TIDMRAT
Underlying profit before tax up 14.3%
This is a preliminary statement of annual results published in
accordance with FCA Listing Rule 9.7A.
It covers the year ended 31 December 2015.
Mark Nicholls, Chairman of Rathbone Brothers Plc, said:
"In spite of subdued investment markets, 2015 was a strong year for
Rathbones with our total funds under management growing by 7.4% to
GBP29.2 billion (2014: GBP27.2 billion). During the year we took the
opportunity to raise GBP20.0 million of long term subordinated loan
notes to support our future growth and we have continued to pursue
acquisition opportunities which will increase shareholder value.
We look forward to completing our recently announced London office move
in early 2017, and notwithstanding an uncertain market outlook, have
decided to continue progressing our strategic initiatives."
Highlights:
-- Total funds under management were GBP29.2 billion at 31 December 2015, up
7.4% from GBP27.2 billion at 31 December 2014. The FTSE 100 Index
decreased by 4.9% and the FTSE WMA Balanced Index decreased by 0.2% over
the same period.
-- The total net annual growth rate of funds under management for Investment
Management was 5.7% (2014: 19.6%). This comprised GBP0.7 billion of
acquired inflows (2014: GBP3.2 billion including GBP2.6 billion in
relation to the Jupiter Asset Management and Deutsche Asset & Wealth
Management transactions) and GBP0.7 billion of net organic growth (2014:
GBP0.8 billion). The underlying rate of net organic growth was 3.0% in
2015 (2014: 4.0%).
-- Unit Trusts saw gross sales of GBP0.9 billion in 2015 (2014: GBP1.0
billion), and funds under management increase by 24.0% to GBP3.1 billion
at 31 December 2015 (2014: GBP2.5 billion).
-- Underlying operating income in Investment Management of GBP209.0 million
for the year ended 31 December 2015 (2014: GBP185.4 million) represents
an increase of 12.7%. The average FTSE 100 Index was 6415 on our
quarterly billing dates (2014: 6657), a decrease of 3.6%.
-- Underlying operating expenses increased 14.1% to GBP158.8 million largely
reflecting growth of the business, higher performance-based staff costs
and salary inflation.
-- Underlying profit before tax (excluding acquisition-related costs, head
office relocation costs and charges in relation to client relationships
and goodwill) increased 14.3% to GBP70.4 million from GBP61.6 million.
Underlying earnings per share increased by 14.3% to 117.0p (2014:
102.4p).
-- Profit before tax was GBP58.6 million for the year ended 31 December
2015, an increase of 28.2%, compared to GBP45.7 million in 2014. Basic
earnings per share increased 28.2% to 97.4p (2014: 76.0p).
-- The board recommends a final dividend of 34p for 2015 (2014: 33p), making
a total of 55p for the year (2014: 52p), an increase of 5.8% on 2014.
Ends
Issued on 24 February 2016
For further information contact:
Rathbone Brothers Plc Camarco
Tel: 020 7399 0000 Tel: 020 3757 4984
email: shelly.chadda@rathbones.com email: ed.gascoigne-pees@camarco.co.uk
Philip Howell, Chief Executive Ed Gascoigne-Pees
Paul Stockton, Finance Director
Shelly Chadda, Investor Relations
Manager
Rathbone Brothers Plc
Rathbone Brothers Plc ("Rathbones"), through its subsidiaries, is a
leading provider of high-quality, personalised investment and wealth
management services for private clients, charities and trustees. This
includes discretionary investment management, unit trusts, tax planning,
trust and company management, pension advice and banking services.
Rathbones has over 1,000 staff in 15 UK locations and Jersey, and
currently has its headquarters in Curzon Street, London.
rathbones.com http://www.rathbones.com
Chairman's statement
Overview of 2015
In spite of subdued investment markets, 2015 was another strong year for
Rathbones. Our total funds under management grew by 7.4% over the year
to GBP29.2 billion (2014: GBP27.2 billion). In August we took the
opportunity to raise GBP20.0 million of long term subordinated loan
notes to support our future growth. In December, we completed the
acquisition of the remaining 80.1% shareholding of Vision Independent
Financial Planning Limited, an independent network of financial
advisers. Over the year, we also welcomed a number of experienced
investment managers and their clients to our business.
Profit before tax was GBP58.6 million in the year ended 31 December
2015, up 28.2% from the previous year as we saw the full benefit of our
2014 acquisitions (2014: GBP45.7 million). This translates into
underlying earnings per share of 117.0p for 2015, up 14.3% on the 102.4p
last year. The board is recommending a final dividend of 34p per share,
which brings the total dividend for the year to 55p per share, an
increase of 5.8% over last year.
Our Strategy
Last year we set out our strategic plan and, although all aspects of
this are kept under review, our principal task this year has been
implementation. We have strengthened our senior management team and made
significant internal and external appointments to the executive
committee. We have continued to invest in our research capabilities and
our investment process. We have combined the distribution teams in our
investment management and unit trust businesses. We have recently
integrated our advisory business into our investment management business,
thereby improving service delivery to clients. We are progressing with
our plans for a private office.
We remain well aware of the demands that the delivery of these strategic
objectives place on our people, together with the higher costs of
implementation. We will therefore continue to move ahead with care so as
not to increase risk unnecessarily nor undermine our profitability.
Governance, culture and the board
The regulatory obligations on the board continue to increase with the
"senior management regime" about to be implemented. The board supports
the need for the individual accountability of directors but believes
strongly in the collective responsibility of the board.
Sound corporate governance is dependent on having a robust culture and
we welcome the growing emphasis of our regulators on culture. The board
believes Rathbones has a good and ethical culture that benefits our
clients and all stakeholders. We are committed to ensuring that the
right values are embedded throughout the organisation and that these
values are upheld notwithstanding the pressures of growth and change. We
are working hard as a board to determine how best to monitor and
preserve our culture bearing in mind our growth strategy. Indeed a
particular responsibility of the chairman under the senior management
regime is to lead the development of the firm's culture by the board.
This will be a priority of mine.
During the year, in addition to regulatory matters, the board paid
particular attention to monitoring our progress on delivery of our
strategic objectives; to making changes to the management structure, to
completing the acquisition of the remaining shareholding in Vision, to
issuing subordinated loan notes and to planning the proposed move of our
London office. We have also discussed how we operate as a board in light
of the independent assessment carried out at the end of 2014 and
considered what new skills the board requires and the timetable for
succession. Sarah Gentleman joined the board as a non-executive director
on 21 January 2015.
In January 2016, we announced that Richard Loader will be stepping down
as company secretary on 30 April 2016. The board would like to thank
Richard for his much valued contribution to the success of the group
since 1990 and we wish him well for the future.
Risks
We welcomed the arrival of Sarah Owen-Jones as chief risk officer in
March 2015, who with her team, has made considerable progress in
developing a new risk management framework this year. Sarah has worked
closely with the board to ensure we have appropriate information on a
timely basis and has also helped streamline the reporting of risk
throughout the organisation. We have decided that, following the
creation of a conduct risk committee which Sarah chairs, the conflicts
of interest committee is no longer required.
We continue to believe that the most significant risks to our business
are operational risks that arise from the growth in our business and
regulatory risks that may arise from continual changes to rules and
standards in our sector. An emerging operational risk is cyber risk and
we are monitoring this carefully. The Financial Reporting Council
published new risk guidance in September 2014 which requires us to
report more formally this year on the principal risks facing the
business and to provide clearer information on the long term viability
of the business. These matters are discussed in more detail in the risk
management report.
Remuneration
All executive directors have clear objectives, both corporate and
personal. Management are developing proposals for remuneration schemes
throughout the firm to reflect the changes to our business and the
regulatory environment with which we must comply.
Employees
The high quality of our employees is a major differentiator for us and
they are the biggest asset of our firm. Our employees have worked hard
in a year of considerable change. It was particularly pleasing to see
the positive results from our first company-wide employee satisfaction
survey.
Shareholders
We are fortunate to have a number of positively engaged institutional
shareholders with a significant investment in the company. I thank them
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for their support and we intend to maintain a regular and constructive
dialogue with them.
Outlook
Whilst we remain beset by geopolitical uncertainties, we will continue
to manage the business positively. We look forward to completing our
recently announced London office move in early 2017, and continuing to
take advantage of growth opportunities in the sector.
Mark Nicholls, Chairman
23 February 2016
Chief executive's statement
2015 market environment
Investment markets started 2015 in a buoyant mood with the FTSE reaching
an all time high in April, though they subsequently proved exceptionally
challenging for our investment managers to navigate. Against this
backdrop, our private client business, Investment Management, delivered
a creditable investment performance overall and attracted net new funds
under management of GBP1.4 billion. Our unit trust business also proved
its resilience by achieving net inflows of GBP371 million, taking funds
under management to a new high of GBP3.1 billion at 31 December 2015.
Strategic update
In spite of market conditions, we stayed focused on delivery of the
medium term strategy that we set out in 2014. We remain confident that
we are on track to achieve our goals.
We have continued to enhance our investment management processes, and in
particular invest in additional research and risk management resources
to underpin the decisions made by our investment managers in serving our
clients on an individual basis. This is a three year programme which is
well underway. We have maintained our level of investment in the
technology that supports investment teams which we believe is a
continued source of competitive advantage for Rathbones in the market.
During the year, we reviewed our pricing structure to ensure that it
remains competitive and introduced a new 'fee only' tariff for all new
private clients. During the second half of 2015, we amended some fee
schedules for some existing private clients in order to bring these more
in line with the tariff for new clients. We hope the simplicity and
transparency of our new tariffs will convince all clients of the
benefits of a clean fee approach over time.
Net organic growth in the private client business, Investment Management,
of 3.0% reflected market conditions and was at the lower end of our
planned range. However, our strategic initiatives to boost business
development remain on track, notably through our new distribution team
collaborating with independent financial advisers, legal and accountancy
firms. Progress in 2015 continued, with ten strategic alliances and many
more new professional relationships established during the year. Our
plan to increase our involvement in the Charities sector has also made
strong progress with funds under management reaching GBP3.5 billion.
Rathbones is now ranked fourth in the Charity Finance Fund Management
survey, moving up two places from sixth last year. In parallel, our
specialist ethical investment business, Rathbone Greenbank Investment,
has established itself as a market leader in its field and now serves
over 1,400 clients with GBP0.76 billion funds under management.
Our unit trust business continues to demonstrate strong performance and,
in contrast to many of its peers, achieved 24.0% growth to a new high in
funds under management of GBP3.1 billion whilst also demonstrating its
intrinsic operational leverage. Rathbone Unit Trust Management continues
to play an integral role in our overall investment strategy.
Alongside these strategic initiatives, we continue to be alert to
acquisition opportunities. Acquired growth from our new joiners in the
year was very much in line with our expectations and importantly, client
retention from our two major acquisitions in 2014 has been very strong.
In May, we launched our new office in Glasgow, welcoming 14 new
colleagues, and were very pleased to see them attract over GBP186
million new funds under management by 31 December 2015.
In October, we announced our intention to purchase the remaining 80.1%
stake in Vision Independent Financial Planning Limited and Castle
Investment Solutions Limited, with the transaction formally completing
on 31 December 2015. Vision will retain its independent status, but is
anticipated to contribute meaningfully to our net organic growth
objectives. At the year end, Vision had GBP845 million funds under
advice with the discretionary fund manager panel, along with 81
independent financial advisers and 7 mortgage advisers operating
nationally. It continues to demonstrate strong growth momentum.
We continue to design and develop our Rathbone Private Office offering
to serve clients with GBP10 million of investible assets and above. We
are currently finalising arrangements with the third party platform
identified to serve clients in this segment of the wealth spectrum and
in 2016 we expect to add new private banking professionals to launch the
initiative.
During 2015, we gradually introduced our new branding which is intended
to more accurately convey the progressive attributes of Rathbones whilst
not losing touch with the heritage and values that define our deep
rooted culture. The final stage for the new branding was reached with
the launch of our new website in November.
In anticipation of the growing demands upon the leadership team in
delivering our growth strategy, we were pleased to welcome Sarah
Owen-Jones as chief risk officer and promote four of our most
experienced investment directors to the executive committee; Rupert
Baron, Ivo Clifton, Andrew Morris and Richard Smeeton.
