Glossary of Terms:
2022 2021
Net interest margin 5.0% 4.7%(1)
Underlying cost:income ratio 77.2% 69.7%
Cost:income ratio 77.0% 70.0%
Gross insurance premiums written GBP254.0m n/a
Loans and advances to customers loss allowance coverage ratio 7.0% 8.9%
(1) The prior year net interest margin has been restated from
5.2% to 4.7% following the inclusion of average interest-bearing
balances of GBP892.0m in respect of investment securities at
amortised cost which were previously excluded in calculating the
prior year net interest margin.
8
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
Capital and Liquidity Ratios
The Directors consider the following to be KPIs for capital and
liquidity reporting:
2022 2021
Common equity tier 1 ratio 24.4% 25.3%(1)
Total capital ratio 27.2% 28.5%(1)
Capital coverage of TU's solvency capital requirement (SCR) (unaudited) 151.0% n/a
MREL ratio 30.9% 32.1%
Net stable funding ratio 132.4% 127.6%
Loan to deposit ratio 121.9% 111.6%
The Group continues to phase in the IFRS 9 'Financial
Instruments' impact on capital over a period of five years. On 27
June 2020, due to the Covid-19 pandemic, the CRR was further
amended to accelerate specific CRR2 measures and implement a new
IFRS 9 transitional relief calculation which applies additional
relief to increases in ECL provisions arising as a result of the
Covid-19 pandemic. As a result, the IFRS 9 transitional
arrangements have been extended by two years. The Group's total
capital ratio remains above regulatory requirements at 27.2% (2021:
28.5%(1) ) on a transitional basis. On an end-point basis, the
Group's total capital ratio is 25.4% (2021: 25.1%(1) ), which is
also above regulatory requirements. Refer to note 50 for full
details of the impact of these amendments on the Group.
TU's unaudited available capital has remained above its SCR
requirement during the period to 28 February 2022; and capital
coverage of TU's SCR of GBP121.1m (unaudited) at the end of
February 2022 was 151.0% (unaudited).
An interim MREL ratio requirement of 18% of risk-weighted assets
was set from 1 January 2020 to 31 December 2022. However, as of 1
January 2022, the Company no longer has a requirement to issue
MREL-compliant debt since, following a change in the Company's
resolution strategy confirmed by the BoE, the Company's MREL
requirement is equal to the TCR. The MREL-compliant debt issued by
the Company in July 2019 remains in issue.
The NSFR, a measure of the Group's liquidity position, is within
appetite at 132.4% as at 28 February 2022 (2021: 127.6%). The Group
maintains a liquid asset portfolio of high quality securities of
GBP2.3bn (2021: GBP1.7bn).
(1) These ratios have been restated following restatement of the
Company's opening capital position at 1 March 2020. This was in
respect of a GBP7.0m dividend received from TU prior to 1 March
2020, which was recognised as a deduction from the carrying value
of the investment in TPF's Statement of Financial Position rather
than through TPF's retained earnings, which comprise part of the
Company's capital position. Refer to note 50 for further
details.
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. Tesco
also reviews and approves certain aspects of the Financial Risk
Appetite.
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 risk management framework (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 Risk
Management model, 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 16 to 22.
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 position
with the approval of the Board.
9
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
Risk Management Approach (continued)
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.
Principal risks and uncertainties Key controls and mitigating
factors
Credit risk All lending is
The risk that subject to
a borrower underwriting
will processes and the
default on a performance of all
debt or exposures is
obligation monitored closely.
by failing to Regular
make management reports
contractually are submitted to
obligated the Board and
payments, or appropriate
that the Committees.
Group will Despite the
incur losses improvement in the
due to wider
any other macro-economic
counterparty environment, there
failing are a number of
to meet their prevailing
financial headwinds
obligations. in place at 28
During the February 2022.
current Inflation
financial and rises in
year, the National Insurance
Group are
continued to expected to put
be impacted significant strain
by ongoing on households over
economic the next financial
uncertainty. year. The Group
In has also assessed
particular, the projected
the impact on its
Group is business
monitoring and results, at 28
the impact February 2022,
on its of the ongoing
customers of conflict in
the rising Ukraine,
cost of the impact of
living, with which could result
inflation in
expected to more sustained
continue to levels of
rise unemployment,
and increases slightly lower
in National forecast GDP, and
Insurance place
expected to a further strain
put on household
significant incomes
strain through an
on households increased rate of
over the next inflation.
financial The Group
year, a regularly
situation benchmarks its
exacerbated macro-economic
by the outlook against
ongoing other
conflict in external forecasts
Ukraine. to ensure its ECL
Although the provisions remain
Group at appropriate
returned to levels.
profitability Prior to the start
during the of the Covid-19
year pandemic, the
as the Group already had
economy a
recovers, the suite of early
Group warning indicators
continues to in place, together
recognise with playbooks
higher for a range of
provisions economic
for ECLs than scenarios.
pre-Covid-19 These playbooks
pandemic continue to be
levels. employed,
The Group's with changes to
future underwriting
performance criteria
is sensitive being made based
to the speed on the Group's
of assessment
the economic of the current and
recovery. forecast
The nature of macro-economic
the Group's environment. The
business Group's risk
model means appetite
that framework was also
Management enhanced to limit
believes exposure to
the direct certain higher
risks from risk segments.
climate The performance of
change are credit portfolios
lower than is actively
for many monitored, and
other this monitoring
lenders. This activity has been
is due to extended
the short throughout
duration of a prolonged period
the Group's of economic
lending and uncertainty
insurance to understand
activities which customers
and the fact are
that lending likely to be more
is or less impacted
not supported by the effects of
by collateral economic
which uncertainty
is more arising from the
likely to be rising cost of
impacted living,
by climate exacerbated by the
change. In ongoing conflict
addition, in Ukraine. These
the Group is activities help
exclusively ensure that the
consumer Group's
focussed in underwriting
its lending controls remain
and has appropriate for
processes in the
place to latest
ensure macro-economic
investments outlook.
meet defined Management
ESG has applied
criteria. specific
management
adjustments
to the Group's
modelled ECL
provision
to capture the
estimated impact
10 of
10 the stress within
the Group's ECL
TESCO provision. Further
PERSONAL information in
FINANCE GROUP respect of these
PLC adjustments is set
STRATEGIC out at note 45.
REPORT 10
(continued) The Group reviewed
Credit risk its stress testing
(continued) scenarios to
ensure it has
sufficient
capital and
liquidity to trade
through
a plausible range
of economic
outcomes.
A number of areas
have been
identified
where the Group
has exposure to
climate
change, however
these typically
represent
an indirect or low
risk to the Group.
The Group could
have exposure to
Operational customers
risk who work for
The risk of a industries whose
potential business
error, models may be
loss, harm, impacted through
or failure transition
caused and, as a result,
by could face lower
ineffective income or the loss
or of their job.
inadequately Physical
defined impacts of weather
processes, events may affect
system the ability of the
failures, Group's colleagues
improper to work in the
conduct, office, although
human error this
or from has been
external significantly
events. mitigated through
11 the move to
TESCO post--Covid-19
PERSONAL working
FINANCE GROUP practices. Changes
PLC to the way the
STRATEGIC Group's customers
REPORT shop and behave,
(continued) such as reducing
Operational travel, may impact
risk the Group's Travel
(continued) Money services.
The likelihood of
an increased
severity
and frequency of
weather events may
impact Home
insurance claims
received
by the Group.
Finally, there may
be
transitional
impacts on the
motor
insurance market,
for example
through
the move to
electric cars,
impacting
the Group's Motor
insurance
business.
Areas of focus for
risk management
over the next year
are building
climate
change into the
Group's Risk
Appetite,
developing further
insightful
management
information and
ensuring business
areas have fully
embedded climate
change into their
risk
identification
and controls
processes.
The Group aims to
manage operational
risks within
defined Risk
Appetite
limits.
Business units and
functions assess
operational risks
on an ongoing
basis
via a prescribed
Risk and Control
Self-Assessment
(RCSA) process and
operational risk
scenario analysis.
The RCSA process
is reviewed and
updated
on a timely basis
by the First Line
of Risk Management
to reflect the
risk and control
environment and
any
changes arising
from changes in
products,
processes and
systems.
The outputs are
reported to
relevant
governance bodies,
including the BRC.
This is
supplemented
further by an
event management
process and
regular
reporting of the
operational risk
profile to the ERC
which provides
oversight of the
Group's
operational
risk profile.
The Group's
continued priority
throughout
the year has been
helping customers
and colleagues
through the many
challenges
created by the
current economic
environment.
The Group
continues to face
a number
of operational
risks including a
high
proportion of
colleagues working
from
home for extended
periods; the need
to implement
social distancing
measures
across the Group's
premises for
colleagues
unable to work
from home; and the
ongoing potential
for the Group's
suppliers to be
impacted by
disruption
to the global
supply chain and
labour
market.
The Group has
served and
supported
its customers,
including the
provision
of payment
holidays and
additional
support for
vulnerable
customers,
while maintaining
the safety and
well--being
of colleagues, and
has transitioned
new working
practices to
business-as-usual.
The actions taken
included enhancing
homeworking
capability and
testing
different ways of
working for
colleagues.
Close monitoring
remains in place
to ensure that the
Group's critical
functions continue
to be resilient.
Regulators have
been consistently
updated with
progress through
regular
and ad-hoc
management
information
and relationship
meetings.
A significant
number of services
and
processes are
provided by
third-party
service providers
and a key
operational
risk is the
failure of an
outsourced
service provider.
The Procurement
and Supplier
Management
Framework provides
an appropriate
and consistent
approach to
procurement
and the management
of suppliers to
ensure the Group
is able to
effectively
engage, manage and
terminate supplier
relationships.
The Framework
supports the
relevant
Group policies
applicable to
procurement
and supplier
management and
enables
the Group to meet
its regulatory
requirements,
understand and
manage supplier
and
service risk
effectively, and
take
a consistent
approach to
supplier
relationships.
12 Increased market demand for specialist
TESCO personnel could result in increased
PERSONAL costs of recruitment and retention
FINANCE or reduced organisational effectiveness
GROUP if a sufficient number of skilled
PLC staff cannot be employed or retained.
STRATEGIC The Executive Committee (ExCo) oversees
REPORT key aspects of people risk, including
(continued) talent management, performance management,
Operational retention and succession planning.
risk Financial crime and fraud are significant
(continued) drivers of operational risk and the
external threat continues to be a
high priority area of risk management
across the Financial Services industry.
The Group has a suite of policies
that provide clear standards for the
management of financial crime risks.
The Group has a dedicated Financial
Crime team and continually monitors
emerging risks and threats and engages
with industry experts to identify
and manage the risks. Regular updates
are provided to Executive and Board
level committees.
The financial services industry remains
under significant threat from cyber-attacks.
This includes various organised groups
targeting institutions through phishing,
malware, denial of service and other
sophisticated methods.
The Group manages cyber security risks
through its Information Security team.
The Group continually monitors emerging
risks and threats. Regular reporting
is provided to the ERC and the BRC.
As a primarily digital bank, technology
is a key element in providing services
to the Group's customers in a consistent
and secure manner. Causes of technology
outages across the industry include
failed change, third-party failures,
shadow IT risks or security events.
The Group manages technology and technology
risk through its Information Technology
team and has aligned key processes
and controls with industry recognised
standards such as the Information
Technology Infrastructure Library
and those set out by the National
Institute of Standards and Technology.
Regular reporting on technology services
and technology risk are provided to
the Group's ExCo, ERC, BRC and the
Board.
The Group has identified shadow IT,
relating to IT systems used by the
business but not managed by the Group's
Chief Information Officer (CIO) function,
as an area of focus. A programme is
underway to identify all shadow IT
across the Group and transfer management
of such systems to the CIO function.
Liquidity and funding risk
Liquidity risk is the risk Liquidity risk is governed through the Asset and Liability Management
that the Group is not able Committee (ALCo), BRC and the Board. The Group maintains
to meet its obligations as a liquidity position in excess of internal and regulatory requirements. The
they fall due. It also covers Treasury function ensures all liquidity and funding
the risk that a given security measures are managed within policy and Risk Appetite on a daily basis. The
cannot be traded quickly enough key liquidity and funding measures monitored on a
in the market to prevent a daily basis are set out on page 129. The Group measures and manages
loss if a credit rating falls. liquidity adequacy in line with these metrics and maintains
Funding risk is the risk that a liquidity and funding profile to enable it to meet its financial
the Group does not have sufficiently obligations under normal and stressed market conditions. The
stable and diverse sources Group monitors and reports on the composition of its funding base against
of funding. defined thresholds to avoid funding source and maturity
13 concentration risks.
TESCO PERSONAL FINANCE GROUP Liquidity and funding risk is assessed through the internal liquidity
PLC adequacy assessment process (ILAAP) on at least an annual
STRATEGIC REPORT (continued) basis. Stress testing of current and forecast financial positions is
Liquidity and funding risk conducted to inform the Group of required liquidity resources.
(continued) Reverse stress testing is conducted to inform the Group of the circumstances
that would result in liquidity resources being exhausted.
Liquidity stress tests are presented to the ALCo on a regular basis to
provide evidence that sufficient liquidity is held to
meet financial obligations in a stress.
The Group is predominantly funded by its retail deposit base, which reduces
reliance on wholesale funding and, in particular,
results in minimal short-term wholesale funding.
Market risk
The risk that movements in market Control of market risk is governed
prices (such as interest rates by the ALCo and Treasury Committee
and foreign exchange rates) lead (TCo). These bodies provide oversight
to a reduction in either the of the Group's market risk position
Group's earnings or economic at a detailed level, providing regular
value. reports and recommendations to the
BRC and the Board.
Market and Liquidity Risk, as part
of the RMFu, also review and challenge
policies and procedures relating to
market risk and provide oversight of
the Balance Sheet Management and Transaction
Management teams within the Treasury
function.
Insurance risk
The risks accepted through the The Group's aim is to actively manage
provision of insurance products insurance risk exposure, with particular
in return for a premium. These focus on those risks that impact profit
risks may or may not occur as volatility. The Group is exposed to
expected and the amount and timing underwriting risk through TU. TU is
of these risks are uncertain a separately regulated entity and is
and determined by events outside capitalised accordingly.
of the Group's control. TU operates a RMF designed to identify
and manage risks to which it is exposed.
This includes the use of reinsurance
to limit risk exposure above certain
levels and the engagement of external
independent actuaries to provide assurance
over the valuation of insurance liabilities.
Risk Appetite and a suite of risk policies
are in place to manage risk in TU.
Further information in respect of insurance
risk is set out at note 45.
Regulatory and conduct risk
Regulatory risk is the risk of The Group has no appetite for failing
poor customer outcomes, reputational to comply with rules and regulations.
damage, liability, loss or regulatory As part of the Group's Policy Framework,
censure arising from failure to Second Line of Risk Management is responsible
comply with the requirements of for the Compliance and Conduct Risk
the financial services regulators Policy, which is approved by the Board,
or industry codes of best practice. as well as for monitoring, challenge
Conduct risk is the risk that and oversight of regulatory risk and
the conduct, acts or omissions compliance across the business. If
of the Group, or individuals within regulatory events and breaches occur,
the Group, leads to customer detriment, the Group will take appropriate rectifying
or has an adverse effect on market action on a timely basis. The Group
stability or effective competition. seeks to deliver fair outcomes for
customers. There has also been a focus
on both conduct and prudential impacts
14 and close tracking of all government
and regulator correspondence to gauge
the potential impact on the Group of
the economic environment, now and in
the future.
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
Regulatory and conduct risk (continued) The risk of business conduct leading
to poor outcomes can arise as a result
of misselling, inadequate creditworthiness
and affordability assessments, or failure
to comply with other regulatory requirements.
Business areas manage conduct risk
and use a range of management information
to monitor the fair treatment of customers.
A framework of product-led conduct
management information has been developed
and is reviewed by Senior Management
in the business lines. Customer outcomes
are also assessed as part of the development
and design of new products and through
annual product reviews of existing
products. The Risk function provides
robust oversight of customer outcomes
and the ERC and the Board review and
challenge delivery of fair outcomes
for customers.
The risk that regulatory changes such
as General Insurance Pricing Practices,
Open Banking and Consumer Duty will
have an impact on how customers manage
both their money and data over the
longer term, with the potential for
such regulatory changes to fundamentally
alter the nature of competition in
UK financial services and have an impact
on the Group's activities. These changes
also create opportunities for traditional
competitors as well as non-banking
firms, particularly digitally focused
technology companies who have the ability
to move at pace.
The volume and pace of regulatory change
remain high. The Group actively engages
in relevant industry consultation and
closely monitors potential changes
to regulatory requirements to allow
it to address possible opportunities
while recognising potential competitive
risks. The Group has opportunities
arising from these changes to create
additional benefits for customers due
to its position within the wider Tesco
group.
Capital risk
The risk that the Group has insufficient The Group undertakes close monitoring
capital resources to support of capital ratios to ensure it complies
its plan and meet minimum capital with current regulatory capital requirements
requirements and buffers under and is well positioned to meet any
both anticipated and stressed anticipated future requirement. Management
conditions. of capital is governed through the
15 ALCo, BRC and the Board.
TESCO PERSONAL FINANCE GROUP The Group undertakes an ICAAP. Material
PLC risks to the Group are reviewed through
STRATEGIC REPORT (continued) stress testing to support an internal
Capital risk (continued) assessment of the level of capital
that the Group should maintain.
Where capital is not considered to
be an appropriate mitigant for a particular
risk, alternative management actions
are identified.
The stress testing scenarios and final
ICAAP results are presented to the
BRC for challenge and to the Board
for approval. The ICAAP is submitted
to the regulator on a regular basis
and forms the basis of the TCR given
to the Group.
The prudential regulation of banks
continues to develop, with a number
of topics currently under consultation
in both the EU and the UK. The impact
of future changes to capital and funding
regulation may have an impact on the
Group's activities.
The Group actively engages in relevant
industry consultation and closely
monitors potential changes to regulatory
requirements.
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 III Disclosure Statements of TPFG for the year
ended 28 February 2022. These disclosures will be published in the
Financial Information section of the Group's corporate website in
due course.
Risk Management Framework
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 RMF is embedded across the Group, creating an integrated
approach to managing risk. The RMF brings together governance, Risk
Appetite, the Three Lines of Risk Management model, the Policy
Framework and risk management tools to support the business in
managing risk as part of day-to-day activity.
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. The governance
structure set out in these disclosures describes the structure that
was in place as at 28 February 2022.
The Board
Chair Executive Directors Non-Executive Directors
Sir John Kingman Richard Henderson Elizabeth Buckley
Gerard Mallon Julie Currie
Deborah Walker Robert Endersby
Jacqueline Ferguson
Simon Machell
Adrian Morris
Tikendra Patel
Amanda Rendle
James Willens resigned from his role as Senior Independent
Non--Executive Director on 28 September 2021, at which point
Jacqueline Ferguson assumed the role of Senior Independent
Non-Executive Director.
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 and any
material new product lines in line with the approved Risk Appetite
and monitors the Group's risk management profile and capital
adequacy position.
16
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
The Board has delegated the day-to-day running of the business
to the CEO. The CEO has established the ExCo to support delivery
against the 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 Board has
established Board committees and the executive has established
Senior Management committees to:
-- challenge and oversee the RMF;
-- identify the key risks facing the Group; and
-- assess the effectiveness of risk management actions.
Tesco Personal
Finance Group/Tesco Personal Finance
Board
Board Audit Board Risk Board Remuneration Board Disclosure Board Nomination
Committee Committee Committee Committee Committee
------------- ----------------------------------------- ------------------ ------------------
The Board has overall responsibility for the management of the
business and acts as the main decision-making forum. It sets the
strategic aims and objectives for the business, in some
circumstances subject to shareholder agreement, 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 Board Diversity and Inclusion Policy which was
reviewed by the Nomination Committee (NomCo) during the year prior
to being approved by the Board. The Group is fully committed to
creating an inclusive culture with a mix of skills, knowledge,
experience, geographical expertise and educational and professional
backgrounds. In addition, the Board aims to have a mix of gender,
tenure, age, ethnicity and other distinctions between
Directors.
In addition, the Equal Opportunities Policy and supporting
guidance aim 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 and
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. The Group has met its
female ExCo membership target ahead of time, reaching 44%
representation against its target of 33% by 2022. The Group has
also exceeded its target of 33% female board members by the end of
2022 by reaching 42% representation. The Group recognises that it
has significant progress to make against its Director target, which
has been impacted by the acquisition of TU. As a result, the
timeline and scope for this target has been revised to include
Senior Management representation of 33% by 2024. These changes
align with industry norms, enabling the Group to continue to
address diversity within its senior leadership populations and take
a holistic approach to addressing diversity throughout the
organisation. In addition, the Group is developing new Diversity
targets specifically for Gender and Ethnicity and, once in place,
will review progress against these on a quarterly basis.
Gerry Mallon is Executive Sponsor for Inclusion and, as such,
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. He is also accountable for progress towards the Women in
Finance Charter targets.
17
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
Gender Diversity at Board Level (continued)
Further information on the role of the Group's NomCo in
reviewing the diversity of the Board and the Group's Senior
Management is set out on page 20. Further information on the
Group's approach to diversity and inclusion, including details of
the Group's targets and progress, can be found at the following
link:
https://bank.tescoplc.com/sustainability/diversity-inclusion/gender/
Board and Committee Attendance
The Board and its Committees held regular meetings throughout
the year. Directors are expected to attend all Board and relevant
Committee meetings. The table below shows the attendance at the
scheduled Board and Committee meetings(1) :
Board Board Disclosure Board Nomination
Board Risk Board Audit Remuneration Committee Committee
Board Committee Committee Committee
Sir John Kingman 13/13 6/6 - 7/7 - 8/8
Elizabeth
Buckley(2) 2/2 1/1 - - - 1/1
Julie Currie 12/13 5/6 7/7 - 1/2 7/8
Robert Endersby 13/13 6/6 7/7 7/7 2/2 8/8
Jacqueline
Ferguson 12/13 6/6 7/7 - - 7/8
Richard Henderson 13/13 - - - 5/5 -
Declan Hourican(3) 3/4 - - - 2/2 -
Simon Machell 13/13 3/3 7/7 7/7 - 8/8
Gerard Mallon 13/13 - - - 3/3 -
Adrian Morris(4) 10/11 4/5 - - - 5/6
Tikendra Patel(5) 1/1 1/1 - - - 0/0
Amanda Rendle 13/13 5/6 - 7/7 - 8/8
Alan Stewart(6) 2/2 1/1 - - - 1/2
Deborah Walker(7) 1/1 - - - 3/3 -
James Willens(8) 7/7 4/4 - 4/4 1/2 4/4
(1) Attendance recorded is of Committee members only and does
not reflect Directors' attendance as observers.
(2) Elizabeth Buckley was appointed to the Board on 9 December
2021.
(3) Declan Hourican resigned from the Board on 29 June 2021.
(4) Adrian Morris was appointed to the Board on 30 April
2021.
(5) Tikendra Patel was appointed to the Board on 30 December
2021.
(6) Alan Stewart resigned from the Board on 30 April 2021.
(7) Deborah Walker was appointed to the Board on 18 January
2022.
(8) James Willens resigned from the Board on 28 September
2021.
Board Evaluation
In accordance with the requirements of the UK Corporate
Governance Code 2018 (2018 Code), the Board carries out a review of
the effectiveness of its performance and that of its Committees and
Directors every year. The evaluation is facilitated externally
every third year.
An externally facilitated review was carried out by Lintstock
Limited (Lintstock) and presented to the Board in 2021. 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 Lintstock and any members of the Board.
The evaluation highlighted a strong Board with the relevant
level of expertise and positive working relationships. The Board
Committees were seen to provide effective support and reported well
to the Board. Whilst no fundamental changes were proposed in the
evaluation, it also highlighted a number of opportunities for
improvement, including the Board continuing to increase its focus
on customer-centric products and services and having more
opportunities to meet colleagues across the Group and Tesco.
18
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
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:
-- Board Audit Committee (BAC)
The BAC comprises Julie Currie (Chair), Robert Endersby,
Jacqueline Ferguson and Simon Machell.
The role of the BAC is to review the Financial Statements,
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; review the
Internal Audit programme; oversee the Internal Audit function; 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 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 BAC is included within the BAC section of
the Directors' Report.
-- Board Risk Committee (BRC)
The BRC comprises Robert Endersby (Chair), Elizabeth Buckley,
Julie Currie, Jacqueline Ferguson, Sir John Kingman, Simon Machell,
Adrian Morris, Tikendra Patel and Amanda Rendle.
The role of the BRC is to oversee that a culture is
appropriately embedded which recognises risk and encourages all
colleagues 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.
-- Board Remuneration Committee (RemCo)
The RemCo comprises Amanda Rendle (Chair), Robert Endersby, Sir
John Kingman and Simon Machell.
The role of the RemCo is to monitor compliance with regulatory
requirements relating to remuneration, specifically the approval
and identification of Material Risk Takers (MRTs) and overseeing
the establishment and implementation of a Remuneration Policy for
all colleagues within the Group (including specific arrangements
for MRTs). The RemCo also provides performance and risk assessment
in the determination of pay outcomes, including the oversight of
pay outcomes for MRT colleagues. The RemCo seeks to ensure that the
levels and structure of remuneration are designed to attract,
retain, and motivate the 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.
-- Board Disclosure Committee (DisCo)
The DisCo comprises Richard Henderson (Chair), Fiona Burden,
Gerard Mallon and Deborah Walker.
The DisCo 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.
19
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
-- Board Nomination Committee (NomCo)
The NomCo comprises Sir John Kingman (Chair), Elizabeth Buckley,
Julie Currie, Robert Endersby, Jacqueline Ferguson, Simon Machell,
Adrian Morris, Tikendra Patel and Amanda Rendle.
The NomCo 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. The Colleague Experience Director and the CEO provide an
update to the Board on ExCo succession planning and any gaps
annually. From a governance perspective, NomCo provides approval
for any hire into ExCo and RemCo provides approval in respect of
reward.
Additionally, the NomCo is responsible for the evaluation of
Board members' performance and appointment of new Board members.
The NomCo establishes the requirements and profile of the candidate
required and then engages with third-party executive search firms
to find the appropriate individual. During the year, Sapphire
Partners and Saxton Bampfylde 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 NomCo. The
executive search partners the Group worked with during the year
were able to demonstrate credentials in supporting the recruitment
of diverse hires at Board level, and were selected on that basis.
The Group's Diversity and Inclusion Policy is discussed in further
detail on pages 17 and 18.
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 support
delivery against the 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, challenging 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.
In order to support their own decision-making, the senior
Executives have established four sub-committees which report
directly to ExCo to support them in challenge and oversight of the
RMF; identification of the key risks facing the Group; and
assessing the effectiveness of risk management actions.
-- Operating Executive Committee (OEC)
The OEC has been established to support the Chief Customer
Officer, Chief Operating Officer, Chief Insurance Officer and
Colleague Experience 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); trade performance
(including pricing plans and customer impact of pricing decisions);
operational matters; change initiatives; risk management; and
certain colleague related matters. The OEC minutes are circulated
to the ExCo, with any material matters being escalated, as
appropriate.
-- Investment Review Committee (IRC)
The IRC has been established to support the CEO 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.
20
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
-- Asset and Liability 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 BRC 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 matter being
escalated, as appropriate.
-- 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 Risk Management 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.
Three Lines of Risk Management
The Three Lines of Risk Management 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 Risk Management
Senior Management within each business area is responsible for
managing the risks that arise from the activities in which the
business area is engaged in accordance with the Group's RMF and
policies. The role of the First Line of Risk Management 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 the respective business area is engaged;
identify, design, implement, own, check and operate management
controls; identify, manage and monitor risk events, including the
delivery of remedial actions and performance of root cause
analysis; translate Risk Appetite into clear, precise articulation
of acceptable risks and operate within Risk Appetite and any
related limits which the Second Line of Risk Management
establishes; provide input to reporting on the risk environment in
line with risk reporting standards established by the Second Line
of Risk Management; 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 Risk Management
The RMFu operates under the leadership of the CRO. Risk teams
reporting to the CRO are the Second Line of Risk Management 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 Risk Management is to own,
develop, communicate, implement and provide advice on the Group's
RMF and policies; provide subject matter expertise in the
management of specific types of risk and regulation, including
supporting in the identification and management of risk events and
associated remediation activity; provide risk-based oversight of
the First Line of Risk Management's implementation of, and
adherence to, the RMF and policies; provide risk-based oversight 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
and propose the Risk Appetite to the Board and oversee
implementation of Risk Appetite in the First Line of Risk
Management; design and deliver standards for consistent risk
reporting, risk governance and escalation; perform Group-wide risk
aggregation and analysis; provide proactive insight and direction
on industry, governing body and regulatory developments that will
help improve the management of risk in the Group; and deliver and
co-ordinate specific regulatory returns.
21
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
-- Third Line of Risk Management
This comprises the Internal Audit 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 Internal Audit function has an independent reporting
line to the Chair of the BAC and is resourced by individuals with
relevant experience and professional qualifications. In addition,
Internal Audit resources are supplemented across a range of audits
by external support to provide additional subject matter expertise
when required.
The primary role of Internal Audit is to provide independent
assurance on the effectiveness of governance, risk management and
control across the First and Second Lines of Risk Management.
Independent assessment is provided through the execution of an
agreed plan of audits, through attendance at relevant governance
committees and through stakeholder management meetings.
Policies
The Group has a Policy Framework in place which requires Level 1
policies to be approved by the Board and Level 2 policies by the
relevant SMF owner. 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 training/information/understanding
to comply; undertaking suitable oversight 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 biennial 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.
-- Risk Identification and Assessment
RCSA is the process used to identify, assess, manage, monitor
and report risks and controls across the Group. The process sets
out principles which should be consistently applied to the
identification of risk. New and emerging risks and the recommended
responses to them are reported by business units and the RMFu to
relevant governance bodies. The risk assessment process is the
means by which the Group understands and estimates the effect of
risk on the business, processes, systems and controls that mitigate
those risks to an acceptable level. These assessments are reported
to the Board on a regular basis.
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. Key discussion points from subordinate risk committees
and Management fora are reported to Senior Management and
committees as appropriate.
-- Event Management
An Event is an occurrence caused by an internal or external
failure which could impact the Group's finances, customers,
compliance with regulations, brand and reputation, or resilience of
operations. The Event Management process provides the tools and
techniques to identify, assess and manage events through to
closure.
-- 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, ERC, BRC and the Board. These are captured in
both the ILAAP and the ICAAP.
22
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
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 'serving its customers, communities and planet 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.
In accordance with Provision 31 of the 2018 Code, the Board is
required to confirm that it believes that the Group will be able to
continue in operation and meet its liabilities, taking into account
its current position and the principal risks it faces, over a
specified time horizon.
In assessing the Group's future prospects, the Board considers a
period of three years to be appropriate as this is within the
five-year period over which the Group's long-term plan is prepared
and internal stress testing of the profit, capital and funding
forecasts are carried out. However, levels of uncertainty increase
in the outer years of the planning period and therefore the shorter
period is considered more suitable for the Viability Statement. The
time period will be subject to annual Board review.
-- 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 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
FPC 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 45 and its
capital position is set out at note 50.
-- 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 the
rising cost of living, exacerbated by the ongoing conflict in
Ukraine.
The Group's principal risks and policies and processes for
managing those risks are set out on pages 10 to 15.
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.
23
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
Viability Statement (continued)
As part of this assessment the Board considered:
-- The impact on the Group's profits as income and charges for
ECLs continue to be affected by the current economic environment.
As part of this, the Board considered the latest macro-economic
scenarios which were received from the Group's third-party
supplier. These are discussed in note 45;
-- The sufficiency of the Group's capital base. The worst case
macro-economic scenarios received were significantly less severe
than those used in the ICAAP reverse stress test. The Group
reviewed its stress testing scenarios to ensure it has sufficient
capital to trade through a plausible range of economic outcomes.
The Group's capital position at 28 February 2022 is set out at note
50;
-- The adequacy of the Group's liquidity as the Group supports
customers through a period of economic uncertainty. The Group
reviewed its stress testing scenarios to ensure it has sufficient
liquidity to trade through a range of plausible economic outcomes.
In addition to the Group's portfolio of liquid assets, it has an
undrawn GBP200.0m committed structured repurchase facility;
-- 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; and
-- The structural protections of the Group's securitisation vehicles.
Further information on the Group's principal risks is set out on
pages 10 to 15.
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.
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.
24
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
S172 Statement by the Directors (continued)
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 29 to
31.
The Board has made some key strategic decisions during the year
ended 28 February 2022 where due consideration was given to the
Group's key stakeholders, including:
Closure of Personal Current Accounts
In March 2021, the Group took the decision to close its PCA
product to all of its existing PCA customers with effect from
November 2021. This decision followed the withdrawal of the PCA
product from sale in December 2019. As a result of the decision to
withdraw from the PCA market, the Group will focus on new
propositions that are specifically designed to meet the everyday
needs of Tesco customers. When making the decision to close the
existing PCA product, the Board considered a number of factors,
including the behaviours of the Group's customers and the fact that
it was a loss-making product. The Group estimated that only around
11% of PCAs were being used by customers as their primary current
account, with most accounts having limited activity or being used
for other purposes, such as a way to save money. The Group's focus
was on helping customers throughout the process, including
informing them of the alternative options available to them.
Options included moving their account to a new current account
provider, and/or moving to a suitable Tesco Bank savings, Clubcard
Pay+ or credit card product. The Board believes that the closure of
the existing PCA product was in the best interests of the Group in
the longer-term.
The Group was committed to providing support to customers during
the process of closing or switching their accounts. Clear
communications were discussed and reviewed extensively before being
issued to customers. Over 775,000 written communications were sent
to 213,000 PCA customers between 26 July 2021 and 30 November 2021.
Particular consideration was given to the Group's more vulnerable
customers and those in need of financial assistance. During the
closure notice period, 48,729 accounts were closed by customers,
with 82% of these being completed via the Current Account Switch
Service. Switch requests exceeded expectations, leading to some
delays during August 2021, however, action was taken to manage this
activity, including additional resource being allocated to support
customers and keep them fully informed. Post-closure communications
were also sent, including Final Closure Statements, five-year
transaction history access details and specific communications to
those customers currently in financial difficulties. In addition,
there were a number of outbound telephone calls made to particular
sets of customers who had failed to take action following the
written communications. Feedback from customers confirmed that they
were aware of the closure and were comfortable with what they were
required to do or, where appropriate, happy to receive a refund by
cheque. Support continues to be available for customers where
required, including those 790 customers who were in arranged
overdrafts at the point of closure. Ongoing monitoring of all
activity associated with the closure continues to be carried out,
particularly in relation to customer service and outcomes. Customer
complaints were monitored as a key source of customer feedback and
used as a way to improve communications and engage with customers.
Total complaints received throughout the closure programme equated
to less than 0.5% of PCA customers. The Group's colleagues were
provided with the necessary training to be able to support the
Group's customers and ensure customers were treated fairly.
25
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
S172 Statement by the Directors (continued)
Given the nature and complexity of the closure, it was delivered
as a project with dedicated resource and funding allocated. The
appropriate governance and risk management was applied to support a
well-controlled project, with senior stakeholders involved at all
stages. Risks were identified and reviewed during the project. A
risk register was maintained and managed, with escalation to senior
stakeholders if required. Regular meetings took place between all
impacted business areas and reporting to senior stakeholders
allowed the necessary visibility of any impacts on the Group's
customers and colleagues.
The regulators were kept informed throughout the project on a
regular basis.
Outsourcing of Collections and Recoveries Capability
In August 2021, the Group announced its decision to outsource
its collections and recoveries capability to a third--party
provider. The decision followed a strategic review carried out in
late 2020. The Board made the decision to outsource to Arrow Global
Group (AGG), a specialist service provider for the management of
customers in financial difficulties. This arrangement allows the
Group to deliver a higher level of service to customers through a
modernised service offering, underpinned by new technologies,
processes and consumer channels and fully aligns to the Tesco
strategy. A robust process was carried out to identify the right
third-party to work with the Group, and AGG was appointed given its
specialism in this area, customer service, customer focus, proven
expertise, technology platforms and for the cultural alignment
between the two organisations. The fair treatment of customers was
a key criterion during the supplier selection process and
subsequently during the more detailed due diligence conducted prior
to contract sign off. Assurance was carried out by the Group,
including a review of AGG's conduct risk, customer outcome and
quality assurance framework, a review of outcome testing results
and a review of a sample of customer journeys to examine all
interactions with customers during financial difficulties. The
assurance confirmed and evidenced that AGG operated to an extremely
high standard in treating customers fairly and ensuring good
customer outcomes.
Aligned with the Group's strategy, the Board also considered the
impact on the business in relation to managing default levels and
associated ECL charges which supported the decision to outsource
the Group's collections and recoveries capabilities. As a result of
the improved capabilities afforded by AGG, the Group will benefit
through expected reduction in arrears, defaults levels and improved
recovery post-default.
The transition of service to AGG concluded in November 2021 and
the partnership resulted in 236 colleague roles transferring, under
the Transfer of Undertakings (Protection of Employment) (TUPE)
regulations, to AGG. This was subject to a collective consultation
process with a recognised trade union. Under the agreement between
the Group and AGG, all colleagues transferred under TUPE are
protected from redundancy for a period of at least two years. The
Group engaged colleagues as early as was possible and listened to
feedback. Colleagues were supported through the formal consultation
and given access to AGG management to ask questions and talk
through any concerns. The Group provided colleagues with support to
help manage them through the change.
The Group had previously conducted a comprehensive assessment of
customer needs in financial difficulty. This assessment, which was
supported by an external agency, involved walking customers through
their real-life journey. The Group also engaged with colleagues who
had experienced financial difficulties and customer focus groups
were used to better understand customer needs and desired
experiences when faced with financial difficulties. This insight
supported the decision to outsource the collections and recoveries
capabilities.
AGG has successfully assumed full servicing responsibilities
using the Group's systems and processes with no customers impacted
during the transition. The service transformation will be delivered
in two further phases, including the migration of the Personal
Loans and Credit Cards books to AGG's systems and processes,
expected to take place during 2022. The benefits that will come
from the service transformation include an enhanced proposition
that significantly improves the Group's ability to support
customers in financial difficulties and provides customers with the
ability to self-serve through a new digital proposition.
The Board continues to be updated on the progress of the service
transformation, with risk management being a key focus. The
escalation of any risks, issues or concerns are communicated to the
Board in a timely manner via senior management. The Group has
engaged with the regulators on the outsourcing arrangement and
continues to have active dialogue with the regulators as the
transition and transformation progresses.
26
TESCO PERSONAL FINANCE GROUP PLC
STRATEGIC REPORT (continued)
S172 Statement by the Directors (continued)
Launch of Tesco Clubcard Pay+
During the year the Group launched Tesco Clubcard Pay+, a new
payment and money management offering designed to help Tesco
customers pay, save and collect Clubcard points. The product allows
customers to add their shopping money to their Clubcard Pay+
account using the Group's secure mobile banking app and to see all
of their grocery spending in one place. A decision was made to
launch the Tesco Clubcard Pay+ product in phases, ensuring that
sufficient time was taken to engage with customers, colleagues and
Tesco to get feedback to inform the product features, align to the
Tesco strategy and to allow time to test the systems that would
underpin its operation and service.
The Group initially launched Tesco Clubcard Pay+ to Tesco
customers for a six-month test and learn period to allow the
proposition and marketing approach to be refined. This was followed
by updates and enhancements to the product in September 2021 before
the nationwide launch in January 2022. Following the initial launch
in March 2021 a rigorous insight framework was implemented,
including a six week 'customer panel' involving multiple
participants across the different categories of Tesco customers. An
enormous amount of insight was gathered and analysed, and a variety
of product and proposition development techniques were used
throughout the process based on continuous customer feedback. From
this engagement the Group identified the key drivers of why
customers would want to take out the product, why they would
continue to use the product and what features they wanted from the
product. From the combination of qualitative and quantitative
insight, improvements were made to the customer experience
following its initial launch. These improvements included
refinements to the application journey and clarity to help
customers understand how to use the product, as well as some new
savings features. Whilst the product development framework was
being rolled out colleagues received training which also provided
opportunities for colleagues to provide feedback, collaborate and
engage with each other, creating an effective product community.
Risk management was also a key focus.
Risks were identified, with controls and actions put in place to
address them. Reporting and escalation of these were tightly
managed. The Board is kept up-to-date with the performance of the
product, with any significant customer or colleague issues being
escalated via Senior Management and there is continuous engagement
with Tesco. There has also been regular dialogue with, and updates
provided to, the regulator.
Since the nationwide launch in January 2022 over 60,000 accounts
have been opened by Tesco customers, with more than GBP42m having
been spent in 1.9m transactions using Tesco Clubcard Pay+. Customer
behaviours continue to be monitored and will help inform further
improvements to the product.
The Strategic Report was approved by the Board of Directors and
signed by order of the Board.
Fiona Burden
Company Secretary
11 April 2022
27
TESCO PERSONAL FINANCE GROUP 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 28 February 2022.
Compliance with the UK Corporate Governance Code
The Group applied the main principles and complied with the
relevant provisions set out in the 2018 Code throughout the year
under review, with the exception of provision 41. Provision 41
relates to disclosures in respect of the Remuneration Committee 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 9.
Risk Management
The Group's risk management disclosures are set out in the
Strategic Report on pages 9 to 16.
Financial Instruments
The Group's policies for hedging each major type of transaction
are discussed in notes 1 and 23 to the Financial Statements.
Capital Structure
The Group's capital structure is discussed in note 50 to the
Financial Statements.
Events after the Reporting Date
Details of events occurring after the reporting date are
discussed in note 55 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 current economic environment,
and including consideration of projections incorporating the impact
of the rising cost of living, exacerbated by the ongoing conflict
in Ukraine, for the Group's capital and funding position.
As part of this assessment the Board considered:
-- The impact on the Group's profits as income and charges for
ECLs continue to be affected by the current economic environment.
As part of this, the Board considered the latest macro-economic
scenarios which were received from the Group's third-party
supplier. These are discussed in note 42;
-- The sufficiency of the Group's capital base. The worst case
macro-economic scenarios received were significantly less severe
than those used in the ICAAP reverse stress test. The Group
reviewed its stress testing scenarios to ensure it has sufficient
capital to trade through a plausible range of economic outcomes.
The Group's capital position at 28 February 2022 is set out at note
50;
-- The adequacy of the Group's liquidity as the Group supports
customers through a period of economic uncertainty. The Group
reviewed its stress testing scenarios to ensure it has sufficient
liquidity to trade through a range of plausible economic outcomes.
In addition to the Group's portfolio of liquid assets, it has an
undrawn GBP200.0m committed structured repurchase facility;
28
TESCO PERSONAL FINANCE GROUP PLC
DIRECTORS' REPORT (continued)
Going Concern (continued )
-- 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; 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.
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 28 February 2022 can be found in the Strategic Report on
pages 25 to 27.
-- Our Customers
The Group's purpose is to serve its customers, communities and
planet a little better every day. Developing customer-centric
insights is key to how the Group designs new services and improves
existing services for customers, bringing the best of Tesco to help
customers with their money needs.
