TIDMRAT
RNS Number : 5265D
Rathbone Brothers PLC
20 February 2020
Rathbone Brothers Plc
2019 Preliminary results
Highlights
- Total funds under management and administration passed a
significant milestone, reaching GBP50.4 billion at 31 December
2019, up 14.3% from GBP44.1 billion at 31 December 2018. The FTSE
100 Index increased 12.1% and the MSCI PIMFA Private Investor
Balanced Index increased 13.1% over 2019.
- Funds in Rathbone Investment Management grew 11.7% to GBP43.0
billion (31 December 2018: GBP38.5 billion). Operating income in
Investment Management was strong, increasing 12.9% to GBP310.9
million for the year ended 31 December 2019 (2018: GBP275.3
million), reflecting a full year of income of Speirs & Jeffrey.
The average FTSE 100 Index was 7456 on quarterly billing dates in
2019, compared to 7269 in 2018. Net organic outflows for the year
totalled GBP0.6 billion (2018: net inflows GBP1.1 billion).
- Rathbone Unit Trust Management continued to perform
exceptionally well with funds under management increasing 32.1% to
GBP7.4 billion at 31 December 2019 (31 December 2018: GBP5.6
billion). Net inflows increased 73.7% to GBP943 million during 2019
(2018: GBP543 million) and operating income totalled GBP37.2
million in the year ended 31 December 2019 (2018: GBP36.7
million).
- Underlying(1) operating expenses of GBP259.4 million (2018:
GBP220.4 million) not only included the full year impact of a
number of growth led investments and Speirs & Jeffrey, but also
software impairment costs of GBP3.1 million and a considerable
increase in the Financial Services Compensation Scheme levy (2019:
GBP4.5 million, 2018: GBP2.8 million).
- Underlying(1) profit before tax of GBP88.7 million (2018:
GBP91.6 million) reflected the above in addition to the expected
cessation of 'risk-free' managers' box dealing profits in our Unit
Trusts business from mid-January 2019 and the acceleration of some
deferred executive awards in relation to recent executive
retirements.
- Statutory profit before tax of GBP39.7 million (2018: GBP61.3
million) reflected anticipated items, most notably the costs
associated with the acquisition of Speirs & Jeffrey. The
majority of these costs were in relation to deferred consideration
payments to former shareholders of the business which have been
treated as remuneration in accordance with accounting
standards.
1. A reconciliation between the underlying measure and its
closest IFRS equivalent is provided in Table 2 of the financial
performance section.
Declaration of final dividend
- The board recommends a final dividend of 45p for 2019 (2018:
42p), making a total of 70p for the year (2018: 66p), an increase
of 6.1% on 2018.
Ends
Issued on 20 February 2020
For further information contact: Camarco (Communications adviser to
Rathbone Brothers Plc Rathbones)
Tel: 020 7399 0000 Tel: 020 3757 4984
Email: shelly.patel@rathbones.com Email: ed.gascoigne-pees@camarco.co.uk
Paul Stockton, Chief Executive Ed Gascoigne-Pees
Jennifer Mathias, Group Finance Director
Shelly Patel, Head of Investor Relations
Chairman's statement
Our year in review
2019 may well be remembered for political reasons more than any
other, but investment markets finished the end of the year
strongly. Our own funds under management and administration
increased 14.3% to GBP50.4 billion, up from GBP44.1 billion on 31
December 2018, as we continued to focus on providing a quality
service to our clients and worked hard to bring Speirs &
Jeffrey fully into Rathbones.
Following the appointment of Paul Stockton as chief executive in
May, we took the opportunity to refocus our strategic direction.
Our updated strategy both recognises a need to invest in our
business in the shorter term and also builds upon our strengths as
we look to grow and develop over the coming years.
Profit before tax for the year totalled GBP39.7 million (2018:
GBP61.3 million) and reflects anticipated costs associated with the
acquisition of Speirs & Jeffrey. Consequently, basic earnings
per share decreased to 50.3p from 88.7p in 2018.
Underlying profit for the year totalled GBP88.7 million (2018:
GBP91.6m), resulting in an underlying operating margin of 25.5% for
the year (2018: 29.4%). Underlying earnings per share in the period
totalled 132.8p (2018: 142.5p). This performance is discussed
further in the chief executive's review and the financial
review.