A year after launching our medium term strategy, we considered it
sensible to conduct an all staff satisfaction survey. The results were
very encouraging with an overall engagement score of 88%, substantially
ahead of the financial services benchmark of 74%. This score collates
the average percentage of responses to questions relating to pride,
longevity, endeavour, advocacy, and care. Naturally, the survey
identified aspects on which we can improve and these have been added to
the management agenda for the coming year. The survey highlighted the
strong culture that has defined Rathbones over decades, and one which we
will continue to nurture as we grow. Importantly, some of the highest
scores reflected our staff's understanding and commitment to delivery of
the strategy.
Financial performance
This year was a strong one financially as the benefits of our
acquisitions supported results in what were challenging investment
markets. With this backdrop, growth did prove more difficult, although
total funds under management at 31 December 2015 were GBP29.2 billion, a
7.4% increase over 2014. Underlying profit before tax in 2015 increased
14.3% to GBP70.4 million from GBP61.6 million in 2014, in spite of the
average FTSE 100 Index on our billing dates falling 3.6% to 6415.
Investment Management attracted GBP1.4 billion of net inflows in 2015
(2014:GBP4.0 billion), of which GBP0.7 billion (2014: GBP3.2 billion)
represented acquired growth. The net organic growth rate for the year
was 3.0% (2014: 4.0%). Charity funds under management increased to
GBP3.5 billion from GBP3.3 billion in 2014, while the number of charity
clients increased 5.9% to 1,213.
Our unit trust business managed GBP3.1 billion of funds under management
at 31 December 2015 (2014: GBP2.5 billion). The business attracted some
GBP371 million of net funds in 2015; although a decrease of 33.0% on the
GBP554 million reported last year, a strong performance when looking at
the industry sectors in which we operate. Our unit trust business
continues to exhibit strong operating leverage, with profit margin
increasing to 32.7% in the year, an absolute increase of 6.9% over the
prior year. Fund performance remains strong.
Net interest income of GBP10.8 million increased by 17.4% on the GBP9.2
million in 2014, reflecting larger average levels of liquidity. Our
client loan book grew 14.8% to GBP111.8 million from GBP97.4 million at
the end of 2014.
The increase in underlying operating expenses to GBP158.8 million
reflected both the growth in the business and the costs of planned
strategic initiatives. Our underlying operating margin was stable at
30.7% in line with a year ago. Underlying earnings per share of 117.0p
were up 14.3% on the 102.4p earned in 2014. Profit before tax of GBP58.6
million was up on the GBP45.7 million reported last year. A full list of
items excluded from underlying results is shown in the "our performance"
section.
Our consolidated Common Equity Tier 1 ratio at 31 December 2015
(including verified profits for the year) stood at 16.4% compared to
17.7% at 31 December 2014. In August, Rathbone Investment Management
Limited completed an issue of Tier 2 capital in the form of GBP20.0
million of 10-year subordinated notes. Our consolidated leverage ratio
(including audited profits for the year) at 31 December 2015 was 7.7%
compared with 7.3% at 31 December 2014.
Other notable events
In his Autumn Statement, the Chancellor announced a supplementary 8% tax
surcharge on banking profits to come into effect from 1 January 2016. We
were pleased to see that measures incorporated in the final version of
the 2015 Finance Bill mean that as long as the accepting of deposits
remains ancillary to our asset management activities, Rathbones will be
exempt from the tax surcharge.
During the year, it became clear that we are fast reaching full capacity
in the 44,000 sq ft of our London head office. This has come somewhat
earlier than we had anticipated and is best explained by the fact that
since moving into 1 Curzon Street in 2012, our funds under management in
London have grown by 85% from GBP8.9 billion to GBP16.5 billion.
Following an exhaustive search, we are pleased to have secured a long
term solution in committing to a 17 year lease on 75,000 sq ft at 8
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Finsbury Circus. This is a brand new yet elegant building in one of the
most prestigious addresses in the City, with excellent travel links.
From 2018, our annual cost for this substantially larger space in the
City will be broadly the same as what we would have been paying on our
smaller Mayfair premises. We plan to move in early 2017.
Outlook
Notwithstanding an uncertain market outlook, we have decided to continue
to progress our strategic initiatives. Whilst this may impact our
operating margin in the near term, we continue to strive for a margin of
30% in most market conditions, and will carefully balance our longer
term investment against the near term impact of lower revenues during
market downturns.
We enter 2016 with even more intense geopolitical tensions and economic
risks than last year, and nearer home, the uncertainty of Britain's
future place in Europe adds to the mix. This will require us to more
frequently review the timing and priority of projects.
We continue to be alert to accretive acquisition opportunities that fit
with our culture and investment philosophy. Notwithstanding the
prospect of another year of market volatility, we are cautiously
optimistic about our ability to protect our clients' interests whilst
maintaining our strategic momentum.
Philip Howell, Chief Executive
23 February 2016
Our performance
Financial performance remained strong in 2015 due to continuing growth
and the full benefit of 2014 acquisitions impacting results. Total funds
under management increased 7.4% to GBP29.2 billion (2014: GBP27.2
billion). Overall, the FTSE 100 Index ended the year 4.9% down at 6242
while the FTSE WMA Balanced Index closed down 0.2% at 3531.
Table 1. Group's overall performance
2015 2014*
GBPm GBPm
Underlying operating income 229.2 200.8
Underlying operating expenses (158.8) (139.2)
Underlying profit before tax(1) 70.4 61.6
Underlying operating margin(2) 30.7% 30.7%
Profit before tax 58.6 45.7
Effective tax rate 20.8% 21.9%
Taxation (12.2) (10.0)
Profit after tax 46.4 35.7
Underlying earnings per share 117.0p 102.4p
Earnings per share 97.4p 76.0p
Dividend per share(3) 55p 52p
* Restated following the adoption of IFRIC21, as described in note 1
1 A reconciliation between underlying profit before tax and profit
before tax is shown in table 2
2 Underlying profit before tax as a % of underlying operating income
3 The total interim and final dividend proposed for the financial
year
Group underlying operating income
Underlying operating income increased 14.1% to GBP229.2 million driven
largely by the positive impact of 2014 acquisitions and organic growth.
A detailed analysis of each component of income and a reconciliation
between underlying operating income and reported operating income is set
out in the segmental review below.
Group underlying operating expenses
Underlying operating expenses increased 14.1% to GBP158.8million,
largely reflecting a combination of fixed and variable staff costs as
the business grows as well as property, IT, marketing and rebranding
expenditure during the year.
Total fixed staff costs increased by 18.7% to GBP73.5 million in 2015,
including inflation of 3.6% and growth of 11.5% in average full time
equivalent headcount to 981 (2014: 880). Total variable staff costs
increased by 12.8% to GBP39.7 million reflecting growth in profits and
funds under management. Variable staff costs in 2015 represented 17.3%
of underlying operating income (2014: 17.5%) and 36.1% of underlying
profit before tax and variable staff costs (2014: 36.4%).
2016 will reflect the full year impact of hiring activity in 2015 in
addition to salary inflation of around 3%.
Underlying operating expenses also included GBP3.3 million (2014: GBP2.8
million) for awards payable to new investment managers for the
introduction of new clients where those managers have been in situ for
more than 12 months (see note 2).
In 2016, incremental costs of approximately GBP5.7 million are expected
to be incurred to support the implementation of our strategic
initiatives.
Capital expenditure
As planned, capital expenditure increased by GBP1.2 million, largely as
a result of opening a new office in Glasgow and additional office space
in Liverpool.
Group underlying profit before tax/operating margin
Underlying profit before tax and earnings per share are considered by
the board to be a better reflection of true business performance than
looking at our results on a statutory basis only. These measures are
widely used by research analysts covering the group. Underlying results
exclude income and expenditure falling in the seven categories explained
below. A full reconciliation between underlying profit and profit
attributable to shareholders is provided in table 2.
Underlying profit before tax grew 14.3% from GBP61.6 million in 2014 to
GBP70.4 million driven largely by the positive impact from 2014
acquisitions and organic growth. The underlying operating margin, which
is calculated as the ratio of underlying profit before tax to underlying
operating income, was 30.7% for the year ended 31 December 2015 (2014:
30.7%). Profit before tax increased 28.2% to GBP58.6 million for the
year, up from GBP45.7 million in 2014.
Table 2. Reconciliation of underlying profit before tax to profit before
tax
2015 2014*
GBPm GBPm
Underlying profit before tax 70.4 61.6
Charges in relation to client relationships and goodwill (11.0) (8.3)
Head office relocation costs (0.4) -
Acquisition-related costs (0.4) (1.1)
Refund of levies for the Financial Services Compensation
Scheme - 1.0
Gain on disposal of financial securities - 6.8
Gain on disposal of pension administration business - 0.7
Contribution to legal settlement - (15.0)
Profit before tax 58.6 45.7
* Restated following the adoption of IFRIC21, as described in
note 1
Charges in relation to client relationships and goodwill
As explained in note 2, client relationship intangible assets are
created when we acquire a business or a team of investment managers. The
amortisation charge associated with these assets represents a
significant non-cash item. It has, therefore, been excluded from
underlying profit, which represents largely cash-based earnings. Charges
for amortisation of client relationship intangibles in the year ended 31
December 2015 were GBP11.0 million (2014: GBP8.3 million), reflecting
historic acquisitions.
Head office relocation costs
On 6 January 2016, we exchanged contracts for a 17 year lease on office
space at 8 Finsbury Circus with the intention of moving the London head
office to the new premises in 2017. As a result, we have reviewed our
estimates of the useful life of assets in the current premises and the
timing of dilapidations payments due under the existing leases,
resulting in total accelerated charges of GBP0.4 million in 2015 (2014:
GBPnil).
In addition to the charge in 2015, the move is also expected to result
in accounting charges of up to GBP9.5 million in 2016. These charges
reflect the rental costs of 8 Finsbury Circus, as well as provisions for
dilapidations on the new property and accelerated depreciation charges
for 1 Curzon Street.
A non-cash charge will also be incurred when our current Curzon Street
premises are vacated, which is expected to be in the first quarter of
2017, representing the discounted cost of the remaining lease
obligations in Curzon Street (which end in 2023) net of expected income
from subletting. Based on current assumptions, this charge could amount
to approximately GBP8 million.
Acquisition related costs
Net costs of GBP0.4 million were incurred in relation to the
acquisitions of Vision Independent Financial Planning Limited ('Vision')
and Castle Investment Solutions Limited ('Castle'), which were completed
on 31 December 2015. This includes the impact of fair value adjustments
for our 19.9% holding in the companies prior to the acquisition, the
write off of the related options and associated professional fees.
As described in note 7, deferred payments to vendors who are remaining
in employment of GBP10.2 million will be charged to profit or loss over
the deferral period. GBP6.0 million of this is expected to be charged in
2016.
In 2014, professional fees of GBP1.1 million were incurred in relation
to the purchase of part of Deutsche Asset & Wealth Management's
London-based private client investment management business and the
acquisition of Jupiter's private client and charity investment
management business.
Refund of levies for the Financial Services Compensation Scheme
In December 2014, the Financial Services Compensation Scheme announced
that they had made recoveries of approximately GBP50 million in relation
to the failure of Keydata and other intermediaries. The share of
recoveries returned to us was GBP1.0 million. No such amounts arose in
2015.
Gain on disposal of financial securities
During 2014, we disposed of our remaining holdings of shares in the
London Stock Exchange Group Plc and Euroclear Plc, raising GBP6.8
million from the disposals. We acquired the shares as we were a member
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of the London Stock Exchange and Crest at the time of their respective
listings. No such income arose in 2015.
Gain on disposal of pension administration business
On 31 December 2014, we disposed of our self invested personal pension
(SIPP) administration business, which was no longer considered to be a
core component of our activities. This generated net proceeds of GBP0.7
million.
Contribution to legal settlement
In 2014, we contributed GBP15.0 million to a settlement of legal
proceedings in Jersey involving a former director and employee of a
former subsidiary and in respect of legal proceedings against certain of
our civil liability (professional indemnity) insurers. No such costs
were incurred in 2015.
Taxation
The tax charge for 2015 was GBP12.2 million (2014: GBP10.0 million), and
represents an effective tax rate of 20.8% (2014: 21.9%). A full
reconciliation of the income tax expense is provided in note 4.
The Finance Bill 2015, which included provisions for the UK corporation
tax rate to be reduced to 19% in April 2017 and 18% in April 2020,
gained royal assent in November 2015. Deferred tax balances have
therefore been calculated based on these reduced rates where timing
differences are forecast to unwind in future years.