The Group has typically interacted with customers in a variety
of ways, including face-to-face, in stores, through surveys and
remotely via telephone and online, all with the common goal to
deepen the Group's understanding of its customers, learn from them
and understand their financial needs. The Covid-19 pandemic meant
that the Group had to amend the ways in which it interacts with
customers. Face-to-face interactions have temporarily stopped but
that has not prevented the Group from connecting with customers on
a regular basis and the Group has implemented a series of digital
tools to ensure customers can provide timely and relevant
feedback.
The Group continues to invest and look at ways to connect Tesco
customers to the right banking and insurance products for their
needs. Investment continues in technology, data, design and
personalised marketing. This connection ensures the Group develops
its relationship with its customers to serve more of their money
needs, gaining trust and loyalty in return.
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 continued to focus on the way in which it
communicates and engages with its more than 3,800 colleagues in
order to keep colleagues feeling connected to each other, the
Group's strategy and its purpose and values as the Group has
transitioned its working practices in response to the Covid-19
pandemic.
29
TESCO PERSONAL FINANCE GROUP PLC
DIRECTORS' REPORT (continued)
-- Our Colleagues (continued)
Business developments were communicated frequently to keep
colleagues informed about the progress of the Group. In addition,
monthly interactive sessions, designed specifically for the Group's
Extended Leadership team, were also held to support and equip them
with information to lead their teams as the Group transitioned new
working practices necessitated by the Covid-19 pandemic to
business-as-usual. The Group has tracked colleague sentiment and
performance against its key performance objectives through its
continuous listening programme, including a series of pulse
surveys, its annual Every Voice Matters (EVM) survey and the
Financial Services Culture Board survey. The most recent EVM survey
results reported that the majority of colleagues consider that the
Group is a great place to work, that their health and wellbeing is
supported, and that they feel they can be themselves without fear
of judgement. The Leadership team will continue to review and
discuss colleague feedback to shape future plans. The Group also
continued to share Covid-19-related government guidance with all
colleagues and ensured that this guidance was reflected within its
policies.
The Group 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'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 to
ensure that colleagues understand the Group's objectives and the
regulatory environment in which it operates. 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. 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 provides colleagues with the ability to
raise any concerns regarding misconduct and breach of the Code for
Business Conduct.
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.
The Group's colleagues have the support of a diverse community of
Mental Health First Aiders, 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, Workplace Options, colleagues also have
access to online content, webinars and over the phone support. This
is an independent and unlimited 24/7 telephone support line.
The Colleague Contribution Panel (CCP) is a panel of elected
colleagues from all across the Tesco group who meet with a
Non-Executive Director from Tesco twice a year to discuss
experiences of working at Tesco. TPFG's Colleague Experience
Director provides feedback from the CCP to TPFG's Executive
Management team. A CCP meeting was held in November 2021, with
outputs shared with the Tesco Executive team and the Tesco Board in
March 2022. The topics raised by the panel ranged from innovation
to technology and training. There were no specific actions for TPFG
to address following this meeting.
30
TESCO PERSONAL FINANCE GROUP PLC
DIRECTORS' REPORT (continued)
-- Our Colleagues (continued)
In addition, the Board has designated Amanda Rendle as the
non-executive director to support colleague engagement activity
across the Group. Amanda has experience in this area through other
non-executive roles and also has a personal interest in colleague
engagement. Based on these factors, the Board nominated her to
engage with colleagues directly to further support the Group in
obtaining colleague feedback.
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).
-- Our Suppliers
The Group engages with around 750 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 28 February 2022 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 procurement and the management of suppliers to ensure
that it can effectively engage, manage and terminate, where
appropriate, supplier relationships. In addition to meetings and
dialogue with suppliers in accordance with the framework, methods
used to encourage feedback and engagement include participation in
the Tesco Supplier Viewpoint Survey and an annual supplier
conference. To support regulatory reporting requirements, the Group
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.
The Group recognises its responsibilities to respect the human
rights of its customers, colleagues, suppliers and the communities
it serves and does not tolerate slavery, human trafficking, forced
labour, child labour or child exploitation. The Group's Modern
Slavery statement is available on its website at the following
link:
https://bank.tescoplc.com/financial-information/accounts-and-disclosures/.
There have been no material changes to the Group's Modern Slavery
statement since this was approved in August 2021.
-- Our Shareholder
The Board uses its relationship with Tesco, the Group's only
shareholder, to provide access to 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. The Group's CEO, Gerry Mallon, is a member of the Tesco
Executive Committee and Adrian Morris, Tesco's General Counsel, is
a Non-Executive Director of the Group's Board.
-- Our Community
Despite many of the Group's colleagues working from home during
the year, teams have remained committed to supporting the Group's
local charity partners. Charitable support has been impacted by
government measures put in place to limit the spread of Covid-19
but colleagues have continued to raise funds for local charitable
causes through a variety of virtual fund-raising challenges.
Dividends
An interim dividend of GBP87.0m (2021: GBP13.0m) in respect of
ordinary share capital was paid to Tesco on 18 February 2022.
Treating Customers Fairly
Treating Customers Fairly is central to the Financial Conduct
Authority'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.
31
TESCO PERSONAL FINANCE GROUP PLC
DIRECTORS' REPORT (continued)
Directors
The present Directors and Company Secretary at the date of
signing this Annual Report and Financial Statements are listed on
page 1. Details of changes in Directors and the Company Secretary
during the year and up to the date of signing the Financial
Statements are set out below.
Since 1 March 2021 to date the following changes have taken
place:
Appointed Resigned
9 December
Elizabeth Buckley 2021
1 February
Fiona Burden (Company Secretary) 2022
Declan Hourican 29 June 2021
Adrian Morris 30 April 2021
31 January
Michael Mustard (Company Secretary) 2022
30 December
Tikendra Patel 2021
Alan Stewart 30 April 2021
18 January
Deborah Walker 2022
28 September
James Willens 2021
-- Audit Committee (BAC)
Introduction from the BAC Chair
The Group operates in a demanding environment, particularly with
regard to economic, reputational, political and regulatory factors.
The role of the BAC 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 BAC 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.
BAC composition, skills and experience
The BAC 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 BAC comprises four Independent Non-Executive Directors.
Julie Currie is a Chartered Accountant and has over 25 years'
experience in the financial services sector, the majority of which
was spent at Lloyds Banking Group. This experience enables her to
fulfil the role as BAC Chair.
Julie's previous appointments include Chief Operating Officer
for the turnaround division of Lloyds Banking Group and Chief
Financial and Operating Officer for the Lloyds bank foundation, the
largest corporate foundation in England and Wales. Julie also spent
nine years in Bank of Scotland's European Leveraged Finance
business. Julie holds a Non-Executive role with Scotiabank Europe,
where she has chaired the Audit Committee since 2018. She was also
the chair of the Audit and Risk Committee for the Department for
International Trade from 2016 to 2020.
Julie joined the TPFG/TPF Board in February 2021 and is Chair of
the BAC.
Robert Endersby has spent almost 40 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 include Chief Risk Officer
and member of the Executive Board of Danske Bank, Denmark's largest
financial enterprise. Robert was also an independent Non-Executive
director and chair of the board risk committees of Credit Suisse
International and Credit Suisse Securities (Europe) Limited. Robert
is also currently an independent Non-Executive director and chair
of the board risk committee of Redwood Bank Limited.
Previously, Robert has also held senior risk management
positions in Barclays, The Royal Bank of Scotland and ING Group and
has a broad international experience of the sector including
assignments based in Denmark, the Netherlands and France.
Robert joined the TPFG/TPF Board in December 2014 and currently
Chairs the BRC.
32
TESCO PERSONAL FINANCE GROUP PLC
DIRECTORS' REPORT (continued)
BAC 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.
Jacqueline joined the TPFG/TPF Board in 2018.
Simon Machell has worked in financial services for over 30 years
and has deep 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. He was chairman of the Motor Insurers' Bureau for
six years. Simon holds Non-Executive roles with Pacific Life Re,
Prudential Corporation (Asia), Suncorp Group and TU.
Simon joined the TPFG/TPF Board in 2013.
The Chair, Chief Executive Officer, 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.
BAC responsibilities
The key responsibilities of the BAC are set out in the Strategic
Report on page 19.
During the year, the BAC received reports from a number of
business areas including Finance in relation to financial reporting
and Risk in relation to regulatory compliance and integrated
assurance. The BAC also considered a variety of matters including
the internal financial control framework, consolidation and
oversight of TU, system access control, the external fraud control
environment and business continuity arrangements, whilst preparing
for Audit Market Reform and the introduction of UK SOx.
Financial Statements and related financial reporting
In relation to the Financial Statements, the BAC 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 28 February 2022, the BAC considered the
following matters:
-- The methods used to account for significant transactions
The BAC reviewed and supported proposals from Management on the
accounting for the Group's acquisition of TU.
-- Going concern assessment
The BAC 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
2023, 12 months subsequent to signing the Annual Report and
Financial Statements for the year ended 28 February 2022. 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 economic
uncertainty arising from the rising cost of living, exacerbated by
the ongoing conflict in Ukraine. These were then subject to stress
testing based on various scenarios, including scenarios
incorporating the impact of the current economic environment. The
detailed considerations taken by the Board in arriving at its going
concern assessment are set out on pages 23 to 24 and 28 to 29.
The BAC 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 BAC 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.
33
TESCO PERSONAL FINANCE GROUP PLC
DIRECTORS' REPORT (continued)
Financial Statements and related financial reporting
(continued)
-- Appropriate critical accounting estimates and judgements
The BAC 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 28 February 2022 are:
o Expected credit loss provision (ECL) (Refer to note 45)
The BAC received regular reports from Management on
provisioning, which assessed the adequacy of provisioning based on
a number of factors. These included levels of arrears, past loss
experience, defaults based on portfolio trends, expected loss rates
and PMAs.
The BAC 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 35)
The Group has a provision for potential customer redress in
relation to payment protection insurance (PPI).
The BAC 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 BAC is satisfied that the provisions and related disclosures
in the Financial Statements in respect of PPI and other customer
redress provisions are appropriate.
o Outstanding insurance claims and provisions (Refer to note
39)
The Group holds an investment in TU, an authorised insurance
company, which became a wholly owned subsidiary of the Group on 4
May 2021.
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 reinsurance
assets, insurance funds withheld and insurance contract provisions
balances in the Consolidated Statement of Financial Position.
The BAC reviewed the key judgements and estimates made by TU in
determining the level of reserves held at the reporting date.
The BAC is satisfied that the carrying value of insurance claims
and provisions is appropriate.
Performance and Effectiveness of Internal Audit
The Internal Audit function supports the BAC 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 BAC 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 Internal Audit Director.
In compliance with the above standards, the BAC assessed the
effectiveness of the Internal Audit function, with the results of
the annual assessment for 2021/22 being positive.
Performance and Effectiveness of External Audit
An externally facilitated review is carried out to assess the
effectiveness of the External Auditor. This review is arranged and
overseen by Tesco, with Executive management and the Chair of
TPFG's BAC asked to participate. The review comprises a
comprehensive set of questions including the scope of the work of
the External Auditor, the quality of reporting, the relationship
with Management, the level of expertise and experience of the
External Auditor and their overall performance. The process of the
assessment is generally carried out during January and February in
each year, after which the final report is issued to the Tesco BAC.
TPFG's BAC is also provided with a copy of the report for review
and discussion.
34
TESCO PERSONAL FINANCE GROUP PLC
DIRECTORS' REPORT (continued)
Performance and Effectiveness of External Audit (continued)
In 2021, Lintstock carried out the assessment of the
effectiveness of the External Auditor. A report was issued to
TPFG's BAC in July 2021, with an effective assessment. The
assessment for 2022 is in progress, with the report due to be
issued and discussed at TPFG's BAC in July 2022. In addition to the
Tesco report, TPFG's BAC Chair will also facilitate a more targeted
assessment of the External Auditor using the output of the survey
provided by Lintstock. This will allow further discussion and
assessment of the External Auditor at TPFG level and help to
support the overall assessment and identification of any specific
areas for further improvement.
Performance and Effectiveness of the BAC
The BAC 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 BAC 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 BAC was reviewed as part of the wider
Board effectiveness review, carried out by Lintstock. This included
interviews with all BAC members and it was concluded that the BAC
continued to be effective.
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 21.
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.
The Board of Directors is ultimately responsible for reviewing
the effectiveness of the Group's RMF and internal controls.
Assessment of the effectiveness of the RMF is undertaken by the BRC
on behalf of the Board, while assessment of the effectiveness of
internal controls is undertaken by the BAC on behalf of the Board,
with any issues escalated to the Board, as appropriate. No material
deficiencies in internal controls have been identified in the year
and the Board therefore considers that the Group has in place an
adequate RMF and internal controls.
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 BAC. The independence of the
External Auditor in relation to the Group is considered annually by
the BAC.
The Group has a Non-audit Services Policy for work carried out
by its External Auditor. This is split into two categories as
follows:
1. Work for which BAC approval is specifically required -
transaction work and certain advisory services; and
2. Work from which the External Auditor is prohibited.
The BAC 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 BAC was
satisfied that audit independence was not, at any point,
compromised.
Deloitte follows the FRC's Ethical Standard and 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 14 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 TPF and 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.
35
TESCO PERSONAL FINANCE GROUP PLC
DIRECTORS' REPORT (continued)
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 10 to 16.
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 174.
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 International Accounting Standards (IASs) in
conformity with the requirements of the Companies Act 2006 and
IFRSs as issued by the International Accounting Standards Board
(IASB).
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 IASs in conformity with the requirements of the
Companies Act 2006 and IFRSs as issued by the IASB, 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 the 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 shareholder to assess the Group's and
Company's position, performance, business model and strategy.
36
TESCO PERSONAL FINANCE GROUP PLC
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 independent auditor in connection with preparing this
report, of which the independent 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 independent auditor is aware
of that information.
External Audit Partner
The External Audit partner for the year to 28 February 2022 was
Peter Birch who has fulfilled the role since the prior year.
Deloitte were appointed 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.
Fiona Burden
Company Secretary
11 April 2022
37
TESCO PERSONAL FINANCE GROUP PLC
Consolidated Income Statement
For the year ended 28 February 2022
2022 2021
Note GBPm GBPm
Continuing operations
Interest and similar income 6 487.5 562.4
Interest expense and similar charges 6 (62.1) (108.9)
-------- --------
Net interest income 425.4 453.5
Fees and commissions income 7 226.9 208.8
Fees and commissions expense 7 (37.5) (32.7)
-------- --------
Net fees and commissions income 189.4 176.1
Insurance premium income 8 239.2 --
Insurance premium income ceded to reinsurers 8 (105.5) --
-------- --------
Net insurance premium income 133.7 --
Net gain on investment securities at fair value through profit or loss (FVPL) 10 4.9 --
Net loss on investment securities at fair value through other comprehensive income (FVOCI) 11 (0.3) --
Net gain/(loss) on other financial instruments at FVPL 10 2.1 (2.5)
Other income 12 10.4 --
-------- --------
Net other income 17.1 (2.5)
Total income 765.6 627.1
-------- --------
Insurance claims incurred 13 (150.2) --
Insurance claims ceded to reinsurers 13 61.9 --
-------- --------
Net insurance claims (88.3) --
Total income, net of insurance claims 677.3 627.1
-------- --------
Administrative expenses 14 (456.1) (382.0)
Depreciation and amortisation 35 (65.2) (56.7)
-------- --------
Operating expenses (521.3) (438.7)
Expected credit loss credit/(charge) on financial assets 15 29.9 (359.5)
Operating profit/(loss) 185.9 (171.1)
Share of profit of joint venture 28 2.6 16.2
-------- --------
Profit/(loss) before tax 188.5 (154.9)
Analysed as:
------------------------------------------------------------------------------------------- ----- -------- --------
Underlying profit/(loss) before tax 186.4 (152.4)
Non-underlying items 2.1 (2.5)
------------------------------------------------------------------------------------------- ----- -------- --------
188.5 (154.9)
Income tax (charge)/credit 17 (44.2) 51.2
-------- --------
Profit/(loss) for the year from continuing operations 144.3 (103.7)
Discontinued operations
Profit after tax from discontinued operations -- 0.2
Profit/(loss) for the year attributable to owners of the parent 144.3 (103.5)
-------- --------
38
TESCO PERSONAL FINANCE GROUP PLC
Consolidated Statement of Comprehensive Income
For the year ended 28 February 2022
2022 2021
Note GBPm GBPm
Profit/(loss) for the year 144.3 (103.5)
Items that may be reclassified subsequently to the Income Statement
Debt securities at FVOCI
Fair value movements 17 (18.5) (3.2)
Taxation 17 5.3 0.8
Net losses transferred to the income statement on disposal 0.3 --
Expected credit loss transferred to the income statement 0.1 --
(12.8) (2.4)
------- --------
Cash flow hedges
Fair value movements 17 1.1 (0.5)
Taxation 17 (0.3) 0.2
0.8 (0.3)
------- --------
Currency basis reserve
Foreign currency movements 17 -- 0.1
-- 0.1
------- --------
Share of other comprehensive (expense) of joint venture (0.6) (1.9)
Transfer of share of other comprehensive income of joint venture to the Income Statement on
change
of control 28 (5.0) --
(5.6) (1.9)
------- --------
Items that will not be reclassified subsequently to the Income Statement
Equity securities at FVOCI
Fair value movements 17 -- 1.9
Taxation 17 -- (0.6)
-- 1.3
------- --------
Other comprehensive expense for the year, net of tax (17.6) (3.2)
------- --------
Total comprehensive income/(expense) for the year 126.7 (106.7)
------- --------
Total comprehensive income/(expense) for the year attributable to owners of the parent
Continuing operations 126.7 (106.9)
Discontinued operations -- 0.2
39
TESCO PERSONAL FINANCE GROUP PLC
CONSOLIDATED AND COMPANY STATEMENTS OF FINANCIAL POSITION
For the year ended 28 February 2022
Company number SC173198
Group Company
2022 2021 2022 2021
Note GBPm GBPm GBPm GBPm
Cash and balances with central banks 19 780.6 804.2 7.8 14.8
Loans and advances to banks 20 50.3 -- -- --
Loans and advances to customers 21 6,490.3 6,402.2 -- --
Loans and advances to subsidiary companies 22 -- -- 484.7 483.5
Derivative financial instruments 23 45.3 6.1 -- --
Investment securities 24 1,466.9 953.5 -- --
Reinsurance assets 39 245.1 -- -- --
Prepayments and accrued income 25 43.2 41.6 -- 1.3
Other assets 26 219.7 211.2 -- --
Current income tax asset 2.5 36.1 -- --
Investment in group undertaking 27 -- -- 1,219.9 1,219.9
Deferred income tax asset 29 64.2 67.3 -- --
Investment in joint venture 28 -- 92.8 -- --
Intangible assets 30 148.6 130.9 -- --
Property, plant and equipment 31 79.8 77.5 -- --
Total assets 9,636.5 8,823.4 1,712.4 1,719.5
------------------------------------------------------ ----- --------- -------- ---------- ----------
Liabilities
Deposits from banks 32 1,052.3 600.0 -- --
Deposits from customers 33 5,325.9 5,738.0 -- --
Debt securities in issue 34 244.0 251.0 250.4 249.4
Derivative financial instruments 23 27.2 47.5 -- --
Provisions for liabilities and charges 35 37.6 60.1 -- --
Accruals and deferred income 36 119.6 86.1 -- 1.3
Other liabilities 37 164.1 184.2 -- --
Insurance funds withheld 38 114.8 -- -- --
Insurance contract provisions 39 650.0 -- -- --
Subordinated liabilities and notes 40 235.6 235.0 235.6 235.0
Total liabilities 7,971.1 7,201.9 486.0 485.7
------------------------------------------------------ ----- --------- -------- ---------- ----------
Equity and reserves attributable to owners of parent
Share capital 41 122.0 122.0 122.0 122.0
Share premium account 41 1,098.2 1,098.2 1,098.2 1,098.2
Retained earnings 431.7 370.7 6.2 13.6
Other reserves 42 13.5 30.6 -- --
Total equity 1,665.4 1,621.5 1,226.4 1,233.8
------------------------------------------------------ ----- --------- -------- ---------- ----------
Total liabilities and equity 9,636.5 8,823.4 1,712.4 1,719.5
------------------------------------------------------ ----- --------- -------- ---------- ----------
Profit for the year of GBP79.6m (2021: GBP15.2m) is attributable
to the Company.
The Consolidated and Company Financial Statements on pages 38 to
44 were approved by the Board of Directors and authorised for issue
on 11 April 2022 and were signed on its behalf by:
Richard Henderson
Director
40
TESCO PERSONAL FINANCE GROUP PLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 28 February 2022
Cash flow Share based
Share Share Retained FV/AFS hedge payment Total
capital premium earnings reserve(1) reserve reserve equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------- ------------- ------------ ------------ ------------- ------------ --------
Balance at 1
March 2021 122.0 1,098.2 370.7 9.3 (0.6) 21.9 1,621.5
Comprehensive
income
Profit for the
year - - 144.3 - - - 144.3
Net fair value
movement on
investment
securities
at FVOCI 17 - - - (12.8) - - (12.8)
Net movement on
cash flow hedges 17 - - - - 0.8 - 0.8
Share of other
comprehensive
expense of joint
venture 28 - - - (0.6) - - (0.6)
Transfer of share
of other
comprehensive
income
of joint venture
to the Income
Statement on
change
of control - - - (5.0) - - (5.0)
Transfer of net
gains to
retained
earnings on
reclassification
during the year
of investment
securities held
at
FVOCI to FVPL(2)
(refer note 24) - - 3.7 (3.7) - - --
Total
comprehensive
income - - 148.0 (22.1) 0.8 - 126.7
--------- ------------- ------------ ------------ ------------- ------------ --------
Transactions with
owners
Dividends to
ordinary
shareholders 18 - - (87.0) - - - (87.0)
Share based
payments 53 - - - - - 4.2 4.2
Total
transactions
with owners - - (87.0) - - 4.2 (82.8)
--------- ------------- ------------ ------------ ------------- ------------ --------
Balance at 28
February 2022 122.0 1,098.2 431.7 (12.8) 0.2 26.1 1,665.4
--------- ------------- ------------ ------------ ------------- ------------ --------
(1) Available-for-sale (AFS).
(2) The Group has a holding in preferred stock issued by VISA
Inc. which was designated at FVOCI in previous years. Following a
review of industry practice and the requirements of IFRS 9, this
holding has been reclassified to FVPL with effect from 1 March
2021. As this amount is not material, no prior year restatement has
been recognised in respect of this reclassification.
41
TESCO PERSONAL FINANCE GROUP PLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 28 February 2022
Cash Share
flow Currency based
Share Share Retained FV/AFS hedge basis payment Total
capital premium earnings reserve(1) reserve reserve reserve equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 March
2020 122.0 1,098.2 487.2 12.3 (0.3) (0.1) 25.1 1,744.4
Comprehensive
income
Loss for the year -- -- (103.5) -- -- -- -- (103.5)
Net fair value
movement
on investment
securities
at FVOCI 17 -- -- -- (1.1) -- -- -- (1.1)
Net movements on
cash
flow hedges 17 -- -- -- (0.3) 0.1 -- (0.2)
Share of other
comprehensive
expense of joint
venture 28 -- -- -- (1.9) -- -- -- (1.9)
Total comprehensive
income -- -- (103.5) (3.0) (0.3) 0.1 -- (106.7)
--------- --------- ---------- ------------ --------- --------- --------- --------
Transactions with
owners
Dividends to
ordinary
shareholders 18 -- -- (13.0) -- -- -- -- (13.0)
Share based
payments 53 -- -- -- -- -- -- (3.2) (3.2)
Total transactions
with owners -- -- (13.0) -- -- -- (3.2) (16.2)
--------- --------- ---------- ------------ --------- --------- --------- --------
Balance at 28
February
2021 122.0 1,098.2 370.7 9.3 (0.6) -- 21.9 1,621.5
--------- --------- ---------- ------------ --------- --------- --------- --------
(1) Available-for-sale (AFS).
42
TESCO PERSONAL FINANCE GROUP PLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 28 February 2022
Share Total
capital Share premium Retained earnings equity
Note GBPm GBPm GBPm GBPm
Balance at 1 March 2021 122.0 1,098.2 13.6 1,233.8
Comprehensive income
Profit for the year - - 79.6 79.6
Total comprehensive income - - 79.6 79.6
--------- -------------- ------------------ --------
Transactions with owners
Dividends to ordinary shareholders 18 - - (87.0) (87.0)
Total transactions with owners - - (87.0) (87.0)
--------- -------------- ------------------ --------
Balance at 28 February 2022 122.0 1,098.2 6.2 1,226.4
--------- -------------- ------------------ --------
Share Share Retained Total
capital premium earnings equity
Note GBPm GBPm GBPm GBPm
Balance at 1 March 2020 122.0 1,098.2 11.4 1,231.6
Comprehensive income
Profit for the year -- -- 15.2 15.2
Total comprehensive income -- -- 15.2 15.2
--------- --------- ---------- --------
Transactions with owners
Dividends to ordinary shareholders 18 -- -- (13.0) (13.0)
Total transactions with owners -- -- (13.0) (13.0)
--------- --------- ---------- --------
Balance at 28 February 2021 122.0 1,098.2 13.6 1,233.8
--------- --------- ---------- --------
43
TESCO PERSONAL FINANCE GROUP PLC
COMPANY AND CONSOLIDATED CASH FLOW STATEMENTS
For the year ended 28 February 2022
Group Company
2022 2021 2022 2021
Note GBPm GBPm GBPm GBPm
Operating Activities
Profit/(loss) before tax from continuing operations 188.5 (154.9) 79.6 15.2
Profit before tax from discontinued operations -- 0.4 -- --
Total profit/(loss) before tax 188.5 (154.5) 79.6 15.2
Adjusted for:
Non-cash items included in operating profit before taxation and other
adjustments 48 30.1 438.5 12.7 12.2
Changes in operating assets and liabilities 48 (45.7) (103.7) (0.1) 0.3
Income taxes paid (3.4) (9.1) -- --
Cash flows generated from operating
activities 169.5 171.2 92.2 27.7
-------- -------- ------- -------
Investing Activities
Purchase of intangible assets and property, plant and equipment (47.4) (59.2) -- --
Purchase of debt investment securities 45 (219.9) (84.4) -- --
Sale of debt investment securities 272.2 201.8 -- --
Investment in subsidiary (89.7) -- -- --
Cash and cash equivalents acquired on investment in subsidiary 42.3 -- -- --
Purchase of subordinated debt issued by subsidiary (21.2) -- --
Dividends received from TU 28 10.0 7.5 -- --
Cash flows (used in)/generated from
investing activities (53.7) 65.7 -- --
-------- -------- ------- -------
Financing Activities
Dividends paid to ordinary shareholders 18 (87.0) (13.0) (87.0) (13.0)
Interest paid on debt securities in issue (8.8) (23.0) (8.8) (8.8)
Interest paid on assets held to hedge debt securities in issue (1.1) (3.9) -- --
Interest paid on subordinated liabilities and notes (3.4) (3.8) (3.4) (3.8)
Principal repayments on lease liabilities 43 (2.2) (1.9) -- --
Interest paid on lease liabilities 43 (3.5) (3.6) -- --
Cash flows used in financing activities (106.0) (821.4) (99.2) (25.6)
-------- -------- ------- -------
Net increase/(decrease) in cash and cash equivalents 9.8 (584.5) (7.0) 2.1
Cash and cash equivalents(1) at beginning of year 779.5 1,364.0 14.8 12.7
Cash and cash equivalents(1) at end of year 47 789.3 779.5 7.8 14.8
-------- -------- ------- -------
(1) Cash and cash equivalents comprise cash and balances with central
banks, excluding encumbered cash balances of GBP41.6m (2021: GBP24.7m)
which do not have a maturity of less than three months, and loans
and advances to banks of GBP50.3m (2021: GBPnil). On a Company basis
there are no encumbered balances or loans and advances to banks.
44
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting Policies
Basis of Preparation
The Financial Statements have been prepared in accordance with
International Accounting Standards (IASs) in conformity with the
requirements of the Companies Act 2006 and International Financial
Reporting Standards (IFRSs) and interpretations issued by the
International Financial Reporting Interpretations Committee of the
International Accounting Standards Board (IASB) and those parts of
the Companies Act 2006 applicable to Companies reporting under
IFRSs.
In these Financial Statements the 'Company' means Tesco Personal
Finance Group plc and the 'Group' means the Company and its
subsidiaries (in the prior year, the Company and its subsidiaries
and joint venture). Details of these subsidiaries and joint venture
are provided in notes 27 and 28. 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, except for certain
financial instruments which are measured 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 GBP0.1 million unless otherwise stated.
New and amended accounting standards adopted by the Group in the
year are detailed in note 54.
The Group has a holding in preferred stock issued by VISA Inc.
which was designated at FVOCI in previous years. Following a review
of industry practice and the requirements of IFRS 9 'Financial
Instruments' (IFRS 9), this holding has been reclassified to fair
value through profit or loss (FVPL) with effect from 1 March 2021.
As a result, GBP5.1m (GBP3.7m net of deferred tax) in respect of
the opening fair value reserve at 1 March 2020 was released from
the fair value reserve in the year and recognised directly in
retained earnings in the Consolidated Statement of Changes in
Equity. As this amount is not material, no prior year restatement
has been recognised in respect of this reclassification.
In addition, a revision has been made during the year to the
estimation of interest earned on the Group's Personal Loans
portfolio using the effective interest rate (EIR) methodology. This
has resulted in the recognition of additional interest income in
the year of GBP3.4m, with a corresponding increase in the related
Personal Loans asset. As this amount is not material, no prior year
restatement has been recognised in respect of this revision.
Impact of restatement of TU dividend
The following balances at 28 February 2021 have been restated
following restatement of the Company's opening capital position at
1 March 2020. This was in respect of a GBP7.0m dividend received
from TU prior to 1 March 2020 which was recognised as a deduction
from the carrying value of the investment in TPF's Statement of
Financial Position rather than through TPF's retained earnings,
which comprise part of the Company's capital position. Refer to
note 50 for further details.
Group As previously reported Dividend restatement Restated
GBPm GBPm GBPm
At 28 February 2021
Capital resources
Shareholders' equity (accounting capital) 1,589.1 7.0 1,596.1
Common equity tier 1 capital 1,721.7 7.0 1,728.7
Total capital 1,935.6 7.0 1,942.6
Share of joint venture's retained earnings (26.6) 7.0 (19.6)
Common equity tier 1 ratio 25.3% 25.3%
Tier 1 ratio 25.3% 25.3%
Total capital ratio - transitional 28.4% 28.5%
Total capital ratio - end-point 25.1% 25.1%
Leverage ratio - transitional 17.0% 17.0%
45
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting Policies (continued)
Onshoring of European Union (EU) Regulations After Brexit
Following the UK's withdrawal from the EU and the ending of the
transition period, any reference to EU regulations and directives
(including technical standards) should be read as a reference to
the UK's version of such regulation or directive, as onshored into
UK law under the European Union (Withdrawal) Act 2018, as
amended.
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 current economic environment,
and including consideration of projections incorporating the impact
of the rising cost of living, exacerbated by the ongoing conflict
in Ukraine, for the Group's capital and funding position. As part
of this assessment the Board considered:
-- The impact on the Group's profits as income and charges for
expected credit losses (ECLs) continue to be affected by the
current economic environment. As part of this, the Board considered
the latest macro-economic scenarios which were received from the
Group's third-party supplier. These are discussed in note 45;
-- The sufficiency of the Group's capital base. The worst case
macro--economic scenarios received were significantly less severe
than those used in the individual capital adequacy assessment
process (ICAAP) reverse stress test. The Group reviewed its stress
testing scenarios to ensure it has sufficient capital to trade
through a range of plausible economic outcomes. The Group's capital
position at 28 February 2022 is set out at note 50;
-- The adequacy of the Group's liquidity as the Group supports
customers through a period of economic uncertainty. The Group
reviewed its stress testing scenarios to ensure it has sufficient
liquidity to trade through a range of plausible economic outcomes.
In addition to the Group's portfolio of liquid assets, it has an
undrawn GBP200.0m committed structured repurchase facility;
-- 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 Consolidated Statement of Financial
Position; 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 internal
liquidity adequacy assessment process (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 Consolidated Financial Statements.
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. Several new accounting policies
have been adopted by the Group following the acquisition of TU on 4
May 2021 (refer policies 1(b), 1(j) and 1(n)) and some existing
policies have been updated (refer policies 1(a), 1(c) and
1(l)).
46
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. Accounting Policies (continued)
(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.
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, except in the case of a subsidiary
acquired via a step acquisition where the original investment is
revalued to fair value at the date on which the Company obtains
control.
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.
On 4 May 2021 the Group purchased the remaining 50.1% share
capital of TU from Ageas (UK) Limited (Ageas), its joint venture
partner. At this point TU became a wholly owned subsidiary of the
Group. Prior to this date the Group's share of the results of the
joint venture was included in the Consolidated Income Statement
using the equity method of accounting. The Group's investment in
its joint venture was 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 its joint venture equalled or
exceeded its investment in the joint venture, the Group did not
recognise further losses, unless it had incurred obligations to do
so or made payments on behalf of the joint venture.
(b) Business combinations
The Group accounts for all business combinations where the
acquisition meets the definition of a business by applying the
acquisition method of accounting.
On acquisition, the assets (including intangible assets),
liabilities and contingent liabilities of an acquired entity are
measured at their fair values.
On acquisition, the purchase consideration is measured as the
fair value of assets transferred. The excess of the purchase
consideration over the fair value of the identifiable net assets
acquired is recorded as goodwill. If the purchase consideration is
less than the fair value of the identifiable net assets acquired
the difference is recognised directly in the Consolidated Income
Statement. All acquisition-related costs are expensed.
When the Group obtains control of a joint venture, the Group's
previously held interest in the acquired entity is remeasured to
its acquisition-date fair value and the resulting gain or loss, if
any, is recognised in the Consolidated Income Statement.
47
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. Accounting Policies (continued)
(c) Revenue recognition
Net interest income recognition
Interest income and expense for all financial instruments
measured at amortised cost are recognised using the 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 ECLs.
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.
Prior to the acquisition of TU on 4 May 2021, the Group
generated commission from the sale and service of Motor and Home
Insurance policies underwritten by TU. Following the acquisition,
these amounts represent intercompany transactions which are fully
eliminated in the Consolidated Income Statement. The Group also
generated commission from the sale and service of Motor and Home
Insurance policies underwritten by a third--party underwriter until
August 2021 when the Group brought in--house the writing of Home
and Motor Insurance policies which were previously underwritten
through its broker panel. This commission income was based on
commission rates which were 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.
The Group also generates fee income from the referral of
insurance customers to third-parties for car hire and legal
services. This income is recognised at the time a referral is made
in line with the satisfaction of the performance obligation for the
Group.
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.
48
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
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.
Net insurance premium income recognition
Gross written premiums comprise the premiums on contracts
entered into during the year, irrespective of whether they relate
in whole or in part to a later accounting period. Premiums exclude
taxes and levies based on premiums. An estimate is made at the
Statement of Financial Position date to recognise retrospective
adjustments to premiums. The earned portion of premiums written is
recognised as revenue. Premiums are earned from the date of
attachment of risk, over the indemnity period, based on the pattern
of risks underwritten. Outward reinsurance premiums are recognised
as a deduction from net insurance revenue in accordance with the
contractual arrangements with reinsurers.
Net insurance claims
Claims incurred consist of claims paid during the financial
year, together with the movement in the provision for outstanding
claims. Claims are recognised net of benefits reimbursed in
accordance with the contractual arrangements with reinsurers.
Dividend income recognition
Dividends are recognised in the Consolidated Income Statement
when the entity's right to receive payment is established.
(d) 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.
(e) 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.
49
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. Accounting Policies (continued)
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.
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.
(f) 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.
(g) 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.
50
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
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.
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.
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 45 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 through the Consolidated Income Statement for value
movements due to the underlying hedged risk.
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(h).
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.
51
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. Accounting Policies (continued)
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.
(h) 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. This attempts to match any gains
or losses on the fair value of the hedged item attributable to the
risk being hedged (e.g. Personal Loans or Savings portfolio) with
the losses or gains on the fair value of the hedging instrument
(e.g. interest rate swap) so that they are recognised in the Income
Statement or Statement of Other Comprehensive Income, as
appropriate, in the same accounting period. Through this matching
process, the volatility in the income statement is either reduced
or eliminated. 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 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.
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 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.
52
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. Accounting Policies (continued)
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.
(i) 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.
(j) Insurance contracts and reinsurance assets
Classification of insurance contracts
Contracts under which the Group accepts significant insurance
risk from another party (the policyholder) by agreeing to
compensate the policyholder or other beneficiary if a specified
uncertain future event (the insured event) adversely affects the
policyholder or other beneficiary are classified as insurance
contracts. These contracts remain insurance contracts until all
rights and obligations are extinguished or expire. Insurance
contracts may also transfer some financial risk.
Reinsurance
The Group cedes reinsurance in the normal course of business for
the purpose of limiting its net loss potential through the
diversification of its risks. Reinsurance ceded includes quota
share (QS), excess of loss and adverse development cover (ADC)
contracts. Reinsurance arrangements do not relieve the Group from
its direct obligations to its policyholders.
Only contracts that give rise to a significant transfer of
insurance risk are accounted for as reinsurance contracts. Amounts
recoverable under such contracts are recognised in the same year as
the related claim. Contracts that do not transfer significant
insurance risk (i.e. financial reinsurance) are accounted for as
financial instruments.
Reinsurance assets include balances due from reinsurance
companies for reinsurance claims. Amounts recoverable from
reinsurers are estimated in a manner consistent with the
outstanding claims provision or settled claims associated with the
reinsured policy.
Amounts recoverable under reinsurance contracts are assessed for
impairment at each year-end date. Such assets are deemed impaired
if there is objective evidence, as a result of an event that
occurred after its initial recognition, that the Group may not
recover all amounts due and that the event has a reliable
measurable impact on the amounts that the Group will receive from
the reinsurer.
For the QS reinsurance ceded, amounts payable for funds
withheld, net of the associated QS profit commission, are
maintained in accordance with contract terms for each underwriting
year. A commutation is performed for the purposes of settling the
profit commission and funds withheld balance within the terms of
the contract, four years after commencement. For further details on
funds withheld see note 38.
Provision for outstanding claims
The provision for outstanding claims represents the Group's
estimate of the ultimate cost of settling all claims incurred but
unpaid at the reporting date whether reported or not, and related
internal and external claims handling expenses. Claims outstanding
are assessed by reviewing individual claims data and making an
allowance for claims incurred but not yet reported, adjusted for
the effect of both internal and external foreseeable events, such
as changes in claims handling procedures, inflation, judicial
trends, enacted or substantively enacted legislative changes and
past experience and trends. Reinsurance and other recoveries are
assessed in a manner similar to the claims outstanding and
presented separately as assets.
53
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. Accounting Policies (continued)
Unexpired risk provision
If required, a provision is made for unexpired risks arising
from business where the expected value of claims and expenses
attributable to the unexpired periods of policies in force at the
reporting date exceeds the unearned premiums provision in relation
to such policies. The provision for unexpired risks is calculated
separately by reference to classes of business which are managed
together, after taking into account the relevant investment
return.
Unearned premium provision
The provision for unearned premiums comprises the proportion of
gross premiums written which is estimated to be earned in the
following or subsequent financial years, calculated separately for
each insurance contract using the daily pro rata method, adjusted
if necessary to reflect any variation in the incidence of risk
during the period covered by the contract.
Deferred acquisition costs
Commission payable to agents and other acquisition costs, which
are incurred for acquiring new and renewal insurance business that
is primarily related to the production of that business, are
deferred. Any balances not considered recoverable are
written-off.
Such deferred acquisition costs are finite and are amortised by
reference to the basis on which the related premiums are earned,
which is over a period of one year.
(k) 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 useful life of the related asset and, for leasehold
improvements and right-of-use assets, 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 3 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.
(l) Intangible assets
Goodwill
Goodwill arising on consolidation represents the excess of the
purchase consideration transferred over the fair value of the
Group's share of the net assets and contingent liabilities of the
acquired subsidiary at the date of acquisition. If the
consideration is less than the fair value of the Group's share of
the net assets, liabilities and contingent liabilities of the
acquired entity (i.e. a bargain purchase), the difference is
credited to the Consolidated Income Statement in the period of
acquisition.
54
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. Accounting Policies (continued)
At the acquisition date of a subsidiary, goodwill acquired is
recognised as an asset and is allocated to each of the
cash-generating units (CGUs) or groups of CGUs expected to benefit
from the business combination's synergies and to the lowest level
at which Management monitors the goodwill.
Goodwill is not subject to amortisation and is tested for
impairment on an annual basis. Refer to accounting policy 1(n) for
further details.
Other intangible assets acquired in a business combination
As part of the acquisition of TU on 4 May 2021, the Group has
recognised separately identified intangible assets in relation to
internally-generated computer software. These are being amortised
over a period of five years.
Purchased intangible assets
Intangible assets that are acquired by the Group, excluding
those acquired as part of a business combination, 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.
Cloud software licence agreements
Licence agreements to use cloud software are treated as service
contracts and expensed in the Consolidated Income Statement, unless
the Group has both a contractual right to take possession of the
software at any time without significant penalty, and the ability
to run the software independently of the host vendor. In such cases
the licence agreement is capitalised as computer software.
(m) 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 Consolidated Statement 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.
55
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. Accounting Policies (continued)
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.
(n) Impairment of non-financial assets
Goodwill is tested annually for impairment. Other 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 (VIU). For the purposes of assessing
impairment, assets are grouped at the lowest levels for which there
are separately identifiable cash flows (CGUs). Non-financial assets
for which an impairment loss has been recognised are reviewed for
possible reversal of the impairment at each reporting date.
Impairment losses on goodwill are not reversed.
(o) Employee benefits
The Group accounts for pension costs on a contributions basis in
line with the requirements of IAS 19 'Employee Benefits' (IAS 19).
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.
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.
(p) 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.
(q) 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, other than those recognised as part of a
business combination, 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.
(r) Dividends paid
Dividends paid are recognised in equity in the period they are
approved by the Group's Board.
56
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
1. Accounting Policies (continued)
(s) 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.
(t) Sale and repurchase agreements
Investment securities sold subject to a commitment to repurchase
them at a predetermined price are retained on the Consolidated
Statement 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.
(u) 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.
(v) Alternative Performance 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.
Details of the Group's APMs are set out at note 5 and in the
glossary of terms on pages 180 to 186.
57
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
2. Acquisition of Tesco Underwriting Limited
On 4 May 2021 the Group acquired the remaining 50.1% ordinary
share capital of its joint venture entity, TU, from its joint
venture partner, Ageas. TU is an authorised insurance company which
provides the insurance underwriting service for a number of the
Group's general insurance products.
The acquisition is in line with the Group's strategy of focusing
on propositions which better meet the needs of Tesco customers. The
investment significantly enhances the Group's insurance capability
and enables the Group to create an insurance business that is
uniquely positioned to help Tesco customers manage their money a
little better every day.
The transaction has been accounted for as an acquisition of a
business in accordance with IFRS 3 'Business Combinations' (IFRS
3). Total cash consideration of GBP89.7m has been paid to date,
with an additional deferred payment of GBP5.0m due to be paid on
expiry of the exit period, subject to the fulfilment of Ageas'
obligations in relation to the migration and transition of the TU
business to the Group. Payment is expected to be made in May
2022.