Reflecting our confidence in the future, strong capital position
and in line with our dividend policy, the board is recommending a
final dividend of 45p per share. This brings the total dividend for
the year to 70p per share, an increase of 6.1% over last year. The
record date for the dividend is 24 April 2020, with the payment
date on 12 May 2020.
Our purpose
In any business, identifying a purpose that drives the right
behaviours and client outcomes is essential to long-term value
creation and the resilience of brand. This year we have undertaken
a firm-wide exercise to define our purpose - in essence, why does
Rathbones exist? This exercise has included both one-on-one
interviews and also group workshops involving colleagues across a
wide spread of teams, regions and ages in a quest to define what
Rathbones means to people within and outside the business. The
result enabled us to distil our purpose to a theme of thinking,
acting and investing responsibly. This is backed by a set of four
central corporate values that we know resonate with our employees.
These involve us being:
- responsible and entrepreneurial in creating value
- courageous and resilient in leading change
- collaborative and empathetic in dealing with people
- professional and high performing in all our actions
In these turbulent times an agreed purpose of thinking, acting
and investing responsibly is a most refreshing outcome. It chimes
well with the longstanding traditions of Rathbones. During 2020, we
will continue to embed this purpose throughout the business.
Governance and culture
The board strongly believes that robust corporate governance
makes a significant contribution to the long-term success of the
firm and the achievement of its strategy. A good governance
framework creates a solid foundation, which enables us to act in
the best interests of our stakeholders.
As a board, we also attribute great importance to the firm's
culture. This has developed over many years and represents a key
competitive advantage. The firm's client focus and integrity are
fundamental to achieving the best results over the long term.
During 2019, the board has continued to monitor a number of culture
indicators. The results of an extensive employee opinion survey,
which had an 86% engagement rate, confirmed that one of our
strengths as a business is a caring culture that is friendly and
supportive.
We also believe it is in the best interests of our clients that
the companies in which we invest adopt best practices in corporate
governance. Mindful of our responsibilities to our clients, we seek
to be good, long-term stewards of the investments we manage on
their behalf, as expressed in our stewardship policy.
2019 also marked the 10th anniversary since we became a
signatory to the Principles of Responsible Investment (PRI). In
this time, we have seen our scoring on the PRI annual benchmarking
improve steadily and we now boast an A+ rating for our strategy and
governance around responsible investment. Our footprint is
substantial in this area and we are widely known for our active
engagement on environmental, social and governance (ESG)
issues.
Inspiring our people
Our people are our greatest asset and proper engagement with
them is crucial to the ongoing success of Rathbones. This year, the
board discussed the results of our employee opinion survey in
detail and further surveys will be undertaken in 2020, together
with ongoing workforce engagement, to ensure the initiatives we
have taken continue to address the feedback from our employees.
As I mentioned in my statement last year, the 2018 Corporate
Governance Code requires a specific mechanism for engagement with
employees. After careful consideration the board agreed that this
was best undertaken by assigning two non-executive directors to the
task. We nominated Colin Clark and Sarah Gentleman to be
responsible for gathering workforce feedback and the process has
started well. They have visited a number of offices, where
employees suggested ways to improve their working environment and
how the best interests of colleagues might be catered for. We will
take forward this initiative with enthusiasm.
Engaging with shareholders
I have been pleased to meet with a number of our shareholders
during the year and welcome discussions with them on strategy and
governance in particular. The remuneration committee also conducted
an investor engagement programme in order to maintain open dialogue
on remuneration matters. All of these meetings have allowed us to
provide useful feedback to the board and we will continue to hold
an open and constructive dialogue in analyst and investor meetings
throughout 2020.
Risks
Our risk management processes continue to play an important role
in decision making and managing the business. In 2019, in addition
to a particular focus on suitability, we paid attention to the
risks associated with cyber crime and business resilience, the
operational risks associated with the integration of Speirs &
Jeffrey and risks associated with our strategic update.
Non-executive members of the board have also participated in a
number of training and operational exercises associated with key
risk areas.
Finally, although Rathbones' exposure to potential disruption
from the UK leaving the European Union remains low, we will
continue to monitor the outcome of post-Brexit trade negotiations
closely and continue to develop appropriate contingency plans.