The Finance Bill 2015 also introduced a banking surcharge, which adds 8%
to the effective tax rate for banks exceeding certain thresholds
relating to the scale of banking operations. However, the measures
incorporated in the final version of the 2015 Finance Bill mean that as
long as the accepting of deposits remains ancillary to our asset
management activities, we will be exempt from the tax surcharge.
Basic earnings per share
Basic earnings per share for the year ended 31 December 2015 were 97.4p,
up significantly from the 76.0p reported in 2014, which incorporated the
impact of the placing of 1,343,000 shares during that year. On an
underlying basis, earnings per share increased by 14.3% to 117.0p in
2015.
Dividends
In light of the results for the year, the board has proposed a final
dividend for 2015 of 34p. This results in a full year dividend of 55p,
an increase of 3p on 2014 (5.8%). The proposed dividend is covered 1.8
times by basic earnings and 2.1 times by underlying earnings.
Segmental review
The group is managed through two key operating segments, Investment
Management and Unit Trusts.
The Investment Management segment includes Vision and Castle, which were
acquired on 31 December 2015 (see note 7). However, as these businesses
were not part of the group until the very end of the year, they have
been excluded from the analysis below.
Investment Management
The financial performance of Investment Management is largely driven by
the value of funds under management. Revenue margins are expressed as a
basis point return, which depends on a mix of tiered fee rates,
commissions charged for transactions undertaken on behalf of clients and
the interest margin earned on cash in client portfolios and loans to
clients, as described below. Portfolios are closely managed by
investment managers, who maintain relationships with clients that are
critical to the retention of client accounts.
Year-on-year changes in the key performance indicators for Investment
Management are shown in table 3, below.
Table 3. Investment Management - key performance indicators
2015 2014
Funds under management at 31 December(1) GBP26.1bn GBP24.7bn
Underlying rate of net organic growth in Investment
Management funds under management(1) 3.0% 4.0%
Underlying rate of total net growth in Investment
Management funds under management(1) 5.7% 19.6%
Average net operating basis point return(2) 76.2 bps 77.2 bps
Number of Investment Management clients 47,000 46,000
Number of investment managers 260 249
1 See table 4
2 See table 7
During 2015 Investment Management has continued to attract new clients
both organically and through acquisitions. The total number of clients
(or groups of closely related clients) increased from approximately
46,000 in 2014 to over 47,000 during the year, with the 2014 number
bolstered by the addition of some 2,800 clients joining as a result of
the Deutsche Asset & Wealth Management and Jupiter Asset Management
transactions. During 2015, the total number of investment managers
increased to 260 at 31 December 2015 from 249 at the end of 2014.
The average net operating basis point return on funds under management
has fallen slightly in 2015; although fee returns have increased, this
was offset by poorer than expected commission levels in weaker second
half markets.
Funds under management
Investment Management funds under management increased by 5.7% to
GBP26.1 billion at 31 December 2015 from GBP24.7 billion at the start of
the year. This increase is analysed in table 4, below.
Table 4. Investment Management - funds under management
2015 2014
GBPbn GBPbn
As at 1 January 24.7 20.2
Inflows 3.0 5.5
- organic(1) 2.3 2.3
- acquired(2) 0.7 3.2
Outflows(1) (1.6) (1.5)
Market adjustment(3) - 0.5
As at 31 December 26.1 24.7
Net organic new business(4) 0.7 0.8
Underlying rate of net organic growth(5) 3.0% 4.0%
Underlying rate of total net growth(6) 5.7% 19.6%
1 Value at the date of transfer in/(out)
2 Value at 31 December
3 Represents the impact of market movements and investment
performance
4 Organic inflows less outflows
5 Net organic new business as a percentage of opening funds under
management
6 Net organic new business and acquired inflows as a percentage of
opening funds under management
Investment Management net organic growth of 3.0% (2014: 4.0%) was below
the targeted 5.0% organic growth across the economic cycle, largely
reflecting market conditions during the year.
All areas of Investment Management contributed to growth in 2015, with
referrals from existing clients remaining a key source of new business.
Charity funds under management continued to grow strongly and reached
GBP3.5 billion at 31 December 2015, up 6.1% from GBP3.3 billion at the
start of the year. The most recent Charity Finance survey placed the
group as the fourth largest charity investment manager in the UK by
funds under management as at 30 June 2015.
Investment Management retained marketing focus on intermediaries during
the year. Funds under management in accounts linked to independent
financial advisers (IFAs) and provider panel relationships increased by
GBP0.6 billion during 2015, ending the year at GBP5.5 billion compared
to GBP4.9 billion in 2014. Vision and Castle, which the group purchased
the remainder of on 31 December 2015, represented GBP634 million, up
from GBP496 million in 2014. Net inflows arising from those clients
introduced to the group by Vision during the year have been reported
within organic growth.
Acquired inflows of GBP3.2 billion in 2014 included GBP2.6 billion from
the purchase of part of Deutsche Asset & Wealth Management's
London-based private client investment management business and the
acquisition of Jupiter Asset Management's private client and charity
investment management business in June 2014 and September 2014
respectively.
In total, net organic and acquired growth added GBP1.4 billion to
Investment Management funds under management in 2015 (2014: GBP4.0
billion), representing an underlying rate of total net growth of 5.7%
(2014: 19.6%).
Average investment returns across all Investment Management clients were
positive in 2015, and at 3.5% total return, were 0.8% above the FTSE WMA
Balanced Index. This was due in large part to sector allocations across
UK equities and in particular to Investment Management's underweight
position in the oil and mining sectors throughout the year, where the
continued weakness in the price of oil and commodities hampered these
stocks. In 2015, Investment Management maintained a lower overseas
exposure than the FTSE WMA Indices, but stock selection was good
particularly in European collectives.
Financial performance
Investment Management income is derived from:
-- a tiered scale of investment management or advisory fees, which are
applied based on the value of clients' funds under management;
-- commissions, which are levied on transactions undertaken on behalf of
clients who are not on a fee only tariff; and
-- an interest margin earned on the cash held in clients' portfolios and on
loans to clients.
On 1 January 2015, Investment Management launched a revised tariff for
new clients. The new rates are intended to provide increased
transparency to clients on the overall level of charges, and are in line
with the trend away from commissions within the industry. In July, our
existing private clients who were on our old fee only or fee and
commission rates, were moved onto the new rate cards.
Table 5. Investment Management - financial performance
2015 2014
GBPm GBPm
Net investment management fee income(1) 143.8 120.5
Net commission income 43.1 43.7
Net interest income(2) 10.8 9.2
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Fees from advisory services(3) and other income 11.3 11.9
Underlying operating income 209.0 185.3
Underlying operating expenses(4) (145.2) (127.8)
Underlying profit before tax 63.8 57.5
Underlying operating margin(5) 30.5% 31.0%
1 Net investment management fee income is stated after deducting
fees and commission expenses paid to introducers
2 Presented net of interest expense paid on client accounts;
excludes interest on own reserves and interest payable on Tier 2 loan
notes issued
3 Fees from advisory services includes income from trust, tax and
pensions advisory services
4 See table 8
5 Underlying profit before tax as a percentage of underlying
operating income
Net investment management fee income increased by 19.3% from GBP120.5
million to GBP143.8 million in 2015, benefiting from the fee tariff
increase during the third quarter and a full year's income from clients
subject to the transactions with Jupiter Asset Management and Deutsche
Asset & Wealth Management. For the majority of clients, fees are
calculated based on a tiered fee scale applied to the value of funds at
Investment Management's quarterly charging dates. Average funds under
management on these billing dates in 2015 were GBP25.7 billion, up 15.8%
from 2014.
Table 6. Investment Management - average funds under management
2015 2014
GBPbn GBPbn
Valuation dates for billing:
- 5 April 26.1 20.7
- 30 June 25.6 21.6
- 30 September 24.8 22.0
- 31 December 26.1 24.7
Average 25.7 22.2
Average FTSE 100 level(1) 6415 6657
1 Based on the corresponding valuation dates for billing
In 2015, net commission income of GBP43.1 million was down 1.4% on
GBP43.7 million in 2014. This was primarily due to market sentiment,
particularly in the second half of the year, as well as the positive
impact in 2014 of work to rebalance the portfolios of new clients who
joined us through our acquisitions in that year. The fee tariff changes
in 2015 also depressed commission income as new clients now pay a fee
only rate.
Net interest income of GBP10.8 million in 2015 was 17.4% above the
GBP9.2 million in 2014 as Investment Management increased the amount
invested in fixed income securities over the course of the year as
conditions in inter-bank markets improved. Cash held at the Bank of
England fell from GBP727.2 million at 31 December 2014 to GBP583.2
million at the end of 2015. The Investment Management loan book
contributed GBP2.9 million to net interest income in 2015 (2014: GBP2.7
million). Included in net interest income is GBP0.5 million of interest
payable on the Tier 2 notes issued in August 2015.
Overall, we saw a slight decrease in the return earned on average funds
under management to 76.2 bps from 77.2 bps in 2014, as the reduction in
commission income offset growth in fees.
Table 7. Investment Management - revenue margin
2015 2014
bps bps
Basis point return(1) from:
- fee income 56.0 54.2
- commission 16.8 19.7
- interest 3.4 3.3
Basis point return on funds under management 76.2 77.2
1 Underlying operating income (see table 5), excluding interest on
own reserves, interest payable on Tier 2 notes issued, fees from
advisory services and other income, divided by the average funds under
management on the quarterly billing dates (see table 6)
Underlying operating expenses in Investment Management for 2015 were
GBP145.2 million, compared to GBP127.8 million in 2014, an increase of
13.6%. This is highlighted in table 8 below.
Table 8. Investment Management - underlying operating expenses
2015 2014
GBPm GBPm
Staff costs(1)
- fixed 51.3 43.9
- variable 29.4 25.8
Total staff costs 80.7 69.7
Other operating expenses 64.5 58.1
Underlying operating expenses 145.2 127.8
Underlying cost/income ratio(2) 69.5% 68.9%
1 Represents the costs of investment managers and teams directly
involved in client-facing activities
2 Underlying operating expenses as a percentage of underlying
operating income (see table 5)
Fixed staff costs of GBP51.3 million increased by 16.9% year-on-year,
principally reflecting a 14.4% increase in average headcount and growth
in pension costs due to low gilt yields at the beginning of 2015.
Variable staff costs are also higher, reflecting higher underlying
profitability and growth in funds under management.
Other operating expenses of GBP64.5 million include property,
depreciation, settlement, IT, finance and other central support services
costs. The year-to-year increase of GBP6.4 million (11.0%) reflects
increased investment in the business, recruitment and higher variable
awards in line with growth in business profitability.
Unit Trusts
Unit Trusts' financial performance is principally driven by the value
and growth of funds under management. Year-on-year changes in the key
performance indicators for Unit Trusts are shown in table 9 below.
Table 9. Unit Trusts - key performance indicators
2015 2014
Funds under management at 31 December(1) GBP3.1bn GBP2.5bn
Underlying rate of net growth in Unit Trusts funds
under management(1) 16.0% 33.3%
Underlying profit before tax(2) GBP6.6m GBP4.0m
1 See table 10
2 See table 12
Funds under management
The recent upward trend in the retail asset management industry's sales
stuttered in 2015 with net retail sales of GBP17.6 billion, down GBP3.2
billion on 2014, as reported by the Investment Association (IA). The IA
cited a slow start in the first quarter because of macro economic issues,
but sales growth recovered after that and industry funds under
management rose to GBP870 billion by the end of the year (2014: GBP835
billion). Sales across the industry remained concentrated in a
relatively small number of funds.
Equity remained the best selling asset class, with net sales of GBP8.4
billion in 2015, only GBP0.2 billion down on 2014. UK Equity Income,
where Unit Trusts have particular expertise and two strong product
offerings, was again the best selling IA sector in 2015 overall with
GBP4.3 billion net retail sales. Global was the second best region at
GBP2.2 billion net retail sales.
Against this backdrop, Unit Trusts' positive momentum continued through
2015 with gross sales of over GBP0.9 billion (2014: GBP1.0 billion). As
a result, Unit Trusts' funds under management closed the year up 24.0%
at GBP3.1 billion (see table 10). Net inflows of GBP0.4 billion (2014:
GBP0.6 billion) continued to be spread across the range of funds, with
the Income, Global Opportunities and Ethical Bond funds seeing
particularly strong sales in the year.