In line with the requirements of IFRS 3, the existing equity
interest in TU held by the Group immediately before the acquisition
date was remeasured to a fair value of GBP89.4m in the Consolidated
Statement of Financial Position. This resulted in a consolidated
remeasurement gain for the Group of GBP4.6m which is included in
other income in the Consolidated Income Statement. In line with the
requirements of IFRS 3, the Group also recognised a consolidated
gain of GBP5.0m, representing the Group's share of TU's
available-for-sale (AFS) reserve immediately prior to acquisition,
which is also included in other income in the Consolidated Income
Statement.
In addition to the purchase of the ordinary share capital of TU,
the Group also acquired the holding in TU subordinated debt from
Ageas on the same date at an amount of GBP21.2m.
58
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
2. Acquisition of Tesco Underwriting Limited (continued)
The table below shows the total cost of obtaining control of TU
in the year:
Cost
GBPm
Cash consideration paid 89.7
Contingent consideration 5.0
Effective settlement of pre-existing balances with TU 11.8
------
Deemed consideration 106.5
Fair value of Group's initial 49.9% investment 89.4
Total cost 195.9
------
The table below sets out the fair values of the identifiable
assets and liabilities acquired:
Fair Value
GBPm
Assets
Cash and balances with central banks 8.8
Loans and advances to banks 33.5
Investment securities 634.8
Reinsurance assets 246.7
Prepayments and accrued income 2.7
Other assets 23.7
Intangible assets 18.0
Property, plant and equipment 0.8
Total assets 969.0
-----------
Liabilities
Accruals and deferred income 15.0
Current income tax liability 0.4
Other liabilities 4.0
Deferred income tax liability 2.0
Insurance funds withheld 100.2
Insurance contract provisions 650.3
Subordinated liabilities 21.2
Total liabilities 793.1
-----------
Net assets 175.9
-----------
Fair value of net assets acquired 175.9
Goodwill arising on acquisition 20.0
Total cost 195.9
-----------
The goodwill arising on the acquisition is primarily
attributable to synergies which are expected to be realised from
the acquisition and having full control over the Group's end-to-end
insurance business. None of the goodwill is expected to be
deductible for tax purposes. Acquired intangible assets comprise
internally generated computer software of GBP18.0m, which is
amortised over a period of five years. Refer to note 30 for further
details.
The fair value of acquired insurance and other receivables is
GBP26.4m, included within prepayments and accrued income and other
assets in the above table. This includes salvage and subrogation
recoveries of GBP16.0m and receivables arising from reinsurance
contracts of GBP7.6m. The fair value is equal to the gross
contractual amount due for these receivables and the best estimate
of the amounts not expected to be collected at the acquisition date
was GBPnil.
59
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
2. Acquisition of Tesco Underwriting Limited (continued)
Since the acquisition date the amount of insurance premium
income contributed to the Group's Consolidated Income Statement
from the acquired TU business was GBP239.2m, and insurance premium
income ceded to reinsurers was GBP105.5m. Profit before tax
contributed to the Group's Consolidated Income Statement from the
acquired TU business was GBP13.9m. These amounts include the impact
of consolidation adjustments, primarily GBP1.2m of amortisation
expense on the acquired intangible assets, and the effect of the
elimination of intercompany transactions. If the acquisition had
occurred on 1 March 2021, the Group's insurance premium income for
the year would have increased by GBP51.1m to GBP290.3m, the
insurance premium income ceded to reinsurers would have increased
by GBP22.5m to GBP128.0m, and the profit before tax would have
increased by GBP3.6m to GBP192.1m(1) .
Acquisition-related costs of GBP7.2m have been incurred by the
Group in relation to the acquisition, of which GBP0.7m (2021:
GBP2.9m) has been included in administrative expenses in the
Consolidated Income Statement. Total prior year acquisition-related
costs amounted to GBP2.9m, with the balance of acquisition-related
costs of GBP3.6m being recognised prior to 1 March 2020.
(1) These amounts include TU income and profits net of
intercompany amounts and consolidation adjustments, and also
exclude the equity accounted share of TU profit of GBP2.6m that was
recognised during the year until the date of acquisition.
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. 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 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.
ECLs on 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, of which macro-economic
assumptions and post-model adjustments (PMAs) are the critical
estimates, as well as the key sensitivities of ECLs to change in
these elements, are set out at note 45.
60
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
3. Critical Accounting Estimates and Judgements in Applying
Accounting Policies (continued)
Outstanding insurance claims and provisions
The Group establishes reserves in respect of the anticipated
amounts of claims incurred in respect of business it has
underwritten. These reserves reflect the expected ultimate cost of
settling claims occurring prior to the Statement of Financial
Position date, but remaining unsettled at that time. Such reserves
are established separately for each line of business underwritten
by the Group and fall into two categories - reserves for reported
losses and reserves for losses incurred but not reported (IBNR) as
of the Statement of Financial Position date.
Case reserves for reported losses are estimates prepared by
claim handlers established on a case-by-case basis and are based
largely on past experience of settlements managed within the Group,
as well as market experience on similar claims. The case reserves
are set on an undiscounted basis and reflect the anticipated cost
of final settlement, taking into account inflation and other
factors which might influence the final outcome. Such reserves are
reviewed on a regular basis to take account of changing
circumstances, such as enacted or substantively enacted changes in
the law and changes in costs relating to settlement.
Technical provisions for losses IBNR as of the Statement of
Financial Position date are mostly established on an undiscounted
basis. They are estimated based on historical data using a variety
of assumptions and making use of various actuarial techniques and
statistical modelling methodologies, calculated separately for each
line of business underwritten, and take into account trends in
settlement costs in arriving at the final estimates.
Technical provisions on a discounted basis are set up in respect
of Periodic Payment Orders (PPOs) only. The expected cashflows
arising from known and potential PPO claims are assessed using a
variety of assumptions and making use of various actuarial
techniques and are calculated at a gross level and a related
calculation is carried out to consider expected reinsurance
cashflows. The future PPO-related cashflows are discounted using a
long-term expected investment return to derive discounted claims
provisions and discounted reinsurance provisions.
Scenarios, such as the Ogden discount rate changing or incorrect
claims handlers' initial assessments in relation to expenses and
interest rates, are assessed for the material components of the
Group's reserves. For motor damage and smaller bodily injury
claims, material scenarios lie in a range between GBP10m above and
GBP10m below the chosen actuarial best estimate (ABE). Those
associated with larger bodily injury claims are in a range between
GBP30m above and GBP30m below the chosen ABE. This assumes an Ogden
discount rate for valuing larger claims of minus 0.25%.
For further details refer to note 39.
61
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
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.
The Group's two operating segments are as follows:
-- Banking - incorporating Credit Cards, Personal Loans, Savings, ATMs and Travel Money; and
-- Insurance - incorporating Motor, Home, Pet and Travel Insurance
There are no transactions between operating segments.
Segmental assets and liabilities are not regularly reported to
the Board of Directors and are therefore not disclosed in this
note.
Segmental results of continuing operations and a reconciliation
of segmental results of continuing operations to the total results
of continuing operations are presented below.
62
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
4. Segmental Reporting (continued)
Continuing operations Total Management Consolidation
reporting and other
adjustments
Group Central
2022 Banking Insurance Costs Total Consolidated
GBPm GBPm GBPm GBPm GBPm GBPm
Interest and similar
income 460.9 26.6 -- 487.5 -- 487.5
Interest expense and
similar charges (62.1) -- -- (62.1) -- (62.1)
Net interest income 398.8 26.6 -- 425.4 -- 425.4
Fees and commissions
income 174.6 52.3 -- 226.9 -- 226.9
Fees and commissions
expense (37.5) -- -- (37.5) -- (37.5)
Net fees and commissions
income 137.1 52.3 -- 189.4 -- 189.4
Insurance premium income -- 239.2 -- 239.2 -- 239.2
Insurance premium income
ceded to reinsurers -- (105.5) -- (105.5) -- (105.5)
Net insurance premium
income -- 133.7 -- 133.7 -- 133.7
Net gain on investment
securities at fair value
through profit or loss
(FVPL) 0.5 4.4 -- 4.9 -- 4.9
Net loss on investment
securities at fair value
through other
comprehensive
income (FVOCI) -- (0.3) -- (0.3) -- (0.3)
Net gain on financial
instruments at FVPL 2.1 -- -- 2.1 -- 2.1
Other income 0.1 10.3 -- 10.4 -- 10.4
Net other income 2.7 14.4 -- 17.1 -- 17.1
Total income 538.6 227.0 -- 765.6 -- 765.6
-------- ---------- ---------- ----------------- -------------- -------------------
Insurance claims incurred -- (150.2) -- (150.2) -- (150.2)
Insurance claims ceded
to reinsurers -- 61.9 -- 61.9 -- 61.9
Net insurance claims -- (88.3) -- (88.3) -- (88.3)
Total income, net of
insurance claims 538.6 138.7 -- 677.3 -- 677.3
-------- ---------- ---------- ----------------- -------------- -------------------
Administrative expenses(1) (125.1) (61.6) (269.4) (456.1) -- (456.1)
Depreciation and
amortisation (10.4) (4.2) (50.6) (65.2) -- (65.2)
Operating expenses (135.5) (65.8) (320.0) (521.3) -- (521.3)
Expected credit loss
credit/(charge) on
financial
assets 30.7 (0.8) -- 29.9 -- 29.9
Operating profit 433.8 72.1 (320.0) 185.9 -- 185.9
Share of profit of joint
venture -- 2.6 -- 2.6 -- 2.6
Profit before tax from
continuing operations 433.8 74.7 (320.0) 188.5 -- 188.5
-------- ---------- ---------- ----------------- -------------- -------------------
Capex per reportable
segment in year (16.0) (6.3) (27.1) (49.4) -- (49.4)
-------- ---------- ---------- ----------------- -------------- -------------------
(1) The Banking and Insurance segments include only directly
attributable administrative costs such as marketing and operational
costs. Central overhead costs, which reflect the overhead of
operating both the Insurance and Banking businesses, are not
allocated against an operating segment for internal reporting
purposes.
63
4. Segmental Reporting (continued)
Continuing operations Total Management Consolidation
reporting and other
adjustments
Group Central
2021 Banking Insurance Costs Total Consolidated
GBPm GBPm GBPm GBPm GBPm GBPm
Interest and similar
income 538.4 24.0 -- 562.4 -- 562.4
Interest expense and
similar charges (108.9) -- -- (108.9) -- (108.9)
Net interest income 429.5 24.0 -- 453.5 -- 453.5
Fees and commissions
income 156.4 52.4 -- 208.8 -- 208.8
Fees and commissions
expense (32.7) -- -- (32.7) -- (32.7)
Net fees and commissions
income 123.7 52.4 -- 176.1 -- 176.1
Net loss on financial
instruments at FVPL (2.5) -- -- (2.5) -- (2.5)
Net other income (2.5) -- -- (2.5) -- (2.5)
Total income 550.7 76.4 -- 627.1 -- 627.1
-------- ---------- ---------- ----------------- -------------- -------------------
Administrative expenses(1) (53.2) (31.2) (297.6) (382.0) -- (382.0)
Depreciation and
amortisation -- -- (56.7) (56.7) -- (56.7)
Operating expenses (53.2) (31.2) (354.3) (438.7) -- (438.7)
Expected credit loss
on financial assets (357.2) (2.3) -- (359.5) -- (359.5)
Operating profit/(loss) 140.3 42.9 (354.3) (171.1) -- (171.1)
Share of profit of joint
venture -- 16.2 -- 16.2 -- 16.2
Profit/(loss) before
tax from continuing
operations 140.3 59.1 (354.3) (154.9) -- (154.9)
-------- ---------- ---------- ----------------- -------------- -------------------
Capex per reportable
segment in year (11.3) (0.1) (42.9) (54.3) -- (54.3)
-------- ---------- ---------- ----------------- -------------- -------------------
(1) The Banking and Insurance segments include only directly
attributable administrative costs such as marketing and operational
costs. Central overhead costs, which reflect the overhead of
operating both the Insurance and Banking businesses, are not
allocated against an operating segment for internal reporting
purposes.
64
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
5. Underlying Profit/(Loss)
The Group's financial performance is presented in the
Consolidated Income Statement on page 38. A summary of the Group's
financial performance in respect of its continuing operations on an
underlying basis, excluding items which are not reflective of
ongoing trading performance, is presented below.
Financial
Statutory basis instruments(1) Underlying basis
GBPm GBPm GBPm
Continuing operations
Year ended 28 February
2022
Net interest income 425.4 -- 425.4
Net other income, net of
insurance claims 251.9 (2.1) 249.8
---------------- ---------------- -----------------
Total income, net of insurance
claims 677.3 (2.1) 675.2
---------------- ---------------- -----------------
Total operating expenses (521.3) -- (521.3)
Expected credit loss credit
on financial assets 29.9 29.9
---------------- ---------------- -----------------
Operating profit 185.9 (2.1) 183.8
---------------- ---------------- -----------------
Share of profit of joint
venture 2.6 2.6
---------------- ---------------- -----------------
Profit before tax 188.5 (2.1) 186.4
---------------- ---------------- -----------------
Financial
Statutory basis instruments(1) Underlying basis
GBPm GBPm GBPm
Year ended 28 February
2021
Net interest income 453.5 -- 453.5
Net other income 173.6 2.5 176.1
---------------- ---------------- -----------------
Total income 627.1 2.5 629.6
---------------- ---------------- -----------------
Total operating expenses (438.7) -- (438.7)
Expected credit loss charge
on financial assets (359.5) -- (359.5)
---------------- ---------------- -----------------
Operating loss (171.1) 2.5 (168.6)
---------------- ---------------- -----------------
Share of profit of joint
venture 16.2 -- 16.2
---------------- ---------------- -----------------
Loss before tax (154.9) 2.5 (152.4)
---------------- ---------------- -----------------
(1) Comprising:
* Gains on financial instruments at FVPL of GBP2.1m
(2021: losses of GBP2.5m) presented within total
income on page 38. Fair value movements on financial
instruments reflect hedge ineffectiveness arising
from hedge accounting and fair value movements on
derivatives in economic hedges that do not meet the
criteria for hedge accounting. Where these
derivatives are held to maturity, fair value
movements represent timing differences that will
reverse over the life of the derivatives. Therefore,
excluding these movements from underlying profit more
accurately represents the underlying performance of
the Group. Where derivatives are terminated prior to
maturity, this may give rise to fair value movements
that do not reverse.
65
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
6. Net Interest Income
2022 2021
GBPm GBPm
Continuing operations
Interest and similar income
On financial assets measured at amortised cost
Loans and advances to customers 469.3 543.3
Cash and balances with central banks 1.0 1.5
Investment securities 12.7 14.3
483.0 559.1
------- --------
On financial assets measured at fair value
Investment securities - FVOCI 4.5 n/a
Derivative financial assets - FVPL -- 3.3
4.5 3.3
------- --------
Total interest and similar income 487.5 562.4
------- --------
Interest expense and similar charges
On financial liabilities measured at amortised
cost
Deposits from customers (29.6) (64.7)
Deposits from banks (3.7) (1.2)
Debt securities in issue (8.8) (20.1)
Lease liabilities (2.1) (2.3)
Subordinated liabilities and notes (3.9) (3.5)
(48.1) (91.8)
------- --------
On financial liabilities measured at fair value
Derivative financial liabilities - FVPL (14.0) (17.1)
(14.0) (17.1)
------- --------
Total interest expense and similar charges (62.1) (108.9)
------- --------
Net interest income 425.4 453.5
------- --------
66
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
7. Net Fees and Commissions Income
2022 2021
GBPm GBPm
Continuing operations
Fees and commissions income
Banking revenue from contracts with customers 179.6 155.2
Insurance revenue from contracts with customers 35.2 52.4
Other revenue from contracts with customers 12.1 1.2
Total fees and commissions income 226.9 208.8
------- -------
Fees and commissions expense
Banking expense (37.5) (32.7)
Total fees and commissions expense (37.5) (32.7)
------- -------
Net fees and commissions income 189.4 176.1
------- -------
With the exception of insurance and 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.
8. Net Insurance Premium Income
2022 2021
GBPm GBPm
Continuing operations
Gross premium written 254.0 n/a
Change in the gross provision for unearned premium (14.8) n/a
Insurance premium income 239.2 n/a
-------- -----
Written premium ceded to reinsurers (110.3) n/a
Reinsurers share of change in the provision
for unearned premium 4.8 n/a
Insurance premium income ceded to reinsurers (105.5) n/a
-------- -----
Net insurance premium income 133.7 n/a
-------- -----
The above net insurance premium income represents income
recognised in the Consolidated Income Statement following
acquisition of TU by the Group on 4 May 2021.
67
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
9. Net Gain on Investment Securities at FVPL
2022 2021
GBPm GBPm
Continuing operations
Fair value gain arising on investment securities at FVPL 4.9 --
Net gain on investment securities at FVPL 4.9 --
----- -----
The above gains represent gains on TU's holding in a property
fund recognised following the acquisition of TU by the Group on 4
May 2021, and gains on the Group's holding in VISA Inc. preferred
stock following the reclassification of this holding from FVOCI to
FVPL with effect from 1 March 2021. Refer to note 1 for further
information in respect of this reclassification.
10. Net Gain/(Loss) on Other Financial Instruments at FVPL
2022 2021
GBPm GBPm
Continuing operations
Foreign exchange loss on financial assets (0.1) (0.2)
Net gain arising on derivatives not designated as hedging
instruments 3.9 0.3
Fair value hedge ineffectiveness (refer note 23) (1.8) (2.5)
Cash flow hedge ineffectiveness (refer note 23) 0.1 (0.1)
Net gain/(loss) on financial instruments at FVPL 2.1 (2.5)
------ ------
11. Net Loss on Investment Securities at FVOCI
2022 2021
GBPm GBPm
Continuing operations
Net loss on disposal of investment securities at FVOCI (0.3) n/a
Net loss on investment securities at FVOCI (0.3) n/a
------ -----
The above losses on investment securities at FVOCI are
recognised following the acquisition of TU by the Group on 4 May
2021.
68
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
12. Other Income
2022 2021
GBPm GBPm
Continuing operations
Dividend income from investment securities at FVPL 0.8 -
Gain on remeasurement of equity interest in TU at acquisition 4.6 n/a
Gain on Group's share of TU's AFS reserve 5.0 n/a
Other income 10.4 -
----- -----
Dividend income from investment securities at FVPL comprises
dividends received from the Group's holding in preferred stock
issued by VISA Inc, and dividends received on TU's holding in a
property fund following acquisition of TU by the Group on 4 May
2021.
Refer note 2 for further details on the gains recognised in
relation to the Group's acquisition of TU during the year.
13. Net Insurance Claims
2022 2021
GBPm GBPm
Continuing operations
Current year claims paid (103.9) n/a
Change in prior year claims provision 52.0 n/a
Additional liabilities arising during the year (98.3) n/a
Insurance claims incurred (150.2) n/a
-------- -----
Reinsurers share of claims and benefits incurred 61.9 n/a
Insurance claims ceded to reinsurers 61.9 n/a
-------- -----
Net insurance claims (88.3) n/a
-------- -----
The above net insurance claims represents the claims expense
incurred and reinsurance recoveries received by TU following
acquisition by the Group on 4 May 2021.
69
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
14. Administrative Expenses
2022 2021
GBPm GBPm
Continuing operations
Staff costs
Wages and salaries 125.9 114.9
Social security costs 12.6 10.8
Other pension costs 8.0 6.6
Share based payments 7.9 3.1
Other costs including temporary staff 55.9 41.3
Total staff costs 210.3 176.7
------ ------
Non-staff costs
Premises and equipment 67.9 75.2
Marketing 40.6 35.1
Auditor's remuneration (refer below) 1.6 0.9
Outsourcing and professional fees 107.4 63.6
Other administrative expenses 28.3 30.5
Total non-staff costs 245.8 205.3
------ ------
Total administrative expenses 456.1 382.0
------ ------
2022 2021
GBP'000 GBP'000
Audit services
Audit of the Company and Consolidated Financial Statements 65 55
Audit of the Company's subsidiaries 1,401 753
Total audit services 1,466 808
-------- --------
Non-audit services
Audit related assurance services 116 47
Other non-audit services not covered above 65 46
Total non-audit services 181 93
-------- --------
Total auditor's remuneration 1,647 901
-------- --------
The average monthly number of persons (including Executive
Directors) employed by the Group split by employee function during
the year, was:
2022 2021
Number Number
Continuing operations
Head office and administration 1,593 1,487
Operations 1,905 2,215
TU 325 -
------- -------
Total average employees 3,822 3,702
------- -------
70
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
15. Expected Credit Loss (Credit)/Charge on Financial Assets
2022 2021
GBPm GBPm
Continuing operations
Expected credit loss (credit)/charge on loans and advances to customers(1) (30.2) 359.7
Expected credit loss credit on investment securities at amortised cost (0.5) (0.2)
Expected credit loss charge on investment securities at FVOCI 0.8 --
Total expected credit loss (credit)/charge on financial assets (29.9) 359.5
------- ------
(1) Included within the expected credit loss on loans and
advances to customers is a credit of GBP6.3m (2021: credit of
GBP5.0m) received through the sale of non-performing debt to third
parties.
Refer to note 45 for further detail on factors impacting
expected credit loss charges.
16. Directors' Emoluments
The remuneration of the Directors paid by the Group during the
year was as follows:
2022 2021
GBPm GBPm
Continuing operations
Aggregate emoluments 3.2 2.6
Aggregate amounts receivable under long-term incentive schemes(1) 1.7 2.1
Share based payments 0.5 -
----- -----
Total Directors' emoluments 5.4 4.7
----- -----
2022 2021
Number Number
Continuing operations
Number of Directors to whom retirement benefits are accruing under defined benefit or defined
contribution schemes 3 3
Number of Directors in respect of whose qualifying services shares were received or receivable
under long-term incentive schemes 3 3
Number of Directors who exercised share options 1 -
The total emoluments of the highest paid Director were GBP2.6m
(2021: GBP1.9m), including aggregate amounts due under long-term
incentive schemes(1) . During the year the highest paid Director
did not exercise any share options (2021: GBPnil).
At 28 February 2022 the accrued pension and lump sum under a
defined benefit scheme for the highest paid Director was GBPnil
(2021: GBPnil).
During the year to 28 February 2022 three Directors (2021: two
Directors) left the Company.
(1) Aggregate amounts receivable under long-term incentive
schemes represent the maximum amounts awarded in the year. Actual
amounts payable under long-term incentive schemes may vary
depending on the level of performance achieved against specific
measures.
71
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
17. Income Tax
Income tax charge/(credit)
2022 2021
GBPm GBPm
Continuing operations
Current tax charge/(credit) for the year 37.4 (51.4)
Adjustments in respect of prior years (0.1) (1.7)
Total current tax charge/(credit) for the
year 37.3 (53.1)
------ -------
Deferred tax charge for the year 8.5 6.2
Tax rate change (1.8) (5.5)
Adjustments in respect of prior years 0.2 1.2
Total deferred tax charge for the year 6.9 1.9
------ -------
Total income tax charge/(credit) 44.2 (51.2)
------ -------
The Group's blended corporation tax rate is 19.0% (2021 19.0%).
In addition, a banking surcharge of 8.0% (2021: 8.0%) is applied to
the banking entities within the Group.
The standard rate of corporation tax in the UK was changed from
20% to 19% with effect from 1 April 2017. The March 2016 Budget
Statement included an announcement that the standard rate of
corporation tax in the UK would be further reduced to 17% from 1
April 2020. Subsequently, at the March 2020 Budget Statement, the
Chancellor announced that this reduction to 17% would no longer
take place, with the standard rate of corporation tax instead being
maintained at 19%. The cancellation of the rate reduction resulted
in the Group's deferred tax asset increasing by GBP5.5m during the
prior year.
In the March 2021 Budget Statement, the Chancellor announced
that the standard rate of corporation tax in the UK will increase
from 19% to 25% from 1 April 2023.
Subsequently, in the October 2021 Budget Statement, it was
announced that, with effect from 1 April 2023, the banking
surcharge will reduce from 8% to 3% and that it will be chargeable
on banking profits above GBP100.0m (previously GBP25.0m). This rate
change was substantively enacted in February 2022 and the 3% rate
is therefore the banking surcharge rate applied in calculating the
deferred tax balances reflected in these Financial Statements.
Therefore, from 1 April 2023, the combined rate of tax on
banking profits over GBP100.0m will be 28% (previously 27%).
The impact on the Group of this change in the combined rate is
to increase the Group's deferred tax asset by GBP1.8m.
In the current year, the tax charge assessed was higher (2021:
tax credit was higher) than that calculated using the overall
blended corporation tax rate for the Group.
72
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
17. Income Tax (continued)
The differences are explained below:
2022 2021
GBPm GBPm
Continuing operations
Profit/(Loss) before taxation from continuing operations 188.5 (154.9)
------ --------
Profit/(Loss) on ordinary activities multiplied by blended rate in the UK of
19.0% (2021: 19.0%) 35.8 (29.5)
Factors affecting charge/(credit) for the year:
Difference between local and group tax rate 10.7 (13.1)
Non-taxable income (1.8) --
Expenses not deductible for tax purposes 1.2 0.7
Adjustment in respect of prior years - current tax (0.1) (1.7)
Adjustment in respect of prior years - deferred tax 0.2 1.2
Share based payments 0.5 (0.2)
Tax rate change (1.8) (5.5)
Share of profit of joint venture (0.5) (3.1)
Total income tax charge/(credit) from continuing operations 44.2 (51.2)
------ --------
Income tax relating to components of other comprehensive
income
Before tax Net of tax
amount Tax credit/(charge) amount
Continuing operations GBPm GBPm GBPm
2022
Items that may be reclassified to the
income statement
Net losses on debt securities at FVOCI (18.1) 5.3 (12.8)
Net gains on cash flow hedges 1.1 (0.3) 0.8
Total income tax relating to components
of other comprehensive income (17.0) 5.0 (12.0)
----------- -------------------- -----------
Before tax Net of tax
amount Tax charge amount
Continuing operations GBPm GBPm GBPm
2021
Items that may be reclassified to the
income statement
Net losses on debt securities at FVOCI (3.2) 0.8 (2.4)
Net losses on cash flow hedges (0.5) 0.2 (0.3)
Net gains on currency interest rate swaps 0.1 - 0.1
Items that will not be reclassified to
the income statement
Net gains on equity securities designated
at FVOCI 1.9 (0.6) 1.3
Total income tax relating to components
of other comprehensive income (1.7) 0.4 (1.3)
----------- ----------- -----------
73
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
17. Income Tax (continued)
Deferred tax charged directly to the Statement of Changes in
Equity
Before tax Net of tax
amount Tax credit amount
Continuing operations GBPm GBPm GBPm
2022
Net gains on share based payments reserve 3.5 0.7 4.2
3.5 0.7 4.2
----------- ----------- -----------
Before tax Net of tax
amount Tax charge amount
Continuing operations
2021 GBPm GBPm GBPm
Net losses on share based payments reserve (2.5) (0.7) (3.2)
(2.5) (0.7) (3.2)
----------- ----------- -----------
18. Distributions to Equity Holders
2022 2021
GBPm GBPm
Continuing operations
Ordinary dividend paid 87.0 13.0
87.0 13.0
----- -----
On 18 February 2022, an interim dividend of GBP87.0m (GBP0.0713
per ordinary share) was paid. In the prior year, an interim
dividend of GBP13.0m (GBP0.0107 per ordinary share) was paid on 24
February 2021.
19. Cash and Balances with Central Banks
Group Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Cash at bank 99.1 106.5 1.7 1.7
Cash deposits held with TPF -- -- 6.1 13.1
Balances held with the Bank of England
(BoE) other than mandatory reserve
deposits 639.9 673.0 -- --
Included in cash and cash equivalents
(refer note 47) 739.0 779.5 7.8 14.8
------ ------ ----- -----
Mandatory reserves deposits held
with the BoE 41.6 24.7 -- --
------ ------ ----- -----
Total cash and balances with central
banks 780.6 804.2 7.8 14.8
------ ------ ----- -----
Mandatory reserve deposits held with the BoE of GBP41.6m (2021:
GBP24.7m) are not included within cash and cash equivalents for the
purposes of the cash flow statement as these do not have short-term
maturities. These balances are not available in the Group's
day-to-day operations and are non-interest bearing. Other balances
are subject to variable interest rates based on the BoE base
rate.
74
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
20. Loans and Advances to Banks
Following the acquisition of TU on 4 May 2021, TU short term
liquidity and custodian funds are now included in the Consolidated
Statement of Financial Position.
Group 2022 2021
GBPm GBPm
Liquidity funds 25.4 n/a
Custodian funds 24.9 n/a
Total loans and advances to banks 50.3 n/a
----- -----
All of the above balances are classified as current at the
year-end.
These represent cash and cash equivalents for the purposes of
the cash flow statement.
21. Loans and Advances to Customers
Group 2022 2021
GBPm GBPm
Unsecured lending 7,009.5 7,020.1
Total unsecured lending 7,009.5 7,020.1
-------- --------
Fair value hedge adjustment (30.4) 6.7
Gross loans and advances to customers 6,979.1 7,026.8
-------- --------
Less: ECL allowance (refer to note 45) (488.8) (624.6)
Net loans and advances to customers 6,490.3 6,402.2
-------- --------
Current 3,349.2 3,093.3
Non-current 3,141.1 3,308.9
Contractual lending commitments and ECL provision
At 28 February 2022, the Group had contractual lending
commitments of GBP12,363.0m (2021: GBP12,668.0m). An additional ECL
provision of GBP16.2m was also recognised at 28 February 2022
(2021: GBP28.3m). This represents the excess of total ECLs for both
drawn and undrawn balances over the gross carrying balances as
above. Refer to note 35 for further details.
Fair value hedge adjustments
Fair value hedge adjustments amounting to a liability of
GBP30.4m (2021: asset of GBP6.7m) are in respect of fixed rate
Personal Loans. These adjustments are largely offset by
derivatives, which are used to manage interest rate risk and are
designated as fair value hedges of loans and advances to
customers.
Effective interest rate (EIR)
IFRS 9 requires the Group to measure the interest earned on its
Credit Card 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 five years from
origination).
An increase of the pay rates assumption by 10% will reduce the
asset value by GBP2.7m and a corresponding reduction of the pay
rates assumption will increase the asset value by GBP3.3m.
75
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
22. Loans and Advances to Subsidiary Companies
Company 2022 2021
GBPm GBPm
Fixed rate subordinated loan 250.9 249.8
Floating rate subordinated loans 190.5 190.0
Undated floating rate notes 45.1 45.0
------ ------
486.5 484.8
------ ------
Less: ECL allowance (See note 38) (1.8) (1.3)
------ ------
Net loans and advances to subsidiary companies 484.7 483.5
------ ------
Current -- --
Non-current 484.7 483.5
The investments are in subordinated loans and notes issued by
TPF. Interest receivable on the GBP250.0m notional (2021: GBP250.0m
notional) fixed rate subordinated loan is 3.5%.
Interest receivable on the floating rate subordinated loans and
notes is based on three-month SONIA plus a margin of 67 to 227
basis points (2021: three-month SONIA plus a margin of 67 to 227
basis points).
23. Derivative Financial Instruments
Strategy in using derivative financial instruments
The objective when using a derivative financial instrument is to
ensure that the risk to reward profile of a transaction is
optimised, allowing the Group to manage its exposure to interest
rate and foreign exchange rate risk. The intention is to only use
derivatives to create economically effective hedges. There are
specific requirements stipulated under IFRS 9/IAS 39 which must be
met for a derivative to qualify for hedge accounting. As a result,
not all derivatives can be designated in an accounting hedge
relationship, either because natural accounting offsets are
expected or because obtaining hedge accounting would be especially
onerous.
For those derivatives where fair value hedge accounting is
applied, gains and losses in the Consolidated Income Statement are
offset by movements in the hedged item. Where cash flow hedge
accounting is applied, the effective portion of the derivative fair
value movement is recorded in OCI. For those derivatives held for
economic hedging purposes which cannot be designated in an
accounting hedge relationship, the gains and losses are recognised
in the Consolidated Income Statement. In the Consolidated Statement
of Financial Position there is no distinction between derivatives
where hedge accounting is applied and derivatives which cannot be
designated in an accounting hedge relationship.
76
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
23. Derivative Financial Instruments (continued)
The following table analyses derivatives held for risk
management purposes by type of instrument and splits derivatives
between those classified in hedge accounting relationships and
those not in hedge accounting relationships.
Group 2022 2021
Notional Notional
amount Assets Liabilities amount Assets Liabilities
GBPm GBPm GBPm GBPm GBPm GBPm
Derivatives in hedge accounting relationships
Derivatives designated as fair value
hedges
Interest rate swaps 2,834.5 43.9 (27.2) 3,227.1 5.8 (46.4)
Derivatives designated as cash flow
hedges
Forward foreign exchange contracts 7.7 0.3 -- 10.0 - (0.8)
Total derivatives in hedge accounting
relationships 2,842.2 44.2 (27.2) 3,237.1 5.8 (47.2)
--------- ------- ------------ --------- ------- ------------
Derivatives not in hedge accounting
relationships
Interest rate derivatives
Interest rate swaps 141.3 1.1 -- 114.2 0.2 (0.1)
Currency derivatives
Forward foreign exchange contracts 0.2 -- -- 4.3 0.1 (0.2)
Total derivatives not in hedge accounting
relationships 141.5 1.1 -- 118.5 0.3 (0.3)
--------- ------- ------------ --------- ------- ------------
Total 2,983.7 45.3 (27.2) 3,355.6 6.1 (47.5)
--------- ------- ------------ --------- ------- ------------
Derivatives, whether designated in hedge accounting
relationships or not, are regarded as current where they are
expected to mature within one year. All other derivatives are
regarded as non-current.
Group 2022 2021
Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm
Current 3.3 (0.9) 0.2 (4.0)
Non-current 42.0 (26.3) 5.9 (43.5)
77
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
23. Derivative Financial Instruments (continued)
Hedge accounting
The following disclosures relate to derivatives in hedge
accounting relationships only. The Group applies hedge accounting
in the following hedging strategies:
-- Fair value hedges of interest rate risk
The Group's risk management objective of creating economically
effective hedges is achieved by the use of interest rate contracts
to swap fixed rate exposures back to a benchmark floating rate
where no existing offset is available. This includes the hedging of
fixed rate investment securities and issuances of fixed rate debt,
which protects the Group against the fair value volatility of these
financial assets and financial liabilities due to movements in
interest rates. Each swap is defined as hedging one or more fixed
rate assets or liabilities. The Group applies IFRS 9 hedge
accounting in respect of these hedging instruments.
Sources of hedge ineffectiveness relate to differences in timing
and repricing between execution of the hedging instrument and
hedged item.
-- Portfolio fair value hedges of interest rate risk
The Group's risk management objective of creating economically
effective hedges is achieved by the use of interest rate contracts
to swap fixed rate exposures back to a benchmark floating rate
where no existing offset is available. This includes the hedging of
portfolios of fixed rate Personal Loans and Savings products, which
protects the Group against the fair value volatility of these
financial assets and financial liabilities due to movements in
interest rates. The Group applies IAS 39 portfolio hedge accounting
in respect of these hedging instruments.
Sources of hedge ineffectiveness include, but are not limited
to, differences in timing and repricing between execution of the
hedging instrument and hedged item, differences between actual and
expected prepayment rates of the underlying hedged item and
repricing differences between the portfolio of hedged items and the
associated hedging instruments.
-- Cash flow hedges of debt securities issued
The Group held cross currency interest rate swaps as cash flow
hedges to mitigate the variability in cash flows associated with
the foreign currency debt securities issued. The cash flows
occurred over the term to maturity in November 2020. The Group
applied IFRS 9 hedge accounting in respect of these hedging
instruments.
Sources of hedge ineffectiveness primarily related to
differences in timing and repricing between execution of the
hedging instrument and hedged item.
-- Cash flow hedges of expected foreign currency payments
The Group holds forward foreign currency contracts as cash flow
hedges to mitigate the variability in cash flows associated with
highly probable foreign currency payments. The payments, associated
cash flows and the forward contracts are expected to occur and
mature over the following 15 months. The Group applies IFRS 9 hedge
accounting in respect of these hedging instruments.
Sources of hedge ineffectiveness relate to differences between
expected and actual cash flows.
Uncertainty arising from IBOR reform
The Group transitioned its remaining London Interbank Offered
Rate interest rate exposure of GBP42.3m, relating to TPF's holding
in subordinated notes issued by TU, to Sterling Overnight Index
Average (SONIA) in October 2021.
78
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
23. Derivative Financial Instruments (continued)
Maturity of Derivatives in Hedge Accounting Relationships
The following tables set out the maturity profile and average
interest rate of the hedging instruments used in the Group's
hedging strategies:
Group Maturity
One year
Up to One to Three months to five More than
2022 one month three months to one year years five years Total
GBPm GBPm GBPm GBPm GBPm
Fair value hedges
of financial
assets
Interest rate
Interest rate
swaps
- Notional amount 46.5 77.0 673.5 1,580.8 151.7 2,529.5
- Average interest
rate 0.37% (0.06%) (0.02%) 0.36% 0.50% -
Fair value hedges
of financial
liabilities
Interest rate
Interest rate
swaps
- Notional amount -- 30.0 25.0 250.0 -- 305.0
- Average interest
rate - 0.11% 0.01% (0.01%) - -
Cash flow hedges
Foreign currency
Forward foreign
exchange contracts
- Notional amount -- 1.1 5.9 0.7 -- 7.7
- Average exchange
rate - 1.41 1.39 1.33 - -
79
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
23. Derivative Financial Instruments (continued)
Group Maturity
One year
Up to One to Three months to five More than
2021 one month three months to one year years five years Total
GBPm GBPm GBPm GBPm GBPm
Fair value hedges
of financial
assets
Interest rate
Interest rate
swaps
- Notional amount - 83.0 747.0 1,355.5 151.6 2,337.1
- Average interest
rate - 1.01% 0.26% 0.70% 1.67% -
Fair value hedges
of financial
liabilities
Interest rate
Interest rate
swaps
- Notional amount - - 555.0 335.0 - 890.0
- Average interest
rate - - 0.02% 0.52% - -
Cash flow hedges
Foreign currency
Forward foreign
exchange contracts
- Notional amount 0.6 2.2 7.2 - - 10.0
- Average exchange
rate 1.29 1.25 1.30 - - -
80
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
23. Derivative Financial Instruments (continued)
The following tables set out details of the hedging instruments
used in the Group's hedging strategies:
Group Carrying amount
Changes in fair value
used for calculating
2022 Notional Assets Liabilities hedge ineffectiveness
GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
Interest rate swaps 2,834.5 43.9 (27.2) 52.3
Cash flow hedges
Foreign currency
Forward foreign exchange
contracts 7.7 0.3 -- 1.4
Total 2,842.2 44.2 (27.2) 53.7
--------- ------- ------------ -----------------------
Group Carrying amount
Changes in fair value
used for calculating
2021 Notional Assets Liabilities hedge ineffectiveness
GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
Interest rate swaps 3,227.1 5.8 (46.4) 7.2
Cash flow hedges
Foreign currency
Forward foreign exchange
contracts 10.0 - (0.8) (0.8)
Total 3,237.1 5.8 (47.2) 6.4
--------- ------- ------------ -----------------------
All of the above amounts are included within the Statement of
Financial Position line item Derivative financial instruments.
81
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
23. Derivative Financial Instruments (continued)
The following tables set out details of the hedged exposures
covered by the Group's hedging strategies:
Accumulated amounts Changes in value
of fair value adjustments for calculating
Group Carrying amount on the hedged item ineffectiveness
2022 Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
- Fixed rate Personal
Loans(1) 3,383.8 -- (30.4) -- (37.1)
- Fixed rate investment
securities(2) 503.7 - (11.2) - (21.5)
- Fixed rate Savings(3) - (1,481.4) - 0.1 0.4
- Fixed rate subordinated
liabilities(4) -- (244.0) -- 5.5 8.3
Total fair value hedges 3,887.5 (1,725.4) (41.6) 5.6 (49.9)
-------- ------------ ---------- ----------------- -----------------
Accumulated amounts Changes in value
of fair value adjustments for calculating
Group Carrying amount on the hedged item ineffectiveness
2021 Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
- Fixed rate Personal
Loans(1) 3,652.9 -- 6.7 - (3.0)
- Fixed rate investment
securities(2) 500.4 - 10.4 - 8.1
- Fixed rate Savings(3) - (1,865.7) - (0.4) 0.3
- Fixed rate bonds(5) - (251.0) - (2.8) 1.5
Total fair value hedges 4,153.3 (2,116.7) 17.1 (3.2) 6.9
-------- ------------ ---------- ----------------- -----------------
The accumulated amount of fair value hedge adjustments remaining
in the Statement of Financial Position for hedged items that have
ceased to be adjusted for hedging gains and losses is an asset of
GBPnil (2021: GBP2.4m asset).
(1) Included within Statement of Financial Position line item
Loans and advances to customers.
(2) Included within Statement of Financial Position line item
Investment securities.
(3) Included within Statement of Financial Position line item
Deposits from customers.
(4) Included within Statement of Financial Position line item
Subordinated liabilities.
(5) Included within Statement of Financial Position line item
Debt securities in issue.
82
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
23. Derivative Financial Instruments (continued)
Cash flow hedge
Group reserve
Change in value
of hedged item
used for calculating
2022 hedge ineffectiveness Continuing hedges
GBPm GBPm
Cash flow hedges
Foreign currency
- Accounts payable(1) 1.1 0.2
Total cash flow hedges 1.1 0.2
----------------------- ------------------
Cash flow hedge
Group reserve
Change in value
of hedged item
used for calculating
2021 hedge ineffectiveness Continuing hedges
GBPm GBPm
Cash flow hedges
Foreign currency
- Accounts payable(1) (0.8) (0.8)
Interest rate/foreign currency
- Securitisation bond(2) (1.5) -
Total cash flow hedges (2.3) (0.8)
----------------------- ------------------
(1) Included within Statement of Financial Position line item
Other liabilities.
(2) Included within Statement of Financial Position line item
Debt securities in issue.
There are no amounts remaining in the cash flow hedge reserve
for which hedge accounting is no longer applied.
83
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
23. Derivative Financial Instruments (continued)
The following tables set out information regarding the
effectiveness of the hedging relationships designated by the Group,
as well as the impacts on profit or loss and other comprehensive
income:
Hedge ineffectiveness
recognised in profit or
Group loss
2022 GBPm
Fair value hedges
Interest rate
- Interest rate swaps (1.8)
Total fair values hedges (1.8)
-------------------------
Hedge ineffectiveness
recognised in profit or
Group loss
2021 GBPm
Fair value hedges
Interest rate
- Interest rate swaps (2.5)
Total fair values hedges (2.5)
-------------------------
Hedge ineffectiveness is included in the Income Statement line
Net gain/(loss) on other financial instruments at FVPL.
Cumulative
Group Cumulative amount reclassified
hedging gains from cash
and (losses) Hedge ineffectiveness flow hedge
recognised recognised reserve to
in other comprehensive in profit profit or
2022 income or loss loss
GBPm GBPm GBPm
Cash flow hedges
Interest rate/foreign currency
- Forward foreign exchange contracts 0.2 0.1 --
Total cash flow hedges 0.2 0.1 --
------------------------ ---------------------- ---------------------
84
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
23. Derivative Financial Instruments (continued)
Cumulative
Group Cumulative amount reclassified
hedging gains from cash
and (losses) Hedge ineffectiveness flow hedge
recognised recognised reserve to
in other comprehensive in profit profit or
2021 income or loss loss
GBPm GBPm GBPm
Cash flow hedges
Interest rate/foreign currency
- Forward foreign exchange contracts (0.8) - -
- Cross currency interest rate swaps
(GBP:USD) - (0.1) -
Total cash flow hedges (0.8) (0.1) -
------------------------ ---------------------- ---------------------
Hedge ineffectiveness is included in the income statement line
Net gain/(loss) on other financial instruments at FVPL.