Board changes and succession
As part of our normal succession planning, the board continues
to monitor its capabilities and assesses what new skills are
necessary to strengthen both the board and the wider business over
time, taking into account the existing balance of knowledge,
experience and diversity.
This year saw the implementation of our succession plans, with
Jennifer Mathias being appointed to the group finance director role
on 1 April 2019. Paul Stockton, the former group finance director,
became chief executive on 9 May 2019. The transition and handover
process has gone smoothly and Paul and Jennifer are working well
together in their respective new roles.
I have served as a non-executive director for over nine years,
and as independent chairman since May 2011, which exceeds the
tenure requirements as outlined in the new 2018 UK corporate
governance code. As a result, Jim Pettigrew, our senior independent
director, has started the process to appoint my successor. I will
however remain as chairman during 2020, working with both Paul and
Jennifer in their new roles and will ensure an orderly handover to
my successor in due course. The nomination committee have assessed
and confirmed my continuing independence for 2020.
Looking forward
Rathbones has taken a number of positive steps forward this year
and, having outlined our strategic priorities in 2019, we look
forward to implementing them in 2020 and beyond. Whilst investment
markets will undoubtedly present a number of unforeseen challenges
this year, I am confident that our renewed focus will stand us in
good stead to drive our business forward.
Mark Nicholls
Chairman
19 February 2020
Chief executive's review
A look back
During 2019, we once again managed a very full agenda, balancing
the impact of acquisitions with projects to improve our service to
both clients and employees. In October, we set out our strategic
focus for the medium term, refocusing our efforts to provide
relevant investment and advice solutions to our clients. We
continued to grow our funds under management and administration
(FUMA), reaching GBP50.4 billion at 31 December 2019 (2018: GBP44.1
billion). Total funds in our Investment Management business were
GBP43.0 billion (2018: 38.5 billion), whilst our Unit Trusts
business reached GBP7.4 billion (2018: GBP5.6 billion).
Total net inflows across the group were GBP0.6 billion in 2019
(2018: GBP8.5 billion, largely reflecting the acquisition of Speirs
& Jeffrey). Gross organic inflows in Investment Management
remained resilient at GBP3.3 billion (2018: GBP3.8 billion) in the
face of weaker investor sentiment and no reoccurrence of the larger
short-term mandates won in 2018, but were offset by elevated
outflows in Investment Management of GBP3.9 billion (2018: GBP2.7
billion). This reflected additional outflows as some pension and
other institutional mandates were repositioned by trustees,
previously noted investment manager departures and the exit of some
lower-margin mandates following the integration of Speirs &
Jeffrey, some of which is expected to continue into 2020.
Net inflows in our Unit Trusts business totalled GBP943 million
in the year (2018: GBP543 million) representing 16.7% of opening
funds under management, an outstanding performance against a
difficult environment for asset managers. Our strong performance in
the year was reflected in the February 2020 Pridham report on the
industry which ranked Rathbones as 9th for overall net retail sales
in 2019.
Profit before tax of GBP39.7 million (2018: GBP61.3 million)
reflected anticipated items including costs associated with the
acquisition of Speirs & Jeffrey, which were capital in nature.
The majority of these costs were in relation to deferred
consideration payments to former shareholders of the business who
remain in employment and have therefore been treated as
remuneration. Accordingly, earnings per share totalled 50.3p (31
December 2018: 88.7p).
When reporting earlier in 2019, we flagged some expected
pressures on our underlying profit expectations for the year,
including the cessation of 'risk-free' managers' box dealing
profits in our Unit Trusts business from mid-January (2019: GBP0.2
million, 2018: GBP3.4 million) and the acceleration of some
deferred executive awards in relation to recent executive
retirements (2019: GBP1.1 million, 2018: GBP0.1 million).
Underlying profit before tax of GBP88.7 million (2018: GBP91.6
million) reflects these items alongside the following factors.
A Financial Services Compensation Scheme (FSCS) charge of GBP4.5
million for the year (2018: GBP2.8 million) was considerable and,
following recent announcements from the FSCS we can reasonably
expect this charge to increase further by up to 45% in 2020. Along
with many in the industry, we feel that the ongoing cost of this
scheme falls unfairly and is becoming a disproportionate burden on
participating firms. We will continue to work closely with industry
bodies on this important issue.