Table 10. Unit Trusts - funds under management
2015 2014
GBPbn GBPbn
As at 1 January 2.5 1.8
Net inflows 0.4 0.6
- inflows(1) 0.9 1.0
- outflows(1) (0.5) (0.4)
Market adjustments(2) 0.2 0.1
As at 31 December 3.1 2.5
Underlying rate of net growth(3) 16.0% 33.3%
1 Valued at the date of transfer in/(out)
2 Impact of market movements and relative performance
3 Net inflows as a % of opening funds under management
During 2015, the range of funds maintained their strong long term
performance track record, which is critical to sales momentum.
Table 11. Unit Trusts - fund performance
2015/(2014) Quartile ranking(1) over: 1 year 3 years 5 years
Rathbone Blue Chip Income and Growth Fund 1 (2) 2 (2) 2 (2)
Rathbone Ethical Bond Fund 1 (2) 1 (1) 1 (1)
Rathbone Global Opportunities Fund 1 (2) 1 (1) 1 (1)
Rathbone Income Fund 1 (1) 1 (1) 1 (1)
Rathbone Recovery Fund 1 (4) 1 (2) 2 (1)
Rathbone Strategic Bond Fund(2) 2 (2) 2 (3) n/a (n/a)
1 Ranking of institutional share classes at 31 December 2015 and
2014 against other funds in the same IA sector
2 Performance data for the Rathbone Strategic Bond Fund is not yet
available beyond three years as the fund was launched on 3 October 2011
Investors continued to switch from retail to institutional units across
all of our funds during the year. Institutional units carry a lower
annual management charge (typically half that of retail units) but do
not allow for any form of trail commission. By 31 December 2015 some 76%
of holdings in Unit Trusts' retail funds were in institutional units (31
December 2014: 60%).
Financial performance
Unit Trusts' income is primarily derived from:
-- annual management charges, which are calculated on the daily value of
funds under management, net of rebates and trail commission payable to
intermediaries; and
-- net dealing profits, which are earned on the bid-offer spread from
intra-day sales and redemptions of units and market movements on the very
small stock of units that are held on our books overnight.
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Table 12. Unit Trusts - financial performance
2015 2014
GBPm GBPm
Net annual management charges 17.6 13.3
Net dealing profits 2.2 1.9
Interest and other income 0.4 0.3
Underlying operating income 20.2 15.5
Underlying operating expenses(1) (13.6) (11.5)
Underlying profit before tax 6.6 4.0
Underlying operating margin(2) 32.7% 25.8%
1 See table 13
2 Underlying profit before tax divided by underlying operating
income
Net annual management charges increased 32.3% to GBP17.6 million in
2015, driven principally by the rise in average funds under management.
Net annual management charges as a percentage of average funds under
management increased to 63 bps (2014: 60 bps) as the total income from
the Rathbone Multi-Assets Portfolio Service units are now recognised
within the Unit Trusts segment following the transfer to Unit Trusts of
the fund manager, whereas 25 bps was previously recognised in Investment
Management. Excluding the impact of this change, the return fell
marginally to 59 bps.
Net dealing profits of GBP2.2 million increased by 15.8% on GBP1.9
million in 2014 due to a higher level of redemptions in the first half
of the year. Underlying operating income as a percentage of average
funds under management grew to 72 bps in 2015 from 70 bps in 2014.
Table 13. Unit Trusts - underlying operating expenses
2015 2014
GBPm GBPm
Staff costs:
- fixed 3.0 3.3
- variable 3.8 2.8
Total staff costs 6.8 6.1
Other operating expenses 6.8 5.4
Underlying operating expenses 13.6 11.5
Underlying cost/income ratio(1) 67.3% 74.2%
1 Underlying operating expenses as a % of underlying operating
income (see table 12)
Fixed staff costs of GBP3.0 million for the year ended 31 December 2015
were 9.1% lower than the GBP3.3 million recorded in 2014. Following the
combination of the Investment Management and Unit Trusts sales teams,
the cost of the sales team is now recognised within Investment
Management which recharges the cost to Unit Trusts. The cost of
inter-segment recharges is reported within "other operating expenses"
Variable staff costs of GBP3.8 million were 35.7% higher than GBP2.8
million in 2014 as higher profitability and growth in gross sales drove
increases in profit share and sales commissions.
Other operating expenses have increased by 25.9% to GBP6.8 million,
reflecting an increase in third party administration costs in line with
growth in the business, and higher inter-segment charges as noted above.
Financial position
Table 14. Group's financial position
2015 2014*
GBPm GBPm
(unless stated) (unless stated)
Capital resources:
- Common Equity Tier 1 ratio(1) 16.4% 17.7%
- Total Own Funds ratio(2) 18.4% 17.7%
- Total equity 300.2 271.3
- Tier 2 subordinated loan notes 19.5 -
- Risk weighted assets 794.1 632.8
- Return on assets(3) 2.6% 2.5%
- Leverage ratio(4) 7.7% 7.3%
Other resources:
- Total assets 1,833.6 1,668.1
- Treasury assets(5) 1,453.2 1,317.1
- Investment management loan book 111.8 97.4
- Intangible assets from acquired
growth(6) 164.3 153.6
- Tangible assets and software(7) 17.0 16.3
Liabilities:
- Due to customers(8) 1,402.9 1,282.4
- Net defined benefit liability 4.5 13.7
* Restated following the adoption of IFRIC21, as described in note 1
1 Common Equity Tier 1 capital as a proportion of total risk exposure
amount
2 Total own funds (see table 15) as a proportion of total risk exposure
amount
3 Profit after tax divided by average total assets
4 Common Equity Tier 1 capital as a percentage of total assets,
excluding intangible assets and investment in associates, plus certain
off balance sheet exposures
5 Balances with central banks, loans and advances to banks and
investment securities (excluding available for sale equity investments)
6 Net book value of acquired client relationships and goodwill
7 Net book value of property, plant and equipment and computer software
8 Total amounts of cash in client portfolios held by Rathbone Investment
Management as a bank
Regulatory capital
We are classified as a banking group under the Capital Requirements
Directive and are therefore required to operate within a wide range of
restrictions on capital resources and banking exposures that are
prescribed by the Capital Requirements Regulation, as applied in the UK
by the Prudential Regulation Authority (PRA). At 31 December 2015, the
group had regulatory capital resources of GBP146.1 million (2014:
GBP111.8 million) as follows:
Table 15. Regulatory capital resources
2015 2014*
GBPm GBPm
Share capital and share premium 100.1 95.4
Reserves 206.3 181.4
Less:
- Own shares (6.2) (5.5)
- Intangible assets(1) (170.4) (159.5)
Total Common Equity Tier 1 capital resources 129.8 111.8
Tier 2 capital resources 16.3 -
Total own funds 146.1 111.8
* Restated following the adoption of IFRIC21, as described in note 1
1 Net book value of goodwill, client relationship intangibles and
software are deducted directly from capital resources
The group's Pillar 3 disclosures are published annually on our website
(www.rathbones.com/investor-relations/results-and-presentations/pillar-3-disclosures)
and provide further details about regulatory capital resources and
requirements.
Our consolidated Common Equity Tier 1 ratio is higher than the banking
industry norm. This reflects the low-risk nature of our banking
activity. The Common Equity Tier 1 ratio has fallen to 16.4% from 17.7%
at the previous year end mainly due to the increase in intangible assets
arising from the acquisition of Vision and Castle as well as an increase
in the value of treasury assets invested in the money markets.
The leverage ratio was 7.7% at 31 December 2015, up from 7.3% at 31
December 2014. The leverage ratio represents our Common Equity Tier 1
capital as a percentage of our total assets, excluding intangible assets
and investment in associates, plus certain off balance sheet exposures.
In addition to our CET1 resources, on 3 August 2015 Rathbone Investment
Management issued GBP20 million of 10-year Tier 2 subordinated loan
notes. The issue of the notes introduces gearing into our balance sheet
as a way of financing future growth in a cost-effective and
capital-efficient manner. The notes are repayable in August 2025, with
a call option for the issuer in August 2020 and annually thereafter.
Interest is payable at a fixed rate of 5.856% until the first call
option date and at a fixed margin of 4.375% over 6-month LIBOR
thereafter.
As required under PRA rules we perform an Internal Capital Adequacy
Assessment Process (ICAAP) and Individual Liquidity Adequacy Assessment
(ILAA) annually, which includes performing a range of stress tests to
determine the appropriate level of regulatory capital and liquidity that
we need to hold. In addition, we monitor a wide range of capital and
liquidity statistics on a daily, monthly or less frequent basis as
required. Surplus capital levels are forecast on a monthly basis, taking
account of proposed dividends and investment requirements, to ensure
that appropriate buffers are maintained. Investment of proprietary funds
is controlled by our treasury department.
Table 16. Group Pillar 1 own funds requirement
2015 2014
GBPm GBPm
Credit risk requirement 36.5 26.7
Market risk requirement 0.3 0.2
Operational risk requirement 26.7 23.7
Pillar 1 own funds requirement 63.5 50.6
Pillar 2A own funds requirement 26.8 14.9
Total Pillar 1 & 2A own funds requirements 90.3 65.5
As at 31 December 2015, the surplus of own funds over total Pillar 1 and
2A own funds requirements was GBP55.8 million, up from GBP46.3 million
at the end of 2014.
In addition to the Pillar 1 and Pillar 2A own funds requirements; we are
also required to hold capital to cover company-specific Pillar 2B
buffers (which provide for potential risks arising from external market
factors over the cycle) that are agreed confidentially with the PRA from
time-to-time.
We face a number of risks to our regulatory capital surplus over the
foreseeable future, the principal of which are:
-- the staged introduction of CRD IV buffers over the next four years
-- developments in the PRA's interpretation and implementation of EU
Directives affecting regulatory capital
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-- future acquisitions which generate intangible assets and, therefore,
reduce CET1 resources
We keep these issues under constant review to ensure that any necessary
capital raising activities are carried out in a planned and controlled
manner.
Capital resources
The consolidated balance sheet remains healthy with total equity of
GBP300.2 million at 31 December 2015, up 10.7% from GBP271.3 million at
the end of 2014, primarily reflecting the impact of retained earnings
over the year and an improvement in the reported position of our defined
benefit pension schemes.
The business is primarily funded by equity, supported by GBP20 million
of subordinated loan notes which fall due in 2025.
Total assets
Total assets at 31 December 2015 were GBP1,833.6 million (2014:
GBP1,668.1 million), of which GBP1,402.9 million (2014: GBP1,282.4
million) represents the cash element of client portfolios that is held
as a banking deposit.
Treasury assets
As a licensed deposit taker, Rathbone Investment Management holds our
surplus liquidity on its balance sheet together with clients' cash. Cash
in client portfolios as held on a banking basis of GBP1,402.9 million
(2014: GBP1,282.4 million) represented 5.5% of total investment
management funds at 31 December 2015 compared to 5.2% at the end of
2014. Cash held in client money accounts was GBP4.5 million (2014:
GBP6.4 million).
The treasury department of Rathbone Investment Management, reporting
through the banking committee to the board, operates in accordance with
procedures set out in a board-approved treasury manual and monitors
exposure to market, credit and liquidity risk. The treasury department
invests in a range of securities issued by a relatively large number of
counterparties. These counterparties must be single 'A' rated or higher
by Fitch and are regularly reviewed by the banking committee. During the
year, we decreased the share of treasury assets held with the Bank of
England to GBP583.2 million from GBP727.2 million at 31 December 2014 to
take advantage of more attractive investment opportunities.
Loans to clients
Loans are provided as a service to Investment Management clients who
have short to medium term cash requirements. Such loans are normally
made on a fully secured basis against portfolios held in our nominee
name, requiring two times cover, and are usually advanced for up to one
year. In addition, equitable charges may be taken on property held by
the client to meet security cover requirements. All loans (and any
extensions to the initial loan period) are subject to review by the
banking committee. Our ability to provide such loans is a valuable
additional service, for example, to clients that require bridging
finance when moving home.
We have continued to increase the size of the investment management loan
book during 2015, to take advantage of the higher demand for client
loans. Loans advanced totalled GBP111.8 million at the end of 2015
(2014: GBP97.4 million).
Intangible assets
Intangible assets arise principally from acquired growth in funds under
management and are categorised as goodwill and client relationships. At
31 December 2015, the total carrying value of intangible assets arising
from acquired growth was GBP164.3 million (2014: GBP153.6 million).