The following table sets out further details of the cumulative
cash flow hedge reserve:
2022 2021
Group GBPm GBPm
Hedging gains and losses recognised in other comprehensive
income 0.3 (0.8)
Amount reclassified from cash flow hedge reserve -- -
to profit or loss
Tax (0.1) 0.2
Cash flow hedge reserve 0.2 (0.6)
------ ------
The following table presents a reconciliation by risk category
of the cash flow hedge reserve and an analysis of other
comprehensive income in relation to hedge accounting:
Cash flow hedge reserve
2022 2021
Group GBPm GBPm
Balance at beginning of year (0.6) (0.3)
Cashflow hedge - foreign exchange risk
- Effective portion of changes in fair value 1.1 (0.8)
- Tax (0.3) --
Cross currency interest rate swaps
- Effective portion of changes in fair value -- (1.4)
- Amount reclassified to profit or loss in the year -- 1.9
Balance at end of year 0.2 (0.6)
------------ ------------
85
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
24. Investment Securities
Group 2022 2021
GBPm GBPm
Investment securities measured at FVPL 24.8 n/a
Investment securities measured at FVOCI - debt 584.7 n/a
Investment securities designated at FVOCI - equity -- 5.1
Investment securities measured at amortised cost 857.4 948.4
Total investment securities 1,466.9 953.5
-------- ------
Investment securities measured at FVPL
Group 2022 2021
GBPm GBPm
VISA Inc. preferred stock 1.8 n/a
Property fund 23.0 n/a
Total investment securities measured at FVPL 24.8 n/a
----- -----
The Group has a holding in preferred stock issued by VISA Inc.
which was designated at FVOCI in previous years. Following a review
of industry practice and the requirements of IFRS 9, this holding
has been reclassified to FVPL with effect from 1 March 2021. As
this amount is not material, no prior year restatement has been
recognised in respect of this reclassification.
During the year ended 28 February 2021, a proportion of these
shares became eligible for conversion to ordinary shares, resulting
in an unrealised gain of GBP1.7m which was recognised in the fair
value reserve at 28 February 2021. Following the change in
classification with effect from 1 March 2021, the opening
unrealised gain in respect of the Group's total holding in VISA
Inc. preferred stock, amounting to GBP5.1m (GBP3.7m net of deferred
tax), was transferred from the fair value reserve to retained
earnings within the Consolidated Statement of Changes in Equity.
Gains and losses from 1 March 2021 are recognised through the
Consolidated Income Statement. The Group disposed of the converted
shares during the year, realising a gain of GBP37k.
The remaining stock may be convertible into Class A Common Stock
of VISA Inc. at certain future dates, the latest point of which
will be June 2028. Conversion is contingent upon future events
principally related to the outcome of interchange litigation
against VISA Europe Limited. As such, the valuation of GBP1.8m
(2021: GBP5.1m) reflects both an illiquidity discount and the risk
of a reduction in the conversion rate to VISA Inc. common stock.
The reduction in the conversion rate is the most significant
unobservable input to the valuation.
Following the acquisition of TU on 4 May 2021, TU's holding in a
property fund held at FVPL is now included in the Consolidated
Statement of Financial Position.
Investment securities measured at FVOCI - debt
Group 2022 2021
GBPm GBPm
Government backed investment securities 34.6 n/a
Supranational investment securities 31.6 n/a
Corporate bonds 516.9 n/a
Other investment securities 1.6 n/a
Total investment securities measured at FVOCI - debt 584.7 n/a
------ -----
Following the acquisition of TU on 4 May 2021, TU debt
investment securities held at FVOCI are now included in the
Consolidated Statement of Financial Position. All of these are
fixed-interest investment securities.
86
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
24. Investment Securities (continued)
Investment securities measured at amortised cost
2022 2021
Group GBPm GBPm
Government backed investment securities 103.1 126.9
Gilts 68.1 39.2
Supranational investment securities 420.3 438.4
Other investment securities 266.1 323.6
Investment in subordinated debt issued by TU -- 21.1
Gross investment securities measured at amortised cost 857.6 949.2
------ ------
Less: allowance for ECL (refer note 45) (0.2) (0.8)
Net investment securities measured at amortised cost 857.4 948.4
------ ------
Included in investment securities at amortised cost at 28
February 2022 were fixed-interest investment securities totalling
GBP518.2m (2021: GBP502.5m), and variable-interest investment
securities amounting to GBP339.2m (2021: GBP424.8m).
The holding in subordinated debt issued by TU with a gross
carrying value of GBP21.1m at February 2021 is now fully eliminated
on consolidation in the Consolidated Statement of Financial
Position following the acquisition of TU on 4 May 2021.
25. Prepayments and Accrued Income
Group Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Prepayments 16.3 14.0 - -
Accrued income 26.9 27.6 - -
Amounts accrued from TPF - - -- 1.3
Total prepayments and accrued
income 43.2 41.6 -- 1.3
----- ----- ----- -----
All of the above balances are classified as current at the
year-end (2021: all current).
87
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
26. Other Assets
Group 2022 2021
GBPm GBPm
Amount due from insurance commissions receivable 11.8 13.2
Contract asset - insurance renewal income 22.4 30.4
Accounts receivable and sundry debtors 145.2 166.9
Amounts due from Tesco Group subsidiaries 4.3 0.7
Salvage and subrogation recoveries 22.1 -
Deferred acquisition costs 13.9 -
------ ------
Total other assets 219.7 211.2
------ ------
All of the above balances are classified as current at the
year-end, (2021: all current) with the exception of GBP12.3m (2021:
GBP22.4m) of the contract asset recognised under IFRS 15 'Revenue
from Contracts with Customers', which is expected to be received
after more than one year.
Contract asset - insurance renewal income
Of the prior year IFRS 15 contract asset balance, GBP14.1m has
been reclassified in the year as commissions receivable (2021:
GBP10.4m has been reclassified in the prior year relating to the
contract asset balance at 28 February 2020) as insurance policies
have been renewed and commission due to the Group has become
payable. The remainder of the movement in the balance relates to
accelerated income of GBP6.1m (2021: GBP7.4m) in respect of certain
insurance renewal commission income where 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.
Deferred acquisition costs
Following the acquisition of TU during the year, certain
insurance acquisition costs are deferred. An analysis of the
movements in the deferred acquisition costs in the year is as
follows:
2022
GBPm
At beginning of year --
Acquisition costs incurred in period 21.3
Amortisation charged to income (7.4)
At end of year 13.9
------
88
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
27. Investment in Group Undertaking
The Company's investment in a group undertaking in the year was
as follows:
Name of company Nature of business Place of Ownership interest Registered
incorporation address
2022 2021
Banking and 2 South Gyle
Tesco Personal general insurance Crescent, Edinburgh,
Finance plc services UK 100% 100% EH12 9FQ
The Company's Investment in a group undertaking amounts to
GBP1,219.9m (2021: GBP1,219.9m), all of which is non-current (2021:
all non-current).
The Group also has the following investment in a group
undertaking owned indirectly by Tesco Personal Finance plc:
Name of company Nature of business Place of Ownership interest Registered
incorporation address
2022 2021
Tesco Underwriting Insurance UK 100% n/a London Court,
Limited 39 London Road,
Reigate, Surrey,
RH2 9AQ
TU is an authorised insurance company which provides the
insurance underwriting service for a number of the Group's general
insurance products. Prior to 4 May 2021 TU was owned 49.9% by the
Group and accounted for as a joint venture, using the equity method
of accounting. On this date the Group acquired the remaining 50.1%
of ordinary share capital from its joint venture partner. Refer to
note 2 for full details of the acquisition.
The following companies are also accounted for as subsidiaries
of the Group. These are securitisation structured entities
established in connection with the Group's Credit Card
securitisation transactions. Although none of the equity of the
securitisation structured entities is owned by the Group, 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.
Nature of Place
Name of company business of incorporation Registered address
--------------------------- --------------- ------------------ ------------------------
Delamare Cards Holdco Securitisation UK 6th Floor, 125 London
Limited entity Wall, London, EC2Y 5AS
Delamare Cards MTN Issuer Securitisation UK 6th Floor, 125 London
plc entity Wall, London, EC2Y 5AS
Delamare Cards Receivables Securitisation UK 6th Floor, 125 London
Trustee Limited entity Wall, London, EC2Y 5AS
Delamare Cards Funding Securitisation UK 6th Floor, 125 London
1 Limited entity Wall, London, EC2Y 5AS
Delamare Cards Funding Securitisation UK 6th Floor, 125 London
2 Limited entity Wall, London, EC2Y 5AS
All of the above companies have a financial year end of 31
December. The management accounts of these entities are used to
consolidate the results to 28 February 2022 within these
Consolidated Financial Statements.
89
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
28. Investment in Joint Venture
The following table shows the aggregate movement in the Group's
investment in its joint venture in the year:
Group 2022 2021
GBPm GBPm
At beginning of year 92.8 86.0
Dividends received (10.0) (7.5)
Share of profit of joint venture 2.6 16.2
Share of other comprehensive expense of joint venture (0.6) (1.9)
Remeasurement of investment in joint venture (refer note 12) 4.6 -
Reclassification of investment to investment in group undertakings (89.4) -
------- ------
At end of year -- 92.8
------- ------
Details of the Group's joint venture
Name of company Registered address Nature Place of Ownership interest
of business incorporation
2022 2021
Tesco Underwriting London Court, 39 Insurance UK n/a 49.9% of
Limited London Road, Reigate, Ordinary
Surrey, RH2 9AQ Share Capital
TU is an authorised insurance company which provides the
insurance underwriting service for a number of the Group's general
insurance products. Prior to 4 May 2021 the Group owned 49.9% of TU
and the Group accounted for TU as a joint venture, using the equity
method of accounting. On 4 May 2021 the Group acquired the
remaining 50.1% of TU's ordinary share capital from its joint
venture partner. Refer to note 2 for full details of the
acquisition.
The Group used the equity method of accounting for its
investment in TU until it became a wholly owned subsidiary on 4 May
2021. TU had a financial year end of 31 December. The accounting
year end date for TU differed from that of the Group as it was in
line with the previous joint venture partner. The management
accounts of TU were used to consolidate the results to 28 February
2021 within these Consolidated Financial Statements. During the
year TU changed its year end to 28 February to align to the rest of
the Group, following the acquisition of the remaining 50.1% from
its joint venture partner.
TU is a private company and there is no quoted market price
available for its shares.
Until the Group acquired the remaining share capital of TU on 4
May 2021 the Group had 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 allowed the Group to equity account for the results of TU
without any adjustments to reflect the impact of IFRS 9 within
these Consolidated Financial Statements. The additional disclosures
required as a result of taking this temporary exemption for the
prior year-end are included within the following sections.
90
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
28. Investment in Joint Venture (continued)
Summarised financial information for the joint venture
This information reflects the amounts presented in the
management accounts of the joint venture (and not the Group's share
of those amounts):
2021
GBPm
Non-current assets 771.4
Current assets 219.7
Current liabilities (674.0)
Non-current liabilities (136.9)
--------
Net assets 180.2
--------
Cash and cash equivalents 73.9
Current financial liabilities (excluding trade and other
payables and provisions) (18.5)
Non-current financial liabilities (excluding trade and
other payables and provisions) (136.9)
2021
GBPm
Income Statement
Revenue 187.4
Expenses including claims costs (155.0)
--------
Profit for the year 32.4
--------
Other comprehensive expense (3.8)
Total comprehensive income 28.6
--------
The above profit includes the following:
Depreciation and amortisation (1.7)
Interest income 12.2
Interest expense (1.8)
Income tax charge (6.9)
91
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
28. Investment in Joint Venture (continued)
Reconciliation of the summarised financial position
A reconciliation of the summarised financial information
presented to the carrying amount of the investment in joint venture
is as follows:
Group 2021
GBPm
Net assets of the joint venture 180.2
------
Group share at 49.9% 90.0
Capitalised legal costs included in investment carrying
value 2.8
Carrying value of investment in joint venture at end
of year 92.8
------
Fair value disclosures
The following table provides information on the fair value of
TU's financial assets at 28 February 2021:
2021 Change in
fair value
Fair value during year
GBPm GBPm
Financial assets that give rise to solely
payments of principal and interest 677.7 4.0
Other financial assets 18.4 (1.1)
696.1 2.9
----------- -------------
Credit risk disclosures
The following table provides information regarding the credit
risk exposures of TU at 28 February 2021 by classifying financial
assets according to the credit ratings of counterparties:
2021 AAA AA A BBB Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Investments 81.1 129.5 270.3 122.9 18.4 622.2
Cash and cash equivalents 25.4 48.5 - - - 73.9
Insurance and other receivables 1.5 1.1 3.8 2.4 13.8 22.6
108.0 179.1 274.1 125.3 32.2 718.7
------ ------ ------ ------ ------ ------
Other information
The Group had no contingent liabilities or commitments in
respect of the joint venture at 28 February 2021. The investment in
the joint venture was classified as non-current at 28 February
2021.
92
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
29. Deferred Income Tax Asset
The net deferred income tax asset can be analysed as
follows:
2022 Accelerated Share
capital Financial based
allowances instruments payments Other Total
Group GBPm GBPm GBPm
At beginning of year 23.7 41.1 2.3 0.2 67.3
Acquisition of TU 0.1 (2.1) -- -- (2.0)
(Charged)/credited to the Consolidated
Income Statement in the current
year (1.8) (7.2) 0.6 (0.1) (8.5)
Credited/(charged) to the Consolidated
Income Statement for prior years 0.2 -- (0.5) 0.1 (0.2)
Credited to equity -- 5.1 0.7 -- 5.8
Change in tax rate 0.7 1.1 -- -- 1.8
At end of year 22.9 38.0 3.1 0.2 64.2
------------ ------------- ---------- ------ ------
Deferred tax asset to be recovered
within one year 54.2
Deferred tax asset to be recovered
after more than one year 14.7
Total deferred income tax asset 68.9
------
Deferred tax liability to be
recovered within one year (1.6)
Deferred tax liability to be
recovered after more than one
year (3.1)
Total deferred income tax liability (4.7)
------
Deferred tax assets (net) 64.2
------
2021 Accelerated Share
capital Financial based
allowances instruments payments Other Total
Group GBPm GBPm GBPm
At beginning of year 23.0 43.1 3.2 0.1 69.4
Credited/(charged) to the Consolidated
Income Statement in the current
year 0.2 (6.0) (0.4) -- (6.2)
(Charged)/credited to the Consolidated
Income Statement for prior years (1.3) -- -- 0.1 (1.2)
Credited/(charged) to equity -- 0.5 (0.7) -- (0.2)
Change in tax rate 1.8 3.5 0.2 -- 5.5
At end of year 23.7 41.1 2.3 0.2 67.3
------------ ------------- ---------- ------ ------
Deferred tax asset to be recovered
within one year 57.6
Deferred tax asset to be recovered
after more than one year 11.1
Total deferred income tax asset 68.7
------
Deferred tax liability to be
recovered within one year (0.5)
Deferred tax liability to be
recovered after more than one
year (0.9)
Total deferred income tax liability (1.4)
------
Deferred tax assets (net) 67.3
------
93
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
30. Intangible Assets
Computer
Group Work-in-Progress Goodwill Software Total
GBPm GBPm GBPm GBPm
Cost
At 1 March 2021 44.4 -- 717.6 762.0
Acquisition of TU -- 20.0 18.0 38.0
Additions 26.1 -- 6.9 33.0
Transfers (42.8) -- 42.8 --
Disposals (0.2) -- (14.8) (15.0)
At 28 February 2022 27.5 20.0 770.5 818.0
----------------- --------- ---------- --------
Accumulated amortisation
At 1 March 2021 -- -- (631.1) (631.1)
Charge for the year -- -- (52.6) (52.6)
Disposals -- -- 14.3 14.3
At 28 February 2022 -- -- (669.4) (669.4)
----------------- --------- ---------- --------
Net carrying value
At 28 February 2022 27.5 20.0 101.1 148.6
----------------- --------- ---------- --------
Cost
At 1 March 2020 27.8 -- 722.4 750.2
Additions 33.5 -- 6.8 40.3
Transfers (16.3) -- 16.1 (0.2)
Disposals (0.6) -- (27.7) (28.3)
At 28 February 2021 44.4 -- 717.6 762.0
------- --- -------- --------
Accumulated amortisation
At 1 March 2020 -- -- (612.0) (612.0)
Charge for the year -- -- (45.8) (45.8)
Disposals -- -- 26.7 26.7
------- --- -------- --------
At 28 February 2021 -- -- (631.1) (631.1)
------- --- -------- --------
Net carrying value
At 28 February 2021 44.4 -- 86.5 130.9
------- --- -------- --------
Work-in-progress at 28 February 2022 relates primarily to the
internal development of IT software assets. Intangible asset
balances are non-current (2021: non-current).
Goodwill
The acquisition of TU on 4 May 2021 resulted in the recognition
of goodwill of GBP20.0m. Refer to note 2 for further details. This
goodwill is supported by the expected increase in cash flows for
the combined insurance business.
Impairment methodology
Goodwill is tested annually for impairment or more frequently
where there are indicators of impairment. Goodwill recognised on
the acquisition of TU is allocated to the insurance segment of the
Group, which is treated as a separate CGU for impairment
testing.
The recoverable amount of the CGU is determined based on VIU
calculations. Head office and central costs are allocated to the
insurance CGU based on its consumption of the Group's supported
services on a cost-plus margin basis.
94
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
30. Intangible Assets (continued)
Estimates for VIU calculations include discount rates, long-term
growth rates and expected changes to future cash flows, including
insurance volumes and pricing. Estimates are based on past
experience and expectations of future changes in the market,
including the prevailing economic climate and global economy,
competitor activity, market dynamics and changing customer
behaviours.
Cash flow projections are based on the Group's three-year
internal forecasts, the results of which are reviewed by the Board.
The forecasts are extrapolated to five years based on Management's
expectations, and beyond five years based on estimated long-term
average growth rates. Long-term growth rates for the Group are
based on inflation and GDP growth forecasts by recognised
bodies.
Management estimate discount rates using pre-tax rates that
reflect the market assessment as at the Statement of Financial
Position date of the time value of money. The pre-tax discount
rates are derived from the Group's post-tax weighted average cost
of capital, as adjusted for the specific risks relating to each
geographical region. Risk-free rates are based on government bond
rates in each geographical region and equity risk premia are based
on forecasts by recognised bodies.
Key assumptions and sensitivity
For VIU calculations, the key assumptions to which the
recoverable amount is most sensitive are discount rates, long-term
growth rates and forecast cash flows. The rates for the insurance
CGU to which goodwill has been allocated are as follows:
2022
%
Pre-tax discount rate 8.0
Post-tax discount rate 6.3
Long-term growth rate 1.6
The Group has carried out sensitivity analysis on the reasonably
possible changes in these key assumptions in the impairment test
for the insurance CGU. Neither a reasonably possible one percentage
point increase in discount rates, a one percentage point decrease
in long-term growth rates nor a five percentage point decrease in
annual cash flows would indicate impairment in the insurance CGU to
which goodwill has been allocated.
Computer Software
As part of the acquisition of TU on 4 May 2021, the Group has
recognised separately identified intangible assets within computer
software. These represent the fair value of the insurance software
acquired.
95
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
31. Property, Plant and Equipment
Plant Right
Work-in- and Fixtures Computer Freehold Leasehold of Use
Group Progress Equipment and Fittings Hardware Buildings Improvements Assets Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 March
2021 18.4 3.0 21.7 126.3 32.4 20.2 29.4 251.4
Additions 8.2 -- 0.4 5.2 -- -- 0.6 14.4
Acquisition
of
TU -- -- -- 0.4 -- -- 0.4 0.8
Transfers (14.3) -- 0.4 13.9 -- -- -- --
Disposals -- (0.5) (4.9) (30.6) -- -- -- (36.0)
At 28
February
2022 12.3 2.5 17.6 115.2 32.4 20.2 30.4 230.6
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
Accumulated
depreciation
At 1 March
2021 -- (3.0) (15.9) (115.9) (8.1) (13.8) (17.2) (173.9)
Charge for
the
year -- -- (1.9) (6.6) (0.9) (1.4) (1.8) (12.6)
Disposals -- 0.5 4.9 30.3 -- -- -- 35.7
At 28
February
2022 -- (2.5) (12.9) (92.2) (9.0) (15.2) (19.0) (150.8)
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
Net carrying
value
At 28
February
2021 12.3 -- 4.7 23.0 23.4 5.0 11.4 79.8
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
Cost
At 1 March 2020 9.1 3.0 19.4 124.6 32.4 20.2 29.4 238.1
Additions 12.3 - 1.1 1.5 - - - 14.9
Transfers (3.0) - 1.2 2.0 - - - 0.2
Disposals - - -- (1.8) - - - (1.8)
At 28 February
2021 18.4 3.0 21.7 126.3 32.4 20.2 29.4 251.4
------ ------ ------- -------- ------ ------- ------- --------
Accumulated depreciation
At 1 March 2020 - (3.0) (13.9) (112.3) (7.3) (12.5) (15.7) (164.7)
Charge for the
year - - (2.0) (5.3) (0.8) (1.3) (1.5) (10.9)
Disposals - - - 1.7 - - - 1.7
At 28 February
2021 -- (3.0) (15.9) (115.9) (8.1) (13.8) (17.2) (173.9)
------ ------ ------- -------- ------ ------- ------- --------
Net carrying value
At 28 February
2021 18.4 -- 5.8 10.4 24.3 6.4 12.2 77.5
------ ------ ------- -------- ------ ------- ------- --------
Work-in-progress at 28 February 2022 relates predominantly to
the development of IT assets. Property, plant and equipment
balances are non-current (2021: non-current).
96
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
32. Deposits from Banks
Group 2022 2021
GBPm GBPm
Deposits from banks 1,052.3 600.0
1,052.3 600.0
-------- ------
Current 152.3 500.0
Non-current 900.0 100.0
Deposits from banks include balances of GBPnil (2021: GBP500.0m)
drawn under the BoE's Term Funding Scheme (TFS) and GBP902.0m
(2021: GBP100.0m) drawn under the BoE's TFS with incentives for
Small and Medium Sized Entities (TFSME). Also included are balances
of GBP150.3m (2021: GBPnil) which have been sold under sale and
repurchase agreements.
97
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
33. Deposits from Customers
Group 2022 2021
GBPm GBPm
Retail deposits 5,326.0 5,737.6
Fair value hedge adjustment (0.1) 0.4
5,325.9 5,738.0
-------- --------
Current 4,576.4 4,821.0
Non-current 749.5 917.0
Fair value hedge adjustments
Fair value hedge adjustments amounting to GBP(0.1)m (2021:
GBP0.4m) are in respect of fixed rate Savings products. These
adjustments are largely offset by derivatives, which are used to
manage interest rate risk and are designated as fair value hedges
of deposits from customers.
34. Debt Securities in Issue
Interest rate Par value Term Maturity 2022 2021
Group GBPm (years) date GBPm GBPm
MREL(1) 3.50% 250.0 6 2025 244.0 251.0
Total debt securities in
issue 244.0 251.0
----- -----
Company
MREL 3.50% 250.0 6 2025 250.4 249.4
Total debt securities in
issue 250.4 249.4
----- -----
(1) This bond was issued on 26 July 2019. The scheduled
redemption date is July 2024.
On 1 January 2020, the Group became subject to the minimum
requirements for own funds and eligible liabilities (MREL), with an
interim requirement of 18% of risk-weighted assets until 31
December 2022. In order to meet this requirement, the Company
undertook an initial GBP250.0m issuance of MREL-compliant debt in
July 2019. Following a review during the year by the BoE of the
Company's resolution strategy, the Company no longer has a
requirement to issue MREL-compliant debt since the MREL requirement
is equal to the total capital requirement (TCR). The MREL-compliant
debt issued by the Company in July 2019 remains in issue. All of
the above balances are classified as non-current at year end, with
the exception of accrued interest of GBP0.8m, which is classified
as current (2021: all non-current).
35. Provisions for Liabilities and Charges
Customer
Redress Restructuring Expected Credit Other
Group Provision Provision Loss Provision Provisions Total
2022 GBPm GBPm GBPm GBPm GBPm
At beginning of
year 22.4 0.8 28.3 8.6 60.1
Acquisition of
TU - - - 0.1 0.1
Provided during
the year -- -- -- 3.7 3.7
Utilised during
the year (8.1) (0.8) -- (3.4) (12.3)
Transfer to loans
and advances ECL
allowance - - (12.1) - (12.1)
Released during
the year -- -- -- (1.9) (1.9)
At end of year 14.3 -- 16.2 7.1 37.6
----------- -------------- ---------------- ------------ -------
Customer redress provision - Payment protection insurance
(PPI)
The customer redress provision of GBP14.3m at 28 February 2022
(2021: GBP22.4m) relates to potential customer complaints arising
from historic sales of PPI. The Financial Conduct Authority's (FCA)
general claims deadline passed on 29 August 2019, albeit legal
claims continue to be received. Although a significant degree of
uncertainty remains with regard to the ultimate cost of settling
PPI claims, the provision balance represents Management's best
estimate at the reporting date of that cost and is based on
historical uphold rates, average redress and the associated
administrative expenses. The PPI provision and the impact of
regulatory changes will continue to be monitored as Management
finalise their assessment of existing claims, ongoing legal claims
and levels of redress thereon. The timing of utilisation of the
remaining provision is dependent on the timing of settlement of the
remaining claims. This remains inherently uncertain given their
legal nature. Management does not consider there to be a
significant risk of a material adjustment to the carrying amount of
the PPI provision within the next financial year. Accordingly, no
sensitivity analysis is provided.
Restructuring provision
The restructuring provision was in respect of costs related to
the Group's strategic review, which was concluded during the
year.
Expected credit loss provision
The ECL provision represents the amount of ECL allowance
recognised under IFRS 9 which exceeds the gross carrying amount of
the financial asset as set out at note 45.
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;
-- 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
bought back under the terms of the debt sale agreements. This
balance is classified as current at the year-end; and
-- a provision in respect of the potential cost of refunding
fees to customers. This balance is classified as current at the
year-end.
98
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
36. Accruals and Deferred Income
Group Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Amounts accrued to Tesco Group
subsidiaries 12.2 18.0 - -
Amounts accrued to Tesco PLC -- 0.5 - 0.5
Other accruals 91.7 52.6 - 0.8
Deferred income 15.7 15.0 - -
Total accruals and deferred
income 119.6 86.1 - 1.3
------ ----- ----- -----
All of the above balances are classified as current at the
year-end (2021: all current).
37. Other Liabilities
2022 2021
Group GBPm GBPm
Accounts payable and sundry creditors 118.4 122.6
Insurance creditor 0.8 14.6
Taxation and social security payable 7.9 2.7
Contract liabilities - insurance refunds 1.1 1.5
Lease liabilities (refer note 43) 26.8 29.6
Amounts owed to Tesco Group subsidiaries 9.1 13.2
Total other liabilities 164.1 184.2
------ ------
All of the above balances are classified as current at the
year-end (2021: all current) with the exception of GBP22.8m (2021:
GBP26.1m) of the lease liabilities which are due after more than
one year.
Contract liabilities - insurance refunds
Revenue recognised in the year under IFRS 15 in respect of the
opening contract liability balance was GBP0.0m (2021: GBP0.2m).
99
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
38. Insurance Funds Withheld
Following the acquisition of TU on 4 May 2021, insurance funds
withheld are now included in the Consolidated Statement of
Financial Position.
2022
GBPm
Insurance funds withheld 114.8
Total insurance funds withheld 114.8
------
TU has put in place a QS contract as part of its overall
reinsurance protection strategy. A funds withheld account is
maintained which represents the balance due to reinsurers in
accordance with the terms of this reinsurance agreement. The
balance is the net of premiums payable, commission receivable,
claims recoveries receivable and profit commission receivable or
payable, with the reinsurance margin paid over eight quarterly
instalments. The funds withheld account is made up of QS funds
withheld of GBP122.5m and a profit commission of (GBP7.7m) (which
is part of the contract but is a separate payable). The contract
will be commuted after four years from inception.
The balance of insurance funds withheld acquired as part of the
acquisition of TU on 4 May 2021 was GBP100.2m. The movement in the
balance since this date to 28 February 2022, in accordance with the
terms of the reinsurance agreement, is GBP14.6m.
All of the above balances are classified as non-current at the
year-end.
39. Insurance Contracts Provisions and Reinsurance Assets
Following the acquisition of TU on 4 May 2021, insurance
contracts provisions and reinsurance assets are now included in the
Consolidated Statement of Financial Position.
The following tables show the breakdown of the Group's insurance
contract provisions and reinsurance assets at 28 February 2022:
Group 28 February 2022
Gross Reinsurance Net
GBPm GBPm GBPm
Unearned premiums 155.8 (64.1) 91.7
Claims 494.2 (181.0) 313.2
Total insurance contract provisions 650.0 (245.1) 404.9
------ ------------ ------
28 February 2022
Gross Reinsurance Net
GBPm GBPm GBPm
Current 623.3 (60.9) 562.4
Non-current 26.7 (184.2) (157.5)
Recoveries are not included above. For details see movement in
outstanding claims analysis below.
Gross insurance contract provisions, unlike reinsurance assets,
are classified as current or non-current based on contractual
rights to defer settlement for at least 12 months after the
reporting date in accordance with IAS 1 'Presentation of Financial
Statements', rather than expected timing of settlement. Analysis
presented on a behavioural basis is set out on page 134.
100
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
39. Insurance Contracts Provisions and Reinsurance Assets (continued)
Analysis of movement in insurance provisions
28 February 2022
Gross Reinsurance Net
GBPm GBPm GBPm
Balance at 1 March 2021 -- -- --
Acquisition of TU 650.3 (246.7) 403.6
Claims (paid)/recovered from insurers (171.3) 65.8 (105.5)
Movement in claims outstanding 156.2 (59.3) 96.9
Change in provisions from unearned
premiums 14.8 (4.9) 9.9
-------- ------------ --------
At 28 February 2022 650.0 (245.1) 404.9
-------- ------------ --------
Analysis of movement in provision for gross unearned premium
28 February
2022
GBPm
Balance at 1 March 2021 --
Acquisition of TU 141.0
Premium written during the year 254.0
Less: premiums earned during the year (239.2)
------------
At 28 February 2022 155.8
------------
Analysis of movement in outstanding claims
28 February
2022
Gross outstanding claims GBPm
Balance at 1 March 2021 --
Acquisition of TU 509.3
Current year claims 213.4
Change in prior year claims (57.1)
Current year claims paid (103.9)
Prior year claims paid (67.4)
------------
At 28 February 2022 494.3
------------
28 February
2022
Salvage and subrogation recoveries GBPm
Balance at 1 March 2021 --
Acquisition of TU 16.0
Current year claims 20.5
Change in prior year claims (14.4)
------------
At 28 February 2022 22.1
------------
28 February
2022
Gross outstanding claims, net of recoveries GBPm
Balance at 1 March 2021 --
Acquisition of TU 493.3
Current year claims 192.9
Change in prior year claims (42.8)
Current year claims paid (103.9)
Prior year claims paid (67.4)
------------
At 28 February 2022 472.1
------------
101
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
39. Insurance Contracts Provisions and Reinsurance Assets (continued)
Process used to determine the assumptions
The sources of data used as inputs for the assumptions behind
insurance provisions are internal, using detailed studies that are
carried out at least annually. The assumptions are checked to
ensure that they are consistent with observable market prices or
other published information. There is more emphasis on current
trends, and where in more recent periods there is insufficient
information to make a reliable best estimate of claims development,
suitable benchmark assumptions are used.
The nature of the business makes it very difficult to predict
with certainty the likely outcome of any particular claim and the
ultimate cost of notified claims. Each notified claim is assessed
on a case-by-case basis with due regard to the claim circumstances
and historical evidence of the size of similar claims. Case
estimates are reviewed regularly and are updated as and when new
information arises. The provisions are based on information
currently available. However, the ultimate liabilities may vary as
a result of subsequent developments. The impact of many of the
items affecting the ultimate costs of the loss is difficult to
estimate. The degree of complexity involved will also differ by
book of business due to differences in the underlying insurance
contract, claim complexity, the volume of claims and the individual
severity of claims, determining the occurrence date of a claim, and
reporting lags.
The cost of outstanding claims and the IBNR provisions are
estimated using various statistical methods. Such methods
extrapolate the development of paid and incurred claims, average
cost per claim and ultimate claim numbers for each accident period
based upon observed development of earlier periods, with reference
to suitable benchmarks.
The key methods are:
Development factor methods, which use historical data to
estimate the paid and incurred to date as proportions of the
ultimate claim cost;
Individual claim assessment methods, which use claim-specific
details for large individual claims to estimate the ultimate claim
cost; and
Benchmarking methods, which use the experience of comparable,
more mature classes, or market data to estimate the cost of
claims.
The actual method or blend of methods used varies by accident
period being considered and the class of business and observed
historical claims development.
To the extent that these methods use historical claims
development information, they assume that the historical claims
development pattern will occur again in the future. There are
reasons why this may not be the case, which, insofar as they can be
identified, have been allowed for by modifying the methods. Such
reasons include:
Changes in processes that affect the development and/or
recording of claims paid and incurred (such as changes in claim
reserving procedures and/or the introduction of a new claims
system);
Economic, legal, political and social trends (resulting in, for
example, a difference in expected levels of inflation);
Changes in mix of business; and
Random fluctuations, including the impact of large losses.
IBNR provisions are initially estimated at a gross level and a
separate calculation is carried out to estimate the size of
reinsurance recoveries. The Group is covered by a variety of excess
of loss reinsurance programmes. The methods used by the Group take
account of historical data, specific details for individual large
claims and details of the reinsurance programme, to assess the
expected size of reinsurance recoveries.
102
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
39. Insurance Contracts Provisions and Reinsurance Assets (continued)
Process used to determine the assumptions (continued)
The Group considers that the liability for claims reported in
the Consolidated Statement of Financial Position is adequate.
However, it recognises that the process of estimation is based upon
certain variables and assumptions, which could differ when claims
arise.
Recoveries through salvage and subrogation are estimated and
recorded separately within other assets based on a combination of
suitable benchmark assumptions and the observed development to
date.
Ogden rate
The personal injury discount rate (Ogden rate) is set by the
Ministry of Justice and is used by the courts to calculate lump sum
personal injury payments. Reserves are assessed at the current rate
of -0.25%.
Analysis of claims development - gross of reinsurance and net of
salvage and subrogation recoveries
Accident year(1)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Estimate of
gross
ultimate
claim costs
At end of
accident
year 529.8 390.6 349.3 327.1 370.7 304.3 317.4 282.2 219.7 224.1 48.1 --
One year
later 534.4 388.4 352.7 343.2 372.1 298.8 296.7 288.1 209.0 -- -- --
Two years
later 522.5 372.6 379.1 343.1 335.0 269.3 267.9 270.9 -- -- -- --
Three years
later 517.3 382.8 352.9 322.7 324.5 258.3 270.7 -- -- -- -- --
Four years
later 526.8 362.5 359.7 311.5 322.9 252.8 -- -- -- -- -- --
Five years
later 517.7 360.3 346.9 304.9 308.6 -- -- -- -- -- -- --
Six years
later 520.3 360.8 349.9 305.4 -- -- -- -- -- -- -- --
Seven years
later 518.9 360.3 343.3 -- -- -- -- -- -- -- -- --
Eight years
later 526.8 360.1 -- -- -- -- -- -- -- -- -- --
Nine years 527.7 -- -- -- -- -- -- -- -- -- -- --
later
Current
estimate
of
cumulative
claims 527.7 360.1 343.3 305.4 308.6 252.8 270.7 270.9 209.0 224.1 48.1 3,120.7
Cumulative
payments
to date (504.5) (348.2) (327.4) (295.9) (286.7) (240.7) (223.6) (188.1) (125.0) (113.5) (8.7) (2,662.3)
Claims
outstanding
prior to
2012
accident
year -- -- -- -- -- -- -- -- -- -- -- 5.9
Current
gross
claims
provision 23.2 11.9 15.9 9.5 21.9 12.1 47.1 82.8 84.0 110.6 39.4 464.3
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------ ----------
Provision
for
claims
handling
costs -- -- -- -- -- -- -- -- -- -- -- 4.8
Fair value
adjustment
to claims
outstanding
provisions
as
a result of
TU
acquisition -- -- -- -- -- -- -- -- -- -- -- 3.0
Total gross
claims
outstanding
provisions -- -- -- -- -- -- -- -- -- -- 472.1
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------ ----------
(1) The information in the above claims development table covers
the period from which the earliest material claim arose in TU for
which there is still uncertainty about the amount and timing of the
claims payments and therefore reflects claims development in
respect of claims arising prior to the acquisition of TU on 4 May
2021.
103
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
39. Insurance Contracts Provisions and Reinsurance Assets (continued)
Analysis of claims development - net of reinsurance and net of
salvage and subrogation recoveries
Accident year(1)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Estimate of
net
ultimate
claim
costs
At end of
accident
year 515.5 378.8 336.0 319.5 310.5 276.0 259.0 235.7 143.9 127.0 37.2 --
One year
later 521.9 380.3 338.2 327.2 319.2 269.7 259.3 254.7 124.9 -- -- --
Two years
later 512.4 367.9 348.9 330.7 302.0 252.0 233.4 243.6 -- -- -- --
Three years
later 506.6 371.5 342.6 314.8 291.7 241.5 246.7 -- -- -- -- --
Four years
later 505.4 358.9 339.1 305.8 292.5 239.4 -- -- -- -- -- --
Five years
later 500.3 355.2 338.0 300.7 286.6 -- -- -- -- -- -- --
Six years
later 503.6 356.2 339.9 300.9 -- -- -- -- -- -- -- --
Seven years
later 500.3 355.1 333.7 -- -- -- -- -- -- -- -- --
Eight years
later 506.5 354.2 -- -- -- -- -- -- -- -- -- --
Nine years 505.6 -- -- -- -- -- -- -- -- -- -- --
later
Current
estimate
of
cumulative
claims 505.6 354.2 333.7 300.9 286.6 239.4 246.7 243.6 124.9 127.0 37.2 2,799.8
Cumulative
payments
to date (498.1) (347.2) (323.1) (292.2) (275.9) (231.9) (210.9) (184.8) (87.2) (66.7) (2.9) (2,520.9)
Claims
outstanding
prior to
2012
accident
year -- -- -- -- -- -- -- -- -- -- -- 4.1
Current net
claims
provision 7.5 7.0 10.6 8.7 10.7 7.5 35.8 58.8 37.7 60.3 34.3 283.1
-------- -------- -------- -------- -------- -------- -------- -------- ------- ------- ------ ----------
Provision
for
claims
handling
costs -- -- -- -- -- -- -- -- -- -- -- 4.8
Fair value
adjustment
to claims
outstanding
provisions
as
a result of
TU
acquisition -- -- -- -- -- -- -- -- -- -- -- 3.0
Total net
claims
outstanding
provisions -- -- -- -- -- -- -- -- -- -- -- 290.9
-------- -------- -------- -------- -------- -------- -------- -------- ------- ------- ------ ----------
(1) The information in the above claims development table covers
the period from which the earliest material claim arose in TU for
which there is still uncertainty about the amount and timing of the
claims payments and therefore reflects claims development in
respect of claims arising prior to the acquisition of TU on 4 May
2021.
104
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
40. Subordinated Liabilities and Notes
Group and Company 2022 2021
GBPm GBPm
Amortised cost:
Floating rate subordinated loans 190.5 190.0
Undated floating rate notes 45.1 45.0
Total subordinated liabilities and notes 235.6 235.0
------ ------
Subordinated liabilities and notes comprise loan capital issued
to Tesco. This includes GBP190.0m notional (2021: GBP190.0m) of
subordinated loans maturing in 2030 and GBP45.0m notional (2021:
GBP45.0m) of undated notes with no fixed maturity date. All of the
above balances are classified as non-current at the year-end (2021:
all non-current) with the exception of accrued interest of GBP0.6m
which is classified as current.
Interest payable on the floating rate subordinated loans and
notes is based on three-month SONIA plus a margin of 67 to 227
basis points (2021: three-month SONIA plus a margin of 67 to 227
basis points).
41. Share Capital and Share Premium Account
Group and Company 2022 2022 2021 2021
Number GBPm Number GBPm
Authorised
A Ordinary shares of 10p each Unlimited Unlimited
B Ordinary shares of 10p each Unlimited Unlimited
C Ordinary shares of 10p each 1 1
Allotted, called up and fully paid
A Ordinary shares of 10p each 991,090,000 99.1 991,090,000 99.1
B Ordinary shares of 10p each 229,089,000 22.9 229,089,000 22.9
C Ordinary shares of 10p each 1 - -
1,220,179,001 122.0 1,220,179,001 122.0
-------------- -------- -------------- --------
2022 2021
GBPm GBPm
Share premium reserve 1,098.2 1,098.2
1,098.2 1,098.2
-------- --------
105
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
42. Other Reserves
Group
2022 2021
GBPm GBPm
AFS - share of joint venture -- 5.6
Fair value reserve (12.8) 3.7
------- ------
Total AFS/FV reserves (12.8) 9.3
------- ------
Cash flow hedge reserve 0.2 (0.6)
Share based payment reserve 26.1 21.9
Total reserves 13.5 30.6
------- ------
AFS reserve
The consolidated AFS reserve included the Group's share of the
AFS reserve of its joint venture, TU, until TU was fully acquired
on 4 May 2021. Immediately prior to the acquisition the Group
recognised a consolidated gain of GBP5.0m in respect of this share
of the TU AFS reserve in the Consolidated Income Statement.
Fair value reserve
The cumulative net change in the fair value of investment
securities measured at FVOCI is included in the fair value reserve,
less the impairment allowance recognised in the Consolidated Income
Statement.
The balance in the fair value reserve at 28 February 2022
relates to debt investment securities recognised through the
acquisition of TU during the year.
The Group has a holding in preferred stock issued by VISA Inc.
which was designated at FVOCI in previous years. Following a review
of industry practice and the requirements of IFRS 9, this holding
has been reclassified to FVPL with effect from 1 March 2021. As a
result, GBP5.1m (GBP3.7m net of deferred tax) in respect of the
opening fair value reserve at 1 March 2020 was released from the
fair value reserve in the year and recognised directly in retained
earnings in the Consolidated Statement of Changes in Equity. As
this amount is not material, no prior year restatement has been
recognised in respect of this reclassification.
Cash flow hedge reserve
The effective portion of changes in the fair value of
derivatives that are designated and qualify as cash flow hedges are
included in the cash flow hedge reserve. The gain or loss relating
to the ineffective portion is recognised immediately in the
Consolidated Income Statement.
Share based payment reserve
The fair value of Tesco equity-settled share options granted to
employees of the Group is included in the share based payment
reserve.