During the strategic review in 2019, we started looking closely
at our IT strategy to deliver on the goals we set out. Refocusing
our digital strategy towards on-boarding and improving the client
experience has meant that software previously aimed at improving
some internal workflows no longer provides value for money and will
no longer be put into production. This has resulted in an
impairment charge of GBP3.1 million in 2019.
An underlying profit before tax of GBP88.7 million represents an
underlying operating margin of 25.5% for the year (2018: 29.4%),
and provides an underlying earnings per share of 132.8p (2018:
142.5p).
Our balance sheet remains strong with a consolidated Common
Equity Tier 1 ratio at 31 December 2019 of 22.0% compared with
20.6% at 31 December 2018. We remain very lightly geared with a
consolidated leverage ratio at 31 December 2019 of 8.3% compared
with 8.9% at 31 December 2018. Our underlying return on capital
employed for the year equalled 14.2% (2018: 16.9%). The decrease
was a result of average equity in 2018 being lower than that in
2019 due to the timing of the GBP60 million share placing in
relation to the acquisition of Speirs & Jeffrey in 2018.
A look forward
One of my key priorities when I took over as chief executive was
setting a strategic focus for the business that leveraged our many
strengths. Although I have been a member of the Rathbones team for
over a decade, I have taken this opportunity to take a step back
and look at the business again.
Over recent years, the industry's focus has been on responding
to a rapidly changing environment that has involved some
considerable regulatory change. Today, in order to progress, we
will now refocus our attention on what we do best, which is
providing a personal service to clients. After dialogue with
various stakeholders, in October 2019 we delivered a strategic
update where we set six clear priorities for the future.
- Provide a refreshed discretionary service that gives clients a
tailored, whole-of-market investment choice, delivered by an
investment professional that is accountable for results, and
supported by a full digital experience
- Deepen investment skills in the company, adding expertise to
invest across a wider range of asset classes, giving clients more
options to invest responsibly, aligned with their values
- Further penetrate specialist markets in the charity and
Environmental, Social and Governance (ESG) space
- Drive organic growth by freeing up team capacity, supporting
business development while growing RUTM, Vision and the financial
planning and advice capability across our branch network
- Establish a common culture and corporate values to inspire our
people
- Drive productivity, whilst looking to take advantage of
inorganic growth opportunities that fit our culture to accelerate
our strategy and build market share
Delivering client service
Client advocacy for our service has always been very positive
and this was reaffirmed through a recent independent study into
client experience in wealth management. Rathbones' net promoter
score (a measure of the willingness of clients to recommend
Rathbones to others) was 55% against an industry benchmark of
46%.
Our strong standing in the industry was further reinforced as we
were awarded our sixth consecutive Gold Standard Award for
discretionary fund management from Investment Week. Although we are
proud of this high degree of advocacy, we also see opportunities to
improve.
Embracing digital to complement our face-to-face service will be
key to future success and we continue to update and deliver our
group-wide digital programme. We have commenced a project to
support the launch of a new client and adviser portal as well as a
new mobile app, due in 2020. These important pieces of technology
will upgrade our existing service. As a firm, we are keen to
provide more holistic communication options to clients through the
medium most convenient to them at the time, whether that be
digitally or face-to-face.
Our longstanding credentials in ESG investing continue to build
on strong foundations. We now manage GBP1.6 billion (2018: GBP1.2
billion) in Rathbone Greenbank Investments and GBP1.5 billion
(2018: GBP1.2 billion) in our Ethical Bond Fund. We also continue
to build our capability in the equity space with our Rathbone
Global Sustainability Fund. Our charities business now manages
GBP6.1 billion (2018: GBP5.3 billion) and is the fourth largest
charity investment manager in the UK, with aspirations to move up
further as it continues to grow. This year also marked the 10th
anniversary since we became a signatory to the Principles for
Responsible Investment (PRI) and we are proud to have been an early
mover in the UK market. We will look to develop our proposition
further in 2020 and beyond.
Focusing on growth
Improving organic growth rates will remain a priority over the
next few years and increasing the number of experienced
client-facing individuals will be fundamental to this. Not only
will we focus on recruiting more investment managers, but we will
also continue to invest in our graduate and apprenticeship
programmes to identify and develop future talent.