During the year, client relationship intangible assets of GBP15.8
million were capitalised (2014: GBP51.2 million), including GBP4.5
million relating to the acquisition of Vision and Castle. Goodwill
totalling GBP5.9 million was acquired during 2015 (2014: GBP11.0
million).
Client relationship intangibles are amortised over the estimated life of
the client relationship, generally a period of 10 to 15 years. When
client relationships are lost, any related intangible asset is
derecognised in the year. The total amortisation charge for client
relationships in 2015, including the impact of any lost relationships,
was GBP10.7 million (2014: GBP7.9 million).
Goodwill which arises from business combinations is not amortised, but
is subject to a test for impairment at least annually. During the year,
the goodwill relating to the trust and tax business was found to be
impaired as the growth forecasts for that business have not kept pace
with cost inflation. An impairment charge of GBP0.3 million was
recognised in relation to this element of goodwill (2014: GBP0.4
million).
Capital expenditure
During 2015, we have continued to invest for future growth with
capitalised expenditure on our premises and systems totalling GBP5.8
million (2014: GBP4.6 million). Investment in new systems continues at a
steady pace as we continue to improve the efficiency of our systems and
our back office. Although some of this is driven by regulatory change,
much is driven by our desire to optimise the service that our clients
receive and to give our investment managers the tools they need to
manage portfolios more easily.
New investment accounted for approximately 76% of capital expenditure in
2015, with the balance being maintenance and replacement of existing
software and equipment. This split is broadly consistent with the
spending pattern in the recent past, although there was only very
limited expenditure on property during the year.
During 2016, we expect to incur fit out costs of the new premises at 8
Finsbury Circus. These costs will be capitalised and amortised over the
period of the 17 year lease.
Defined benefit pension schemes
We operate two defined benefit pension schemes, both of which have been
closed to new members for several years.
The increase in corporate bond yields during the latter stages of 2015
has been the primary factor responsible for improving the valuation of
the schemes in our balance sheet at 31 December 2015 to a combined
deficit of GBP4.5 million compared to a combined deficit of GBP13.7
million at 31 December 2014.
Triennial funding valuations form the basis of the annual contributions
that we make into the schemes. Funding valuations of the schemes were
last carried out as at 31 December 2013. As a result there have been no
changes to the level of regular contributions made to the schemes.
Liquidity and cash flow
Table 17. Extracts from the consolidated statement of cash flows
2015 2014
GBPm GBPm
Cash and cash equivalents at the end of the year 703.6 835.8
Net cash inflows from operating activities 176.5 417.7
Net change in cash and cash equivalents (132.2) 516.0
Fee income is largely collected directly from client portfolios and
expenses, by and large, are predictable; consequently we operate with a
modest amount of working capital. Larger cash flows are principally
generated from banking and treasury operations when investment managers
make asset allocation decisions about the amount of cash to be held in
client portfolios.
As a bank, we are subject to the PRA's ILAA regime, which requires us to
hold a suitable Liquid Assets Buffer to ensure that short term liquidity
requirements can be met under certain stressed scenarios. Liquidity
risks are actively managed on a daily basis and depend on operational
and investment transaction activity.
Cash and balances at central banks was GBP583.2 million at 31 December
2015 (2014: GBP727.2 million).
Cash and cash equivalents, as defined by accounting standards, includes
cash, money market funds and banking deposits which had an original
maturity of less than three months (see note 9). Consequently cash
flows, as reported herein, include the impact of capital flows in
treasury assets. In 2015, the average duration of treasury assets was
increased, which has driven the reported reduction in cash and cash
equivalents.
Net cash flows from operating activities include the effect of a
GBP120.8 million increase in banking client deposits (2014: GBP390.5
million increase) and a GBP5.6 million increase in the component of
treasury assets placed in term deposits for more than three months
(2014: GBP11.1 million increase).
In addition, cash flows included a net outflow of GBP278.3 million from
the purchase of longer dated certificates of deposit (2014: GBP152.7
million net inflow from maturities of longer dated certificates of
deposit), which is shown within investing activities in the consolidated
statement of cash flows.
The most significant non-operating cash flows during the year were as
follows:
-- outflows relating to the payment of dividends of GBP25.8 million (2014:
GBP23.8 million);
-- outflows relating to payments to acquire intangible assets (other than as
part of a business combination) of GBP20.3 million (2014: GBP14.3
million);
-- inflow of GBP19.5 million from the issue of Tier 2 securities on 3 August
2015 net of legal fees;
-- net outflow of GBP3.5 million for the acquisition of Vision Independent
Financial Planning Limited and Castle Investment Solutions Limited on 31
December 2015 (net of cash acquired); and
-- GBP2.5 million of capital expenditure on property, plant and equipment
(2014: GBP1.7 million).
Risk management
We have continued to enhance the group's risk management framework and
evolve the main components of its risk governance, risk processes and
risk infrastructure. During 2015, we appointed a dedicated chief risk
officer to strengthen our operating model and infrastructure for risk
management. We have reviewed, developed and aligned the group's risk
management framework and risk committees, to reflect emerging themes
which together support our three lines of defence model. This has
ensured the risk management framework and risk processes continue to
provide a structured and consistent approach across the group.
Three lines of defence
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Rathbones adopts a three lines of defence model to support its risk
management framework. Under the framework, responsibility and
accountability for risk management are effectively broken down as
follows:
First line: Senior management and operational business units are
responsible for managing risks, by developing and maintaining effective
internal controls to mitigate risk.
Second line: The risk function and compliance function maintain a level
of independence from the first line. They are responsible for providing
oversight and challenge of the first line's day to day management,
monitoring and reporting of risks to both senior management and
governing bodies.
Third line: The internal audit function is responsible for providing an
independent assurance to both senior management and governing bodies as
to the effectiveness of the group's governance, risk management and
internal controls.
Risk appetite
Rathbones' risk appetite is defined as both the amount and type of risk
the group is prepared to take or retain in the pursuit of its strategy.
Our appetite is subject to regular review to ensure it remains aligned
to our strategic goals. Within our risk appetite framework there are
some overarching parameters, alongside specific primary and secondary
measures for each risk category. At least annually the board and group
risk committee will formally review and approve the risk appetite
statement for the group and assess whether Rathbones has operated in
accordance with its stated risk appetite measures during the year.
Overall, and notwithstanding the business growth and strategic change
programme for 2016, the board remains committed to having a relatively
low overall appetite for risk and to ensuring Rathbones' internal
controls mitigate risk to within appropriate levels. The board continues
to recognise that the business is susceptible to fluctuations in
investment markets and will bear losses from financial and operational
risks from time to time, either as reductions in income or increases in
operating costs.
Identification and profiling of principal risks
Rathbones classifies risks using a hierarchical approach. The highest
level (Level 1) identifies risks as financial, conduct or operational.
The next level (Level 2) contains sixteen risk categories which are
listed below. Detailed risks (Level 3) are then identified as a subset
of Level 2 risks and are captured and maintained within a group risk
register, which is the principal tool for monitoring risks. The
classification ensures a structured approach to identifying all known
material risks to the business and those emerging risks which may impact
future performance, and is regularly reviewed.
Rathbones reviews and monitors its risk exposures closely, considering
the potential impact and any management actions required to mitigate the
impact of emerging issues and future events. To ensure we identify our
principal risks, regular reviews take place with risk owners, senior
management and business units across the group. The risk function
conducts these reviews and risk workshops during the year. A watch list
is maintained to record any current concerns, emerging issues and future
events which will or could have the potential to impact Rathbones' risk
profile and may therefore require active management, process changes or
systems development. The group's risk profile, risk register and watch
list are regularly reviewed by the executive, senior management, board
and governance committees.
Rathbones assesses risks using a 1 - 4 scoring system, with each Level 3
risk rated by assessing the likelihood of its occurrence in a five year
period and the associated impact. A residual risk score and overall risk
rating of high, medium or low is then derived for the five year period
by taking into account an assessment of the internal control environment
or insurance mitigation.
Risk assessment process
As part of the risk management framework, the board and senior
management are actively involved in a continuous risk assessment
process. A regular review and risk assessment is conducted for the
board's strategic plan, supported by the annual Internal Capital
Adequacy Assessment Process (ICAAP) and Individual Liquidity Adequacy
Assessment (ILAA) work which assesses the principal risks facing the
group.
Activities undertaken in relation to ICAAP, ILAA and reverse stress
testing support the risk assessment process, and stress tests include
consideration of the impact of a number of material severe but plausible
events that could impact the business. The work also takes account of
the availability and likely effectiveness of mitigating actions that
could be taken to avoid or reduce the impact or occurrence of the
underlying risks.
Day to day, our risk assessment process considers both the impact and
likelihood of risk events which could materialise affecting the delivery
of strategic goals and annual business plans. A top-down and bottom-up
approach ensures that the risk assessment process is challenged and
reviewed on a regular basis. The board and senior management receive
regular reports and information from line management, risk oversight
functions and specific risk committees.
The group executive, group risk committee and other key risk focused
committees consider the risk assessments and provide challenge, which is
reported though the governance framework and considered by the board.
Profile and mitigation of principal risks
Forty-one Level 3 risks continue to form the basis of the group's risk
register, each of which is classified under one of the sixteen Level 2
risk categories.
Rathbones approach to managing risk is underpinned by an understanding
of our current risk exposures and how risks change over time.
During the year there have been some changes to the sixteen Level 2 risk
categories; however, the underlying risk profile and ratings for the
majority of Level 2 risks have remained consistent during 2015. The
following table summarises the most important changes to the risk
ratings.
Ref Risk Risk Description of change
change
in 2015
A Credit Increase Allocation of treasury assets to certificates of deposit
has increased by GBP278 million, whilst cash held
with central banks has decreased by GBP144 million.
D Pension Increase As the scheme matures and grows, its valuation becomes
more sensitive to changes in expectations of future
interest rates and inflation.
G Regulatory Increase Volume of regulation remains high together with continued
focus on conduct, remuneration and taxation across
the financial services industry.
J Data Increase Continued increase in the threat of cyber attack within
integrity the financial services sector.
&
security
During the year, the executive continued to recognise a number of
emerging risks and threats to the business model and financial services
sector as a whole, particularly in the areas of cyber risk and
geopolitical risk. These have been taken into account in assessing our
risk profile.
Based upon the risk assessment processes identified above, the board
believes that the principal risks and uncertainties facing the group
have been identified within the information below, and has recognised
the impact of strategic change in the year. The board continues to
believe that the most significant risks to the business are operational
risks that arise from the growth in our business, and regulatory risks
that may arise from continual changes to rules and standards in our
sector.
Our overall risk profile and ways in which we mitigate risks are
analysed below. The board receives assurance from senior management and
line management responsible as the first line of defence that the
systems of internal control are operating effectively; and from the
activities of the second line and third line that there are no material
control issues which would affect the board's view of its principal
risks and uncertainties.
In line with current guidance, we also include in the tables the
potential impacts (I) the firm might face and our assessment of the
likelihood (L) of each principal risk arising in the event it
materialises. These assessments take into account the controls in place
to mitigate the risks. However, as always the case, should a risk
materialise, a range of outcomes (both in scale and type) might be
experienced. This is particularly relevant for firms such as Rathbones
where the outcome of a risk event can be influenced by market conditions
as well as internal control factors.
We have used ratings of high, medium and low in this risk assessment.
We perceive high risk items as those which have the potential to impact
the delivery of strategic objectives, with medium and low rated items
having proportionately less impact on the firm. Likelihood is similarly
based on a qualitative assessment.
Financial risks
Ref Level 2 Definition Residual How the risk arises Key Mitigators
Risk Rating
I L
A Credit The risk that one or more counterparties fail to fulfil Low Low This risk can arise from placing funds with other
contractual obligations, including stock settlement. banks and holding interest-bearing securities. There -- Banking committee oversight.
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is also a limited level of lending to clients.
-- Counterparty limits and credit reviews.
-- Treasury policy and procedures.
-- Active monitoring of exposures.
-- Client loan policy and procedures.
-- Annual Individual Capital Adequacy Assessment
Process.
B Liquidity The risk of having insufficient financial resources Low Low This risk can arise through day to day operations
to meet obligations as they fall due, or that to secure in so far as a significant proportion of client funds -- Banking committee oversight.
access to such resources would be at an excessive could be withdrawn in a short time period and marketable
cost. assets may not be realised in time and at the value -- Daily treasury procedures, reconciliations and
required. reporting to senior management.
-- Cash flow forecasting.