106
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
43. Leases
Leasing activities
The Group has entered into leases for office buildings. These
lease contracts contain a wide range of terms and conditions,
including extension options. These options are exercisable only by
the Group and not by the respective Lessor. The Group has also
entered into a contract to sublease space in one of these office
buildings to a third-party supplier.
Consolidated Income Statement Amounts Relating to Leases
The Consolidated Income Statement includes the following amounts
relating to leases:
2022 2021
Group GBPm GBPm
Sub-lease income - n/a
Depreciation charge on right-of-use assets(1) 1.8 1.5
Interest expense on lease liabilities(2) 2.1 2.3
Total 3.9 3.8
----- -----
Consolidated Statement of Financial Position Amounts Relating to
Leases
The Consolidated Statement of Financial Position includes the
following amounts relating to leases:
2022 2021
Group GBPm GBPm
Right-of-use assets(3)
Office buildings 11.4 12.2
Total right-of-use assets 11.4 12.2
----- -----
Lease liabilities(4)
Current 4.0 3.5
Non-current 22.8 26.1
Total lease liabilities 26.8 29.6
----- -----
Consolidated Cash Flow Statement amounts relating to leases
The Consolidated Cash Flow Statement includes the following
amounts relating to leases:
2022 2021
Group GBPm GBPm
Interest paid on lease liabilities 3.5 3.6
Principal payments on lease liabilities 2.2 1.9
Total cash outflow for lease liabilities 5.7 5.5
----- -----
Possible future cash outflows not included in lease
liability
Potential future lease payments (undiscounted) in relation to
extension options not included in the reasonably certain lease
term, and hence not included in lease liabilities, total GBP65.3m
(2021: GBP64.4m).
(1) Included in Depreciation and amortisation in the
Consolidated Income Statement (refer to note 14).
(2) Included in Net interest income in the Consolidated Income
Statement (refer to note 6).
(3) Included in Property, plant and equipment in the
Consolidated Statement of Financial Position (refer to note
31).
(4) Included in Other liabilities in the Consolidated Statement
of Financial Position (refer to note 37).
107
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
44. Employee Benefit Liability
Defined benefit plans
The Group made contributions in the year to a closed funded
defined benefit scheme operated by TSL. The principal pension plan
is the Tesco pension scheme, a funded defined benefit pension
scheme in the UK, the assets of which are held as a segregated fund
and administered by the Trustee. TSL has recognised the appropriate
net liability of the Tesco pension scheme in accordance with IAS
19.
Defined contribution plans
A defined contribution scheme operated by TSL is open to all
Group employees in the UK.
Detailed disclosures, in line with the requirements of IAS 19,
are included in the Tesco 2022 Financial Statements.
45. Risk Management
Unless otherwise stated, there are no differences in the manner
in which risks are managed and measured between the Group and the
Company. Therefore, the explanations of the management, the control
responsibilities and the measurement of risk described in this
section are those for the Group unless otherwise stated. The
amounts included in this note are those for the Group unless
otherwise stated.
Through its normal operations, the Group is exposed to a number
of risks, the most significant of which are credit risk,
operational risk, liquidity and funding risk, market risk,
insurance risk, residual price risk, legal and regulatory
compliance risk and insurance capital risk. The key risk management
processes and tools are described in detail on pages 16 to 22
within the Strategic Report.
(a) Credit Risk
Credit risk within the Group arises principally from retail
lending activities but also from placement of surplus funds with
other banks, holdings in transferable securities and interest rate
and foreign exchange derivatives. In addition, credit risk arises
from contractual arrangements with third-parties where payments and
commissions are owed to the Group for short periods of time. Credit
risk may also materialise when an adverse change in an entity's
credit rating causes a fall in the fair value of the Group's
holding of that entity's financial instrument.
Types of credit risk
Retail credit risk
Retail credit risk is the risk that a borrower, who is a
personal customer, will default on a debt or obligation by failing
to make contractually obligated payments. The Group is following
FCA guidance, updated due to the Covid-19 pandemic, in relation to
those Credit Card customers defined as being in persistent
debt.
Controls and risk mitigants
To minimise the potential for the Group to be exposed to levels
of default that are outside Risk Appetite, processes, systems and
limits have been established that cover the end-to-end retail
credit risk customer life cycle, the key components of which are
outlined below:
Credit scoring: The quality of new lending is controlled using
appropriate credit scoring and associated rules. Judgemental
analysis is used for more complex cases.
Affordability: The Group aims to be a responsible lender and
accordingly employs affordability models, including minimum free
income thresholds based on customers' income and outgoings, to
confirm that they have the ability to repay the advances they are
seeking.
Credit policies and guides: A suite of retail credit risk
policies and supporting guides are maintained by the Credit Risk
function. These policies define the minimum requirements for the
management of credit activities across the credit life cycle. The
guides also comprise specific product and customer related
thresholds that in turn seek to ensure that the Group is operating
within agreed retail credit Risk Appetite parameters.
108
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Monitoring and reporting: Management information is produced
covering all lending portfolios which is tailored to meet the
requirements of different audiences within the overall governance
framework. Risk Appetite Measures (RAMs) with supporting limits and
tolerances allow the Group to track performance against Risk
Appetite and identify any emerging trends that could act as an
early warning that performance could move outside approved Risk
Appetite thresholds, thereby allowing mitigating actions to be
taken to address such trends.
Wholesale credit risk
Wholesale credit risk is the risk that the counterparty to a
transaction will default before the final settlement of the
transaction's cash flows. Such transactions relate to contracts for
derivative financial instruments, securities financing transactions
(SFTs) and long-dated settlement transactions. As at 28 February
2022, the Group had an undrawn GBP200.0m committed structured
repurchase facility and has no long-dated settlement
transactions.
The Group does not operate in the mainstream commercial or
corporate lending market. However, the Group is exposed to
wholesale credit risk primarily through Treasury activities, as a
result of cash management, liquidity and market risk management,
with the inherent risk that these counterparties could fail to meet
their obligations.
Controls and risk mitigants
Daily monitoring of exposures is undertaken, with oversight from
the Second Line of Risk Management. Monthly reporting of RAMs is
provided to the Executive Risk Committee (ERC). Escalation
processes are in place for the reporting of any breached limits
directly to the ERC.
The RAM limits are set out in the Wholesale Credit Risk Policy
which is approved by the Board. The limits contained in the Policy
are approved by the Board. The Treasury Director is responsible for
ensuring that the Treasury function complies with counterparty
credit risk limits.
The Group's approach to holding liquidity investments focuses on
counterparties with strong capacity to meet financial commitments
and requires approved counterparties to have investment grade
ratings. Counterparty types include financial institutions,
sovereigns and multilateral development banks, with approved
instrument types including cash, certificates of deposit, bonds,
treasury bills, gilts, repurchase agreements and interest rate and
foreign exchange derivatives. Ratings issued by external credit
assessment institutions are taken into account as part of the
process to set limits.
Wholesale credit risk limits restrict the amounts that can be
invested based on counterparty credit-worthiness by country,
instrument type and remaining tenor. As part of the credit
assessment process for wholesale credit risk exposures, the Group
uses the external credit ratings issued by Fitch (as the nominated
external credit assessment institution) to help determine the
appropriate risk-weighting to apply under the Standardised Approach
(SA) to credit risk exposures. The Wholesale Credit Risk Policy is
set by the Board and any new counterparty limits, Policy exceptions
or overrides must follow delegated authorities agreed by the Board
that require as a minimum explicit sign-off by the Chief Financial
Officer and Chief Risk Officer (CRO).
The Wholesale Credit Risk Policy also provides that credit risk
mitigation techniques are applied to reduce wholesale credit risk
exposures. International Swaps Derivatives Association (ISDA)
master agreements are in place with all derivative counterparties,
Global Master Repurchase Agreements are in place for all repurchase
counterparties and ISDA Credit Support Annexes have been executed
with all of the Group's derivative counterparties. The Group uses
central counterparties in order to clear specified derivative
transactions (predominantly interest rate swaps) thereby mitigating
counterparty credit risk. Positions are continuously
marked-to-market and margin in the form of collateral is exchanged
on at least a daily basis. As at 28 February 2022, no additional
credit risk mitigation was deemed necessary.
109
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Credit risk: ECL measurement
The Group assesses, on a forward-looking basis, the ECLs
associated with its financial assets carried at amortised cost and
FVOCI and its exposure arising from loan commitments. The Group has
not recognised an ECL allowance for cash, loans and advances to
banks, and other financial assets balances at 28 February 2022 due
to the short-term nature of these balances, the frequency of
origination and settlement of balances and collateral held.
ECLs are calculated in line with the requirements of IFRS 9
using the three-stage model for impairment:
Stage 1 Financial asset is not credit impaired and has not had a
significant increase in credit risk since initial recognition.
Stage 2 Financial asset is not credit impaired but has had a
significant increase in credit risk since initial recognition.
Stage 3 Financial asset is credit impaired.
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 or 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.
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 Group compares the lifetime
probability of default (PD) at the reporting date with the lifetime
PD that was expected at the reporting date at initial recognition
(PD thresholds). The Group has established PD thresholds for each
type of product which vary depending on initial term and term
remaining.
Qualitative criteria:
A number of qualitative criteria are in place such as:
Forbearance offered to customers in financial difficulty;
Risk-based pricing post-origination;
Credit indebtedness;
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.
Definition of default
An account is deemed to have defaulted when the Group considers
that a customer is in significant financial difficulty and that the
customer meets certain quantitative and qualitative criteria
regarding their ability to make contractual payments when due.
110
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
This includes instances where:
the customer makes a declaration of significant financial
difficulty and is placed on a temporary interest-free repayment
plan or permanent reduction in annual percentage rate;
the customer or third-party agency communicates that it is
probable that the customer will enter bankruptcy or another form of
financial restructuring such as insolvency or repossession;
the account has been transferred to recoveries and the
relationship is terminated;
the customer is more than 90 days past due (the equivalent of
four payments down) for Personal Loans and Credit Cards; or
where the customer is deceased.
An account 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
The ECL is determined by multiplying together the 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
the 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 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 debt
sales.
These inputs are adjusted to reflect forward-looking information
as described below.
Expected lifetime
The expected lifetime of a financial asset is generally the
contractual term. In the case of Personal Loans, the expected
lifetime is the behavioural life. 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 historical
customer data. The current expected lifetime of the Group's Credit
Card portfolio is six years.
Incorporation of forward-looking information
The ECL 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 historical patterns observed over a
range of economic cycles.
Past due and impaired definitions
The Group considers exposures to be past due where a customer
does not make the minimum contractual monthly payment of principal,
interest or fee. For Personal Current Accounts (PCA), past due
status arises when the account is in excess of its contractual
overdraft limit. Accounts remain as past due but not impaired until
the point where a loss trigger has occurred.
The definition of default set out above aligns to both statutory
and regulatory reporting and complies with the requirements of
each. The Group has no past-due exposures of more than 90 days that
are not considered to be impaired.
111
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
The Group has engaged a third-party supplier to provide relevant
economic data 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.
At 28 February 2022, the Group continued to use four economic
scenarios. These scenarios included a Base scenario, an Upside
scenario and two different downside scenarios. These scenarios were
assigned weightings of 40%, 30%, 25% and 5% respectively.
The Base scenario incorporates benefits from the vaccine
programme and lifting of restrictions, which contribute to an
increase in consumer confidence. GDP is expected to return to
pre-pandemic levels by Q3 2022. This is discussed in more detail
below.
The Upside scenario builds on the assumptions in the Base
scenario but assumes a quicker rate of growth with a return to
pre-pandemic levels of GDP by Q1 2022. Accumulated savings from
lockdown periods will be utilised, driving a recovery in consumer
spending. Unemployment in the Upside scenario is expected to peak
at 4.0% in Q1 2022.
The Downside 1 scenario projects an increase in new Covid-19
cases and hospitalisations, which lead to a reintroduction of
tiered restrictions across the early part of the year. This puts
additional pressure on struggling businesses, leading to
unemployment peaking at 6.2% in Q2 2022.
The Downside 2 scenario projects that the increase in new
Covid-19 cases and hospitalisations is sufficient enough to result
in a full national lockdown being introduced that lasts up to 2
months. The severity of these measures results in a larger decline
in GDP than the Downside 1 scenario (1.9% reduction across Q1
2022), and an unemployment peak of 8.0% in Q2 2022.
These scenarios are also reviewed to ensure an unbiased estimate
of ECLs by ensuring the credit loss distribution under a larger
number of scenarios is adequately captured using these scenarios
and their respective weightings.
Base Scenario
The Group's Base scenario projects a recovery throughout 2022,
returning to pre-pandemic levels in Q3 2022. The Base scenario
applied by the Group at 31 August 2021 projected a return to
pre-pandemic levels by Q4 2021. The Base scenario expects
unemployment to peak at 4.7% in Q2 2022.
Pay growth across 2022 is expected to be eroded by high rates of
inflation, with further pressure on household incomes through
rising energy costs and rises in National Insurance. This drives a
continued slowdown in consumer spending. Above-target inflation
prompted the BoE to increase the UK bank rate to 0.25% in December
2021. The Base scenario assumes further slow and steady rises in
interest rates next year.
The Base scenario employed at 28 February 2022 is more
optimistic than the one in place at 31 August 2021, mainly due to a
significant reduction in projected levels of unemployment,
following low levels of redundancies at the end of the furlough
scheme. The weighted peak of unemployment now stands at 5.0%
compared to a rate of 7.1% at 31 August 2021.
Despite the improvement in the wider macro-economic environment,
the pressures on household incomes referred to above are expected
to put significant strain on households over the next financial
year. The Group held a PMA of GBP74.7m in respect of this issue at
28 February 2022.
The Group has also assessed the projected impact on its business
and results, at 28 February 2022, of the ongoing conflict in
Ukraine and has sourced an additional scenario at that date to
understand the projected impact of the conflict on the UK economy.
The scenario shows a more sustained level of unemployment which
does not recover as quickly as the Group's Base assumption,
slightly lower forecast GDP, and a further strain on household
incomes through an increased rate of inflation. The scenario
assumes the conflict ends by June 2022. The impact of this issue
has been held as a PMA of GBP6.3m at 28 February 2022.
112
45. Risk Management (continued)
The tables below show the key macro-economic variables in each
scenario, averaged over a five-year period.
The economic scenarios used include the following ranges of key
indicators:
2022
Scenario Weighting Sensitivity Economic measure 2022 2023 2024 2025 2026
(100%
weighted)(1)
GBPm % % % % %
Bank of England base
Base 40% (12.8) rate(2) 0.7 1.2 1.2 1.0 0.8
Gross domestic product(3) 2.4 2.1 1.3 1.6 1.6
Unemployment rate 4.5 4.1 4.0 3.9 3.9
Unemployment rate
peak in year 4.7 4.2 4.0 3.9 3.9
Bank of England base
Upside 30% (27.3) rate(2) 1.1 1.5 1.5 1.2 1.0
Gross domestic product(3) 4.5 2.1 1.3 1.6 1.6
Unemployment rate 4.0 3.9 3.9 3.9 3.9
Unemployment rate
peak in year 4.0 3.9 3.9 3.9 3.9
Downside Bank of England base
1 25% 31.1 rate(2) 0.3 0.9 0.8 0.7 0.6
Gross domestic product(3) 0.9 2.1 1.3 1.6 1.6
Unemployment rate 5.9 5.5 4.8 4.3 4.1
Unemployment rate
peak in year 6.2 5.8 5.0 4.4 4.1
Downside Bank of England base
2 5% 110.4 rate(2) 0.2 0.5 0.6 0.5 0.4
Gross domestic product(3) (0.8) 2.0 1.3 1.6 1.6
Unemployment rate 7.5 7.5 6.5 5.5 4.7
Unemployment rate
peak in year 8.0 7.8 7.0 5.8 4.9
Bank of England base
Weighted scenarios rate(1) 0.7 1.2 1.1 1.0 0.8
Gross domestic product 2.5 2.1 1.3 1.6 1.6
Unemployment rate 4.8 4.6 4.3 4.1 4.0
Unemployment rate
peak in year 5.0 4.7 4.4 4.1 4.0
(1) Represents the impact on ECL provision if 100% weighting
applied to each macro-economic scenario.
(2) Simple average.
(3) Annual growth rates.
113
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
2021
Scenario Weighting Sensitivity Economic measure 2021 2022 2023 2024 2025
(100%
weighted)(1)
GBPm % % % % %
Bank of England base
Base 40% (1.1) rate(2) 0.1 0.1 0.1 0.1 0.2
Gross domestic product(3) 4.7 3.2 1.8 1.6 1.6
Unemployment rate 7.7 6.4 4.9 4.3 4.1
Unemployment rate
peak in year 8.0 7.2 5.3 4.5 4.1
Bank of England base
Upside 30% (65.8) rate(2) 0.1 0.1 0.1 0.2 0.4
Gross domestic product(3) 9.5 2.6 1.6 1.8 1.8
Unemployment rate 6.4 4.7 4.2 4.1 4.0
Unemployment rate
peak in year 6.7 5.2 4.2 4.1 4.1
Downside Bank of England base
1 25% 56.8 rate(2) - - 0.1 0.1 0.1
Gross domestic product(3) 2.0 3.5 1.9 1.8 1.8
Unemployment rate 8.6 8.6 6.8 5.3 4.4
Unemployment rate
peak in year 9.6 9.3 7.5 5.8 4.7
Downside Bank of England base
2 5% 116.8 rate(2) - (0.1) 0.1 0.1 0.1
Gross domestic product(3) (1.0) 4.4 2.2 1.8 1.8
Unemployment rate 9.4 10.4 9.3 7.8 6.2
Unemployment rate
peak in year 10.8 10.7 9.7 8.4 6.8
Bank of England base
Weighted scenarios rate(2) 0.1 0.1 0.1 0.1 0.3
Gross domestic product(3) 5.2 3.2 1.8 1.7 1.7
Unemployment rate 7.6 6.6 5.4 4.7 4.3
Unemployment rate
peak in year 8.2 7.3 5.7 4.9 4.4
(1) Represents the impact on ECL provision if 100% weighting
applied to each macro-economic scenario.
(2) Simple average.
(3) Annual growth rates.
114
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Sensitivity analysis
As the calculation of ECLs is complex and involves use of
judgement, sensitivity analysis has been performed to illustrate
the impact on ECLs of any changes to the main components of the
calculation. The effect of applying a 100% weighting to each of the
macro-economic scenarios, as well as the impact on ECLs as a result
of changes in LGD, staging, PD and expected lifetime, have been
assessed.
Most of the sensitivities have been calculated as single-factor
sensitivities and any impact on ECL reflects the sensitivity of the
estimate to each key component in isolation. However, the PD and
macro-economic sensitivities also include a rebasing of the staging
allocation and thresholds. The impact of these is therefore
incorporated within the impact disclosed for these
sensitivities.
The most significant assumptions affecting the ECL calculation
are as follows:
PD;
LGD;
Macro-economic scenarios and their relative weightings;
PD threshold (staging); and
Expected lifetime of revolving credit facilities.
Set out below are changes in the ECL allowance that would arise
from reasonably possible changes in these assumptions over those
used in the Group's calculations at 28 February 2022:
Impact on loss
allowance
2022 2021
GBPm GBPm
Closing ECL allowance 488.8 624.6
Macro-economic (100% weighted) Upside (27.3) (65.8)
Base (12.8) (1.1)
Downside 1 31.1 56.8
Downside 2 110.4 116.8
Increase of
PD 2.5% 5.8 7.5
Decrease of
2.5% (5.6) (7.5)
Increase of
LGD 2.5% 7.2 10.3
Decrease of
2.5% (7.2) (10.4)
Increase of
Staging - change in threshold 20% (8.6) (7.4)
Decrease of
20% 12.7 10.6
Increase of
Expected lifetime (revolving credit facilities) 1 year 10.9 9.3
Decrease of
1 year (9.6) (8.7)
115
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Management Overlays
Throughout the Covid-19 pandemic, the macroeconomic forecasts
employed by the Group projected lasting impacts to levels of
unemployment and customers experiencing significant financial
difficulty as a result. The unprecedented levels of government
support and concessions offered by the Group have led to a low
level of customer defaults observed to 28 February 2022. While
there has been significant recovery observed in the wider economy,
the degree of uncertainty remains high.
As a result, Management has recognised PMAs in respect of
economic uncertainty to address these prevailing downside risks.
The PMAs employed at 28 February 2022 are as follows:
Management has assessed that the beneficial impact of lower
consumer spending through the Covid-19 pandemic, which has resulted
in an improvement in credit scores, as well as other inputs to ECLs
such as lower EADs on the Credit Cards portfolio, will have
suppressed ECLs. A PMA of GBP112.6m (2021: GBP129.5m) is held in
this respect, calculated from pre-Covid-19 pandemic coverage rates
and based upon credit limits, but reduced in line with the
reduction in portfolio utilisation observed during the year. An
increase or decrease of 10% on the adjustment for lower drawn
balances would increase or decrease this overlay by GBP12.6m. This
PMA reflects Management's belief that the level of risk prior to
the emergence of Covid-19 is more reflective of future ECLs.
Management has assessed that the emergence of customer defaults
will be more aligned with the most recent economic downturn
experienced through the 2008/2009 global financial crisis. A PMA of
GBP19.5m is held in respect of this uncertainty. Extending the
emergence of defaults by 6 months increases the overlay by GBP4.2m,
while reducing it by 6 months decreases the overlay by GBP6.3m.
Management has assessed that the current cost of living crisis
makes a portion of the Group's customers more vulnerable to rises
in inflation and a deterioration in their ability to repay
unsecured lending balances. These customers were identified based
on their total level of unsecured debt (GBP10k or more) and their
consumer indebtedness index provided by the external credit
reference bureau. A PMA of GBP74.7m is held after moving these
customers into Stage 2. Expanding the affected population to
include customers who are five points lower on the consumer
indebtedness index would increase the overlay by GBP41.2m.
Management has assessed the projected impact on its business and
results, at 28 February 2022, of the ongoing conflict in Ukraine
and has sourced an additional scenario at that date to understand
the projected impact of the conflict on the UK economy. The
scenario shows a more sustained level of unemployment which does
not recover as quickly as the Group's Base assumption, slightly
lower forecast GDP, and a further strain on household incomes
through an increased rate of inflation. The scenario assumes the
conflict ends by June 2022. A PMA of GBP6.3m is held at 28 February
2022 in respect of this ongoing issue.
In the prior year, the Group held the following PMAs in addition
to those outlined above:
A PMA of GBP21.1m was held at 28 February 2021 in respect of
customers who had taken an extension to their initial payment
holiday as they were deemed to be exhibiting a higher level of
credit risk. Due to the time that has elapsed since the end of
their payment holiday extension, this risk is deemed not to be
prevalent at 28 February 2022 and, as such, the PMA is no longer
required.
A PMA of GBP63.6m was held at 28 February 2021 as Management
assessed that the impact of customer support measures was
suppressing arrears and defaults. With the ending of these
measures, Management has assessed that this PMA is not required at
28 February 2022.
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.
116
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Credit risk: Credit risk exposure
Maximum exposure to credit risk
The table below represents the Group's maximum exposure to
credit risk, by IFRS 9 stages at the reporting date, in respect of
financial assets held.
For financial assets, the balances are based on gross carrying
amounts as reported in the Company and Consolidated Statement of
Financial Position. For loan commitments, the amounts in the table
represent the amounts for which the Group is contractually
committed. For all financial assets at FVPL and reinsurance assets,
the maximum exposure to credit risk is their carrying amount.
Stage Stage
1 Stage 2 3 Total
<30 days >30 days
Not past past past
2022 due due due Total
Group(1) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross Exposure
Loans and advances
to customers 5,973.1 797.1 22.5 15.9 835.5 200.9 7,009.5
Investment securities
at FVOCI 584.7 -- -- -- -- -- 584.7
Investment securities
at amortised cost 857.6 -- -- -- -- -- 857.6
Loan commitments
- Loans and advances
to customers(2) 12,028.9 325.1 2.4 0.6 328.1 6.0 12,363.0
Total gross exposure 19,444.3 1,122.2 24.9 16.5 1,163.6 206.9 20,814.8
--------- --------- --------- --------- -------- ------ ---------
Loss allowance
Loans and advances
to customers(2) 95.2 247.3 9.4 9.5 266.2 127.4 488.8
Investment securities
at FVOCI(3) 0.8 -- -- -- -- -- 0.8
Investment securities
at amortised cost 0.2 -- -- -- -- -- 0.2
Total loss allowance 96.2 247.3 9.4 9.5 266.2 127.4 489.8
--------- --------- --------- --------- -------- ------ ---------
Net Exposure
Loans and advances
to customers 5,877.9 549.8 13.1 6.4 569.3 73.5 6,520.7
Investment securities
at FVOCI 583.9 -- -- -- -- -- 583.9
Investment securities
at amortised cost 857.4 -- -- -- -- -- 857.4
Total net exposure 7,319.2 549.8 13.1 6.4 569.3 73.5 7,962.0
--------- --------- --------- --------- -------- ------ ---------
Coverage
Loans and advances
to customers 1.6% 31.0% 41.8% 59.7% 31.9% 63.4% 7.0%
--------- --------- --------- --------
(1) On a Company basis, loans and advances to subsidiary
companies of GBP486.5m are considered to be low risk and stage 1.
The related loss allowance of GBP1.8m is also considered to be
stage 1.
(2) The loss allowance in respect of loan commitments is
included within the total loss allowance for loans and advances to
customers as above to the extent that it is below the gross
carrying amount of loans and advances to customers. Where the loss
allowance exceeds the gross carrying amount, any excess is included
within provisions as set out at note 35.
(3) 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.
117
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
2021 Stage 1 Stage 2 Stage 3 Total
Not past due <30 days past due >30 days past due Total
Group(1) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross Exposure
Loans and advances to
customers 5,748.5 980.5 24.9 24.6 1,030.0 241.6 7,020.1
Investment securities at
FVOCI 5.1 - - - - - 5.1
Investment securities at
amortised cost 949.2 - - - - - 949.2
Loan commitments - Loans and
advances to customers(2) 12,378.9 282.9 2.3 0.3 285.5 3.6 12,668.0
-------- ------------ ----------------- ----------------- ------- ------- --------
Total gross exposure 19,081.7 1,263.4 27.2 24.9 1,315.5 245.2 20,642.4
-------- ------------ ----------------- ----------------- ------- ------- --------
Loss allowance
Loans and advances to
customers(2) 132.3 312.5 11.1 15.7 339.3 153.0 624.6
Investment securities at - - - - - - -
FVOCI
Investment securities at
amortised cost 0.8 - - - - - 0.8
-------- ------------ ----------------- ----------------- ------- ------- --------
Total loss allowance 133.1 312.5 11.1 15.7 339.3 153.0 625.4
-------- ------------ ----------------- ----------------- ------- ------- --------
Net exposure
Loans and advances to
customers 5,616.2 668.0 13.8 8.9 690.7 88.6 6,395.5
Investment securities at
FVOCI 5.1 - - - - - 5.1
Investment securities at
amortised cost 948.4 - - - - - 948.4
-------- ------------ ----------------- ----------------- ------- ------- --------
Total net exposure 6,569.7 668.0 13.8 8.9 690.7 88.6 7,349.0
-------- ------------ ----------------- ----------------- ------- ------- --------
Coverage
Loans and advances to
customers 2.3% 31.9% 44.6% 63.8% 32.9% 63.3% 8.9%
------------ ----------------- ----------------- -------
(1) On a Company basis, loans and advances to subsidiary
companies of GBP484.8m are considered to be low risk and stage 1.
The related loss allowance of GBP1.3m is also considered to be
stage 1.
(2) The loss allowance in respect of loan commitments is
included within the total loss allowance for loans and advances to
customers as above to the extent that it is below the gross
carrying amount of loans and advances to customers. Where the loss
allowance exceeds the gross carrying amount, any excess is included
within provisions as set out at note 35.
118
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
The table below shows a breakdown of Stage 2 loans and advances
to customers.
Group Maximum exposure to credit
risk
Gross Loans Total ECL
and Advances
GBPm GBPm
2022
Currently > 30 days past due 15.9 9.5
Currently < 30 days past due 819.6 256.7
- PD threshold 520.4 171.2
- Business rules only 299.2 85.5
Total Stage 2 at 28 February 2022 835.5 266.2
---------------- -----------
Group Maximum exposure to credit
risk
Gross Loans Total ECL
and Advances
GBPm GBPm
2021
Currently > 30 days past due 24.6 15.7
Currently < 30 days past due 1,005.4 323.6
- PD threshold 921.4 291.6
- Business rules only 84.0 32.0
Total Stage 2 at 28 February 2021 1,030.0 339.3
---------------- -----------
Credit quality of loans and advances to customers
The table below provides details of the credit quality of loans
and advances to customers and loan commitments for which an ECL
allowance is recognised.
The Group defines four classifications of credit quality for all
credit exposures; High, Satisfactory, Low quality and below
standard, and Credit impaired. Credit exposures are segmented
according to the IFRS 9 12-month PD, with credit impaired
reflecting a PD of 100%. The classifications are the same for the
current and prior year.
119
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
IFRS 9
12 Month PD
(%)
High quality <=3.02%
Satisfactory quality >3.03% - 11.10%
Low quality and below => 11.11%
standard
Credit impaired 100%
Group(1) 2022
Stage 1 Stage 2 Stage 3 Total
GBPm GBPm GBPm GBPm
Loans and advances to customers
High quality 5,666.4 299.8 -- 5,966.2
Satisfactory quality 287.3 390.4 -- 677.7
Low quality and below standard 19.4 145.3 -- 164.7
Credit impaired -- -- 200.9 200.9
Total 5,973.1 835.5 200.9 7,009.5
--------- -------- -------- ---------
Loan Commitments
High quality 11,924.1 246.0 -- 12,170.1
Satisfactory quality 98.3 71.1 -- 169.4
Low quality and below standard 6.5 11.0 -- 17.5
Credit impaired -- -- 6.0 6.0
Total 12,028.9 328.1 6.0 12,363.0
--------- -------- -------- ---------
Total exposure 18,002.0 1,163.6 206.9 19,372.5
--------- -------- -------- ---------
(1) On a Company basis, loans and advances to subsidiary
companies of GBP486.5m are considered to be low risk, high quality
and stage 1.
120
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Credit quality of loans and advances to customers
(continued)
Group(1) 2021
Stage 1 Stage 2 Stage 3 Total
GBPm GBPm GBPm GBPm
Loans and advances to customers
High quality 5,312.9 443.4 - 5,756.3
Satisfactory quality 392.3 389.4 - 781.7
Low quality and below standard 43.3 197.2 - 240.5
Credit impaired -- - 241.6 241.6
Total 5,748.5 1,030.0 241.6 7,020.1
--------- -------- -------- ---------
Loan Commitments
High quality 12,263.1 198.5 - 12,461.6
Satisfactory quality 90.1 65.7 - 155.8
Low quality and below standard 25.7 21.3 - 47.0
Credit impaired - - 3.6 3.6
Total 12,378.9 285.5 3.6 12,668.0
--------- -------- -------- ---------
Total exposure 18,127.4 1,315.5 245.2 19,688.1
--------- -------- -------- ---------
(1) On a Company basis, loans and advances to subsidiary
companies of GBP484.8m are considered to be low risk, high quality
and stage 1.
Counterparty credit rating
Group 2022 2021
Long-term Rating GBPm GBPm
Investment securities at amortised
cost AAA to BBB 857.4 927.3
Investment securities at FVOCI(1) AAA to BBB 584.7 5.1
Insurance and other receivables AAA to BBB 8.2 -
1,450.3 932.4
-------- ------
(1) The Group has a holding in preferred stock issued by VISA
Inc. which was designated at FVOCI in previous years. Following a
review of industry practice and the requirements of IFRS 9, this
holding has been reclassified to FVPL with effect from 1 March
2021. As a result, GBP5.1m (GBP3.7m net of deferred tax) in respect
of the opening fair value reserve at 1 March 2020 was released from
the fair value reserve in the year and recognised directly in
retained earnings in the Consolidated Statement of Changes in
Equity. As this amount is not material, no prior year restatement
has been recognised in respect of this reclassification.
Concentration risk
Concentration risk is the risk of losses arising as a result of
concentrations of exposures to a specific counterparty, economic
sector, segment or geographical region.
The Group could become exposed to this risk were it to become
concentrated in certain geographic areas or product profiles e.g. a
disproportionate level of high value unsecured Personal Loans. Such
concentrations could produce unacceptable levels of default in some
adverse but plausible situations.
Controls and risk mitigants
The Group mitigates these potential concentration risks by
establishing appropriate limits and trigger thresholds that are
regularly monitored and reported to the appropriate Senior
Management team and risk committees. An assessment of credit
concentration is also undertaken as part of the ICAAP. The Group
does not consider itself to be overly concentrated, other than its
geographic concentration as a UK business.
Concentration profiles
The following tables provide concentration profiles in terms of
the geographic distribution of the Group's exposures and analysis
of material asset class by industry type.
121
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Geographical distribution profile
The Group is primarily focused on providing financial services
and products to UK personal customers.
The table below provides the geographical distribution of the
Group's total credit risk exposures. For on balance sheet assets,
the balances set out below are based on net carrying amounts as
reported in the Consolidated Statement of Financial Position.
2022 2021
Group GBPm GBPm
UK 20,462.6 20,430.1
Europe (excluding UK) 330.3 149.1
Other 623.2 466.2
Total 21,416.1 21,045.4
--------- ---------
Industry type profile
The table below represents the distribution of exposures by
industry type. The Group is primarily focused on providing
financial services and products to personal customers in the UK,
although it also has exposure to wholesale counterparties as
detailed below. For on balance sheet assets, the balances set out
below are based on net carrying amounts as reported in the
Consolidated Statement of Financial Position.
2022 2021
Group GBPm GBPm
Financial institutions 1,473.9 1,112.1
Government 785.4 840.8
Individuals 18,866.9 19,083.1
Wholesale and retail trade 289.9 9.4
Total 21,416.1 21,045.4
--------- ---------
122
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Credit risk: Loss allowance
Loss allowance reconciliation
The following table provides a reconciliation of the movements
in the loss allowance in the year:
2022 Stage 1 Stage 2 Stage 3 Total
Group(1) GBPm GBPm GBPm GBPm
Loans and advances to customers
At 1 March 2021 132.3 339.3 153.0 624.6
Transfers (2, 4)
Transfers from stage 1 to stage
2 (18.7) 18.7 - --
Transfers from stage 2 to stage
1 44.6 (44.6) - -
Transfers to stage 3 (5.4) (37.4) 42.8 --
Transfers from stage 3 1.5 3.1 (4.6) --
Income statement charge
Net remeasurement(3) following
transfer of stage(4) (34.0) 11.8 58.3 36.1
New financial assets originated(5) 21.3 8.9 3.5 33.7
Financial assets derecognised
during year (15.3) (15.6) (3.6) (34.5)
Changes in risk parameters and
other movements(6) (35.8) (23.3) 10.3 (48.8)
Other movements
Write-offs and asset disposals(7) (0.3) (1.8) (132.3) (134.4)
Transfer from provisions for liabilities
and charges(8) 5.0 7.1 -- 12.1
ECL allowance at 28 February 2022 95.2 266.2 127.4 488.8
-------- -------- -------- --------
Investment securities at FVOCI
At 1 March 2021 -- - - --
Income statement charge
New financial assets originated 1.1 - - 1.1
Financial assets derecognised
during year (0.1) - - (0.1)
Change in risk parameters and
other movements (0.2) - - (0.2)
-------- -------- -------- --------
ECL allowance at 28 February 2022 0.8 - - 0.8
-------- -------- -------- --------
Investment securities at amortised
cost
At 1 March 2021 0.8 - - 0.8
Income statement charge
Changes in risk parameters and
other movements(6) 0.1 - - 0.1
Changes in models (0.6) - - (0.6)
Other movements
TU sub debt(9) (0.1) - - (0.1)
ECL allowance at 28 February 2022 0.2 - - 0.2
-------- -------- -------- --------
Reconciliation to income statement
Net expected credit loss charge (63.5) (18.2) 68.5 (13.2)
Recoveries and write-offs -- -- (16.7) (16.7)
Total income statement charge (63.5) (18.2) 51.8 (29.9)
-------- -------- -------- --------
(1) On a Company basis, the movements in loss allowance for the
year ended 28 February 2022 of GBP0.5m relating to loans and
advance to subsidiary companies arise entirely due to changes in
risk parameters and is considered to be stage 1.
(2) Transfers - The opening loss allowance on financial assets
which transferred stage during the year.
(3) Net remeasurement - The increase/(decrease) in the opening
loss allowance as a result of a stage transfer.
(4) Includes a credit in stages 1 and 2 ECL of GBP199.8m due to
a change in the macro-economic scenarios assumptions.
(5) New financial assets originated or purchased - The loss
allowance on new financial assets originated or purchased during
the year, representing their stage at 28 February 2022.
(6) Changes in risk parameters and other movements - The change
in loss allowance due to changes in macro-economic scenarios, PD,
LGD and EAD during the year.
(7) Write-offs and asset disposals - The release of the loss
allowance following the write-off and/or disposal of a financial
asset during the year.
(8) Transfer from provisions for liabilities and charges - The
movement in loss allowance which exceeds the gross carrying amount
of the financial asset.
(9) The Group's holding in subordinated debt issued by TU is now
fully eliminated in the Consolidated Statement of Financial
Position following the acquisition of TU on 4 May 2021.
123
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
2021 Stage 1 Stage 2 Stage 3 Total
Group(1) GBPm GBPm GBPm GBPm
Loans and advances to customers
At 1 March 2020 84.1 218.6 185.7 488.4
Transfers (2,4)
Transfers from stage 1 to stage
2 (20.0) 20.0 - -
Transfers from stage 2 to stage
1 8.5 (8.5) - -
Transfers to stage 3 (2.4) (42.1) 44.5 -
Transfers from stage 3 1.6 2.0 (3.6) -
Income statement charge
Net remeasurement(3) following
transfer of stage(4) (5.9) 34.9 71.6 100.6
New financial assets originated(5) 25.4 4.7 1.7 31.8
Financial assets derecognised
during year (7.2) (9.3) (3.1) (19.6)
Changes in risk parameters and
other movements(6) 56.5 133.6 83.5 273.6
Other movements
Write-offs and asset disposals(7) - (2.3) (227.3) (229.6)
Transfer from provisions for
liabilities and charges(8) (8.3) (12.3) - (20.6)
ECL allowance at 28 February
2021 132.3 339.3 153.0 624.6
-------- -------- -------- --------
Investment securities at FVOCI
At 1 March 2020 0.9 - - 0.9
Other movements
Transfer to investment securities
at amortised cost(9) (0.9) - - (0.9)
-------- -------- -------- --------
ECL allowance at 28 February
2021 - - - -
-------- -------- -------- --------
Investment securities at amortised
cost
At 1 March 2020 0.1 - - 0.1
Income statement charge
New financial assets originated(5) 0.1 - - 0.1
Financial assets derecognised
during the year (0.1) - - (0.1)
Changes in risk parameters and
other movements(6) (0.2) - - (0.2)
Other movements
Transfer from investment securities
at FVOCI 0.9 - - 0.9
ECL allowance at 28 February
2021 0.8 - - 0.8
-------- -------- -------- --------
Reconciliation to income statement
Net expected credit loss charge 68.6 163.9 153.7 386.2
Recoveries and write-offs - - (26.7) (26.7)
Total income statement charge 68.6 163.9 127.0 359.5
-------- -------- -------- --------
(1) On a Company basis, the movements in loss allowance for the
year ended 28 February 2021 of GBP0.3m relating to loans and
advances to subsidiary companies arise entirely due to changes in
risks parameters and is considered to be stage 1.
(2) Transfers - The opening loss allowance on financial assets
which transferred stage during the year.
(3) Net remeasurement - The increase/(decrease) in the opening
loss allowance as a result of a stage transfer.
(4) Includes a charge in stages 1 and 2 ECL of GBP194.1m due to
a change in the macro-economic scenarios assumptions.
(5) New financial assets originated or purchased - The loss
allowance on new financial assets originated or purchased during
the year, representing their stage at 28 February 2021.
(6) Changes in risk parameters and other movements - The change
in loss allowance due to changes in macro-economic scenarios, PD,
LGD and EAD during the year.
(7) Write-offs and asset disposals - The release of the loss
allowance following the write-off and/or disposal of a financial
asset during the year.
(8) Transfer from provisions for liabilities and charges - The
movement in loss allowance which exceeds the gross carrying amount
of the financial asset.
(9) On 1 March 2020 the Group's portfolio of debt investment
securities measured at FVOCI was reclassified to amortised cost
following a change in business model.
124
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
The following table provides a reconciliation of the movements
in the gross carrying amounts of financial instruments to help
explain their significance to the changes in the loss allowance
during the year as set out in the above table:
2022 Stage 1 Stage 2 Stage 3 Total
Group(1) GBPm GBPm GBPm GBPm
Loans and advances to customers
Gross carrying amount
At 1 March 2021 5,748.5 1,030.0 241.6 7,020.1
Transfers (2)
Transfers from stage 1 to stage
2 (325.7) 325.7 - --
Transfers from stage 2 to stage
1 294.7 (294.7) - --
Transfers to stage 3 (57.5) (91.2) 148.7 --
Transfers from stage 3 3.1 6.0 (9.1) --
Other movements
New financial assets originated(3) 1,757.6 83.1 4.6 1,845.3
Net decrease in lending(4) (1,442.9) (219.2) (24.5) (1,686.6)
Write-offs and asset disposals(5) (0.1) (1.9) (155.5) (157.5)
Changes in interest accrual
and other movements (4.6) (2.3) (4.9) (11.8)
At 28 February 2022 5,973.1 835.5 200.9 7,009.5
---------- -------- -------- ----------
Investment securities at FVOCI
Gross carrying amount
At 1 March 2021 5.1 - - 5.1
Acquisition of TU 616.1 - - 616.1
New financial assets purchased 89.9 - - 89.9
Financial assets derecognised
during the year (91.4) - - (91.4)
Reclassification to FVPL during
the year(6) (5.1) - - (5.1)
Other movements (29.9) - - (29.9)
At 28 February 2022 584.7 - - 584.7
---------- -------- -------- ----------
Investment securities at amortised
cost
Gross carrying amount
At 1 March 2021 949.2 - - 949.2
New financial assets purchased(3) 130.0 - - 130.0
Financial assets derecognised
during the year (177.0) - - (177.0)
Other movements (23.5) - - (23.5)
TU sub debt(7) (21.1) - - (21.1)
At 28 February 2022 857.6 - - 857.6
---------- -------- -------- ----------
(1) On a Company basis, loans and advances to subsidiary
companies of GBP486.5m are considered to be low risk and stage
1.
(2) Transfers - The opening gross carrying amount of financial
assets held which transferred stage as at year end.
(3) New financial assets originated or purchased - The gross
carrying amount of financial assets originated or purchased during
the year, representing their stage as at 28 February 2022.
(4) Net decrease in lending - The changes in gross carrying
amount of financial assets after taking account of additional
borrowing and/or payments received from customers.
(5) Write-offs and asset disposals - The write-off of the gross
carrying amount when a financial asset is deemed uncollectable
and/or has been disposed of.
(6) During the year, following a review of industry practice and
the requirements of IFRS 9, the Group reclassified its holding in
preferred stock issued by VISA Inc. from FVOCI to FVPL.
(7) The Group's holding in subordinated debt issued by TU is now
fully eliminated in the Consolidated Statement of Financial
Position following the acquisition of TU on 4 May 2021.