Our strategy also highlighted the importance of investment in
business development skills and resources. During 2019 we therefore
established business development teams focused on financial
advisers and added to our client development support team. These
teams have already been instrumental in winning some larger
mandates and helping our investment management teams grow.
We have also been looking carefully at new solutions to help
optimise the capacity of our current investment management teams.
During the year we worked to develop the Rathbone Select Portfolio
service, a cost-effective investment solution for clients with
GBP15,000 or more to invest. The service accesses our in-house
multi-asset funds on a self-select basis and is designed for
clients who are comfortable choosing an investment strategy to meet
their investment objectives. The solution is efficient whilst
offering an effective choice for clients. A pilot is already
underway and the roll out will commence during 2020.
Finally, although we remain investment led, we strongly believe
that the provision of financial planning and advice, either on a
one-off or ongoing basis, is an important part of our future
proposition. We now have over 30 financial planners and
paraplanners in our in-house Rathbone Financial Planning business,
with recruitment expected to continue into 2020. Our external
financial planning business, Vision Independent Financial Planning,
will continue to collaborate across Rathbone offices and with
Rathbone Financial Planning to service clients who are not covered
by our in-house services. The business continues to perform
strongly and now advises on GBP1.9 billion assets under
administration and has over 130 external independent advisers, up
from GBP1.5 billion and 125 external advisers a year earlier. We
anticipate adviser numbers will continue growing in 2020 as the
regional footprint expands.
The inorganic opportunity
Whilst much of our strategic focus is on organic growth, part of
our strategy has been, and will continue to be, acquiring
businesses that fit our culture.
We formally acquired Speirs & Jeffrey in 2018 and
transferred clients onto our platform during 2019, completing the
largest acquisition and client migration project that Rathbones has
undertaken to date. By 1 October 2019 we had transferred 98% of
funds under management and administration to Rathbones' systems.
This was a significant operational exercise and confirmation of our
ability to successfully consolidate a sizeable business onto our
platform, which gives us confidence as we seek further
opportunities. The spirit of engagement we have seen on all fronts
has been very positive, with teams learning a considerable amount
from one another over the past 18 months. During 2020 and 2021 we
will focus on realising the remaining potential synergy benefits of
the transaction.
Reinforcing our commitment to developing specialist businesses,
in November 2019 we announced the acquisition of the Court of
Protection (COP) and Personal Injury (PI) business of Barclays
Wealth. The business, acquired through existing capital resources,
comprises approximately GBP500 million of funds managed on behalf
of approximately 600 clients and their deputies and trustees. A
team of ten individuals will join Rathbones' current specialist COP
and PI team at completion, which is expected in the second quarter
of 2020. We will continue to support our specialist teams in order
to afford them further growth.
Building on a successful culture
People are our most important asset in meeting our strategic
objectives and being a diverse and inclusive organisation is a key
element of our strategy. Companies with positive cultures tend to
work well together in difficult times, which enables them to emerge
with a stronger business when conditions improve. I have seen a lot
of this in our own business over the past year as we navigated
through changes. The commitment to our clients that our teams
exhibit reaffirms my belief that a strong culture must remain
central to our purpose. To this end, we ran more than 10 workshops
encompassing a cross-section of employees across our regional
network, ranging in age and background, who helped to define our
purpose and corporate values to ensure that they resonate across
the business. Thinking, acting and investing responsibly is what we
do.
Although there is still work to do, we have also taken important
steps forward on improving our commitments to our people. We
recognise the importance of an appropriate work-life balance, both
to the health and welfare of employees and to the business. Whilst
our engagement survey results suggest the vast majority of
colleagues feel they strike the right balance between work and home
life, we have continued to grow our employee wellbeing offering. In
2019, we increased the range and number of training opportunities
through one-to-one and drop-in sessions on wellbeing-related
topics, including: building resilience, using mindfulness, managing
stress, and protecting mental health.
During the year, we also appointed a diversity and inclusion
committee, improved our maternity, paternity and shared parental
leave policies, continued our rollout of unconscious bias and
inclusive leadership training programmes across the business and
achieved 20.3% of the Women in Finance target to have senior
management composed of 25% women by 2023. Our initiatives in this
space will continue throughout 2020 and beyond.