-- Contingency funding plan.
-- Annual Individual Liquidity Adequacy Assessment
(including stress testing).
C Market The risk that earnings or capital will be adversely Low Low This risk can arise through two primary areas; the
affected by changes in the level or volatility of exposure to mismatch between repricing of the firm's -- Banking committee oversight.
interest rates, foreign currency exchange rates or own financial assets and liabilities, and to a lesser
market prices. extent, transactional foreign exchange risk. -- Documented policies and procedures.
-- Daily monitoring of interest rates, exchange rates,
maturity mismatch and extent of marketable assets.
-- Robust application of policy and investment limits.
D Pension The risk that the cost of our defined benefit pension Med Low This risk can arise through a sustained deficit between
schemes increases, or its valuation affects dividends, the schemes' assets and liabilities. A number of factors -- Board, senior management and trustee oversight.
reserves and capital. impact a deficit including increased life expectancy,
falling interest rates and falling equity prices. -- Monthly valuation estimates.
-- Triennial independent actuarial valuations.
-- Investment policy.
-- Senior management review and defined management
actions management
-- Annual Individual Capital Adequacy Assessment
Process.
Conduct risks
Ref Level 2 Risk Definition Residual How the risk arises Key Mitigators
Rating
I L
E Business The risk that the business model does not respond High Med This risk can arise from both strategic decisions
model in an optimal manner to changing market conditions which fail to consider the current operating environment -- Board and executive oversight.
such that sustainable growth, market share or profitability or can be influenced by external factors such as material
is adversely affected. changes in regulation, or legislation within the financial -- A documented strategy.
services sector.
-- Annual business targets, subject to regular review
and challenge.
-- Regular reviews of pricing structure.
-- Continued investment in the investment process,
service standards and marketing.
-- Trade body participation.
-- Regular competitor benchmarking and analysis.
F Performance The risk that clients receive inappropriate financial, Med Med This risk can arise through a failure to appropriately
& advice trust or investment advice, inadequate documentation understand the wealth management needs of our clients -- Investment governance and structured committee
or unsuitable portfolios resulting in a failure to and a failure to apply suitable advice or investment oversight.
meet clients' investment and/or other objectives or strategies, along with having inadequate tools and
expectations. systems in place to support our client facing financial -- Management oversight and segregated quality assurance
professionals. and performance teams.
-- Performance measurement and attribution analysis.
-- Weekly investment management meetings.
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-- Monthly investment manager peer reviews through
sampling.
-- Compliance monitoring.
G Regulatory The risk of failure by the group (and/or a subsidiary) High Low This risk can arise from failures by the business
to fulfil its regulatory requirements and comply with to comply with existing regulation, along with a failure -- Board and executive oversight.
the introduction of new or changes to the existing to identify and react to regulatory change.
regulation. -- Active involvement with industry bodies.
-- Compliance monitoring programme to examine the
control of key regulatory risks.
-- Separate anti-money laundering role with specific
responsibility
-- Oversight of industry and regulatory developments.
-- Close contact with the regulators.
-- Documented policy and procedures.
-- Staff training and development.
H Reputational The risk of reputational damage from financial and Med Low This risk can arise from a variety of reasons; primarily
non-financial events or failing to meet stakeholders' within Rathbones this could be from the conduct of -- Board and executive oversight.
expectations. the company or its employees, and from the service
or products provided to clients. -- Strong corporate values and approach to governance.
-- Positive culture regarding risk and regulation,
supported by appropriate remuneration practices.
-- Appropriate emphasis on the control environment
through the 3 lines of defence.
-- Proactive and positive communications with key
stakeholders.
-- Crisis response plan.
-- Monitoring of company performance relative to
competitors.
Operational risks
Ref Level 2 Definition Residual How the risk arises Key Mitigators
Risk Rating
I L
I Business The risk that the planning or implementation of change Med Low This risk can arise if the business is too aggressive
change is ineffective or fails to deliver desired outcomes, and unstructured with its change programme to manage -- Executive and Board oversight of material change
the impact of which may lead to unmitigated financial project risks, resource capacity and capabilities programmes.
exposures. to deliver business benefits. The firm also recognises
the risks associated with its planned office move -- Group programme board.
in London which will lead to the subletting of some
premises. -- Dedicated project office function, use of internal
and where required, external subject matter experts.
-- Documented business plans and IT strategy.
-- Two-stage assessment, challenge and approval of
project plans.
-- Documented project and change procedures.
J Business The risk that an internal or external event results Med Low This risk can arise from the business failing to effectively
continuity in either failure or detriment to core business processes control and administer its core operating systems, -- Group business continuity committee oversight.
or services. manage current and future resource requirements and
maintain appropriate security of its infrastructure. -- Documented crisis/incident management and disaster
recovery plans.
-- Regular disaster recovery testing.
-- Continuous monitoring of IT systems availability.
-- Off-site data centre.
K Data The risk of a lack of integrity of, inappropriate Med Low This risk can arise from the firm failing to maintain
integrity & access to, or disclosure of, client or company-sensitive and keep secure at all times sensitive and confidential -- Data security committee oversight.
security information. data through its operating infrastructure, including
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the activities of employees and cyber threats. -- Data protection policy and procedures.
-- System access controls and encryption.
-- Penetration testing & multi layer network security.
-- Training and employee awareness programmes.
-- Physical security at all locations.
L Fraud The risk of fraudulent action ether internal or external Med Low This risk can arise from failures to implement appropriate
being taken against the group (and / or a subsidiary). management controls to detect or mitigate impropriety -- Executive oversight.
either within or external to the business and services
provided. -- Documented policies and procedures.
-- Segregation of duties between front and back office.
-- System authority and payment limits.
-- System access controls.
-- Training and employee awareness programmes.
M Legal The risk of legal action being taken against the group Med Low This risk can arise from the inappropriate behaviour
(and/or a subsidiary) or failure to comply with legislative of individuals or from the inadequate drafting of -- Executive oversight.
requirements resulting in financial loss and reputational the firm's contractual documentation.
damage. -- Retained specialist legal advisers.
-- Routine control of risks which might lead to
litigation if adverse outcomes are experienced by
clients or other third parties.
-- Documented policies and procedures.
-- Training and employee awareness programmes.
N Outsourcing The risk of one or more third parties failing to provide Med Low This risk can arise due to significant unknown operational
or perform outsourced services to standards expected changes at key outsourced relationships or a material -- Executive oversight.
by the group, impacting the ability to deliver core change to their business model which affects their
services. ability to provide the required services for Rathbones. -- Supplier due diligence and regular financial reviews.
-- Active relationship management, including regular
service review meetings.
-- Service level agreements and monitoring of key
performance indicators.
-- Compliance monitoring.
O People The risk of loss of key staff, lack of skilled resources Med Med This risk can arise across all areas of the business
and inappropriate behaviour or actions. This could as a result of resource management failures or from -- Executive oversight.
lead to lack of capacity or capability threatening external factors such as increased competition or
the delivery of business objectives, or behaviour material changes in regulation. -- Succession and contingency planning.
leading to complaints, regulatory action or litigation.
-- Transparent, consistent and competitive remuneration
schemes.
-- Contractual clauses with restrictive covenants.
-- Continual investment in staff training and
development.
-- Employee engagement survey
-- Appropriate balanced performance measurement system.
P Processing The risk that the design or execution of client/financial/ Low Med This risk can arise from the failure of management
settlement transaction processes (including dealing to implement and control operational processes and -- Authorisation limits and management oversight.
activity) are inadequate or fail to deliver an appropriate systems to support the volumes of transactions processed
level of service and protection to client or company on a daily basis. -- Dealing limits and supporting system controls.
assets.
-- Active investment in automated processes.
-- Counter review/4-eyes processes.
-- Segregation of duties.
-- Documented procedures.
-- Annual controls assessment (ISAE3402 report).
Assessment of the company's prospects
The board prepares or reviews its strategic plan annually, completing
ICAAP and ILAA work, the basis for capital planning and regular
discussion with the PRA.
During the year the board has considered a number of stress tests and
scenarios which focus on material or severe but plausible events that
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could impact the business and company's financial position. The board
also considers the plans and procedures in place in the event that
contingency funding is required to replenish regulatory capital. On a
monthly basis, critical capital projections and sensitivities have been
refreshed and reviewed taking into account current or expected market
movements and business developments.
The board's assessment considers all the principal risks identified by
the group, and assesses the sufficiency of all Pillar 1 risks (credit,
market and operational risks) to required regulatory standards. In
addition, the following risks were focussed on for enhanced stress
testing: equity market risk, interest rate risk, a loss of
business/competition risk, business expansion risk and pension
obligation risk.
The group considers the possible impacts of serious business
interruption as part of its operational risk assessment process and
remains mindful of the importance of maintaining its reputation. Whilst
the business is almost wholly UK situated, it does not suffer from any
material client, geographical or counterparty concentrations.
Whilst this review does not consider all of the risks that the group may
face, the directors consider that this stress-testing based assessment
of the group's prospects is reasonable in the circumstances of the
inherent uncertainly involved.
Viability Statement
In accordance with the UK Corporate Governance Code, the board has
assessed the prospects and viability of the group over a three year
period taking into account the risk assessments (which are based upon a
five year period as detailed above). The directors have taken into
account the firm's current position and the potential impact of the
principal risks and uncertainties set out above. As part of the
viability statement the directors confirm that they have carried out a
robust assessment of the principal risks facing the group including
those that would threaten its business model, future performance,
solvency or liquidity.
The directors have determined that a three year period to 31 December
2018 constitutes an appropriate period over which to provide its
viability statement. The board does consider five year projections as
part of its annual regulatory reporting cycle and its opinion of the
likelihood of risks materialising; however the uncertainties associated
with predicting the future impact of investment markets on the business
make a three year period more aligned with its detailed capital planning
activity.
Based on this assessment, the directors confirm that they have a
reasonable expectation that the company will be able to continue in
operation and meet its liabilities as they all fall due over the period
to 31 December 2018.
Going concern
Details of the group's business activities, results, cash flows and
resources, together with the risks it faces and other factors likely to
affect its future development, performance and position are set out
above.
Group companies are regulated by the PRA and the Financial Conduct
Authority (FCA) and perform annual capital adequacy assessments, which
include the modelling of certain extreme stress scenarios. The company
publishes Pillar 3 disclosures annually on its website, which provide
detail about its regulatory capital resources and requirements. In July
2016, Rathbone Investment Management issued GBP20 million of 10 year
subordinated loan notes to finance future growth. The group has no other
external borrowings.
In 2015, the group has continued to generate organic growth in client
funds under management and this is expected to continue. The directors
believe that the company is well-placed to manage its business risks
successfully despite the continuing uncertain economic and political
outlook. As the directors have a reasonable expectation that the company
has adequate resources to continue in operational existence for the
foreseeable future, they continue to adopt the going concern basis of
accounting in preparing the annual financial statements.