125
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
2021 Stage 1 Stage 2 Stage 3 Total
Group(1) GBPm GBPm GBPm GBPm
Loans and advances to customers
Gross carrying amount
At 1 March 2020 7,687.9 953.3 288.8 8,930.0
Transfers (2)
Transfers from stage 1 to stage
2 (555.6) 555.6 - -
Transfers from stage 2 to stage
1 46.3 (46.3) - -
Transfers to stage 3 (90.0) (122.3) 212.3 -
Transfers from stage 3 3.8 5.0 (8.8) -
Other movements
New financial assets originated(3) 1,212.0 16.9 2.4 1,231.3
Net decrease in lending(4) (2,540.5) (328.8) (22.5) (2,891.8)
Write-offs and asset disposals(5) - (2.3) (237.6) (239.9)
Changes in interest accrual
and other movements (15.4) (1.1) 7.0 (9.5)
At 28 February 2021 5,748.5 1,030.0 241.6 7,020.1
---------- -------- -------- ----------
Investment securities at FVOCI
Gross carrying amount
At 1 March 2020 1,060.6 - - 1,060.6
Transfer to investment securities
at amortised cost(6) (1,057.4) - - (1,057.4)
Other movements 1.9 - - 1.9
At 28 February 2021 5.1 - - 5.1
---------- -------- -------- ----------
Investment securities at amortised
cost
Gross carrying amount
At 1 March 2020 21.1 - - 21.1
Transfer from investment securities
at FVOCI(6) 1,057.4 - - 1,057.4
New financial assets originated(3) 84.4 - - 84.4
Financial assets derecognised
during the year (201.8) - - (201.8)
Other movements (11.9) - - (11.9)
At 28 February 2021 949.2 - - 949.2
---------- -------- -------- ----------
(1) On a Company basis, loans and advances to subsidiary
companies of GBP484.8m are considered to be low risk and stage
1.
(2) Transfers - The opening gross carrying amount of financial
assets held which transferred stage as at year end.
(3) New financial assets originated or purchased - The gross
carrying amount of financial assets originated or purchased during
the year, representing their stage as at 28 February 2021.
(4) Net decrease in lending - The changes in gross carrying
amount of financial assets after taking account of additional
borrowing and/or payments received from customers.
(5) Write-offs and asset disposals - The write-off of the gross
carrying amount when a financial asset is deemed uncollectible
and/or has been disposed of.
(6) On 1 March 2020 the Group's portfolio of debt investment
securities measured at FVOCI was reclassified to amortised cost
following a change in business model.
126
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Credit risk: Write off policy
When a loan is deemed uncollectable it is written off against
the related provision after all of the necessary procedures have
been completed and the amount of the loss has been determined. A
loan is deemed uncollectable when the Group believes there is no
realistic prospect of future recoveries as a result of the
customer's insolvency or the account being sold through a debt
sale.
The Group may write off loans that are still subject to
enforcement activity. The outstanding contractual amount of such
assets written off during the year ended 28 February 2022 was
GBP110.2m (2021: GBP154.1m). Expected recoveries from written off
financial assets subject to enforcement activity are recognised in
the Consolidated Statement of Financial Position.
Credit risk: Forbearance
The Group provides support to customers who are experiencing
financial difficulties. Forbearance is relief granted by a lender
to assist customers in financial difficulty, through arrangements
which temporarily allow the customer to pay an amount other than
the contractual amounts due. These temporary arrangements may be
initiated by the customer or the Group where financial distress
would prevent repayment within the original terms and conditions of
the contract.
The main aim of forbearance is to support customers in returning
to a position where they are able to meet their contractual
obligations.
The Group has adopted the definition of forbearance as published
in Regulation EU 2015/227. The Group reports all accounts meeting
this definition, providing for them appropriately.
Controls and risk mitigants
The Group has well defined forbearance policies and processes. A
number of forbearance options are made available to customers by
the Group. These routinely, but not exclusively, include the
following:
Arrangements to repay arrears over a period of time, by making
payments above the contractual amount, that ensure the loan is
repaid within the original repayment term.
Short-term concessions, where the borrower is allowed to make
reduced repayments (or in exceptional circumstances, no repayments)
on a temporary basis to assist with short-term financial
hardship.
The table below details the values of secured and unsecured
advances that are subject to forbearance programmes, in accordance
with the European Banking Authority (EBA) definition.
Gross loans and advances subject Forbearance programmes as a Proportion of forbearance
to forbearance programmes proportion of total loans and programmes covered by
advances by category impairment provision
Group 2022 2021 2022 2021 2022 2021
GBPm GBPm % % % %
Credit Cards 106.4 118.9 3.1 3.7 51.2 50.2
Loans 39.4 48.0 1.2 1.3 46.7 56.0
127
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
(b) Operational risk
Operational risk is the risk of a potential error, loss, harm or
failure caused by ineffective or inadequately defined processes,
system failures, improper conduct, human error or from external
events. The Group is subject to the SA method to calculate Pillar 1
operational risk capital, as outlined in the Capital Requirements
Regulation (CRR).
Financial crime and fraud are significant drivers of operational
risk and the external threat continues to grow across the Financial
Services industry. The industry remains under significant threat
from cyber attacks. This includes various organised groups
targeting institutions through phishing, malware, denial of service
and other sophisticated methods.
The Group has an appropriate risk framework and continually
monitors emerging risks and threats.
Controls and risk mitigants
The Group's risks are assessed utilising a Risk Management
Framework (RMF) methodology which is aligned to the Three Lines of
Risk Management model.
The CRO and the Head of Operational Risk, together with a
dedicated Operational Risk team, are responsible for:
developing and maintaining the Operational Risk Policy;
working with relevant business areas to make sure that First
Line of Risk Management responsibilities are understood and that
those responsibilities should be executed as defined within the
Risk Management Framework;
supporting relevant business areas to embed policies and
controls, instilling a positive risk management culture; and
independently monitoring, assessing and reporting on operational
risk profiles and losses.
Second Line of Risk Management maintains policies defining the
minimum requirements for the management of operational risk and
financial crime.
Business units and functions assess their operational risks on
an ongoing basis via a prescribed Risk and Control Self-Assessment
(RCSA) process and Operational Risk Scenario Analysis (ORSA). The
RCSA process is reviewed and updated on a timely basis by the First
Line of Risk Management to reflect changes to the risk and control
environment arising from changes in products, processes and
systems. The RCSA outputs are reported to relevant governance
bodies, including the BRC. This is supplemented further by an event
management process and regular reporting of the Operational Risk
profile to the ERC, which provides oversight of the Group's
operational risk profile. The ORSA builds on the RCSA process and
event management process to identify the forward-looking risk
profile and the results are used to inform the Board's decision on
any additional requirement for operational risk capital under
Pillar II.
The ERC provides oversight of the Group's operational risk
profile and provides regular reports and recommendations to the
Board Risk Committee (BRC) and the Board.
(c) Liquidity and funding risk
Liquidity risk is the risk that the Group is not able to meet
its obligations as they fall due. It also covers the risk that a
given security cannot be traded quickly enough in the market to
prevent a loss if a credit rating falls. Funding risk is the risk
that the Group does not have sufficiently stable and diverse
sources of funding.
The Group operates within a Liquidity and Funding Control
Framework designed to ensure that sufficient funds are available at
all times to meet demands from depositors; to fund agreed advances;
to meet other commitments as and when they fall due; and to ensure
the Board's Risk Appetite is adhered to.
128
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Controls and risk mitigants
Liquidity and funding risk is assessed through the ILAAP on at
least an annual basis. The ILAAP process involves detailed
consideration of the following:
identification of sources of liquidity risk;
quantification of those risks through stress testing;
consideration of management processes and controls to manage the
risk;
assessment of the type and quality of liquid asset holdings
required to mitigate the risk; and
consideration of the levels of contingent funding required to
mitigate the risk.
The Group sets formal limits within the Liquidity and Funding
Risk Management Policy to maintain liquidity risk exposures within
the liquidity and funding Risk Appetite set by the Board. The key
liquidity and funding measures monitored on a daily basis are:
the internal liquidity requirement;
the total liquidity requirement;
the net stable funding ratio;
the wholesale funding ratio;
minimum eligible collateral floor;
the asset encumbrance ratio; and
the unencumbered assets to retail liabilities ratio.
The Group measures and manages liquidity in line with the above
metrics and maintains a liquidity and funding profile to enable it
to meet its financial obligations under normal and stressed market
conditions.
The Group monitors and reports on the composition of its funding
base against defined thresholds to avoid funding source and
maturity concentration risks.
The Group prepares both short-term and long-term forecasts to
assess liquidity requirements and takes into account factors such
as Credit Card payment cycles, expected utilisation of undrawn
credit limits, investment maturities, customer deposit patterns,
and wholesale funding (including TFSME) maturities. These reports
support daily liquidity management and are reviewed on a daily
basis by Senior Management, along with early warning
indicators.
Stress testing of current and forecast financial positions is
conducted to inform the Group of required liquidity resources.
Reverse stress testing is conducted to inform the Group of the
circumstances that would result in liquidity resources being
exhausted. Liquidity stress tests are presented to the Treasury
Committee (TCo) and Asset and Liability Management Committee (ALCo)
on a regular basis to provide evidence that sufficient liquidity is
held to meet financial obligations in a stress.
129
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
The Treasury Director is responsible for formulating, and
obtaining Board approval for, an annual funding plan as part of the
overall business planning process. The Group is predominantly
funded by its retail deposit base which reduces reliance on
wholesale funding and, in particular, results in minimal short-term
wholesale funding.
A significant part of these retail deposits are repayable on
demand on a contractual basis. The Group continuously monitors
retail deposit activity so that it can reasonably predict expected
maturity flows. These instruments form a stable funding base for
the Group's operations because of the broad customer base and the
historical behaviours exhibited.
The table below shows the Group's primary funding sources:
2022 2021
Group GBPm GBPm
On balance sheet
Deposits from banks 1,052.3 600.0
Deposits from customers 5,325.9 5,738.0
Subordinated liabilities and notes 235.6 235.0
Debt securities in issue 244.0 251.0
Total on balance sheet funding 6,857.8 6,824.0
-------- --------
130
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
The tables below show cash flows payable up to a period of 20
years on an undiscounted basis. These differ from the Statement of
Financial Position values due to the effects of discounting on
certain Statement of Financial Position items and due to the
inclusion of contractual future interest flows.
Derivatives designated in a hedging relationship are included
according to their contractual maturity.
Group Within Between Between Between Between
2022 1 1 and 2 and 3 and 4 and Beyond
year 2 years 3 years 4 years 5 years 5 years Total
On balance sheet GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets:
Cash and balances
at
central banks 780.9 -- -- -- -- -- 780.9
Loans and advances
to banks 50.3 -- -- -- -- -- 50.3
Loans and advances
to customers 4,825.5 976.7 677.9 410.7 204.2 116.6 7,211.6
Derivatives settled
on a net basis
- Derivatives in
accounting hedge
relationships 3.8 9.4 3.9 (0.5) 0.5 0.1 17.2
Investment securities
- FVOCI 151.3 65.0 89.1 63.0 48.9 214.6 631.9
- FVPL 1.8 -- -- -- -- 23.0 24.8
- Amortised cost 247.3 430.1 126.9 116.2 98.5 92.5 1,111.5
Other assets 219.7 -- -- -- -- 219.7
Total financial
assets 6,280.6 1,481.2 897.8 589.4 352.1 446.8 10,047.9
--------- --------- --------- --------- --------- --------- ---------
Financial liabilities:
Deposits from banks 162.9 17.3 115.0 805.0 -- -- 1,100.2
Deposits from customers 4,677.4 443.8 160.2 23.7 25.0 -- 5,330.1
Debt securities
in issue 8.8 8.8 254.4 -- -- -- 272.0
Other liabilities
- Lease liabilities 5.8 5.6 5.2 3.8 3.8 9.6 33.8
- Other liabilities
excluding lease
liabilities 130.3 -- -- -- -- -- 130.3
Subordinated liabilities 5.8 7.5 7.3 192.9 1.5 52.5 267.5
Total financial
liabilities 4,991.0 483.0 542.1 1,025.4 30.3 62.1 7,133.9
--------- --------- --------- --------- --------- --------- ---------
Off balance sheet
Contractual lending
commitments 12,363.0 -- -- -- -- -- 12,363.0
Total off balance
sheet 12,363.0 -- -- -- -- -- 12,363.0
--------- --------- --------- --------- --------- --------- ---------
131
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Company Within Between Between Between Between
2022 1 1 and 2 and 3 and 4 and Beyond
year 2 years 3 years 4 years 5 years 5 years Total
On balance sheet GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets:
Cash and balances
at central banks 7.8 -- -- -- -- -- 7.8
Other assets -- -- -- -- -- -- --
Loans and advances
to subsidiary companies 16.0 16.2 261.7 192.9 1.5 52.5 540.8
Total financial
assets 23.8 16.2 261.7 192.9 1.5 52.5 548.6
------- --------- --------- --------- --------- --------- ------
Financial liabilities:
Debt securities
in issue 8.8 8.8 254.4 -- -- -- 272.0
Other liabilities -- -- -- -- -- -- --
Subordinated liabilities 5.8 7.5 7.3 192.9 1.5 52.5 267.5
Total financial
liabilities 14.6 16.3 261.7 192.9 1.5 52.5 539.5
------- --------- --------- --------- --------- --------- ------
132
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Group Within Between Between Between Between
2021 1 1 and 2 and 3 and 4 and Beyond
year 2 years 3 years 4 years 5 years 5 years Total
On balance sheet GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets:
Cash and balances
at central banks 804.3 -- -- -- -- -- 804.3
Loans and advances
to customers 4,643.7 1,099.4 807.7 483.8 224.5 168.8 7,427.9
Investment securities
- FVOCI 5.8 -- -- -- -- -- 5.8
- Amortised cost 310.9 281.1 377.2 76.4 139.5 161.4 1,346.5
Other assets 211.2 -- -- -- -- -- 211.2
Total financial
assets 5,975.9 1,380.5 1,184.9 560.2 364.0 330.2 9,795.7
--------- --------- --------- --------- --------- --------- ---------
Financial liabilities:
Deposits from banks 500.5 0.2 100.1 -- -- -- 600.8
Deposits from customers 4,884.4 488.4 253.0 113.6 24.0 0.2 5,763.6
Debt securities
in issue 8.8 8.8 8.8 254.4 -- -- 280.8
Derivatives settled
on a net basis
- Derivatives in
economic but not
accounting hedges 0.9 -- -- -- -- -- 0.9
- Derivatives in
accounting hedge
relationships 14.8 10.6 6.5 4.0 4.4 2.6 42.9
Other liabilities
- Lease liabilities 3.5 3.8 4.1 3.9 2.8 11.6 29.7
- Other liabilities
excluding lease
liabilities 154.6 -- -- -- -- -- 154.6
Subordinated liabilities 4.6 5.0 4.7 5.1 5.2 262.3 286.9
Total financial
liabilities 5,572.1 516.8 377.2 381.0 36.4 276.7 7,160.2
--------- --------- --------- --------- --------- --------- ---------
Off balance sheet
Contractual lending
commitments 12,668.0 -- -- -- -- -- 12,668.0
Total off balance
sheet 12,668.0 -- -- -- -- -- 12,668.0
--------- --------- --------- --------- --------- --------- ---------
133
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Company Within Between Between Between Between
2021 1 1 and 2 and 3 and 4 and Beyond
year 2 years 3 years 4 years 5 years 5 years Total
On balance sheet GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets:
Cash and balances
at central banks 14.8 -- -- -- -- -- 14.8
Other assets 1.3 -- -- -- -- -- 1.3
Loans and advances
to subsidiary companies 13.4 13.8 13.5 259.5 5.2 262.3 567.7
Total financial
assets 29.5 13.8 13.5 259.5 5.2 262.3 583.8
------- --------- --------- --------- --------- --------- ------
Financial liabilities:
Debt securities
in issue 8.8 8.8 8.8 254.4 -- -- 280.8
Other liabilities 1.3 -- -- -- -- -- 1.3
Subordinated liabilities 4.6 5.0 4.7 5.1 5.2 262.3 286.9
Total financial
liabilities 14.7 13.8 13.5 259.5 5.2 262.3 569.0
------- --------- --------- --------- --------- --------- ------
The table below shows information about the estimated timing of
cash flows in relation to insurance claims liabilities at 28
February 2022. The estimated phasing is based on current estimates
and the actual timing of future settlement cash flows may differ
from that disclosed below. These cash flows arise for the Group
following the acquisition of TU on 4 May 2021 therefore there are
no prior year comparatives.
Group 2022 2022 2022 2022
Salvage
and subrogation
Gross recoveries Net
GBPm GBPm GBPm %
Payment period:
0-1 year 95.7 (12.7) 83.0 17.6
2-5 years 203.3 (9.2) 194.1 41.1
5 years and above 195.3 (0.3) 195.0 41.3
Total 494.3 (22.2) 472.1 100.0
------ ----------------- ------ ------
The majority of balances in the above table are undiscounted as
the claims are expected to settle in less than four years. For
long-term personal injury claims, the personal injury discount rate
(Ogden rate) is used.
134
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Encumbrance
The table below summarises the Group's assets which are
available to support future funding and collateral needs and shows
the extent to which these assets are currently pledged for this
purpose.
The Group has adopted the definition of encumbrance in
accordance with the Prudential Regulation Authority's (PRA's)
Rulebook. Asset encumbrance represents a claim to an asset by
another party usually in the form of a security interest such as a
pledge. Encumbrance reduces the assets available and therefore the
recovery rate of its depositors and other unsecured bank
creditors.
Group Encumbered Unencumbered Total
2022 GBPm GBPm GBPm
Encumbered asset summary
Investment securities - FVOCI -- 584.7 584.7
Investment securities - amortised cost -- 857.4 857.4
Investment securities - FVPL -- 24.8 24.8
Loans and advances to customers 1,796.9 4,693.4 6,490.3
Other assets 21.9 197.8 219.7
Cash and balances with central banks 41.6 739.0 780.6
1,860.4 7,097.1 8,957.5
----------- ------------- --------
Encumbered loans and advances to customers
Securitisation - Delamare Master Trust 1,170.9
Personal Loans 626.0
1,796.9
-----------
Encumbered cash and balances with central
banks
Cash ratio deposit 21.6
Reserves Collateralisation Account 20.0
41.6
-----------
Encumbered other assets
Initial margin held at Clearing Houses 21.9
-----------
21.9
-----------
135
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Group Encumbered Unencumbered Total
2021 GBPm GBPm GBPm
Encumbered asset summary
Investment securities - FVOCI -- 5.1 5.1
Investment securities - amortised cost 61.2 887.2 948.4
Loans and advances to customers 862.4 5,539.8 6,402.2
Other assets 83.1 128.1 211.2
1,006.7 6,560.2 7,566.9
----------- ------------- --------
Encumbered investment securities -
amortised cost
Debt securities at amortised cost(1) 61.2
61.2
-----------
Encumbered loans and advances to customers
Personal Loans 862.4
862.4
-----------
Encumbered other assets
Cash ratio deposit 24.7
Initial margin held at Clearing Houses 15.7
Variation margin held at Clearing Houses 41.8
Collateral held at counterparties 0.9
83.1
-----------
Loans and advances assigned for use as collateral in securitisation transactions
At 28 February 2022, GBP2,966.8m (2021: GBP2,959.5m) of the
Credit Cards portfolio had its beneficial interest assigned to a
securitisation special purpose entity, Delamare Cards Receivables
Trustee Limited, for use as collateral in securitisation
transactions. The total encumbered portion of this portfolio is
GBP1,170.9m(2021: GBPnil).
At 28 February 2022, Delamare Cards MTN Issuer plc had
GBP1,840.0m (2021: GBP1,840.0m) notes in issue in relation to
securitisation transactions.
At 28 February 2022, GBP1,380.0m (2021: GBP1,550.0m) of the
class A retained Credit Card backed notes are held within their
single collateral pool.
Loans and advances prepositioned with the BoE
Group 2022 2021
GBPm GBPm
Credit Card backed notes(1) 1,380.0 1,550.0
Unsecured personal Loans 2,063.5 2,243.2
Total assets prepositioned as collateral with the BoE 3,443.5 3,793.2
-------- --------
Collateralised TFS drawings -- 500.0
Collateralised TFSME drawings 900.0 100.0
Total 900.0 600.0
-------- --------
(1) Issued by Delamare Cards MTN Issuer plc.
136
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Undrawn Committed Facilities
The Group has the following undrawn committed facilities:
2022 2021
Group GBPm GBPm
Expiring between one and two years 200.0 --
Expiring in more than two years -- 200.0
Total 200.0 200.0
------ ------
The undrawn committed facilities includes a GBP200.0m (2021:
GBP200.0m) committed repurchase facility. All facilities incur
commitment fees at market rates and would provide funding at
floating rates. There were no withdrawals from the facilities
during the year.
(d) Market risk
The Group defines Market Risk as the risk that movements in
market prices (such as interest rates and foreign exchange rates)
lead to a reduction in either the Bank's earnings or economic
value.
The Group assesses Interest Rate Risk in the Banking Book
(IRRBB) by measuring:
(a) the value risk to equity capital; and
(b) future earnings sensitivity under specific interest rate
scenarios.
The Group assesses its exposure to foreign exchange risk by
measuring its net open currency position.
Control and risk mitigants
With the exception of portfolio management in respect of TU,
which is undertaken by the TU Investment Committee, with oversight
and challenge provided by the Group's Finance function, control of
market risk exposure is managed by the ALCo and the TCo. These
bodies provide oversight of the Group's market risk position at a
detailed level, providing regular reports and recommendations to
the BRC and the Board.
The Board approved market risk policy provides direction to all
staff with responsibility for managing market risk and defines the
approach the Group must apply to measure, monitor, and control
market risk. The Group's market Risk Appetite statement is
documented within this policy which includes specific limits on
market risk measures.
The Treasury Function implements and operates systems and
standards for measuring Market Risk including a comprehensive
reporting suite for the BRC and the ALCo including timely updates
in response to changing market conditions. The Treasury Function
ensures compliance with the Board's market risk appetite statement
by implementing hedging strategies such as the use of derivatives
to hedge any residual risks.
Second Line of Risk Management independently validates
measurement systems and models used to assess the Group's market
risk exposures; and provides oversight and challenge on market risk
reporting, management strategies and other related matters.
Per the Senior Managers Regime and via the ALCo, the Chief
Financial Officer (CFO) is responsible for understanding and
assessing the performance of the Treasury Function in monitoring
and controlling market risk within Board approved limits. The
purpose of the Group's ALCo is to support the CFO by providing
oversight and challenge in relation to principal Treasury risks
including market risk; the ALCo has representation from various
First Line of Risk Management functions including Treasury, Finance
and Commercial plus Second and Third Line of Risk Management
representatives.
137
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Interest rate risk in the Banking Book
IRRBB is the current or prospective risk to both earnings and
economic value arising from movements in interest rates. The main
sub-types of IRRBB include gap risk (or repricing risk), basis risk
and customer optionality risk.
The Group offers lending and savings products with varying
interest rate features and maturities which create re-pricing
mismatches and therefore potential interest rate risk exposures.
The Group is therefore exposed to interest rate risk through its
dealings with retail banking products as well as through its
limited wholesale market activities and, therefore, potential
interest rate risk exposures.
IRRBB is the main market risk that could affect the Group's net
interest income.
Control and risk mitigants
The main hedging instruments used to hedge IRRBB exposures are
interest rate swaps. Any residual exposures are then assessed
against Board approved limits under various interest rate scenarios
which consider changes in the slope and/or shape of the yield
curve, and changes in the relationship between different rate
indexes.
On a monthly basis the Treasury function measures and reports
the Group's Capital at Risk (CaR) and Annual Earnings at Risk
(AEaR) results to the TCo, ALCo, ERC and the Board.
The Group measures and controls its IRRBB exposures by assessing
both its earnings and valuation sensitivities to movements in
interest rates against Board approved risk appetites. The interest
rate shock scenarios considered include both parallel and
non-parallel movements of the yield curve and have been designed to
assess impacts across a suitable range of severe but plausible
movements in interest rates.
In addition to the Group's internal IRRBB measures, the Group
monitors its EVE/NII sensitivities which are described and
disclosed below:
Changes to Economic Value of Equity (<DELTA>EVE): measures
the market value risk where equity is excluded from the cash flows
and is measured by subtracting the net present value of total
liabilities from the net present value of total assets.
Changes to Net Interest Income (<DELTA>NII): measures
changes in future interest income over a rolling 12--month period,
which includes expected cash flows (such as commercial margins and
other spread components) arising from all interest rate--sensitive
assets, liabilities and off--balance sheet items in the banking
book. It is computed assuming a constant balance sheet, where
maturing or repricing cash flows are replaced by new cash flows
with identical features.
<DELTA>EVE <DELTA>NII
Group and Company 2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Parallel shock up (29.5) (56.5) 9.9 3.2
Parallel shock down (10.4) (1.3) (25.9) (14.1)
Steepener shock (0.1) (3.4) n/a n/a
Flattener shock (11.1) (25.3) n/a n/a
Short rates shock up (18.6) (40.8) n/a n/a
Short rates shock down 0.2 1.0 n/a n/a
Maximum (29.5) (56.5) (25.9) (14.1)
Tier 1 capital 1,668.4 1,728.7 n/a n/a
Maximum/Tier 1 Capital 1.8% 3.3% n/a n/a
138
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
(e) Foreign exchange risk
Foreign exchange risk is the risk that the value of transactions
in currencies other than Sterling is altered by the movement of
exchange rates.
The Group's Risk Appetite permits investment in non-sterling
denominated bonds and the Group may raise funding from the
wholesale markets in currencies other than sterling. Foreign
exchange exposure arises if these are not hedged. Foreign exchange
exposure may also arise through the Group's 'Click and Collect'
Travel Money provision and invoices received which are denominated
in foreign currencies.
Control and risk mitigants
Substantially all non-domestic currency exposure is hedged to
reduce exposure to a minimum level, within Board-approved limits.
The residual exposure is not material and, as such, no sensitivity
analysis is disclosed.
The Group's maximum exposure to foreign exchange risk at 28
February 2022 was GBP3.8m (2021: GBP6.7m), representing the Group's
net assets (2021: net assets) denominated in foreign
currencies.
(f) Pension obligation risk
Pension obligation risk is the risk relating to a firm's
contractual or other liabilities relating to a pension scheme
(whether established for its employees or those of a related
company or otherwise). The Group is a participating employer in the
Tesco Pension Scheme (operated by TSL) and is exposed to pension
obligation risk through its obligation to the scheme. TSL has
recognised the appropriate net liability of the Tesco pension
scheme in accordance with IAS 19 (refer note 44).
Controls and risk mitigants
The Group undertakes an assessment of the impact of its share of
the pension scheme under a stress as part of its annual ICAAP.
(g) Insurance risk
The Group is exposed to insurance risk through its wholly owned
subsidiary, TU, an authorised insurance company.
The Group defines insurance risk as the risks accepted through
the provision of insurance products in return for a premium. These
risks may or may not occur as expected and the amount and timing of
these risks are uncertain and determined by events outside of the
Group's control (e.g. flood or vehicular accident).
TU operates a separate RMF with dedicated risk and compliance
teams and a suite of TU risk policies to ensure that the TU
insurance portfolio is operating within agreed Risk Appetite.
Types of insurance risk
Underwriting risk
Underwriting risk is the risk that future claims experience on
business written is materially different from the results expected
based on the assumptions made at the point of underwriting
policies, resulting in current year losses.
Contracts are typically issued on an annual basis, meaning that
the Group's liability usually extends for a 12--month period, after
which the Group is entitled to decline to renew or can revise
renewal terms by amending the premium or other policy terms and
conditions such as the excess.
Controls and risk mitigants
Products are priced based on the Group's knowledge using past
exposures, historical losses (plus an appropriate allowance for
IBNR losses) and external data sources, with the appropriate
adjustments to reflect anticipated future market conditions and
expenses.
The Group reinsures a portion of the risks it underwrites in
order to control its exposure to losses and protect capital
resources. The Group buys primarily excess of loss
(non--proportional) reinsurance treaties to reduce its net exposure
to agreed levels for each line of business in accordance with the
Group's Risk Appetite. The Group has also purchased ADC against the
risk of low frequency high impact scenarios. The Group is also
party to a QS reinsurance treaty in which the Group and the
reinsurer share premiums and losses at an agreed percentage.
139
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Claims reserving risk
Reserving and the ultimate cost of claims risk occurs where the
Group's estimates of its insurance liabilities prove to be
insufficient through inaccurate forecasting, adverse random
variation and additional expenses.
The methods used to estimate the insurance liabilities in
respect of outstanding claims and provisions are detailed in note
39.
Controls and risk mitigants
The aim of the reserving policy of the Group is to provide
estimates of insurance liabilities that are accurate and reliable
across each line of business and are consistent over the time
period required to settle all the claims.
The Group's reserving position is reviewed at the TU Reserving
Committee and is presented to the TU Board. In addition, an annual
independent reserve review is undertaken.
Claims management risk
Claims management risk may arise in the event of inaccurate or
incomplete case reserving or settlement, poor customer service,
claims fraud, ineffective or inefficient claim processes or
excessive costs of handling claims.
Controls and risk mitigants
The Group's approach to claims management focuses upon creating
a successful balance between satisfying the needs of the customer
against control of the overall cost of the provision of the service
that meets those needs in agreement with its service provider.
Customers include both the insured as well as others that believe
the insured has breached a duty of care.
Reinsurance risk
Reinsurance is placed to reduce the Group's exposure to specific
risks, events and accumulations. The risk is that the reinsurance
contracts fail to perform as planned and do not reduce the gross
cost of claims in terms of the limits purchased, either by risks
not being appropriately covered, reinsurance defaults or by there
not being gaps in the programme.
Controls and risk mitigants
The reinsurance programme is subject to considerable scenario
planning, including by the TU brokers, and is approved by the TU
Reinsurance Committee and the TU Board. All reinsurers in the
reinsurance programme have a minimum credit rating of A.
Sensitivity of insurance risk
A well-designed and executed Stress and Scenario Testing
programme is part of TU's contingency planning, consistent
with previous years.
Insurance stresses tested will consider:
TU's market competitiveness - to assess the impact of lower
profitability from writing lower than expected volumes or the
capital strain from writing higher than expected volumes;
Multiple weather events - to model events as a result of
increasing aggravating climate changes and the impact on TU's
catastrophe reinsurance covers;
Large bodily injury claims - to assess the impact of
insufficient loss reserves;
Reinsurance contracts - to assess the benefits versus the costs
of TU's QS reinsurance contract and ADC contact; and
Ogden discount rate - to assess the impact of a reduction in the
Ogden rate that is used in discounting large bodily injury
claims.
140
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Concentration of insurance risk
Concentration of insurance risk may exist where a particular
event or series of events could impact significantly upon the
Group's liabilities. Such concentrations may arise from a single
insurance contract or through a small number of related
contracts.
Concentrations of risk can arise in both high-severity, low
frequency events, such as natural and other disasters and in
situations where underwriting is biased towards a particular group,
such as a particular geographical concentration or demographic
trend. Material geographical concentrations or risk can exist in
property portfolios such that natural perils of windstorm and
floods may give rise to a large number of material damage and
business interruption claims.
High-severity, low frequency concentrations
The timing and frequency of high severity events are, by their
nature, uncertain. They represent a material risk as the occurrence
of such an event would have a significant adverse impact on TU's
cash flows and profitability.
TU manages these risks by making appropriate allowance within
the price calculated by underwriters and by purchasing a
reinsurance programme that limits the impact of these events. TU
uses non-proportional reinsurance treaties to manage retention
levels and the limits of protection.
Geographic and demographic concentrations
Material geographical concentrations or risk exist in property
portfolios such that natural perils of windstorm and floods may
give rise to a large number of material damage and business
interruption claims. TU only writes policies in the UK and Channel
Islands. TU models its exposure to this risk to estimate its
probable maximum loss and purchases reinsurance to significantly
reduce its exposure to such events.
Economic conditions
TU's insurance portfolio exposes it to a potential accumulation
of different risks in the event of difficult economic conditions or
more challenging points in the underwriting cycle. TU's strategy
has been to ensure that it charges the right premium for the
business underwritten and it focuses on maintaining prices in such
difficult market conditions. It also monitors claims closely to
identify any that may be exaggerated or fraudulent.
Total aggregate exposure
TU identifies the total aggregate exposure that it is prepared
to accept in relation to concentrations of risk. It monitors these
exposures on a regular basis by reviewing reports which show the
key aggregations to which TU is exposed. TU uses a number of
modelling tools to monitor aggregation and to simulate catastrophe
losses in order to measure the effectiveness of the reinsurance
programmes, and to quantify the net exposure to which TU is
exposed. Additional stress and scenario tests are run using these
models during the year.
Third-party injury claims and credit hire
In recent years, the insurance market in general has experienced
an increase in the frequency and value of third-party injury
claims, arising mainly in the motor market.
These increases have been driven by an increased propensity for
the population to be litigious and the extensive activities of
companies actively persuading potential victims to instigate
claims. In addition, the growth in credit hire has also had a
significant impact. TU is aware of this trend and monitors its
development closely, adjusting the prices of its products
accordingly.
(i) Residual price risk
Residual price risk is the risk that the fair value of a
financial instrument and its associated hedge will fluctuate
because of changes in market prices, for reasons other than
interest rate or credit risk. The Group has equity investment
securities which are held at fair value in the Consolidated
Statement of Financial Position and debt investment securities
which are held at fair value in the Consolidated Statement of
Financial Position.
141
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
Controls and risk mitigants
The Group has established appropriate hedging strategies to
mitigate interest rate and foreign exchange risks. Residual price
risk remains.
The table below demonstrates the Group's exposure to residual
price risk at the year end. Included in the table is the expected
impact of a 10% shock in market prices on the Group's FVOCI and
FVPL investment securities.
Fair value Impact of 10% Value after
shock 10% shock
2022 2021 2022 2021 2022 2021
Group GBPm GBPm GBPm GBPm GBPm GBPm
Government-backed investment
securities 34.6 -- (3.5) -- 31.1 --
Supranational investment
securities 31.6 -- (3.2) -- 28.4 --
Corporate bonds 516.9 -- (51.7) -- 465.2 --
Other investment securities 1.6 -- (0.2) -- 1.4 --
Equity securities - FVPL 24.8 -- (2.5) -- 22.3 --
Equity securities - FVOCI -- 5.1 -- (0.5) -- 4.6
609.5 5.1 (61.1) (0.5) 548.4 4.6
------ ----- -------- ------ ------- -----
(i) Legal and regulatory compliance
Regulatory risk is the risk of poor customer outcomes,
reputational damage, liability, loss or regulatory censure arising
from failure to comply with the requirements of the financial
services regulators or related codes of best practice. The risk of
business conduct leading to poor outcomes can arise as a result of
an over-aggressive sales strategy; poor management of sales
processes, credit assessments and credit processes; or failure to
comply with other regulatory requirements. The Group's Risk
Appetite is to comply with the relevant rules, regulations and data
protection legislation. Where breaches occur, the Group will take
appropriate rectifying action. The Group seeks to deliver fair
outcomes for customers.
Controls and risk mitigants
As part of the Group's Policy Framework, the Second Line of Risk
Management is responsible for the Compliance and Conduct Risk
Policy which is approved by the Group's Board, as well as for
monitoring, challenge and oversight of regulatory risk and
compliance across the Group's business. Guidance and advice to
enable the business to operate in a compliant manner is provided by
Second Line of Risk Management and the Legal team.
Second Line of Risk Management is also responsible for the
detailed regulatory policies which underpin the Compliance and
Conduct Risk Policy. These are further supported by practical
guidance documents supplied to business and operational areas to
enable them to comply with the regulatory policies.
The Group has also established the Regulatory Change Forum which
is responsible for the oversight of communications from all
external regulators and monitoring regulatory change, including
impact analysis and action tracking.
The Group's Legal function has responsibility for commercial
legal work, regulatory legal compliance, litigation/dispute
resolution matters, advising on competition law and supporting the
Group's Treasury activity. The Legal team also comprises the
Company Secretariat function which, in addition to its role
supporting the Board and maintaining statutory books, ensures the
Company complies with all applicable governance codes.
Business areas manage conduct risk and use a range of management
information to monitor the fair treatment of customers. A framework
of product-led conduct management information has been developed
and is reviewed by Senior Management in the business lines.
Customer outcomes are also assessed as part of the development and
design of new products and through annual product reviews of
existing products. The ERC and the Board review and challenge
delivery of fair outcomes for customers.
142
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
45. Risk Management (continued)
(j) Insurance Capital
Insurance capital management is the collection of processes and
activities undertaken by TU to provide sufficient capital to enable
TU to meet its liabilities and ultimately ensure it remains a going
concern, particularly in the case of losses arising from adverse
events. Insurance capital management includes the assessment of
capital required to support TU's plans and objectives, the
structure of its shareholders' funds, arrangements to secure
capital and the ongoing monitoring of capital against business
requirements, as well as the assessments required by the PRA under
the Solvency II (SII) regime, including the minimum capital
requirement (TU's minimum capital requirement) and solvency capital
requirement (SCR), assessed using TU's approved SII partial
internal model (PIM), which was approved by the PRA in 2020. There
have been no significant changes to the PIM during the period to 28
February 2022. TU models a range of stress and scenario tests that
are published in its annual Solvency and Financial Condition
Report, which will be published in due course and will be available
at the following link:
www.tescounderwriting.com/publications-and-reports/. These show
that TU's capital position is resilient to a range of possible
scenarios. TU also maintains a capital contingency plan supported
by its shareholder, TPF. TU's unaudited available capital has
remained above its SCR requirement during the period to 28 February
2022; and capital coverage of TU's SCR of GBP121.1m (unaudited) at
the end of February 2022 was 151.0% (unaudited).
Following its purchase of Ageas' 50.1% shareholding in May 2021,
the Group owns 100% of the TU's share capital (GBP129.7m) and
provides 100% of its subordinated debt of GBP42.3m.
143
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
46. Financial Instruments
Classification of financial assets and liabilities
The following tables analyse the financial assets and financial
liabilities in accordance with the categories of financial
instruments in IFRS 9.
FVPL -
Designated
Amortised at initial FVOCI -
Group(1) cost recognition Debt instruments Total
2022 GBPm GBPm GBPm GBPm
Financial assets
Cash and balances with central
banks 754.3 26.3 -- 780.6
Loans and advances to banks 50.3 -- -- 50.3
Loans and advances to customers 6,490.3 -- -- 6,490.3
Derivative financial instruments -- 45.3 -- 45.3
Investment securities(2) :
- FVPL -- 24.8 -- 24.8
- FVOCI -- -- 584.7 584.7
- Amortised cost 857.4 -- -- 857.4
Other assets 219.7 -- -- 219.7
Total financial assets 8,372.0 96.4 584.7 9,053.1
---------- ------------- ------------------ --------
Financial liabilities
Deposits from banks 1,052.3 -- -- 1,052.3
Deposits from customers 5,325.9 -- -- 5,325.9
Debt securities in issue 244.0 -- -- 244.0
Derivative financial instruments -- 27.2 -- 27.2
Other liabilities 164.1 -- -- 164.1
Subordinated liabilities 235.6 -- -- 235.6
Total financial liabilities 7,021.9 27.2 -- 7,049.1
---------- ------------- ------------------ --------
(1) On a Company basis, cash and balances with central banks is
GBP7.8m and loans and advances to subsidiary companies is
GBP484.7m, both of which are held at amortised cost.
All derivative financial instruments are held for economic
hedging purposes, although not all derivatives are designated as
hedging instruments under the terms of IFRS 9.
144
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
46. Financial Instruments (continued)
FVOCI -
Amortised Designated equity
Group(1) cost as at FVPL instruments Total
2021 GBPm GBPm GBPm GBPm
Financial assets
Cash and balances with central
banks 791.1 13.2 -- 804.3
Loans and advances to customers 6,402.2 -- -- 6,402.2
Derivative financial instruments -- 6.1 -- 6.1
Investment securities:
- FVOCI -- -- 5.1 5.1
- Amortised cost 948.4 -- -- 948.4
Other assets 211.2 -- -- 211.2
Total financial assets 8,352.9 19.3 5.1 8,377.3
---------- ------------ ------------- --------
Financial liabilities
Deposits from banks 600.0 -- -- 600.0
Deposits from customers 5,738.0 -- -- 5,738.0
Debt securities in issue 251.0 -- -- 251.0
Derivative financial instruments -- 47.5 -- 47.5
Other liabilities 184.2 -- -- 184.2
Subordinated liabilities 235.0 -- -- 235.0
Total financial liabilities 7,008.2 47.5 -- 7,055.7
---------- ------------ ------------- --------
(1) On a Company basis, cash and balances with central banks is
GBP14.8m and loans and advances to subsidiary companies is
GBP483.5m, both of which are held at amortised cost.
145
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
46. Financial Instruments (continued)
Offsetting
The following tables show those financial assets and liabilities
subject to offsetting, enforceable master netting arrangements and
similar agreements.
Group Related amounts
not offset
-----------------------------------
2022 Gross and net Financial Collateral Net amounts
amounts instruments (received)/pledged
presented in
Statement
of Financial
Position
GBPm GBPm GBPm GBPm
Financial assets
Derivative financial instruments 45.3 (27.2) (18.1) --
Total financial assets 45.3 (27.2) (18.1) --
-------------- ------------- -------------------- --------------
Financial liabilities
Derivative financial instruments (27.2) 27.2 -- --
Repurchases, securities lending
and similar agreements (150.3) -- 150.3 --
Total financial liabilities (177.5) 27.2 150.3 --
-------------- ------------- -------------------- --------------
Group Related amounts
not offset
-----------------------------------
2021 Gross and net Financial Collateral Net
amounts instruments pledged amounts
presented in
Statement
of Financial
Position
GBPm GBPm GBPm GBPm
Financial assets
Derivative financial instruments 6.1 (6.1) -- --
Total financial assets 6.1 (6.1) -- --
-------------- ------------- -------------------- ------------
Financial liabilities
Derivative financial instruments (47.5) 6.1 42.7 1.3
Total financial liabilities (47.5) 6.1 42.7 1.3
-------------- ------------- -------------------- ------------
In the above tables, the net amount presented for financial
assets and financial liabilities is restricted to GBPnil where the
total of the related amounts not offset exceeds the amount of the
financial assets or financial liabilities.
For the financial assets and financial liabilities subject to
enforceable master netting arrangements above, each agreement
between the Group and the counterparty allows for net settlement of
the relevant financial assets and financial liabilities when both
elect to settle on a net basis. In the absence of such an election,
financial assets and financial liabilities will be settled on a
gross basis. However, each party to the master netting agreement or
similar agreement will have the option to settle all such amounts
on a net basis in the event of default of the other party.
146
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
46. Financial Instruments (continued)
Fair values of financial assets and financial 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 Statement of Financial
Position are approximately equal to their fair values.