Investing in productivity
During the last few years, a significant amount of process has
been added to meet the requirements of a number of complex
regulatory compliance projects with mandatory deadlines. These
external requirements have had to be balanced with important
internal projects. In 2019, we adopted MiFID II costs and charges
disclosure standards, taking care to achieve as much commonality as
possible with other industry participants. We believe that being
more transparent about costs is a positive step for both our
clients and the wealth management industry generally. Alongside
this work, we also updated client documentation and anti-money
laundering documentation and standards.
With more of this mandatory work behind us, now is the time to
move forward and look at how we can increase productivity. This
includes new ways of working with technology, workflow tools, and
re-engineering processes in order to ease client administration,
improve client on-boarding and enhance our digital capabilities to
create capacity for our investment managers so they can continue to
meet the growing needs of our current and future clients.
Ongoing risk management
Evidence points to an increased frequency of cyber attacks on
our industry, which reinforces the importance of managing cyber
risk to protect our client data and assets. We continue to focus on
this risk, implementing a number of tangible improvements to
operating processes in the year and putting in place structures to
support our response capabilities and training for staff.
Managing through any uncertainties associated with a disorderly
Brexit will also remain a focus, as will our relentless monitoring
and assessment of how unforeseen global events, economic and
trading conditions will impact our approach to investment.
Outlook
Rathbones has grown considerably in the past five years, nearly
doubling its funds under management and administration during that
time. Opportunities to build our market share remain. Delivering on
our strategy will be our focus in the near term as we balance
greater productivity with an ongoing desire to invest and grow.
Paul Stockton
Chief Executive
19 February 2020
Financial performance
Overview of financial performance
The group's financial performance for the year to 31 December
2019 was resilient during a year of significant integration
activity and economic and political uncertainty.
Statutory profit before tax of GBP39.7 million in 2019 (2018:
GBP61.3 million) includes planned costs of GBP30.8 million for the
acquisition and integration of Speirs & Jeffrey.
Underlying profit before tax was GBP88.7 million (2018: GBP91.6
million) reflecting the initiation of investment into the strategic
plans announced in October 2019 and a number of other cost
increases, as detailed below. The underlying operating margin,
which is calculated as the ratio of underlying profit before tax to
underlying operating income, was 25.5% (2018: 29.4%).
The board primarily considers underlying measures of income,
expenditure and earnings when assessing the performance of the
group. These are considered by the board to be a better reflection
of true business performance than reviewing results on a statutory
basis only. These measures are also widely used by research
analysts covering the group. A full reconciliation between
underlying results and the closest IFRS equivalent is provided in
Table 2.
Table 1. Group's overall performance
2019 2018
GBPm GBPm
(unless (unless
stated) stated)
------------------------------------------------------ -------- --------
Operating income (and underlying operating income(1)) 348.1 312.0
Underlying operating expenses1 (259.4) (220.4)
Underlying profit before tax1 88.7 91.6
Underlying operating margin1 25.5% 29.4%
Profit before tax 39.7 61.3
Effective tax rate 32.2% 24.6%
Taxation (12.8) (15.1)
Profit after tax 26.9 46.2
Underlying earnings per share1 132.8p 142.5p
Earnings per share 50.3p 88.7p
Dividend per share2 70.0p 66.0p
Underlying return on capital employed (ROCE) 1 14.2% 16.9%
------------------------------------------------------ -------- --------
1. A reconciliation between the underlying measure and its
closest IFRS equivalent is shown in table 2
2. The total interim and final dividend proposed for the
financial year
Underlying operating income
No adjustments have been made to operating income as reported
under IFRS for 2019 or 2018.
Operating income increased 11.6% in 2019 to GBP348.1 million.
This included a full year of income from Speirs & Jeffrey,
which represented a GBP17.2 million increase.
Fee income of GBP260.2 million in 2019 increased 11.5% compared
to GBP233.4 million in 2018. Fees represented 74.7% of underlying
operating income in 2019, which was in line with 74.8% in 2018.
Net commission income increased 23.4% to GBP51.1 million in 2019
(2018: GBP41.4 million). Commission income was higher in the second
half of the year, reflecting elevated levels of investment activity
as investor sentiment improved, notably following the general
election in December.