Consolidated statement of comprehensive income
for the year ended 31 December 2015
2014
2015 GBP'000
(restated - note
Note GBP'000 1)
Interest and similar income 12,663 10,024
Interest expense and similar charges (1,822) (865)
Net interest income 10,841 9,159
Fee and commission income 222,638 196,637
Fee and commission expense (8,049) (9,126)
Net fee and commission income 214,589 187,511
Net trading income 2,230 1,878
Other operating income 1,361 2,086
Share of profit of associates 157 169
Gain on remeasurement of non-controlling interest 885 -
Refund of levies for the Financial Services Compensation
Scheme - 982
Gain on disposal of financial securities - 6,833
Gain on disposal of pension administration business - 683
Operating income 230,063 209,301
Charges in relation to client relationships and goodwill (11,014) (8,287)
Contribution to legal settlement - (15,000)
Transaction costs (162) (1,057)
Loss on derivative financial instruments (1,030) -
Head office relocation costs (412) -
Other operating expenses (158,813) (139,247)
Operating expenses (171,431) (163,591)
Profit before tax 58,632 45,710
Taxation 4 (12,261) (10,032)
Profit after tax 46,371 35,678
Profit for the year attributable to equity holders
of the company 46,371 35,678
Other comprehensive income:
Items that will not be reclassified to profit or loss
Net remeasurement of defined benefit liability 6,524 (17,466)
Deferred tax relating to net remeasurement of defined
benefit liability (1,509) 3,493
Items that may be reclassified to profit or loss
Revaluation of available for sale investment securities:
- net gain from changes in fair value 53 959
- net profit on disposal transferred to profit or
loss during the year - (6,820)
53 (5,861)
Deferred tax relating to revaluation of available
for sale investment securities (10) 1,172
Other comprehensive income net of tax 5,058 (18,662)
Total comprehensive income for the year net of tax
attributable to equity holders of the company 51,429 17,016
Dividends paid and proposed for the year per ordinary
share 5 55.0p 52.0p
Dividends paid and proposed for the year 26,305 24,863
Earnings per share for the year attributable to equity
holders of the company:
- basic 97.4p 76.0p
- diluted 96.6p 75.4p
Consolidated statement of changes in equity
for the year ended 31 December 2015
(restated - note 1)
Available
Share Share Merger for sale Own Retained Total
capital premium reserve reserve shares earnings equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2014 2,315 65,484 31,835 4,717 (5,722) 152,371 251,000
Restatement (see note 1) 498 498
At 1 January 2014 (restated) 2,315 65,484 31,835 4,717 (5,722) 152,869 251,498
Profit for the year 35,678 35,678
Net remeasurement of defined benefit liability (17,466) (17,466)
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Revaluation of available for sale investment securities:
- net gain from changes in fair value 959 959
- net profit on disposal transferred to profit or
loss during the year (6,820) (6,820)
Deferred tax relating to components of other comprehensive
income 1,172 3,493 4,665
Other comprehensive income net of tax - - - (4,689) - (13,973) (18,662)
Dividends paid (23,793) (23,793)
Issue of share capital 80 27,503 27,583
Share-based payments:
- value of employee services 374 374
- cost of own shares acquired (1,655) (1,655)
- cost of own shares vesting 1,846 (1,846) -
- tax on share-based payments 248 248
At 1 January 2015 2,395 92,987 31,835 28 (5,531) 149,557 271,271
Profit for the year 46,371 46,371
Net remeasurement of defined benefit liability 6,524 6,524
Revaluation of available for sale investment securities:
- net gain from changes in fair value 53 53
Deferred tax relating to components of other comprehensive
income (10) (1,509) (1,519)
Other comprehensive income net of tax - - - 43 - 5,015 5,058
Dividends paid (25,836) (25,836)
Issue of share capital 12 4,656 4,668
Share-based payments:
- value of employee services 1,022 1,022
- cost of own shares acquired (2,413) (2,413)
- cost of own shares vesting 1,767 (1,767) -
- tax on share-based payments 51 51
At 31 December 2015 2,407 97,643 31,835 71 (6,177) 174,413 300,192
Consolidated balance sheet
as at 31 December 2015
2014
2015 GBP'000
GBP'000 (restated - note 1)
Assets
Cash and balances with central banks 583,156 727,178
Settlement balances 17,948 15,890
Loans and advances to banks 108,877 144,399
Loans and advances to customers 117,269 101,640
Investment securities:
- available for sale 53,386 15,514
- held to maturity 707,745 429,974
Prepayments, accrued income and other assets 59,344 55,272
Property, plant and equipment 9,999 10,242
Net deferred tax asset 4,579 6,895
Investment in associates - 1,434
Intangible assets 171,326 159,654
Total assets 1,833,629 1,668,092
Liabilities
Deposits by banks 299 -
Settlement balances 21,481 22,584
Due to customers 1,402,890 1,282,426
Accruals, deferred income, provisions and
other liabilities 78,698 73,888
Current tax liabilities 6,076 4,213
Subordinated loan notes 19,492 -
Retirement benefit obligations 4,501 13,710
Total liabilities 1,533,437 1,396,821
Equity
Share capital 2,407 2,395
Share premium 97,643 92,987
Merger reserve 31,835 31,835
Available for sale reserve 71 28
Own shares (6,177) (5,531)
Retained earnings 174,413 149,557
Total equity 300,192 271,271
Total liabilities and equity 1,833,629 1,668,092
Consolidated statement of cash flows
for the year ended 31 December 2015
2014
2015 GBP'000
(restated - note
Note GBP'000 1)
Cash flows from operating activities
Profit before tax 58,632 45,710
Share of profit of associates (157) (169)
Net profit on disposal of available for sale investment
securities - (6,820)
Net interest income (10,841) (9,159)
Net impairment charges/(recoveries) on impaired loans
and advances 19 (589)
Net charge for provisions 1,045 380
(Profit)/loss on disposal of property, plant and
equipment (4) 517
Loss on fair value of derivative financial instrument 1,030 -
Gain on remeasurement of non-controlling interest (885) -
Depreciation, amortisation and impairment 16,115 13,367
Defined benefit pension scheme charges 4,217 3,332
Defined benefit pension contributions paid (6,902) (5,474)
Share-based payment charges 4,629 5,477
Interest paid (1,282) (852)
Interest received 11,349 10,284
76,965 56,004
Changes in operating assets and liabilities:
- net increase in loans and advances to banks and
customers (5,606) (11,074)
- net (increase)/decrease in settlement balance debtors (2,058) 3,721
- net increase in prepayments, accrued income and
other assets (2,396) (8,982)
- net increase in amounts due to customers and deposits
by banks 120,763 390,529
- net decrease in settlement balance creditors (1,103) (5,042)
- net increase in accruals, deferred income, provisions
and other liabilities 329 2,790
Cash generated from operations 186,894 427,946
Tax paid (10,414) (10,215)
Net cash inflow from operating activities 176,480 417,731
Cash flows from investing activities
Dividends received from associates 107 31
Acquisition of subsidiaries, net of cash acquired (3,528) (40,129)
Purchase of property, plant, equipment and intangible
assets (22,879) (15,953)
Proceeds from sale of property, plant and equipment 33 (517)
Purchase of investment securities (988,127) (641,858)
Proceeds from sale and redemption of investment
securities 709,853 794,548
Net cash (used in)/generated from investing activities (304,541) 96,122
Cash flows from financing activities
Issue of ordinary shares 2,255 25,928
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Net proceeds from the issue of subordinated loan notes 19,454 -
Dividends paid 5 (25,836) (23,793)
Net cash (used in)/generated from financing activities (4,127) 2,135
Net (decrease)/increase in cash and cash equivalents (132,188) 515,988
Cash and cash equivalents at the beginning of the
year 835,816 319,828
Cash and cash equivalents at the end of the year 9 703,628 835,816
Notes to the preliminary announcement
1. Accounting policies
In preparing the financial information included in this statement the
group has applied accounting policies which are in accordance with
International Financial Reporting Standards as adopted by the EU at 31
December 2015. The accounting policies have been applied consistently
to all periods presented in this statement, except as detailed below.
Standards and interpretations affecting the reported results or the
financial position
In the current year, the group has adopted IFRIC 21 'Levies'. IFRIC 21
'Levies' changes the point at which the group recognises a liability in
respect of Financial Services Compensation Scheme (FSCS) levies. From 1
January 2015, the group has recognised a liability in respect of FSCS
levies from the date at which the triggering event specified in the
legislation occurs. The triggering event for recognition of FSCS levies
has changed from 31 December of the preceding financial year to 1 April
of the current financial year, resulting in levies recognised in the
previous financial year being derecognised and recognised in the current
financial year.
Comparatives have been restated for the impact of the change. As at 1
January 2014, retained earnings brought forward have been increased by
GBP498,000. For the year ended 31 December 2014, profit after tax has
been increased by GBP41,000, total assets have been reduced by
GBP147,000 and total liabilities have been reduced by GBP686,000.
No other standards or interpretations, new or revised, have been adopted
in the current year.
2. Critical accounting judgements and key sources of estimation and
uncertainty
Client relationship intangibles
Client relationship intangibles purchased through corporate transactions
When the group purchases client relationships through transactions with
other corporate entities, a judgement is made as to whether the
transaction should be accounted for as a business combination or as a
separate purchase of intangible assets. In making this judgement, the
group assesses the assets, liabilities, operations and processes that
were the subject of the transaction against the definition of a business
in IFRS 3. In particular, consideration is given to the scale of the
operations subject to the transaction, whether ownership of a corporate
entity has been acquired and to whom any amounts payable under the
transaction are payable, among other factors.
Payments to newly recruited investment managers
The group assesses whether payments made to newly recruited investment
managers under contractual agreements represent payments for the
acquisition of client relationship intangibles or remuneration for
ongoing services provided to the group. Payments made for the
acquisition of client relationship intangibles are capitalised whereas
those that are judged to be in relation to the provision of ongoing
services are expensed in the period in which they are incurred.
The group determines a suitable period during which awards accruing to
new investment managers are capitalised. Typically, this will be for
the period ending up to 12 months after the cessation of any non-compete
period. After the defined period has elapsed, any payments made are
charged to profit or loss.
During the year the group capitalised GBP11,308,000 of payments made to
investment managers and expensed GBP3,254,000 (2014: GBP22,073,000
capitalised and GBP2,824,000 expensed). A reduction in the
capitalisation period by one month would decrease client relationship
intangibles by GBP256,000 and decrease profit before tax by GBP256,000
(2014: GBP257,000 and GBP257,000 respectively).
Amortisation of client relationship intangibles
The group makes estimates as to the expected duration of client
relationships to determine the period over which related intangible
assets are amortised. The amortisation period is estimated with
reference to historical data on account closure rates and expectations
for the future. During the year client relationship intangible assets
were amortised over a 10-15 year period. Amortisation of GBP11,094,000
(2014: GBP8,287,000) was charged during the year. A reduction in the
average amortisation period of one year would increase the amortisation
charge by approximately GBP1,000,000 (2014: GBP700,000). At 31 December
2015, the carrying value of client relationship intangibles was
GBP100,869,000 (2014: GBP95,720,000).
Retirement benefit obligations
The group makes estimates about a range of long term trends and market
conditions to determine the value of the surplus or deficit on its
retirement benefit schemes, based on the group's expectations of the
future and advice taken from qualified actuaries. Long term forecasts
and estimates are necessarily highly judgemental and subject to risk
that actual events may be significantly different to those forecast. If
actual events deviate from the assumptions made by the group then the
reported surplus or deficit in respect of retirement benefit obligations
may be materially different.
Business combinations
During the year, the group entered into a transaction to acquire the
remaining 80.1% of Vision Independent Financial Planning Limited and
Castle Investment Solutions Limited ('the Vision businesses'), having
already acquired 19.9% in 2012. The group has accounted for the
transaction as a business combination, as set out in note 7.
Treatment and fair value of consideration transferred
The purchase price payable in respect of the acquisition is split into a
number of different components. The payment of certain elements has been
deferred; the timing and value of these are contingent on certain
employment conditions and/or operational targets being met.
The proportion of the deferred payments that are contingent on selling
shareholders remaining employees of the group for a specific period are
accounted for as remuneration for ongoing services in employment. The
group's estimate of the amounts ultimately payable will be expensed over
the deferral period.
Those deferred payments accounted for as additional consideration were
assessed against the operational targets to which they are subject.
Based on performance against the operational targets to date, there is
no evidence to suggest that these payments would be delayed or reduced.
Therefore, a provision for contingent consideration has been made for
the maximum amount expected to be paid, with amounts payable after 1
year discounted to their present value.
Remeasurement to fair value of non-controlling interest
The stepped nature of the acquisition requires the group to remeasure
its pre-existing equity interest in the two entities at its acquisition
date fair value and recognise the resulting gain or loss in profit or
loss. The fair value was determined using a probability weighted
discounted cash flow model. The fair value of the pre-existing 19.9%
holding was calculated as GBP2,369,000, and a gain arising on
remeasurement of GBP885,000 was recognised.
The assumptions underlying the discounted cash flow model are the growth
in the number of IFAs associated with the Vision businesses, the assets
under advisement generated by those IFAs and the discount rate used. A
reduction in the discount rate of 2.5 percentage points would increase
the fair value of the pre-existing holding by GBP338,000.
Identification of assets acquired and liabilities assumed
As at 31 December 2015, the date of acquisition, the Vision businesses'
identifiable assets, liabilities and contingent liabilities have been
recognised at their fair value.
In accordance with the process described above, the group has recognised
a client relationship intangible of GBP4,539,000, arising from the
Vision businesses' relationship with clients whose assets are managed
via the panel of discretionary fund managers.
Goodwill of GBP5,911,000 has also been recognised.
3. Segmental information
For management purposes the group is currently organised into two
operating segments: Investment Management and Unit Trusts. The cost of
staff providing support services is included in indirect expenses. The
allocation of these costs is shown in a separate column in the table
below, alongside the information presented for internal reporting to the
executive committee.