Group(1,2) 2022 2021
Carrying Fair Carrying Fair
value Value value value
GBPm GBPm GBPm GBPm
Financial assets
Loans and advances to customers 6,490.3 6,565.5 6,402.2 6,617.6
Investment securities - amortised
cost 857.4 867.4 948.4 959.1
7,347.7 7,432.9 7,350.6 7,576.7
--------- -------- --------- --------
Financial liabilities
Deposits from customers 5,325.9 5,296.1 5,738.0 5,744.4
Debt securities in issue 244.0 252.4 251.0 263.7
Subordinated liabilities 235.6 214.2 235.0 215.9
--------- -------- --------- --------
5,805.5 5,762.7 6,224.0 6,224.0
--------- -------- --------- --------
(1) On a Company basis, loans and advances to subsidiary
companies have a carrying value of GBP484.7m (2021: GBP483.5m),
with a fair value of GBP445.9m (2021: GBP458.3m). On a Company
basis, subordinated liabilities and debt securities in issue have
the same carrying value and fair value as set out in the Group
table above.
(2) Fair value disclosures are not required for lease
liabilities.
The only financial assets and financial liabilities which are
carried at fair value in the Consolidated Statement of Financial
Position at year-end are cash balances relating to the Group's
Travel Money offering, FVPL and FVOCI investment securities and
derivative financial instruments. The valuation techniques and
inputs used to derive fair values at the year 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.
147
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
46. Financial Instruments (continued)
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.
Group(1) Level 1 Level 2 Level 3 Total
2022 GBPm GBPm GBPm GBPm
Financial assets carried at
fair value
Cash in hand(2) -- 26.3 -- 26.3
Investment securities - FVOCI 584.7 -- -- 584.7
Investment securities - FVPL 23.0 1.8 24.8
Derivative financial instruments:
- Interest rate swaps -- 45.0 -- 45.0
- Forward foreign currency
contracts -- 0.3 -- 0.3
Financial assets carried at
amortised cost
Loans and advances to customers -- -- 6,565.5 6,565.5
Investment securities - amortised
cost 867.4 -- -- 867.4
Total 1,452.1 94.6 6,567.3 8,114.0
-------- -------- -------- --------
Financial liabilities carried
at fair value
Derivative financial instruments:
- Interest rate swaps -- 27.2 -- 27.2
Financial liabilities carried
at amortised cost
Deposits from customers -- -- 5,296.1 5,296.1
Debt securities in issue 252.4 -- -- 252.4
Subordinated liabilities -- 214.2 -- 214.2
Total 252.4 241.4 5,296.1 5,789.9
-------- -------- -------- --------
(1) On a Company basis, loans and advances to subsidiary
companies of GBP445.9m are categorised as level 2. On a Company
basis, subordinated liabilities and debt securities in issue have
the same fair value and categorisation as set out in the Group
table above.
(2) Cash balances relating to the Group's Travel Money offering
are carried at fair value under IFRS 9.
148
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
46. Financial Instruments (continued)
Group(1) Level 1 Level 2 Level 3 Total
2021 GBPm GBPm GBPm GBPm
Financial assets carried at
fair value
Cash and balances with central
banks (2) -- 13.2 -- 13.2
Investment securities - FVOCI(3) -- 3.4 1.7 5.1
Derivative financial instruments:
- Interest rate swaps -- 6.0 -- 6.0
- Forward foreign currency
contracts -- 0.1 -- 0.1
Financial assets carried at
amortised cost
Loans and advances to customers -- -- 6,617.6 6,617.6
Investment securities - amortised
cost 932.3 26.8 -- 959.1
Total 932.3 49.5 6,619.3 7,601.1
-------- -------- -------- --------
Financial liabilities carried
at fair value
Derivative financial instruments:
- Interest rate swaps -- 46.5 -- 46.5
- Forward foreign currency
contracts -- 1.0 -- 1.0
Financial liabilities carried
at amortised cost
Deposits from customers -- -- 5,744.4 5,744.4
Debt securities in issue 263.7 -- -- 263.7
Subordinated liabilities -- 215.9 -- 215.9
Total 263.7 263.4 5,744.4 6,271.5
-------- -------- -------- --------
(1) On a Company basis, loans and advances to subsidiary
companies of GBP458.3m are categorised as level 2. On a Company
basis, subordinated liabilities and debt securities in issue have
the same fair value and categorisation as set out in the Group
table above.
(2) Cash balances relating to the Group's Travel Money offering
are carried at fair value under IFRS 9.
(3) The Group has a holding in preferred stock issued by VISA
Inc. which was designated at FVOCI in previous years. Following a
review of industry practice and the requirements of IFRS 9, this
holding has been reclassified to FVPL with effect from 1 March
2021. As a result, GBP5.1m (GBP3.7m net of deferred tax) in respect
of the opening fair value reserve at 1 March 2020 was released from
the fair value reserve in the year and recognised directly in
retained earnings in the Company and Consolidated Statements of
Changes in Equity. As this amount is not material, no prior year
restatement has been recognised in respect of this
reclassification.
149
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
46. Financial Instruments (continued)
There are three levels to the hierarchy as follows:
Level 1
Quoted prices (unadjusted) in active markets for identical
assets or liabilities.
Level 2
Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly (for
example, as prices) or indirectly (for example, derived from
prices).
Fair values of cash balances relating to the Group's Travel
Money offering are considered to equate to their carrying value as
they are short-term in nature.
Derivative financial instruments which are categorised as Level
2 are those which either:
Have future cash flows which are on known dates and for which
the cash flow amounts are known or calculable by reference to
observable interest and foreign exchange rates; or
Have future cash flows which are not pre-defined, but for which
the fair value of the instrument has very low sensitivity to
changes in estimate of future cash flows.
In each case the fair value is calculated by discounting future
cash flows using benchmark, observable market interest rates.
Fair values of investment in subordinated debt classified as
amortised cost are calculated using quoted prices, where available,
or by using discounted cash flows applying market rates.
The estimated fair value of subordinated liabilities is
calculated using a discounted cash flow model based on a current
yield curve appropriate for the remaining term to maturity.
Financial assets classified as FVPL comprise the Group's holding
in VISA Inc, and TU's holding in a property fund. The estimated
fair value of the Group's holding in VISA Inc. is described in note
24. The estimated fair value of TU's holding in a property fund is
derived from market prices.
Level 3
Inputs for the asset or liability are not based on observable
market data (unobservable inputs).
Loans and advances to customers are net of charges for
impairment. The estimated fair value of loans and advances
represents the discounted amount of estimated future cash flows
expected to be received. Expected cash flows are discounted at
current market rates to determine fair value.
The estimated fair value of deposits from customers represents
the discounted amount of estimated future cash flows expected to be
paid. Expected cash flows are discounted at current market rates to
determine fair value.
The estimated fair value of financial assets classified as FVPL,
being the Group's holding in VISA Inc., is described in note
24.
Transfers
There were no transfers between Levels 1 and Level 2 in the year
to 28 February 2022 (2021: no transfers).
There were no transfers between Level 2 and Level 3 in the year
to 28 February 2022. During the year ended 28 February 2021 the
Group transferred investment securities totalling GBP1.7m from
Level 3 to Level 2.
150
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
47. Cash and cash equivalents
Group Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Cash and balances with central
banks (refer note 19) 739.0 779.5 7.8 14.8
Loans and advances to banks
(refer note 20) 50.3 -- -- --
------ ------ ----- -----
Total cash and cash equivalents 789.3 779.5 7.8 14.8
------ ------ ----- -----
151
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
48. Cash Flows from Operating Activities
Group Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Non cash and other items included in operating
profit before taxation
Expected credit loss (credit)/charge on loans and advances (refer notes
15 & 45) (30.2) 359.7 0.3 (0.3)
Expected credit loss credit on investment securities at amortised cost
(refer note 15) (0.5) (0.2) -- --
Expected credit loss charge on investment securities at FVOCI (refer note
15) 0.8 -- --
Depreciation and amortisation (refer notes 30 & 31) 65.2 56.7 -- --
Loss on disposal of investment securities 0.3 -- -- --
Loss on disposal of non-current assets 1.0 1.7 -- --
Gain on disposal of assets of the disposal group -- (0.4) -- --
Deferred acquisition costs (13.9) -- --
Provisions for liabilities and charges (refer note 35) 1.8 3.1 -- --
Share of profit of joint venture (2.6) (16.2) -- --
Gain on share of pre-acquisition reserves of joint venture (5.0) -- --
Fair value gain on investment in joint venture (4.6) -- --
Equity-settled share based payments 3.5 (2.5) -- --
Interest paid on debt securities in issue 9.3 20.1 8.9 9.0
Interest paid on assets held to hedge debt securities in issue 1.0 3.3 -- --
Interest on subordinated liabilities 3.5 3.5 3.5 3.5
Interest on lease liabilities (refer note 43) 2.1 2.3 -- --
Research and development tax claim (0.9) (0.5) -- --
Fair value movements (0.7) 7.9 -- --
Total 30.1 438.5 12.7 12.2
-------- ---------- ------ ------
Changes in operating assets and liabilities
Net movement in mandatory balances with central banks (17.0) 6.9 -- --
Net movement in loans and advances to banks -- -- -- --
Net movement in loans and advances to customers (106.9) 1,707.0 -- --
Net movement in reinsurance assets 1.7 -- -- --
Net movement in prepayments and accrued income 1.0 14.0 (0.1) 0.3
Net movement in other assets 34.3 32.1 -- --
Net movement in assets of the disposal group -- 44.9 -- --
Net movement in deposits from banks 452.3 100.0 -- --
Net movement in deposits from customers (411.7) (1,968.4) -- --
Net movement in accruals and deferred income 20.0 (6.2) -- --
Provisions utilised (12.3) (22.3) -- --
Net movement in other liabilities (21.4) (11.7) -- --
Net movement in insurance funds withheld 14.6 n/a -- n/a
Net movement in insurance contract provisions (0.3) n/a -- n/a
Total (45.7) (103.7) (0.1) 0.3
-------- ---------- ------ ------
152
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
49. Reconciliation of Liabilities Relating to Financing Activities
Non-cash movements
Group At 1 March 2021 Financing Cash Fair value Accrued Interest Other At 28 February 2022
flows change
GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities in
issue (251.0) -- 8.3 (0.2) (0.3) (243.2)
Subordinated
liabilities and
notes (235.0) -- -- -- -- (235.0)
Interest payable (1.3) 12.2 -- (12.3) -- (1.4)
Assets held to hedge
fixed rate bonds(1) 2.0 1.1 (9.5) (0.1) -- (6.5)
Lease liabilities
(2) (29.6) 5.7 -- (2.1) (0.8) (26.8)
Total liabilities
from financing
activities (514.9) 19.0 (1.2) (14.7) (1.1) (512.9)
---------------- --------------- ----------- ----------------- ------ --------------------
Non-cash movements
Company At 1 March 2021 Financing Cash Fair value Accrued Interest Other At 28 February 2022
flows change
GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities in
issue (249.4) -- -- (0.2) -- (249.6)
Subordinated
liabilities and
notes (235.0) -- -- -- -- (235.0)
Interest payable (1.3) 12.2 -- (12.3) -- (1.4)
Total liabilities
from financing
activities (485.7) 12.2 -- (12.5) -- (486.0)
---------------- --------------- ----------- ----------------- ------ --------------------
Non-cash movements
Group At 1 March 2020 Financing Cash Fair value Accrued Interest Other At 28 February 2021
flows change
GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities in
issue (1,024.0) 772.2 3.2 (0.2) (2.2) (251.0)
Subordinated
liabilities and
notes (235.0) -- -- -- -- (235.0)
Interest payable (4.7) 26.8 -- (23.2) -- (1.1)
Assets held to hedge
fixed rate bonds(1) 4.1 3.9 (5.4) (0.6) -- 2.0
Lease liabilities(2) (32.8) 5.5 -- (2.3) -- (29.6)
Total liabilities
from financing
activities (1,292.4) 808.4 (2.2) (26.3) (2.2) (514.7)
---------------- --------------- ----------- ----------------- ------ --------------------
Non-cash movements
Company At 1 March 2020 Financing Cash Fair value Accrued Interest Other At 28 February 2021
flows change
GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities in
issue (249.2) -- -- (0.2) -- (249.4)
Subordinated
liabilities and
notes (235.0) -- -- -- -- (235.0)
Interest payable (1.6) 12.6 -- (12.3) -- (1.3)
Total liabilities
from financing
activities (485.8) 12.6 -- (12.5) -- (485.7)
(1) Assets held to hedge fixed rate bonds and securitisation
bonds are included within derivative financial instruments in the
Consolidated Statement of Financial Position on page 40.
(2) Lease liabilities are included within total other
liabilities in the Consolidated Statement of Financial Position on
page 40.
153
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
50. Capital Resources
IFRS 9 became effective for annual periods beginning on or after
1 January 2018 and is reflected in the Group disclosures. The Group
has elected to use the transitional arrangements available under
Article 473a of CRR. These arrangements allow the IFRS 9 impact on
capital to be phased in over a period of five years. On 27 June
2020, due to the Covid-19 pandemic, CRR was further amended to
accelerate specific measures and implement a new IFRS 9
transitional relief calculation which applies additional relief to
increases in ECL provisions arising as a result of the Covid-19
pandemic. As a result, the IFRS 9 transitional arrangements have
been extended by two years and a new modified calculation has been
introduced.
The following tables analyse the regulatory capital resources of
the Group applicable as at the year-end on a 'transitional' and
'end point' position for the current year as related to the IFRS 9
transitional period:
Transitional End Point Transitional
2022 2022 2021(1)
GBPm GBPm GBPm
Common equity tier 1
Shareholders' equity (accounting capital) 1,668.6 1,668.6 1,596.1(1)
Regulatory adjustments
Unrealised gains on cash flow hedge reserve (0.2) (0.2) 0.6
Intangible assets (111.9) (111.9) (130.9)
Material holdings in financial sector entities (28.4) (28.4) --
IFRS 9 transitional add back 140.3 -- 262.9
Common equity tier 1 capital 1,668.4 1,528.1 1,728.7(1)
Tier 2 capital (instruments and provisions)
Undated subordinated notes 45.0 45.0 45.0
Dated subordinated notes net of regulatory
amortisation 190.0 190.0 190.0
Tier 2 capital (instruments and provisions)
before regulatory adjustments 235.0 235.0 235.0
Regulatory adjustments
Material holdings in financial sector entities (42.2) (42.2) (21.1)
Total regulatory adjustments to tier 2 capital
(instruments and provisions) (42.2) (42.2) (21.1)
Total tier 2 capital (instruments and provisions) 192.8 192.8 213.9
Total capital 1,861.2 1,720.9 1,942.6(1)
Total risk-weighted assets (unaudited) 6,832.0 6,772.7 6,822.4
Common equity tier 1 ratio (unaudited) 24.4% 22.6% 25.3%(1)
Tier 1 ratio (unaudited) 24.4% 22.6% 25.3%(1)
Total capital ratio (unaudited) 27.2% 25.4% 28.5%(1)
(1) The above balances and ratios have been restated following
restatement of the Company's opening capital position at 1 March
2020. This was in respect of a GBP7.0m dividend received from TU
prior to 1 March 2020, which was recognised as a deduction from the
carrying value of the investment in TPF's Statement of Financial
Position rather than through TPF's retained earnings, which
comprise part of the Company's capital position. Refer to note 1
for further details.
154
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
50. Capital Resources (continued)
As a result of the acquisition of Ageas's 50.1% share of TU and
in accordance with the CRR, the Company has made the required
deductions from Tier 1 and Tier 2 capital and risk-weighted the
remaining value of the investment at 250%.
Total capital requirement (TCR) refers to the amount and quality
of capital the Group must maintain to comply with the CRR Pillar 1
and 2A capital requirements. The TCR for TPFG as at 28 February
2022 is 11.59% of risk-weighted assets plus GBP52m as a static
add-on for pension obligation risk.
The table below reconciles shareholders' equity of the Group to
shareholders' equity of the Company for regulatory purposes:
2022 2021
GBPm GBPm
Tesco Personal Finance Group plc (Group) shareholders'
equity 1,665.4 1,621.5
Share of joint venture's retained earnings(1) -- (19.6)(2)
Subsidiaries' retained earnings(1) (9.6) (0.2)
Share of joint venture's AFS reserve(1) -- (5.6)
Subsidiary's fair value reserve(1) 12.8 --
Tesco Personal Finance Group plc shareholders'
equity for regulatory purposes 1,668.6 1,596.1(2)
-----------
(1) Following the acquisition of 50.1% of TU on 4 May 2021 it is
now a wholly owned subsidiary of the Group. Prior to this TU was a
joint venture of the Group.
(2) The above balances at 28 February 2021 have been restated
following restatement of the Company's opening capital position at
1 March 2020. This was in respect of a GBP7.0m dividend received
from TU prior to 1 March 2020, which was recognised as a deduction
from the carrying value of the investment in TPF's Statement of
Financial Position rather than through TPF's retained earnings,
which comprise part of the Company's capital position. Refer to
note 1 for further details.
It is the Group's policy to maintain a strong capital base, to
expand it as appropriate and to utilise it efficiently throughout
its activities to optimise the return to shareholders while
maintaining a prudent relationship between the capital base and the
underlying risks of the business. In carrying out this policy, the
Group has regard to the supervisory requirements of the PRA.
The Group is required to submit ICAAP reports to the PRA which
set out future business plans, the impact on capital availability,
capital requirements and the risk to capital adequacy under stress
scenarios.
The Group also maintains a Recovery Plan that provides a series
of recovery options which could be deployed in a severe stress
event impacting capital or liquidity positions. The Recovery Plan
is reviewed and approved by the Board on at least an annual
basis.
The Group has met all relevant capital requirements throughout
the year.
155
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
50. Capital Resources (continued)
Leverage ratio (unaudited)
The Leverage Ratio was introduced under the Basel III reforms as
a simple, transparent, non-risk-based ratio intended to restrict
the build-up of leverage in the banking sector to avoid distressed
de-leveraging processes that can damage the broader financial
system and the economy.
The Leverage Ratio is defined as the ratio of Tier 1 capital to
the total Leverage Ratio exposures excluding claims on central
banks and applies an equal weighting to all assets regardless of
their risk.
The following Leverage Ratio disclosures for the year ended 28
February 2022 are laid out in accordance with the requirements of
the PRA Rulebook: CRR Firms: Leverage Instrument 2021.
The Group has published the leverage ratio on a Capital
Requirements Directive IV basis using the existing exposure
approach:
Exposures for leverage ratio (unaudited) Transitional End point Transitional
2022 2022 2021
GBPm GBPm
Total balance sheet exposures 9,636.5 9,636.5 8,823.4
Adjustments for entities which are consolidated
for accounting purposes but outside scope
of regulatory consolidation (774.4) (774.4) (25.6)
Adjustment for exemption of exposures to
central bank (639.9) (639.9) --
Removal of accounting value of derivatives
and SFTs (45.3) (45.3) (6.1)
Exposure value for derivatives and SFTs 37.6 37.6 4.4
Off balance sheet: unconditionally cancellable
(10%) 1,236.3 1,236.3 1,266.8
Off balance sheet: other (20%) -- -- --
Regulatory adjustment - intangible assets (111.9) (111.9) (130.9)
Regulatory adjustment - other, including
IFRS 9 115.6 (24.7) 212.9
Total 9,454.5 9,314.2 10,144.9
1,728.7
Common equity tier 1 1,668.4 1,528.1 (1)
17.0%
Leverage ratio 17.6% 16.4% (1)
(1) The above balance and ratio have been restated following
restatement of the Company's opening capital position at 1 March
2020. This was in respect of a GBP7.0m dividend received from TU
prior to 1 March 2020, which was recognised as a deduction from the
carrying value of the investment in TPF's Statement of Financial
Position rather than through TPF's retained earnings, which
comprise part of the Company's capital position. Refer to note 1
for further details.
Capital Management
The Group operates an integrated risk management process to
identify, quantify and manage risk in the Group. The quantification
of risk includes the use of both stress and scenario testing. Where
capital is considered to be an appropriate mitigant for a given
risk, this is identified and reflected in the Group's internal
capital assessment. The capital resources of the Group are
regularly monitored against the higher of this internal assessment
and regulatory requirements. Capital adequacy and performance
against the Group's capital plan are monitored closely, with
monthly reporting provided to the Board and ALCo.
Pillar 2 capital methodologies
The PRA updated its Pillar 2 capital methodologies in July 2016
following the publication of prudential requirements for
implementation of ring-fencing and issued a policy statement in
October 2017 refining the Pillar 2A framework.
156
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
50. Capital Resources (continued)
These proposals are aimed at promoting the safety and soundness
of PRA-regulated firms, to facilitate a more effective banking
sector and to make the PRA's Pillar 2A capital assessment more
proportionate by addressing some of the concerns over the
differences between SA and internal ratings-based risk weights.
This will continue to be managed as part of the Group's ICAAP in
line with the PRA policy statement issued in October 2017. The PRA
general safety and soundness objectives in relation to continuity
of core services in the UK and ring-fencing of banking activities
where core deposits are in excess of GBP25bn came into effect from
1 January 2019. The Group has not exceeded this threshold and was
not therefore automatically required to ring-fence the Group's core
activities by the 2019 implementation date.
Credit Risk
In December 2017 the Basel Committee on Banking Supervision
(BCBS) finalised Basel III reforms for credit risk, including
revisions to the calculation of risk-weighted assets and
enhancements to the risk-sensitivity of the SAs to credit risk,
constraining the use of internal model approaches by placing limits
on certain inputs and replacing the existing Basel II output floors
with a risk-sensitive floor based on the Committee's Basel III
standardised approaches. On 21 March 2022 the PRA confirmed its
intention that these changes will become effective on 1 January
2025.
Operational risk
In December 2017, the BCBS finalised Basel III reforms for
operational risk by replacing all existing approaches in the Basel
II framework with a single risk-sensitive SA to be used by all
banks. The new SA increases the sensitivity by combining a refined
measure of gross income with the bank's internal historical losses.
On 21 March 2022 the PRA confirmed its intention that these changes
will become effective on 1 January 2025.
Leverage
At present the Group is not subject to the minimum Tier 1
leverage ratio requirement of 3.25% as it is currently exempt from
the UK Leverage Framework Regime, which only applies to LREQ firms
with retail deposit levels equal to or greater than GBP50 billion.
However, although the PRA has confirmed that the minimum 3.25%
ratio will be an LREQ requirement, as a smaller domestic deposit
taker, the regulator has stated it still expects the Group to
maintain a minimum leverage ratio of 3.25%. The Group will not be
subject to regulatory sanctions if it fails to do so.
The European Commission's minimum requirements for own funds and
eligible liabilities (MREL)
On 1 January 2020, the Group became subject to MREL, with an
interim requirement of 18% of risk-weighted assets until 31
December 2022. In order to meet this requirement, the Company
undertook an initial GBP250.0m issuance of MREL-compliant debt in
July 2019.
From 1 January 2022, following a change in the Company's
resolution strategy confirmed by the BoE in December 2021, the
Company no longer has a requirement to issue MREL-compliant debt
since the MREL requirement is equal to the TCR. The MREL-compliant
debt issued by the Company in July 2019 remains in issue.
At 28 February 2022, the MREL ratio was 30.9% (2021: 32.1%).
157
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
51. Related Party Transactions
During the year the Group had the following transactions with
related parties:
Transactions involving Directors and other key connected
persons
For the purposes of IAS 24, 'Related Party Disclosures', the
Group's key Management personnel comprises Directors of the Group.
The captions in the Group's primary Financial Statements include
the following amounts attributable, in aggregate, to key connected
persons of both the Group and Tesco, the Company's ultimate parent
undertaking.
Group 2022 2021
GBPm GBPm
Deposits from customers(1)
Deposits at the beginning of the year 0.1 0.1
Deposits repaid during the year -- (0.1)
Deposits at the end of the year 0.1 --
Interest expense on deposits -- --
(1) The opening and closing balances reported are in respect of
related parties of the Group during and at the reporting date in
each year.
Remuneration of key Management personnel
The amount of remuneration incurred by the Group in relation to
the Directors is set out below in aggregate. Further information
about the remuneration of Directors is provided in note 16.
Group 2022 2021
GBPm
Short-term employee benefits 3.2 2.6
Other long-term benefits (1) 1.7 2.1
Share based payments 0.5 --
Total emoluments 5.4 4.7
(1) Other long-term benefits, being aggregate amounts receivable
under long-term incentive schemes, represent the maximum amounts
awarded in the year. Actual amounts payable under long-term
incentive schemes may vary depending on the level of performance
achieved against specific measures.
158
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
51. Related Party Transactions (continued)
Trading transactions
Group 2022 2022 2022 2021 2021 2021
Tesco Tesco
Tesco Tesco Underwriting Tesco Tesco Underwriting
PLC subsidiaries - JV PLC subsidiaries - JV
GBPm GBPm GBPm GBPm GBPm GBPm
Interest received
and other income -- 3.2 7.3 -- 3.8 28.2
Dividend income -- -- -- -- -- 7.5
Interest paid (3.5) -- -- (3.5) -- --
Provision of services -- (45.9) 1.1 -- (47.6) 3.0
Company 2022 2022 2022 2021 2021 2021
Tesco Tesco
Tesco Tesco Underwriting Tesco Tesco Underwriting
PLC subsidiaries - JV PLC subsidiaries - JV
GBPm GBPm GBPm GBPm GBPm GBPm
Interest received
and other income -- 12.3 -- -- 12.3 --
Dividend income -- 80.0 -- -- 15.0 --
Interest paid (3.5) -- -- (3.5) -- --
Provision of services -- 0.1 -- -- -- --
Balances owing to/from related parties are identified in notes
26, 28, 36, 37, 40, 41 and 42.
Prior to 4 May 2021 TU was a joint venture of the Group. Trading
transactions with TU as a joint venture are shown separately in the
table above. From 4 May 2021 TU became a subsidiary of the Group.
Transactions with TU are eliminated in the Group disclosures from
this date.
Investment transactions with TU are identified in note 28.
Ultimate parent undertaking
The Company's parent undertaking and controlling party is Tesco
PLC which is incorporated in England. The Financial Statements for
Tesco PLC can be obtained from its registered office at Tesco
House, Shire Park, Kestrel Way, Welwyn Garden City, AL7 1GA.
159
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
52. Contingent Liabilities and Commitments
Contingent liabilities
Contingent liabilities are possible obligations arising from
past events, whose existence will be confirmed only by uncertain
future events, or present obligations arising from past events that
are not recognised because either it is not probable that an
outflow of economic benefits will be required or the amount of the
obligation cannot be reliably estimated.
Contingent liabilities are not recognised but information about
them is disclosed unless the possibility of any outflow of economic
benefits is remote. There are a number of contingent liabilities
that arise in the normal course of business which, if realised, are
not expected to result in a material liability to the Group.
Lending commitments
Under an undrawn Credit Card commitment, the Group agrees to
make funds available to a customer in the future. Undrawn Credit
Card commitments may be unconditionally cancelled or may continue,
providing all facility conditions are satisfied or waived.
Under a PCA overdraft commitment, the Group agreed to make funds
available to a customer in the future. PCA overdraft commitments
were usually for a specified term and could be unconditionally
cancelled or could continue, providing all facility conditions are
satisfied or waived. The Group closed its PCA offering on 30
November 2021.
Further detail on undrawn lending commitments is included in the
liquidity and funding risk disclosure in note 45.
The contractual amounts do not represent the amounts at risk at
the reporting date but the amounts that would be at risk should the
available facilities be fully drawn upon.
Capital commitments
At 28 February 2022 the Group had capital commitments related to
property, plant and equipment of GBP1.7m (2021: GBP0.5m) and
intangible assets of GBP1.3m (2021: GBP2.1m). This is in respect of
IT software development and IT hardware. The Group's Management is
confident that future net revenues and funding will be sufficient
to cover these commitments.
160
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
53. Share Based Payments
The Group charge for the year recognised in respect of share
based payments is GBP7.9m (2021: GBP3.1m), which is made up of
share option schemes and share bonus payments. Of this amount,
GBP6.8m (2021: GBP3.1m) will be equity-settled and GBP1.1m (2021:
GBPnil) cash-settled representing employee tax and National
Insurance contributions.
Share option schemes
The Group had three share option schemes in operation during the
year, all of which are equity-settled schemes using Tesco
shares:
The Savings-related Share Option Scheme (2021) permits the grant
to colleagues of options in respect of ordinary shares linked to a
building society/bank save-as-you-earn contract for a term of three
or five years with contributions from colleagues of an amount
between GBP5 and GBP500 per four-weekly period. Options are capable
of being exercised at the end of the three or five-year period at a
subscription price of not less than 80% of the average of the
middle-market quotations of an ordinary share over the three
dealing days immediately preceding the offer date.
Colleagues participate in the Annual Bonus Plan and Deferred
Bonus Plan, a performance-related bonus scheme. The amount paid to
colleagues is based on a percentage of salary and is paid partly in
cash and partly in shares. Bonuses are awarded, at the discretion
of RemCo and Board, to colleagues who have completed a required
service period and depend on the achievement of corporate and
individual performance targets.
Selected executives participate in the Performance Share Plan
(2011), the Long-Term Incentive Plan (2015) and the Long-Term
Incentive Plan (2021). Awards made under these plans will normally
vest on the vesting date(s) set on the date of the award for nil
consideration. Vesting will normally be conditional on the
achievement of specified performance targets over a three-year
performance period and/or continuous employment.
161
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
53. Share Based Payments (continued)
The following table reconciles the total number of share options
outstanding under each share option scheme and the weighted average
exercise price (WAEP):
Savings- Savings-
related related Approved Approved
share share share share Unapproved Unapproved
option option option option share options share options
scheme scheme scheme scheme scheme scheme
Options WAEP (pence) Options WAEP (pence) Options WAEP (pence)
Outstanding at 1
March 2021 3,859,640 192.89 - - - -
Granted 1,146,690 242.00 - - - -
Forfeited (353,867) 206.14 - - - -
Exercised (744,562) 169.39 - - - -
Outstanding at 28
February 2022 3,907,901 210.58 - - - -
Exercisable at 28
February 2022 26,835 190.00 - - - -
Exercise price range
(pence) - 190.00 - - - -
Weighted average
remaining contractual
life (years) - 0.42 - - - -
Savings- Savings-
related related Approved Approved
share share share share Unapproved Unapproved
option option option option share options share options
scheme scheme scheme scheme scheme scheme
Options WAEP (pence) Options WAEP (pence) Options WAEP (pence)
Outstanding at 1
March 2020 3,453,607 182.00 - - - -
Granted 1,423,533 198.00 - - - -
Forfeited (244,248) 201.05 - - - -
Exercised (773,252) 152.75 - - - -
Outstanding at 28
February 2021 3,859,640 192.89 - - - -
Exercisable at 28
February 2021 55,142 152.33 - - - -
Exercise price range
(pence) - 152.33 - - - -
Weighted average
remaining contractual
life (years) - 0.40 - - - -
Share options were exercised on a regular basis throughout the
financial year. The average Tesco share price during the year ended
28 February 2022 was 254.05p (2021: 227.07p).
162
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
53. Share Based Payments (continued)
The fair value of savings related share options schemes are
estimated at the date of grant using the Black-Scholes option
pricing model. The following table gives the assumptions applied to
the options granted in the respective periods shown. No assumption
has been made to incorporate the effects of expected early
exercise.
Group 2022 2021
Savings Savings
- related - related
share options share options
schemes schemes
4.1% --
Expected dividend yield (%) 4.2% 4.9% - 5.1%
21.8% --
Expected volatility (%) 21.9% 23% - 26%
1.38% --
Risk free interest rate (%) 1.39% 0.2% -0.3%
Expected life of option (years) 3 or 5 3 or 5
Weighted average fair value (WAFV) of options
granted (pence) 38.47 27.13
7.4% --
Probability of forfeiture (%) 9.5% 6% - 10%
Share price (pence) 268.5 217.80
WAEP (pence) 242.00 198.00
Volatility is a measure of the amount by which a price is
expected to fluctuate in the period. The measure of volatility used
in Tesco's option pricing models is the annualised standard
deviation of the continuously compounded rates of return on the
share over a period of time. In estimating the future volatility of
Tesco's share price, the Tesco Board considers the historical
volatility of the share price over the most recent period that is
generally commensurate with the expected term of the option, taking
into account the remaining contractual life of the option.
Share Bonus Schemes
Colleagues participate in the Annual Bonus Plan and Deferred
Bonus Plan, a performance-related bonus scheme. The amount paid to
colleagues is based on a percentage of salary and is paid partly in
cash and partly in shares. Bonuses are awarded, at the discretion
of RemCo and Board, to colleagues who have completed a required
service period and depend on the achievement of corporate and
individual performance targets.
Selected executives participate in the Performance Share Plan
(2011), the Long-Term Incentive Plan (2015) and the Long-Term
Incentive Plan (2021). Awards made under these plans will normally
vest on the vesting date(s) set on the date of the award for nil
consideration. Vesting will normally be conditional on the
achievement of specified performance targets over a three-year
performance period and/or continuous employment.
The fair value of shares awarded under these schemes is their
market value on the date of the award. Expected dividends are not
incorporated into the fair value.
The number of Tesco shares and WAFV of share bonuses awarded
during the year were:
2022 2022 2021 2021
WAFV WAFV
Shares (number) (pence) Shares (number) (pence)
Group Bonus Plan 0 0.00 1,103,685 246.70
Performance Share Plan 2,318,344 227.76 2,401,609 222.02
163
TESCO PERSONAL FINANCE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS (continued)
54. Adoption of New and Amended International Financial
Reporting Standards
Standards, amendments and interpretations issued which became
effective in the current year
There were no new accounting standards or amendments to
standards which became effective with relevant endorsement for
annual periods beginning on or after 1 January 2021, that had any
impact on the Group in the year.
Early adoption of new standards
During the year the Group did not early adopt any new accounting
standards or amendments to standards.
Standards, amendments and interpretations issued but not yet
effective
Standards, amendments and interpretations issued and effective
on or after 1 January 2022 that are expected to have an impact on
the Group are as follows:
IFRS 17 'Insurance Contracts'
IFRS 17 is effective for annual periods beginning on or after 1
January 2023, subject to endorsement in the UK. Early adoption is
permitted provided IFRS 9 and IFRS 15 are also applied.
IFRS 17, which is a replacement for IFRS 4 'Insurance
Contracts', requires insurance liabilities to be measured at a
current fulfilment value and provides a more uniform measurement
and presentation approach for all insurance contracts. IFRS 17
includes an optional simplified premium allocation approach which
is permitted for short-duration contracts.
IFRS 17 is relevant to the Group's subsidiary, TU, which
provides the insurance underwriting service for a number of the
Group's general insurance products. TU has established an IFRS 17
project team and work is well progressed on the design and build of
the systems that will enable reporting under IFRS 17 from 1 March
2023. TU expects to be able to apply the simplified premium
allocation approach to all material insurance and reinsurance
contract groups. TU intends to perform a parallel run during the
next financial year to conclude on the full impact on the financial
statements at adoption.
The Group's assessment of the impact of IFRS 17 and measurement
of any required changes will be undertaken by reference to contract
inception on 4 May 2021, being the date from which TU became a
wholly owned subsidiary of the Group. This may differ from the
assessment and measurement undertaken by TU in its own financial
statements, which will reference the original contract inception
date.
Amendments to IAS 1 'Accounting Policies'
These amendments are effective for annual periods beginning on
or after 1 January 2023, subject to endorsement in the UK. They
require the disclosure of material accounting policy information
rather than significant accounting policies. These amendments may
result in some minor changes to future disclosure of accounting
policies in the annual financial statements of the Group. The full
impact on the Group is still being assessed.
55. Events After the Reporting Date
There were no events after the reporting date which have
required either adjustment or disclosure in these Financial
Statements.
164
TESCO PERSONAL FINANCE GROUP PLC
INDEPENT AUDITOR'S REPORT TO THE MEMBER OF TESCO PERSONAL
FINANCE GROUP PLC
1. Opinion
In our opinion:
the Financial Statements of Tesco Personal Finance Group plc
(the parent Company) and its subsidiaries (the Group) give a true
and fair view of the state of the Group's and of the parent
Company's affairs as at 28 February 2022 and of the Group's profit
for the year then ended;
the Group Financial Statements have been properly prepared in
accordance with United Kingdom adopted International Accounting
Standards (IASs) and International Financial Reporting Standards
(IFRSs) as issued by the International Accounting Standards Board
(IASB);
the parent Company Financial Statements have been properly
prepared in accordance with United Kingdom adopted IASs and as
applied in accordance with the provisions of the Companies Act
2006; and
the financial statements have been prepared in accordance with
the requirements of the Companies Act 2006.
We have audited the Financial Statements which comprise:
the Consolidated Income Statement;
the Consolidated Statement of Comprehensive Income;
the Consolidated and Parent Company Statements of Financial
Position;
the Consolidated and Parent Company Statements of Changes in
Equity;
the Consolidated and Parent Company Cash Flow Statements;
the Accounting Policies; and
the related notes 1 to 55.
The financial reporting framework that has been applied in their
preparation is applicable law and United Kingdom adopted IASs and
IFRSs as issued by the IASB. The financial reporting framework that
has been applied in the preparation of the Parent Company Financial
Statements is applicable law and IASs in conformity with the
requirements of the Companies Act 2006.
2 Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
auditor's responsibilities for the audit of the financial
statements section of our report.
We are independent of the Group and the parent Company in
accordance with the ethical requirements that are relevant to our
audit of the financial statements in the United Kingdom (UK),
including the Financial Reporting Council's (FRC's) Ethical
Standard as applied to listed public interest entities, and we have
fulfilled our other ethical responsibilities in accordance with
these requirements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
165
TESCO PERSONAL FINANCE GROUP PLC
INDEPENT AUDITOR'S REPORT TO THE MEMBER OF TESCO PERSONAL
FINANCE GROUP PLC (continued)
3. Summary of our audit approach
Key audit matters The key audit matters that we identified in the current
year were:
expected credit loss (ECL) provisions;
valuation of insurance contract liabilities and reinsurance
assets in Tesco Underwriting Limited (TU); and
recognition of revenue.
Within this report, key audit matters are identified
as follows: Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
Materiality The materiality that we used for the Group Financial
Statements was GBP9.23m, which represents 0.6% of net
assets.
Scoping Our audit scoping provides full scope audit coverage
of 100% of revenue, profit before tax and net assets.
There is one component, TU, which was previously a
joint venture and has been 100% acquired by the Group
in the year. This has been audited by a Deloitte UK
component audit team.
Significant changes In the prior year, we identified the valuation of the
in our approach provision for payment protection insurance (PPI) redress
as a key audit matter. Following the timebar deadline
for complaints in August 2019, the provision, and inherent
judgment in the provision has continued to diminish
and as such we no longer consider this to be a key
audit matter.
In the period the Group acquired the remaining shares
in the joint venture TU which is fully consolidated
into the Group Financial Statements for the current
year. As a result we have refined the significant risk
identified within the TU component to reflect the change
from insurance reserving in TU to the valuation of
insurance contract liabilities and reinsurance assets
in TU.
166
TESCO PERSONAL FINANCE GROUP PLC
INDEPENT AUDITOR'S REPORT TO THE MEMBER OF TESCO PERSONAL
FINANCE GROUP PLC (continued)
4. Conclusions relating to going concern
In auditing the Financial Statements, we have concluded that the
Directors' use of the going concern basis of accounting in the
preparation of the Financial Statements is appropriate.
Our evaluation of the Directors' assessment of the Group's and
Company's ability to continue to adopt the going concern basis of
accounting included:
Obtaining an understanding of the relevant controls around
Management's going concern assessment;
Assessing Management's considerations regarding whether they
consider it appropriate to adopt the going concern basis of
accounting;
Assessing the Group's and parent Company's compliance with
regulation including capital and liquidity requirements;
Assessing the assumptions, such as cash flows, capital and
liquidity, used in the forecasts prepared by Management;
Assessing historical accuracy of forecasts prepared by
Management;
Involving prudential risk specialists in assessing the
information supporting the liquidity and capital forecasts; and
Assessing the appropriateness of the going concern
disclosures.
Based on the work we have performed, we have not identified any
material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the
Group's and parent Company's ability to continue as a going concern
for a period of at least twelve months from the date of the
approval of the Financial Statements.
In relation to the reporting on how the Group has applied the UK
Corporate Governance Code, we have nothing material to add or draw
attention to in relation to the Directors' statement in the
Financial Statements about whether the Directors considered it
appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors
with respect to going concern are described in the relevant
sections of this report.
167
TESCO PERSONAL FINANCE GROUP PLC
INDEPENT AUDITOR'S REPORT TO THE MEMBER OF TESCO PERSONAL
FINANCE GROUP PLC (continued)
5. Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the Financial
Statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had
the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the
engagement team.
These matters were addressed in the context of our audit of the
Financial Statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
5.1 Expected credit loss provisions
Key audit matter As disclosed in note 15 (Expected Credit Loss on
description Financial Assets) and note 21 (Loans and Advances
to Customers), the Group held an ECL provision
of GBP488.8m at 28 February 2022 (28 February 2021:
GBP624.6m), resulting in a current year credit
to the Consolidated Income Statement of GBP30.2m
(28 February 2021: GBP359.7m charge). The decrease
in provision compared to the prior year is primarily
due to the improvements in the macro-economic outlook,
partially offset by additional post-model adjustments
('PMAs') to account for the risks associated with
prevailing headwinds in the economy.
Despite the improvement in the macro-economic outlook
in the current year, loan impairment remains one
of the most significant judgments made by Management.
We consider the most significant areas of judgement
within the Group's collective provisioning methodologies,
and therefore the key audit matters within loan
impairment, to be:
Macro-economic scenarios - ECL provisions are required
to be calculated on a forward-looking basis under
IFRS 9. Management apply significant judgement
in determining the forecast macro-economic scenarios
and the probability-weighting of each scenario
that are incorporated into the ECL model.
Post-model adjustments - Management has included
a number of PMAs to capture the potential downside
risks and model limitations arising as a result
of the continued macro-economic uncertainty. This
includes PMAs to account for artificial improvements
in customers' behavioural scores over the course
of the pandemic, the potential impact of the emerging
cost of living crisis on the Group's customers,
the ongoing conflict in Ukraine and to align future
default emergence to previous economic downturns.
Other material judgements include the determination
of the expected life of exposures, the definition
of a significant increase in credit risk, the determination
of probability of default and exposure at default,
the identification of loss events and the determination
of loss given default.
Given the material impact of the significant judgements
taken by Management in the measurement of the ECL
provision, we also consider there is an inherent
risk of fraud through manipulation of this balance.
Management's associated accounting policies are
detailed in note 1 with detail about the judgments
made in applying accounting policies and critical
accounting estimates in note 3 .
168
TESCO PERSONAL FINANCE GROUP PLC
INDEPENT AUDITOR'S REPORT TO THE MEMBER OF TESCO PERSONAL
FINANCE GROUP PLC (continued)
5.1 Expected credit loss provisions (continued)
How the scope Our audit work to address the key audit matter
of our audit included the procedures noted below.
responded to We have obtained an understanding of, and assessed,
the key audit the relevant controls including model governance
matter forums, model monitoring and calibrations including
the determination of PMAs, the review and approval
of macro-economic scenarios, the flow of data from
the Group's information systems into the model,
and the flow of the output of the model to the
general ledger.
Macro-economic scenarios and related model refinements
With support from internal economic modelling specialists,
we challenged the macro-economic scenario forecasts
that were incorporated into the ECL model, including
Management's selection of the relevant macro-economic
variables. We assessed Management's forecasts and
their probability against external sources to assess
their reasonableness, considering the forecasts
in light of any contradictory information.