Net interest income increased 7.2% to GBP16.4 million,
reflecting higher average levels of liquidity in client portfolios
- particularly in the second half of the year following the
migration of former Speirs & Jeffrey clients onto the group's
banking terms.
Underlying operating expenses
Operating expenses increased from GBP250.7 million to GBP308.4
million during the year. Operating expenses include expenditure
falling into the three categories explained under Table 2.
Underlying operating expenses increased by 17.7% to GBP259.4
million. As well as the full year impact of Speirs & Jeffrey,
which added GBP11.7 million to the cost base, this reflects a
number of specific areas of cost growth, described below, in
addition to underlying growth of the business.
Regulation continued to drive cost growth with additional
Financial Services Compensation Scheme levies and regulatory change
projects adding GBP2.5 million to costs in 2019. Charges of GBP3.1
million were incurred in relation to a review of our IT
infrastructure and the write off of IT developments which are no
longer planned to be put into use in the business. The group also
incurred GBP0.4 million on preparations for a no-deal Brexit.
Planned additions to headcount in 2018 and 2019 and market led
salary increases increased fixed staff costs by 15.4% to GBP110.8
million. The full year impact of Speirs & Jeffrey contributed
GBP6.8 million of this increase. In total, average headcount
increased by 13.5% to 1,509 in 2019. Planned reductions in
headcount following the successful integration of Speirs &
Jeffrey into the group will take effect in early 2020.
Total variable staff costs increased by 21.2% to GBP66.8
million, reflecting improved performance-based reward levels and
the additional cost of share incentives to staff, including a full
year charge for the Staff Equity Plan launched in May 2018. The
previously announced retirements of a number of executives resulted
in accelerated charges for deferred executive awards of GBP1.1
million in 2019. Variable staff costs in 2019 represented 19.2% of
underlying operating income (2018: 17.7%) and 43.0% of underlying
profit before variable staff costs and tax (2018: 37.6%).
Alternative performance measures
Table 2. Reconciliation of underlying performance measures to
closest equivalent IFRS measures
2019 2018
GBPm GBPm
(unless (unless
stated) stated)
--------------------------------------------------------- -------- --------
Operating income (and underlying operating income) 348.1 312.0
Operating expenses (308.4) (250.7)
Charges in relation to client relationships and goodwill 15.9 13.2
Acquisition-related costs 33.1 19.9
Head office relocation costs - (2.8)
--------------------------------------------------------- -------- --------
Underlying operating expenses (259.4) (220.4)
Profit before tax 39.7 61.3
--------------------------------------------------------- -------- --------
Underlying profit before tax1 88.7 91.6
--------------------------------------------------------- -------- --------
Operating margin 11.4% 19.6%
--------------------------------------------------------- -------- --------
Underlying operating margin2 25.5% 29.4%
--------------------------------------------------------- -------- --------
Taxation (12.8) (15.1)
Tax on non-underlying expenses (4.8) (2.3)
--------------------------------------------------------- -------- --------
Underlying taxation (17.6) (17.4)
Profit after tax 26.9 46.2
--------------------------------------------------------- -------- --------
Underlying profit after tax3 71.1 74.2
--------------------------------------------------------- -------- --------
Weighted average number of shares in issue 53.6m 52.1m
Earnings per share 50.3p 88.7p
--------------------------------------------------------- -------- --------
Underlying earnings per share4 132.8p 142.5p
--------------------------------------------------------- -------- --------
Quarterly average total equity 498.9 440.1
Underlying ROCE5 14.2% 16.9%
--------------------------------------------------------- -------- --------
1. Underlying operating income less underlying operating
expenses
2. Underlying profit before tax as a % of underlying operating
income
3. Underlying profit before tax less underlying taxation
4. Underlying profit after tax divided by the weighted average
number of shares in issue
5. Underlying profit after tax as a percentage of quarterly
average total equity
Charges in relation to client relationships and goodwill (note
10)
As explained in note 4.1, client relationship intangible assets
are recognised when we acquire a business or hire a team of
investment managers. The charges associated with these assets
represent the proportion of acquisition costs which are charged to
profit or loss as amortisation each year over the estimated
duration of the client relationships. The quantum of the accounting
charge will vary depending on the terms of each individual
acquisition or team hire and represents a significant non-cash
profit and loss item. They have, therefore, been excluded from
underlying profit, which represents largely cash-based earnings and
more directly relates to the financial reporting period.