Investment Indirect
Unit
Management Trusts expenses Total
31 December 2015 GBP'000 GBP'000 GBP'000 GBP'000
Net investment management fee income 143,777 17,632 - 161,409
Net commission income 43,136 - - 43,136
Net interest income 10,841 - - 10,841
Fees from advisory services and other income 11,241 2,551 - 13,792
Underlying operating income 208,995 20,183 - 229,178
Staff costs - fixed (51,277) (2,966) (19,296) (73,539)
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Staff costs - variable (29,460) (3,794) (6,493) (39,747)
Total staff costs (80,737) (6,760) (25,789) (113,286)
Other direct expenses (19,186) (4,370) (21,971) (45,527)
Allocation of indirect expenses (45,306) (2,454) 47,760 -
Underlying operating expenses (145,229) (13,584) - (158,813)
Underlying profit before tax 63,766 6,599 - 70,365
Charges in relation to client relationships and
goodwill (11,014) - - (11,014)
Transaction costs (162) - - (162)
Loss on derivative financial instruments (1,030) - - (1,030)
Gain on remeasurement of non-controlling interest 885 - - 885
Segment profit before tax 52,445 6,599 - 59,044
Head office relocation costs (412)
Profit before tax attributable to equity holders of
the company 58,632
Taxation (note 4) (12,261)
Profit for the year attributable to equity holders
of the company 46,371
Investment
Unit
Management Trusts Total
GBP'000 GBP'000 GBP'000
Segment total assets 1,793,257 37,806 1,831,063
Unallocated assets 2,566
Total assets 1,833,629
Investment Indirect
Unit
Management Trusts expenses Total
31 December 2014 (re-stated - note 1) GBP'000 GBP'000 GBP'000 GBP'000
Net investment management fee income 120,561 13,281 - 133,842
Net commission income 43,723 - - 43,723
Net interest income 9,159 - - 9,159
Fees from advisory services and other income 11,908 2,171 - 14,079
Underlying operating income 185,351 15,452 - 200,803
Staff costs - fixed (43,885) (3,304) (14,760) (61,949)
Staff costs - variable (25,790) (2,751) (6,664) (35,205)
Total staff costs (69,675) (6,055) (21,424) (97,154)
Other direct expenses (17,013) (2,788) (22,292) (42,093)
Allocation of indirect expenses (41,085) (2,631) 43,716 -
Underlying operating expenses (127,773) (11,474) - (139,247)
Underlying profit before tax 57,578 3,978 - 61,556
Refund of levies for the Financial Services Compensation
Scheme 907 75 - 982
Gain on disposal of pension administration business 683 - - 683
Charges in relation to client relationships and goodwill (8,287) - - (8,287)
Transaction costs (1,057) - - (1,057)
Segment profit before tax 49,824 4,053 - 53,877
Gain on disposal of financial securities 6,833
Contribution to legal settlement (15,000)
Profit before tax attributable to equity holders of
the company 45,710
Taxation (note 4) (10,032)
Profit for the year attributable to equity holders
of the company 35,678
Investment
Unit
Management Trusts Total
GBP'000 GBP'000 GBP'000
Segment total assets 1,630,464 32,878 1,663,342
Unallocated assets 4,750
Total assets 1,668,092
Centrally incurred indirect expenses are allocated to operating segments
on the basis of the cost drivers that generate the expenditure;
principally the headcount of staff directly involved in providing those
services from which the segment earns revenues, the value of funds under
management and the segment's total revenue.
Geographic analysis
The following table represents operating income by the geographical
location of the group entity providing the service:
2015 2014
GBP'000 GBP'000
United Kingdom 221,957 202,634
Jersey 8,106 6,667
Operating income 230,063 209,301
The following is an analysis of the carrying amount of non-current
assets analysed by the geographical area in which the assets are
located:
2015 2014
GBP'000 GBP'000
United Kingdom 175,170 162,901
Jersey 6,155 6,995
Non-current assets 181,325 169,896
Major clients
The group is not reliant on any one client or group of connected clients
for generation of revenues.
4. Taxation
2014
2015 GBP'000
GBP'000 (restated - note 1)
Current tax:
- charge for the year 12,266 10,587
- adjustments in respect of prior years 17 (136)
Deferred tax:
- charge for the year (27) (510)
- adjustments in respect of prior years 5 91
12,261 10,032
The tax charge is calculated based on our best estimate of the amount
payable as at the balance sheet date. Any subsequent difference between
these estimates and the actual amount paid are recorded as adjustments
in respect of prior years.
The tax charge on profit for the year is higher (2013: lower) than the
standard rate of corporation tax in the UK of 20.2% (2014: 21.5%). The
differences are explained below:
2014
2015 GBP'000
(restated - note
GBP'000 1)
Tax on profit from ordinary activities at the standard
rate of 20.2% (2014: 21.5%) 11,871 9,824
Effects of:
- disallowable expenses 584 587
- share-based payments (179) (339)
- tax on overseas earnings (75) (143)
- (over)/underprovision for tax in previous years 22 (45)
- other (37) 112
Effect of change in corporation tax rate on deferred
tax 75 36
12,261 10,032
5. Dividends
2015 2014
GBP'000 GBP'000
Amounts recognised as distributions to equity holders
in the year:
- final dividend for the year ended 31 December 2014
of 33.0p (2013: 31.0p) per share 15,766 14,734
- interim dividend for the year ended 31 December
2015 of 21.0p (2014: 19.0p) per share 10,070 9,059
Dividends paid in the year of 54.0p (2014: 50.0p)
per share 25,836 23,793
Proposed final dividend for the year ended 31 December
2015 of 34.0p (2014: 33.0p) per share 16,235 15,804
An interim dividend of 21.0p per share was paid on 7 October 2015 to
shareholders on the register at the close of business on 11 September
2015 (2014: 19.0p).
A final dividend declared of 34.0p per share (2014: 33.0p) is payable on
23 May 2016 to shareholders on the register at the close of business on
29 April 2016. The final dividend is subject to approval by shareholders
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at the Annual General Meeting on 18 May 2016 and has not been included
as a liability in the financial statements.
6. Earnings per share
Earnings used to calculate earnings per share on the bases reported in
this announcement were:
2014
2015 (restated - note 1)
Pre-tax Taxation Post-tax Pre-tax Taxation Post-tax
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Underlying profit attributable to shareholders 70,365 (14,637) 55,728 61,556 (13,437) 48,119
Gain on remeasurement of non-controlling interest 885 (179) 706 - - -
Refund of levies for the Financial Services Compensation
Scheme - - - 982 (211) 771
Gain on disposal of financial securities - - - 6,833 (1,469) 5,364
Gain on disposal of pension administration business - - - 683 (147) 536
Charges in relation to client relationships and goodwill (11,014) 2,230 (8,784) (8,287) 1,781 (6,506)
Contribution to legal settlement - - - (15,000) 3,224 (11,776)
Transaction costs (162) 33 (129) (1,057) 227 (830)
Loss on derivative financial instruments (1,030) 209 (821) - - -
Head office relocation costs (412) 83 (329) - - -
Profit attributable to shareholders 58,632 (12,261) 46,371 45,710 (10,032) 35,678
Basic earnings per share has been calculated by dividing profit
attributable to shareholders by the weighted average number of shares in
issue throughout the year, excluding own shares, of 47,612,026 (2014:
46,971,196).
Diluted earnings per share is the basic earnings per share, adjusted for
the effect of contingently issuable shares under the Long Term Incentive
Plan, employee share options remaining capable of exercise and any
dilutive shares to be issued under the Share Incentive Plan, all
weighted for the relevant period:
2015 2014
Weighted average number of ordinary shares in issue
during the year - basic 47,612,026 46,971,196
Effect of ordinary share options/Save As You Earn 174,219 21,684
Effect of dilutive shares issuable under the Share
Incentive Plan 26,636 63,866
Effect of contingently issuable ordinary shares under
the Long Term Incentive Plan 204,110 247,202
Diluted ordinary shares 48,016,991 47,303,948
2014
2015 (restated - note
1)
Underlying earnings per share for the year attributable
to equity holders of the company:
- basic 117.0p 102.4p
- diluted 116.1p 101.7p
7. Business combinations
Vision Independent Financial Planning and Castle Investment Solutions
On 31 December 2015, the group acquired the remaining 80.1% of the
ordinary share capital of Vision Independent Financial Planning Limited
('Vision') and Castle Investment Solutions Limited ('Castle') (together,
the 'Vision group'). The group originally purchased a 19.9% stake in the
Vision group for GBP2,000,000 in October 2012.
Vision is an independent specialist financial advice network, while
Castle, its sister company, provides it with administrative services.
The acquisition of the Vision group is part of the group's strategy of
broadening its distribution reach and accessing a greater share of new
business intermediated by financial advisers.
Consideration transferred
The following table summarises the acquisition date fair value of each
class of consideration transferred:
GBP'000
Cash consideration 5,000
Deferred and contingent consideration (see below) 4,145
Total consideration 9,145
Cash consideration comprises an initial payment of GBP5,000,000, paid on
31 December 2015.
Deferred and contingent consideration
Deferred and contingent consideration is split into a number of
different components:
GBP'000
Deferred net asset value payment 1,926
Contingent consideration payments 2,219
Deferred and contingent consideration 4,145
The deferred net asset value payment of GBP1,926,000 is payable in the
first quarter of 2016, subject to agreement of the net asset value (as
at the acquisition date) of the acquired businesses.
Contingent consideration of up to GBP2,219,000 is payable between the
balance sheet date and the end of 2019. Further deferred payments to
vendors who are remaining in employment with the acquired companies of
up to GBP10,203,000 is payable over the same period and will be charged
to profit or loss over the deferral period. Both sets of payments are
subject to performance against certain growth and operational targets.
Contingent consideration represents the maximum amount payable under the
targets to which it is subject. The group has discounted any amounts
payable after 1 year. The undiscounted value of the deferred and
contingent consideration is GBP4,596,000.
All contingent consideration and deferred payments to vendors who are
remaining in employment will be made 80% in cash and 20% in shares.
Acquisition-related costs
Acquisition-related costs totalling GBP162,000 for legal and advisory
fees have been recognised in transaction costs in the year in relation
to this transaction.
Identifiable assets acquired and liabilities assumed
The acquired businesses' identifiable net assets at the acquisition date
were as follows:
Carrying Fair value Recognised
amounts adjustments values
31 December 2015 GBP'000 GBP'000 GBP'000
Property, plant and equipment 53 - 53
Trade and other receivables 1,399 - 1,399
Intangible assets - 4,539 4,539
Loans and advances to banks 1,472 - 1,472
Trade and other payables (806) - (806)
Accruals, deferred income and other
liabilities (192) - (192)
Deferred tax liabilities - (862) (862)
Total net assets acquired 1,926 3,677 5,603
The carrying amounts of the net assets acquired are provisional and
subject to agreement of the acquired businesses' completion accounts.
The fair value of acquired trade and other receivables and loans and
advances to banks is equal to the contractual amounts receivable, all of
which are expected to be collected.
The fair value of Vision's client relationship intangible assets has
been measured using a discounted cash flow model.
Goodwill
Goodwill arising from the acquisition has been recognised as follows:
GBP'000
Total consideration (see above) 9,145
Fair value of pre-existing interest in Vision group 2,369
Fair value of identifiable net assets acquired (see
above) (5,603)
5,911
The remeasurement to fair value of the group's existing 19.9% stake in
the Vision group immediately prior to acquisition resulted in a gain of
GBP885,000. This amount has been included in operating income.
Goodwill of GBP5,911,000 arises as a result of the acquired workforce
and future growth synergies as a result of this acquisition. Any
impairment of goodwill in future periods is expected to be deductible
for tax purposes.
No operating income or profit before tax relating to the acquired
businesses are included within the consolidated statement of
comprehensive income for the year ended 31 December 2015.
If the group had made the acquisition on 1 January 2015, the group
operating income and profit before tax would have been GBP232,691,000
and GBP59,431,000 respectively.
8. Related parties
The remuneration of the key management personnel of the group, who are
defined as the company's directors and other members of senior
management who are responsible for planning, directing and controlling
the activities of the group, is set out below.
2015 2014
GBP'000 GBP'000
Short term employee benefits 10,659 8,089
Post-employment benefits 791 132
Other long term benefits 1,706 948
Share-based payments 2,878 1,582
16,034 10,751
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