We also assessed the competence, capabilities and
objectivity of Management's expert, who supplies
the macro-economic forecasts to Management and
considered whether the methodology adopted by the
expert was reasonable.
We also evaluated whether there was adequate disclosure
regarding the macro-economic scenarios selected
by Management, their probability-weighting, and
the related sensitivities.
Post-model adjustments (PMAs)
With support from internal credit risk specialists,
we challenged the appropriateness of each significant
PMA recorded by Management as well as the completeness
of PMAs with reference to our observations in the
broader market and understanding of the risk profile
of the portfolio.
We evaluated the accuracy of the calculation of
the PMAs, which included an assessment of the completeness
and accuracy of the underlying data used by Management
in their calculation.
We also evaluated whether there was adequate disclosure
regarding the significant PMAs including how they
were determined and the range of possible outcomes.
Key observations Based on our audit procedures above, we concluded
that Management's ECL provision is reasonably stated,
and is supported by a methodology that is consistently
applied and compliant with IFRS 9.
169
TESCO PERSONAL FINANCE GROUP PLC
INDEPENT AUDITOR'S REPORT TO THE MEMBER OF TESCO PERSONAL
FINANCE GROUP PLC (continued)
5.2 Valuation of insurance contract liabilities and reinsurance
assets within TU
Key audit matter In the 28 February 2021 Financial Statements, TU
description was a joint venture with a carrying value in the
Consolidated Statement of Financial Position of
GBP92.8m. Following acquisition of the remaining
shares in TU during the year, insurance contract
provisions of GBP650.0m and reinsurance assets
of GBP245.1m are now included in the Group's Financial
Statements. Under IFRS 4 Insurance Contracts, provisions
are required to be recognised for expected ultimate
losses on claims occurring prior to the period
end. Estimating these provisions is inherently
subjective and requires the use of complex models
and the application of judgment and estimation.
Within gross insurance contract provisions, bodily
injury (BI) claims relating to motor insurance
policies represent the most significant area of
management judgment and materiality to the company's
financial position. In addition, TU's Management
commission an external actuary to provide an independent
concurring review on methodology and the basis
for assumptions they have calculated. Our key audit
matter is focused upon the selection of frequency
and severity assumptions, or pricing benchmarks,
for large BI claims, as these claims have a higher
level of uncertainty in relation to the development
of ultimate losses compared to property damage
claims. The associated reinsurance assets are also
subject to uncertainty given the lack of historical
experience and the materiality of the estimation.
Management utilise best estimate views provided
by claims handlers, which typically include a level
of prudence that unwinds as the claims progress.
The level of prudence or redundancy within the
booked provisions reflects the uncertainty in assessing
long tail claims of this class, and also limitations
in historical data. Associated reinsurance recoveries
are estimated separately, using a deterministic
model which applies the relevant reinsurance programmes
to each claim.
Management's associated accounting policies are
detailed in note 1, with detail about the judgments
made in applying accounting policies and critical
accounting estimates in note 3.
How the scope We obtained and understanding of and assessed relevant
of our audit controls relating to the assessment of large BI
responded to claims and reinsurance recoveries.
the key audit Utilising actuarial specialists on our engagement
matter team, we obtained and inspected the reserving reports
from management, and their external expert actuary.
We assessed and challenged the methodologies and
key assumptions applied by Management and we assessed
where Management's judgments and estimates differed
from those applied by the external actuary. We
determined whether any differences in view between
Management and their external actuary were supportable
and reasonable.
We assessed the objectivity and competence of management's
external actuary.
We re-produced the reserving model results utilising
our in-house software and management's stated methodology
and assumptions, and performed benchmarking of
management's assumptions against available industry
data and the changes in risk profile over the period.
We tested management's roll forward of results
from the pre year end full reserving review to
the period end and substantively tested the completeness
and accuracy of the underlying data.
Key observations Based on the procedures performed we concluded
that the valuation of TU's insurance contract liabilities
and reinsurance assets are reasonably stated and
in line with the requirements of IFRS 4.
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TESCO PERSONAL FINANCE GROUP PLC
INDEPENT AUDITOR'S REPORT TO THE MEMBER OF TESCO PERSONAL
FINANCE GROUP PLC (continued)
5.3 Recognition of revenue
Key audit matter In accordance with IFRS 9, the revenue streams
description from financial products that are considered 'integral
to the yield' must be recognised using the effective
interest rate method (EIR) over the behavioural
life of the financial products.
The judgements taken in estimating the cash flows
which drive the expected lives used in the calculation
of the EIR can be sensitive to change, and could
significantly impact the income recognised in any
financial period, particularly in relation to introductory
rate offers and similar structures. Accordingly,
we have identified the judgement on expected lives
of Credit Cards, specifically the repayment assumptions,
to be the key audit matter over revenue recognition.
In this respect, the most significant model relates
to the Credit Card portfolio, which supports an
EIR asset of GBP15.0m at 28 February 2022 (GBP28.9m
at 28 February 2021).
Given the material impact of the significant judgements
taken by Management in calculating the EIR asset,
we consider that there is an inherent risk of fraud
through manipulation of this balance.
Management's associated accounting policies are
detailed on page 48 with detail about the judgements
in applying accounting policies and critical accounting
estimates, including sensitivities to the pay rates
assumptions, in note 21.
How the scope We have obtained an understanding of, and assessed,
of our audit relevant controls that the Group has established
responded to in relation to recognition of revenue using EIR.
the key audit We assessed the underlying code used to calculate
matter the repayment rate assumptions that drive the expected
lives used in the model to ensure that it is consistent
with the methodology adopted by Management in order
to assess the expected lives. The methodology was
also challenged to ensure that it is in compliance
with the requirements of IFRS 9. We then assessed
Management's assessment of whether any overlays
were required to historic payment rates to reflect
regulatory headwinds and macro-economic factors.
We performed substantive testing over the completeness
and accuracy of the underlying data inputs into
the model that is used to support the repayment
rate assumptions and we reviewed the arithmetic
accuracy of the EIR model.
Key observations Based on the work performed, we consider Management's
assumptions reasonable and supportable in the Credit
Cards' revenue recognition model, including those
relating to the repayment rates assumptions of
Credit Cards. We are satisfied that Management's
methodology and model is appropriate, in line with
IFRS 9 requirements and that it supports the EIR
asset.
171
TESCO PERSONAL FINANCE GROUP PLC
INDEPENT AUDITOR'S REPORT TO THE MEMBER OF TESCO PERSONAL
FINANCE GROUP PLC (continued)
6. Our application of materiality
6.1 Materiality
We define materiality as the magnitude of misstatement in the
Financial Statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or
influenced. We use materiality both in planning the scope of our
audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality
for the Financial Statements as a whole as follows:
Group Financial Statements Parent Company Financial
Statements
Group materiality GBP9.32m (2021: GBP9.0m) GBP6.86m (2021: GBP8.9m)
Basis for determining Materiality has been determined Parent Company materiality
materiality as 0.6% of net assets has been determined as
(2021: 0.6% of net assets). 0.6% of net assets (2021:
0.6% of net assets).
Rationale for We believe that the use We believe that the use
the benchmark of net assets is appropriate of net assets is appropriate
applied given the overall capital given the overall capital
base is a key focus area base is a key focus area
for the stakeholders and for the stakeholders and
regulators. regulators.
[Refer to attached pdf]
http://www.rns-pdf.londonstockexchange.com/rns/1895I_1-2022-4-12.pdf
6.2 Performance materiality
We set performance materiality at a level lower than materiality
to reduce the probability that, in aggregate, uncorrected and
undetected misstatements exceed the materiality for the Financial
Statements as a whole. Group performance materiality was set at 70%
of Group materiality for the 2022 audit (2021: 70%). In determining
performance materiality, we considered the following factors:
The quality of the control environment and that we were able to
rely on controls for a number of business cycles; and
The low number of corrected and uncorrected misstatements
identified in previous audits.
6.3 Error reporting threshold
We agreed with the Board Audit Committee (BAC) that we would
report to the Committee all audit differences in excess of GBP0.46m
(2021: GBP0.45m), as well as differences below that threshold that,
in our view, warranted reporting on qualitative grounds. We also
report to the BAC on disclosure matters that we identified when
assessing the overall presentation of the Financial Statements.
172
TESCO PERSONAL FINANCE GROUP PLC
INDEPENT AUDITOR'S REPORT TO THE MEMBER OF TESCO PERSONAL
FINANCE GROUP PLC (continued)
7. An overview of the scope of our audit
7.1 Identification and scoping of components
Our Group audit was scoped by obtaining an understanding of the
Group and its environment, including Group-wide controls, and
assessing the risks of material misstatement at the Group level.
Audit work to respond to the risks of material misstatement was
performed by the Group engagement team. Our audit scoping provides
full scope audit coverage of 100% of the Group's revenue, loss
before tax and net assets.
7.2 Our consideration of the control environment
We planned to rely on controls in our audit of the following
areas: Credit Cards, Savings, Loans, Insurance and the common
operations processes (products, payments and reconciliations). In
doing so we obtained an understanding and tested the relevant
controls. The Group is reliant upon the effectiveness of a number
of IT applications and controls to ensure that financial
transactions are processed and recorded completely and accurately
and we involved our IT specialists to obtain an understanding of
general IT controls across the systems relevant to the areas
listed.
With the exception of the insurance cycle, we relied upon the
controls tested as planned.
In relation to insurance premiums we identified control
deficiencies over the related IT system, and supporting
reconciliation controls performed by management. Although
management rectified these deficiencies by the period end, we were
unable to rely on controls during the period. As a result of these
findings, we reconsidered our risk assessment in relation to gross
premiums written, conducted additional substantive procedures
including increased sample testing of individual policies, and
focused testing upon management's reconciliation of premiums.
Similar control deficiencies were identified over the system
used to record claims, which prevented us from taking a controls
reliance approach in the period over the claims and reserving
cycles. We adopted a fully substantive approach in our audit
testing.
7.3 Working with other auditors
Work on TU, the Group's insurance underwriting subsidiary, was
performed by component auditors. The timing of our engagement with
the component auditors was planned to enable us to be involved
during the planning and risk assessment process in addition to the
execution of detailed audit procedures. We attended key meetings
with TU Management and the component auditor, and reviewed the
audit files of the component auditor to understand the audit
approach adopted, with specific focus over the claims reserves
recognised. We also had a dedicated senior member of the audit team
focused on overseeing the role of the component auditors. The
materiality level applied by the component auditor of TU was
GBP3.7m (2021: GBP3.6m).
173
TESCO PERSONAL FINANCE GROUP PLC
INDEPENT AUDITOR'S REPORT TO THE MEMBER OF TESCO PERSONAL
FINANCE GROUP PLC (continued)
8. Other information
The other information comprises the information included in the
Annual Report, other than the Financial Statements and our
auditor's report thereon. The Directors are responsible for the
other information contained within the Annual Report.
Our opinion on the Financial Statements does not cover the other
information and, except to the extent otherwise explicitly stated
in our report, we do not express any form of assurance conclusion
thereon.
Our responsibility is to read the other information and, in
doing so, consider whether the other information is materially
inconsistent with the Financial Statements or our knowledge
obtained in the course of the audit, or otherwise appears to be
materially misstated.
If we identify such material inconsistencies or apparent
material misstatements, we are required to determine whether this
gives rise to a material misstatement in the Financial Statements
themselves. If, based on the work we have performed, we conclude
that there is a material misstatement of this other information, we
are required to report that fact.
We have nothing to report in this regard.
9. Responsibilities of Directors
As explained more fully in the Directors' responsibilities
statement, the Directors are responsible for the preparation of the
Financial Statements and for being satisfied that they give a true
and fair view, and for such internal control as the Directors
determine is necessary to enable the preparation of Financial
Statements that are free from material misstatement, whether due to
fraud or error.
In preparing the Financial Statements, the Directors are
responsible for assessing the Group's and the parent Company's
ability to continue as a going concern, disclosing as applicable,
matters related to going concern and using the going concern basis
of accounting unless the Directors either intend to liquidate the
Group or the parent Company or to cease operations, or have no
realistic alternative but to do so.
10. Auditor's responsibilities for the audit of the Financial
Statements
Our objectives are to obtain reasonable assurance about whether
the Financial Statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these Financial
Statements.
A further description of our responsibilities for the audit of
the Financial Statements is located on the FRC's website at:
http://www.frc.org.uk/auditorsresponsibilities. This description
forms part of our auditor's report.
174
TESCO PERSONAL FINANCE GROUP PLC
INDEPENT AUDITOR'S REPORT TO THE MEMBER OF TESCO PERSONAL
FINANCE GROUP PLC (continued)
11. Extent to which the audit was considered capable of
detecting irregularities including fraud
Irregularities, including fraud, are instances of non-compliance
with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements
in respect of irregularities, including fraud. The extent to which
our procedures are capable of detecting irregularities, including
fraud is detailed below.
11.1 Identifying and assessing potential risks related to
irregularities
In identifying and assessing risks of material misstatement in
respect of irregularities, including fraud and non-compliance with
laws and regulations, we considered the following:
the nature of the industry and sector, control environment and
business performance including the design of the Group's
remuneration policies, key drivers for Directors' remuneration,
bonus levels and performance targets;
results of our enquiries of Management, Internal Audit and the
BAC about their own identification and assessment of the risks of
irregularities;
any matters we identified having obtained and reviewed the
Group's documentation of their policies and procedures relating
to:
identifying, evaluating and complying with laws and regulations
and whether they were aware of any instances of non-compliance;
detecting and responding to the risks of fraud and whether they
have knowledge of any actual, suspected or alleged fraud;
the internal controls established to mitigate risks of fraud or
non-compliance with laws and regulations;
the matters discussed among the audit engagement team and
involving relevant internal specialists, including tax, IT,
actuarial specialists, credit risk specialists and industry
specialists regarding how and where fraud might occur in the
Financial Statements and any potential indicators of fraud.
As a result of these procedures, we considered the opportunities
and incentives that may exist within the organisation for fraud and
identified the greatest potential for fraud in the following areas:
ECL provisions, valuation of insurance contract liabilities and
reinsurance assets in TU and recognition of revenue. In common with
all audits under ISAs (UK), we are also required to perform
specific procedures to respond to the risk of management
override.
We also obtained an understanding of the legal and regulatory
frameworks that the Group operates in, focusing on provisions of
those laws and regulations that had a direct effect on the
determination of material amounts and disclosures in the Financial
Statements. The key laws and regulations we considered in this
context included the UK Companies Act, UK Pensions Act and the HM
Revenue and Customs (HMRC) Tax Legislation.
In addition, we considered provisions of other laws and
regulations that do not have a direct effect on the Financial
Statements but compliance with which may be fundamental to the
Group's ability to operate or to avoid a material penalty. These
included the requirements of the United Kingdom's Prudential
Regulation Authority (PRA) and Financial Conduct Authority
(FCA).
175
TESCO PERSONAL FINANCE GROUP PLC
INDEPENT AUDITOR'S REPORT TO THE MEMBER OF TESCO PERSONAL
FINANCE GROUP PLC (continued)
11.2 Audit response to risks identified
As a result of performing the above, we identified ECL
provisions, valuation of insurance contract liabilities and
reinsurance assets in TU and recognition of revenue as key audit
matters related to the potential risk of fraud. The key audit
matters section of our report explains the matters in more detail
and also describes the specific procedures we performed in response
to those key audit matters.
In addition to the above, our procedures to respond to risks
identified included the following:
reviewing the Financial Statement disclosures and testing to
supporting documentation to assess compliance with provisions of
relevant laws and regulations described as having a direct effect
on the Financial Statements;
enquiring of Management, the BAC, in-house and external legal
counsel concerning actual and potential litigation and claims;
performing analytical procedures to identify any unusual or
unexpected relationships that may indicate risks of material
misstatement due to fraud;
reading minutes of meetings of those charged with governance,
reviewing Internal Audit reports and reviewing correspondence with
HMRC, the PRA and the FCA; and
in addressing the risk of fraud through Management override of
controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making
accounting estimates are indicative of a potential bias; and
evaluating the business rationale of any significant transactions
that are unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations
and potential fraud risks to all engagement team members including
internal specialists, and remained alert to any indications of
fraud or non-compliance with laws and regulations throughout the
audit.
176
TESCO PERSONAL FINANCE GROUP PLC
INDEPENT AUDITOR'S REPORT TO THE MEMBER OF TESCO PERSONAL
FINANCE GROUP PLC (continued)
Report on other legal and regulatory requirements
12. Opinions and other matters prescribed by the Companies Act
2006
In our opinion, based on the work undertaken in the course of
the audit:
the information given in the Strategic Report and the Directors'
Report for the financial year for which the Financial Statements
are prepared is consistent with the Financial Statements; and
the Strategic Report and the Directors' Report have been
prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and
the parent Company and their environment obtained in the course of
the audit, we have not identified any material misstatements in the
Strategic Report or the Directors' Report.
13. Corporate Governance Statement
The Listing Rules require us to review the Directors' statement
in relation to going concern, longer-term viability and that part
of the Corporate Governance Statement relating to the Group's
compliance with the provisions of the UK Corporate Governance Code
specified for our review.
Based on the work undertaken as part of our audit, we have
concluded that each of the following elements of the Corporate
Governance Statement is materially consistent with the financial
statements and our knowledge obtained during the audit:
the Directors' statement with regards to the appropriateness of
adopting the going concern basis of accounting and any material
uncertainties identified set out on pages 28 and 29;
the Directors' explanation as to its assessment of the Group's
prospects, the period this assessment covers and why the period is
appropriate set out on pages 28 to 29;
the Directors' statement on fair, balanced and understandable
set out on page 36;
the Board's confirmation that it has carried out a robust
assessment of the emerging and principal risks, set out on page
28;
the section of the Annual Report that describes the review of
effectiveness of risk management and internal control systems set
out on pages 16 to 23; and
the section describing the work of the BAC set out on pages 33
to 35.
14. Matters on which we are required to report by exception
14.1 Adequacy of explanations received and accounting
records
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
we have not received all the information and explanations we
require for our audit; or
adequate accounting records have not been kept by the parent
Company, or returns adequate for our audit have not been received
from branches not visited by us; or
the parent Company Financial Statements are not in agreement
with the accounting records and returns.
We have nothing to report in respect of these matters.
14.2 Directors' remuneration
Under the Companies Act 2006 we are also required to report if
in our opinion certain disclosures of Directors' remuneration have
not been made.
We have nothing to report in respect of these matters.
15. Other matters
15.1 Auditor tenure
Following the recommendation of the BAC, we were appointed by
the Board of Directors on 30 June 2015 to audit the Financial
Statements for the year ending 29 February 2016 and subsequent
financial periods. The period of total uninterrupted engagement
including previous renewals and reappointments of the firm is seven
years, covering the years ending 29 February 2016 to 28 February
2022.
177
TESCO PERSONAL FINANCE GROUP PLC
INDEPENT AUDITOR'S REPORT TO THE MEMBER OF TESCO PERSONAL
FINANCE GROUP PLC (continued)
15.2 Consistency of the audit report with the additional report
to the BAC
Our audit opinion is consistent with the additional report to
the BAC we are required to provide in accordance with ISAs
(UK).
16. Use of our report
This report is made solely to the Company's member, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
Company's member those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company's member as a body,
for our audit work, for this report, or for the opinions we have
formed.
Peter Birch ACA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Leeds, United Kingdom
11 April 2022
178
TESCO PERSONAL FINANCE GROUP PLC
ABBREVIATIONS
ABE Actuarial best estimate
ADC Adverse development cover
AEaR Annual earnings at risk
AFS Available-for-sale
AGEAS AGEAS (UK) Limited
ALCo Asset and Liability Management Committee
APM Alternative Performance Measure
BAC Board Audit Committee
BCBS Basel Committee on Banking Supervision
BoE Bank of England
BRC Board Risk Committee
CA Compliance Advisory
CaR Capital at risk
CCB Capital conservation buffer
CCP Colleague Contribution Panel
CCyB Countercyclical capital buffer
CEO Chief Executive Officer
CFO Chief Financial Officer
CGU Cash-generating unit
CII Consumer indebtedness index
CIO Chief Information Officer
CRD Capital Requirements Directive
CRO Chief Risk Officer
CRR Capital Requirements Regulation
DisCo Disclosure Committee
EAD Exposure at default
EBA European Banking Authority
ECLs Expected credit losses
EIR Effective interest rate
ERC Executive Risk Committee
ESG Environmental, Social and Governance
EU European Union
EVM Every Voice Matters
ExCo Executive Committee
FCA Financial Conduct Authority
FPC Financial Policy Committee
FRC Financial Reporting Council
FVOCI Fair value through other comprehensive income
FVPL Fair value through profit or loss
HMRC HM Revenue and Customs
IAS International Accounting Standard
IAS 19 IAS 19 'Employee Benefits'
IAS 39 IAS 39 'Financial instruments: Recognition and Measurement'
IASB International Accounting Standards Board
IBNR Incurred but not reported
ICAAP Internal capital adequacy assessment process
IFRS International Financial Reporting Standard
IFRS 3 IFRS 3 'Business Combinations'
IFRS 9 IFRS 9 'Financial Instruments'
IFRS 15 IFRS 15 'Revenue from Contracts with Customers'
IFRS 17 IFRS 17 'Insurance contracts'
IILAAP Internal liquidity adequacy assessment process
IRC Investment Review Committee
IRRBB Interest rate risk in the Banking Book
ISAs (UK) International Standards on Auditing (UK)
ISDA International Swaps Derivatives Association
IT Information technology
LGD Loss given default
MLR Market and Liquidity Risk
MREL Minimum requirements for own funds and eligible liabilities
MRT Material Risk Taker
NI National Insurance
NomCo Nomination Committee
NSFR Net stable funding ratio
OEC Operating Executive Committee
ORSA Operational risk scenario analysis
PCA Personal Current Account
PD Probability of default
PIM Partial internal model
PMA Post-model adjustment
PPI Payment protection insurance
PPO Periodic payment order
PRA Prudential Regulation Authority
PSD2 Second Payment Services Directive
QS Quota share
RAM Risk Appetite measure
RemCo Remuneration Committee
RCSA Risk and control self-assessment
RMF Risk management framework
RMFu Risk Management Function
SA Standardised approach
SCR Solvency capital requirement
SFTs Securities financing transactions
SII Solvency II
SMF Senior Management Function
SONIA Sterling Overnight Index Average
TCo Treasury Committee
tCO(2) e Tonnes of carbon dioxide equivalent
TCR Total capital requirement
Tesco Tesco PLC
TFS Term Funding Scheme
TFSME TFS for small and medium sized entities
TPF Tesco Personal Finance plc
TPFG Tesco Personal Finance Group plc
TSL Tesco Stores Limited
TU Tesco Underwriting Limited
TUPE Transfer of Undertakings (Protection of Employment) regulations
UK United Kingdom
VIU Value-in-use
WAEP Weighted average exercise price
WAFV Weighted average fair value
2018 UK Corporate Governance
Code Code 2018
179
TESCO PERSONAL FINANCE GROUP PLC
GLOSSARY OF TERMS
A
Actuarial best estimate An estimate of ultimate claims or claims reserve that
is intended to be neither too high, nor too low, taking
into account known information.
Adverse development cover Reinsurance cover that will pay the reinsured if claims
develop adversely over a certain limit.
Alternative performance In the reporting of financial information, the Directors
measure 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.
Amortised cost The amount at which the financial asset or financial liability
is measured at initial recognition minus principal repayments,
plus or minus the cumulative amortisation using the EIR
method of any difference between the initial amount and
the maturity amount and minus any reduction (directly
or through the use of an allowance account) for impairment
or uncollectability.
Annual earnings at risk Changes in interest rates affect the Group's earnings
by altering interest rate-sensitive income and expenses.
Excessive interest income sensitivity can pose a threat
to the Group's current capital base and/or future earnings.
The Annual Earnings at Risk model measures the impact
on earnings of +/- 0.25%, 0.50%, 0.75%, 1% parallel interest
rate shocks against the base case. The most adverse scenario
is measured against Risk Appetite.
Annual percentage rate The yearly interest generated by a sum that is charged
to borrowers or paid to investors.
Asset encumbrance An asset shall be treated as encumbered if it has been
pledged or if it is subject to any form of arrangement
to secure, collateralise or credit enhance any transaction
from which it cannot be freely withdrawn.
Asset encumbrance ratio The asset encumbrance ratio is calculated as (total encumbered
assets + total collateral received which has been re-used
for financing transactions) divided by (total assets +
total collateral received which is available for encumbrance).
Audit Market Reform The creation of a new audit profession overseen by a new
regulator, which will aim to drive up quality and standards
in the market and increase choice for businesses, while
breaking up the dominance of the so-called "Big Four"
firms.
B
Basel II Basel II is a set of international banking regulations
put forth by the Basel Committee on Bank Supervision,
which levelled the international regulation field with
uniform rules and guidelines. Basel II expanded rules
for minimum capital requirements established under Basel
I and provided the framework for regulatory review, as
well as set disclosure requirements for assessment of
capital adequacy of banks.
Basel III Basel III is an international regulatory accord that introduced
a set of reforms designed to improve the regulation, supervision
and risk management within the banking sector.
Basis risk Basis risk is the financial risk that offsetting investments
in a hedging strategy will not experience price changes
in entirely opposite directions from each other.
Black-Scholes model A financial model used to price options.
Brexit The process by which the United Kingdom (UK) left the
European Union (EU).
C
Capital at risk Capital at risk is an economic-value measure and assesses
sensitivity to a reduction in the Group's capital to movements
in interest rates. When interest rates change, the present
value and timing of future cash flows change. This changes
the underlying value of a bank's assets, liabilities and
off-balance sheet items and its economic value which in
turn poses a threat to the capital base.
Capital conservation buffer A general buffer of risk-weighted assets designed to provide
for losses in the event of stress, which can then be drawn
upon as losses are incurred.
Capital Requirements Directive CRD IV is an EU legislative package that contains prudential
180 rules for banks, building societies and investment firms
as onshored to the UK post-Brexit and amended by applicable
Statutory Instruments.
TESCO PERSONAL FINANCE GROUP PLC
GLOSSARY OF TERMS (continued)
C (continued)
Capital Requirements Regulation The CRR is an EU law which was onshored to the UK post-Brexit
and amended by relevant Statutory Instruments. The CRR
aims to decrease the likelihood that banks become insolvent,
reflecting Basel III rules on capital measurement and
capital standards.
Capital resources Eligible capital held in order to satisfy capital requirements.
Capital risk The risk that the Group has insufficient capital resources
to support its plan and meet minimum capital requirements
and buffers under both anticipated and stressed conditions.
Cash-generating unit The smallest identifiable group of assets that generates
cash inflows that are largely independent of the cash
inflows from other assets or groups of assets.
Claims reserve A provision held to cover the settlement of claims, including
claims that may not yet have been notified.
Common equity tier 1 capital The highest form of regulatory capital under Basel III
that comprises shares issued and related share premium,
retained earnings and other reserves net of regulatory
adjustments.
Common equity tier 1 ratio The common equity tier 1 ratio is calculated by dividing
total tier 1 capital at the end of the year by total risk-weighted
assets and is calculated in line with the CRR.
Company Tesco Personal Finance Group plc.
Concentration risk The risk of losses arising as a result of concentrations
of exposures to a specific counterparty, economic sector,
segment or geographical region.
Consumer indebtedness index The CII provides an assessment of those customers that
have high levels of indebtedness and may experience delinquency
as a result. The CII is a score in the range of 1 to 99,
where scores over 40 highlight customers that should be
carefully managed.
Cost:income ratio The cost:income ratio is calculated by dividing operating
expenses by total income.
Countercyclical capital A capital buffer, determined by the regulator, which aims
buffer to ensure that banking sector capital requirements take
account of the macro-economic financial environment in
which banks operate. Its primary objective is to set a
buffer of capital to achieve the broader macro-prudential
goal of protecting the banking sector from periods of
excess aggregate credit growth that have often been associated
with the build-up of system-wide risk. The buffer can
be drawn down to absorb losses during stressed periods.
Covid-19 An infectious disease, caused by a novel coronavirus.
CRD IV Legislation published in June 2013 (in force from 1 January
2014) by the European Commission, comprising the CRD and
CRR and together forming the CRD IV package.
Implements the Basel III proposals in addition to new
proposals on sanctions for non-compliance with regulatory
rules, corporate governance and remuneration.
The rules have been implemented in the UK via Prudential
Regulatory Authority (PRA) policy statement PS7/13, with
some elements subject to transitional phase-in.
Credit risk Credit risk is the risk that a borrower will default on
a debt or obligation by failing to make contractually
obligated payments, or that the Group will incur losses
due to any other counterparty failing to meet their financial
obligations.
Credit risk mitigation Techniques (such as collateral agreements) used to reduce
the credit risk associated with an exposure.
Cross-cutting risk A risk that falls between or across a number of principal
risks, rather than being a standalone principal risk.
D
Derivatives Financial instruments whose value is based on the performance
of one or more underlying assets.
E
Equity method A method of accounting whereby the investment is initially
recognised at cost and adjusted thereafter for the post-acquisition
change in the investor's share of the investee's net assets.
The investor's profit or loss includes its share of the
investee's profit or loss and the investor's other comprehensive
income includes its share of the investee's other comprehensive
income.
Event An Event is an occurrence caused by an internal or external
failure which could impact the Group's finances; customers;
compliance with regulations; brand and reputation; or
resilience of operations.
Expected credit losses The weighted average of credit losses with the respective
181 risks of a default occurring as the weights.
TESCO PERSONAL FINANCE GROUP
PLC
GLOSSARY OF TERMS (continued)
E (continued)
Exposure A claim, contingent claim or position which carries a
risk of financial loss.
Exposure at default or exposure The amount expected to be outstanding after any credit
value risk mitigation, if and when the counterparty defaults.
EAD reflects both drawn down balances as well as an allowance
for undrawn commitments and contingent exposures.
External Credit Assessment These include external credit rating agencies such as
Institutions Standard & Poor's, Moody's and Fitch.
F
Fair value 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.
Financial Conduct Authority The statutory body responsible for conduct of business
regulation and supervision of UK authorised firms from
1 April 2013. The Financial Conduct Authority also has
responsibility for the prudential regulation of firms
that do not fall within the PRA's scope.
Financial instrument A contract that gives rise to a financial asset of one
entity and a financial liability or equity instrument
of another entity.
Financial Policy Committee The BoE's FPC identifies, monitors and takes action to
remove or reduce systemic risks with a view to protecting
and enhancing the resilience of the UK financial system.
Forbearance A temporary postponement or alteration of contractual
repayment terms in response to a counterparty's financial
difficulties.
Foreign exchange risk The risk that the value of transactions in currencies
other than Sterling is altered by the movement of exchange
rates.
Funding risk The risk that the Group does not have sufficiently stable
and diverse sources of funding.
G
Gross domestic product The total value of goods produced and services provided
in a country during one year.
Gross insurance premiums Premiums paid by policyholders for their insurance, inclusive
written of commission and insurance premium tax over a given period.
Group The Company and its subsidiaries and, in the prior year,
its joint venture.
I
Impairment losses The reduction in value that arises following an impairment
review of an asset which has determined that the asset's
value is lower than its carrying value.
Insurance risk The risks accepted through the provision of insurance
products in return for a premium. These risks may or may
not occur as expected and the amount and timing of these
risks are uncertain and determined by events outside of
the Group's control.
Intensity factor The emission rate of a given pollutant relative to the
intensity of a specific activity.
Interest rate risk The risk arising from the different repricing characteristics
of the Group's non-trading assets and liabilities.
Interest rate risk in the IRRBB is the current or prospective risk to both earnings
banking book and economic value arising from movements in interest
rates. The main sub-types of IRRBB include gap risk (or
repricing risk), basis risk and customer optionality risk.
Internal capital adequacy The Group's own assessment of the level of capital needed
assessment process in respect of its regulatory capital requirements (for
credit, market and operational risks) and for other risks
including stress events.
Internal liquidity adequacy The Group's own assessment of the level of liquidity needed
assessment process in respect of its regulatory requirements to ensure that
the Group maintains adequate liquid assets to survive
a defined stress scenario for a sufficient period as defined
by Risk Appetite.
Internal liquidity requirement In place to ensure that the Group maintains adequate liquid
assets to survive a defined stress scenario for a sufficient
period as defined by Risk Appetite.
International Swaps and A standardised contract developed by the ISDA which is
Derivatives Association used as an umbrella contract for bilateral derivative
master agreement contracts.
182
TESCO PERSONAL FINANCE GROUP
PLC
GLOSSARY OF TERMS (continued)
L
Leverage ratio The ratio of tier 1 capital to the total leverage ratio
exposures, excluding claims on central banks and applying
an equal weighting to all assets regardless of their risk.
Liquidity coverage ratio Liquidity buffer divided by net liquidity outflows over
a 30-day calendar day stress period.
Liquidity risk Liquidity risk is the risk that the Group is not able
to meet its obligations as they fall due. This includes
the risk that a given security cannot be traded quickly
enough in the market to prevent a loss if a credit rating
falls.
Loan to deposit ratio The loan to deposit ratio is calculated by dividing loans
and advances to customers by deposits from customers.
Loans and advances to customers The loans and advances to customers loss allowance coverage
loss allowance coverage ratio is calculated by dividing the ECL provision in respect
ratio of loans and advances to customers by the gross carrying
amount of loans and advances to customers.
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 debt sales.
M
Market-based A method of calculating a company's emissions which reflects
the emissions from electricity purchased by a company,
including its purchase of electricity backed by Renewable
Energy Guarantees of Origin or Renewable Energy Certificates.
Market risk The risk that movements in market prices (such as interest
rates and foreign exchange rates) lead to a reduction
in either the Group's earnings or economic value.
Minimum capital requirement The minimum regulatory capital that must be held in accordance
with Pillar 1 requirements for credit, market and operational
risk. This is currently 8%.
Minimum requirements for A requirement for minimum loss-absorbing capacity institutions
own funds and eligible liabilities must hold.
MREL ratio The MREL ratio is calculated by dividing total capital
plus MREL debt by risk-weighted assets.
N
National insurance NI is a fundamental component of the welfare state in
the UK. It acts as a form of social security, since payment
of NI contributions establishes entitlement to certain
state benefits for workers and their families.
Net interest margin Net interest margin is calculated by dividing net interest
income from continuing operations by average interest-bearing
assets, excluding assets held for sale.
Net stable funding ratio The net stable funding ratio is calculated under the CRD
IV methodology.
Net zero The balance achieved when the amount of carbon added to
the atmosphere is no more than the amount removed.
O
Ogden tables Tables which are used to calculate the cost of any claim
that involves compensation for loss of future benefits.
The tables provide an estimate of the return to be expected
from the investment of a lump sum damages award.
Operational risk The risk of a potential error, loss, harm or failure caused
by ineffective or inadequately defined processes, system
failures, improper conduct, human error or from external
events.
P
Partial internal model Partial internal models can be used to model the capital
183 requirements for operational risk or for the loss-absorbing
capacity of technical provisions.
TESCO PERSONAL FINANCE GROUP
PLC
GLOSSARY OF TERMS (continued)
P (continued)
Past due loans Loans are past due when a counterparty has failed to make
a payment in line with their contractual obligations.
PD threshold The maximum lifetime PD for each financial asset that
was expected at the reporting date at initial recognition
before a significant increase in credit risk is deemed
to have occurred.
Pension obligation risk The risk to the Group caused by contractual or other liabilities
to or with respect to a pension scheme.
Periodic payment order Large bodily injury claims that are settled by means of
periodic payments, approved in a court of law and typically
pay for the cost of care and lost earnings.
Persistent debt Persistent debt is a term used by the FCA. It describes
any account where the person is paying more in interest,
fees and charges than towards paying back what they have
borrowed.
Physical risks Risks arising from changes in weather and climate, impacting
physical assets and people.
Pillar 1 The first pillar of the Basel II framework sets out the
minimum regulatory capital requirements (8%) for credit,
market and operational risks.
Pillar 2 The second Pillar of the Basel II framework, known as
the Supervisory Review Process, sets out the review process
for a bank's capital adequacy; the process under which
supervisors evaluate how well banks are assessing their
risks and the actions taken as a result of these assessments.
Pillar 2A Pillar 2A addresses risks to an individual firm which
are either not captured, or not fully captured, under
the Pillar 1 capital requirements applicable to all banks.
Pillar 3 The third pillar of the Basel II framework aims to encourage
market discipline by setting out disclosure requirements
for banks on their capital, risk exposures and risk assessment
processes. These disclosures are aimed at improving the
information made available to the market.
Policies in force The number of live policies in the Group's insurance portfolio
for which the Group is obliged to provide cover.
Post-model adjustment PMAs reflect the use of Management judgment to address
perceived limitations in models or data.
Probability of default Represents the likelihood a customer will default over
the relevant period, being either 12 months or the expected
lifetime.
Prudential Regulation Authority The statutory body responsible for the prudential regulation
and supervision of banks, building societies, credit unions,
insurers and major investment firms in the UK.
PRA Rulebook The PRA Rulebook contains provisions made by the PRA that
apply to PRA-authorised firms. This includes the inclusion
over additional rules required after revocation from the
CRR by HM Treasury.
Second Payment Services The Second Payment Services Directive (PSD2) is an EU
Directive Directive that regulates payment services and payment
service providers throughout the EU and European Economic
Area. PSD2 updates and replaces the Payment Services Directive
2008.
Q
Quota share A type of reinsurance where the insured shares a portion
(quota) of its premium and risk with one or more reinsurers.
R
Recovery plan The recovery options which could be deployed in a severe
stress event impacting capital or liquidity positions.
Regulatory capital The capital that a bank holds, determined in accordance
with the relevant regulation arising from the CRR.
Regulatory and conduct risk Regulatory risk is the risk of poor customer outcomes,
reputational damage, liability, loss or regulatory censure
arising from failure to comply with the requirements of
the financial services regulators or industry codes of
best practice. Conduct risk is the risk that the conduct,
acts or omissions of the organisation, or individuals
within the Group, leads to customer detriment, or has
an adverse effect on market stability or effective competition.
Repricing risk Repricing risk is the risk of changes in interest rate
charged (earned) at the time a financial contract's rate
is reset. It emerges if interest rates are settled on
liabilities for periods which differ from those on offsetting
assets.
Residual price risk The risk that the fair value of a financial instrument
184 and its associated hedge will fluctuate because of changes
in market prices, for reasons other than interest rate
or credit risk.
TESCO PERSONAL FINANCE GROUP
PLC
GLOSSARY OF TERMS (continued)
R (continued)
Retail credit risk Retail credit risk is the risk that a borrower, who is
a personal customer, will default on a debt or obligation
by failing to make contractually obligated payments.
Risk Appetite The level and types of risk that the Group is willing
to assume to achieve its strategic objectives.
Risk Appetite Measures Measures designed to monitor the Group's exposure to certain
risks to ensure that exposure stays within approved Risk
Appetite.
Risk-weighted assets Calculated by assigning a degree of risk expressed as
a percentage (risk-weight) to an exposure value in accordance
with the applicable SA rules.
S
Securitisation A securitisation is defined as a transaction where the
payments are dependent upon the performance of a single
exposure or pool of exposures, where the subordination
of tranches determines the distribution of losses during
the life of the transaction.
Securities financing transactions The act of lending, or borrowing, a stock, derivative,
or other security to or from an investor or firm. For
the Group, this represents market repo transactions and
does not represent securities financing for clients.
Shadow IT Shadow IT refers to IT systems deployed by departments
other than a company's central IT department.
Stress testing The term used to describe techniques where plausible events
are considered as vulnerabilities to ascertain how this
will impact the capital resources which are required to
be held by the Group.
Securitisation structured A corporation, trust, or other non-bank entity, established
entity for a defined purpose, including for carrying on securitisation
activities. Structured entities are designed to isolate
their obligations from those of the originator and the
holder of the beneficial interests in the securitisation.
Solvency II Solvency II sets out regulatory requirements for insurance
firms and groups, covering financial resources, governance
and accountability, risk assessment and management, supervision,
reporting and public disclosure.
Standardised approach In relation to credit risk, the method for calculating
credit risk capital requirements using risk-weightings
that are prescribed by regulation. SAs following prescribed
methodologies also exist for calculating market and operational
risk capital requirements.
Subordinated liabilities Liabilities which, in the event of insolvency or liquidation
of the issuer, are subordinated to the claims of depositors
and other creditors of the issuer.
T
Term funding schemes Funding schemes provided by the BoE which provide participating
banks and building societies with funding at interest
rates close to the BoE's base rate. The Group has utilised
both the original TFS and the more recent TFSME.
The 2degC or lower scenario The 2 degree scenario is seen as the accepted limitation
of temperature growth to avoid significant and potentially
catastrophic changes to the planet. The 2 degree target
was reached in the Paris Agreement in 2015.
Tier 1 capital A component of regulatory capital defined by the CRR,
comprising common equity tier 1 capital and additional
tier 1 capital. Additional tier 1 capital includes qualifying
capital instruments such as non-cumulative perpetual preference
shares and additional tier 1 capital securities.
Tier 2 capital A component of regulatory capital, comprising qualifying
subordinated loan capital and related non-controlling
interests.
Tonnes of carbon dioxide Tonnes of carbon dioxide equivalent refers to the amount
equivalent of carbon dioxide emitted by one metric ton of another
greenhouse gas.
Total capital ratio The total capital ratio is calculated by dividing total
regulatory capital by total risk-weighted assets.
Total capital requirement The amount and quality of capital the Bank must maintain
to comply with the CRR Pillar 1 and the 2A capital requirements.
Total liquidity requirement Financial institutions are required to hold at all times
liquid assets, the total value of which equals, or is
greater than, the net liquidity outflows which might be
experienced under stressed conditions over a short period
of time (30 days).
Transition risks Risks arising from the transition to a low-carbon economy.
TU's minimum capital requirement Under the Solvency II regime, the minimum capital requirement
185 for TU to write business.
TESCO PERSONAL FINANCE GROUP
PLC
GLOSSARY OF TERMS (continued)
T (continued)
TUPE The UK's implementation of the EU Transfer of Undertakings
Directive. It is an important part of UK labour law, protecting
employees whose business is being transferred to another
business.
U
UK Leverage Framework regime The UK leverage ratio framework currently applies to firms
with retail deposit levels equal to or greater than GBP50
billion on an individual or consolidated basis.
UK SOx UK SOx is the unofficial name given to the new UK corporate
governance regime.
Underlying cost:income ratio The underlying cost:income ratio, which is an APM, is
calculated by dividing underlying operating expenses by
total underlying income.
Underwriting risk Underwriting risk is the risk that future claims experience
on business written is materially different from the results
expected based on the assumptions made at the point of
underwriting policies, resulting in current year losses.
Unencumbered assets to retail The minimum unencumbered assets to retail liabilities
liabilities ratio ratio is the surplus of unencumbered assets relative to
the total amount of retail liabilities.
V
Value-in-use The present value of the future cash flows expected to
be derived from an asset or cash-generating unit.
W
Wholesale credit risk Wholesale credit risk is the risk that the counterparty
to a transaction will default before the final settlement
of the transaction's cash flows. Such transactions relate
to contracts for derivative financial instruments, securities
financing transactions and long-dated settlement transactions.
Wholesale funding ratio The wholesale funding ratio is calculated by dividing
186 total wholesale funding by total funding.
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FR ITMLTMTABBPT
(END) Dow Jones Newswires
April 13, 2022 02:02 ET (06:02 GMT)
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