Acquisition-related costs (note 7)
Acquisition-related costs are significant costs which arise from
strategic investments to grow the business rather than its
operating performance and are therefore excluded from underlying
results.
They primarily represent deferred acquisition consideration and
the costs of integrating acquired businesses into the group.
Deferred acquisition costs are generally significant payments
that are capital in nature reflecting the transfer of ownership of
the business. However, in accordance with IFRS 3, any deferred
consideration payments to former shareholders of the acquired
business who remain in employment with the group must be treated as
remuneration. This distorts the view of operational performance
given by the statutory measure of profit.
During 2019, GBP26.0 million of deferred consideration payments
for Speirs & Jeffrey (2018: GBP14.7 million) were charged to
the income statement and are considered separately for executive
remuneration purposes. A further GBP4.7 million of integration
costs and GBP0.1 million of legal fees were also incurred in
2019.
Deferred costs of GBP2.0 million (2018: GBP1.5 million) were
incurred in relation to the acquisitions of Vision Independent
Financial Planning and Castle Investment Solutions, which were
completed on 31 December 2015. These amounts represent the cost of
payments to vendors of the business who remained in employment with
the group. The final payment in respect of this acquisition of GBP7
million was made to the vendors at the end of 2019.
As announced on 28 November 2019, acquisition costs of GBP0.2
million were incurred in relation to the acquisition of the
Personal Injury and Court of Protection business of Barclays
Wealth, which is expected to complete in the second quarter of
2020.
Head office relocation costs
During February 2017, we relocated our London head office to new
premises. On 6 June 2018, our legacy lease was assigned, several
months earlier than anticipated, triggering a release of the unused
element of a provision for the cost of the surplus property. A
credit of GBP2.8 million, net of professional costs incurred in
2018 was therefore recognised in the result for 2018. There has
been no impact in 2019.
These items represent an investment to expand our operating
capacity in a key location and are not expected to recur in the
medium term; they have therefore been excluded from underlying
results.
Taxation
The corporation tax charge for 2019 was GBP12.7 million (2018:
GBP15.1 million). The effective tax rate of 32.1% (2018: 24.6%)
reflects the disallowable costs of deferred consideration payments
for the acquisition of Speirs & Jeffrey. The effective tax rate
in 2020 is expected to remain elevated as the group continues to
recognise these costs. Thereafter, the group expects it to return
to 1-2% above the statutory rate.
A full reconciliation of the income tax expense is provided in
note 8.
The Finance Bill 2016, which included provisions for the UK
corporation tax rate to be reduced to 17% in April 2020, from 19%
in April 2017, gained royal assent in September 2016. Although the
Government has announced its intention to delay these reductions,
the legislation to effect this amendment has not yet been passed.
Deferred tax balances have therefore been calculated based on these
reduced rates where timing differences are forecast to unwind in
future years.
Basic earnings per share
Basic earnings per share for the year ended 31 December 2019
were 50.3p compared to 88.7p in 2018. This reflects the full impact
of non-underlying charges as well as the issue of 3.9 million
shares in June 2018 to partially finance the acquisition of Speirs
& Jeffrey and to satisfy share based remuneration scheme
awards. On an underlying basis, earnings per share were 132.8p in
2019, compared to 142.5p in 2018 (see note 14).
Dividends
We operate a generally progressive dividend policy.
In determining the level of any proposed dividend, the board has
regard to current and forecast financial performance. Any proposal
to pay a dividend is subject to compliance with the Companies Act,
which requires that the company must have sufficient distributable
reserves from which to pay the dividend. The company's
distributable reserves are primarily dependent on:
- compliance with regulatory capital requirements for the minimum level of own funds;
- the level of profits earned by the company, including
distributions received from trading subsidiaries (some of which are
subject to minimum regulatory capital requirements themselves);
and
- actuarial changes in the value of the pension schemes that are
recognised in the company's other comprehensive income, net of
deferred tax.
At 31 December 2019 the company's distributable reserves were
GBP72.0 million (2018: GBP68.9 million).
In light of the results for the year, the board has proposed a
final dividend for 2019 of 45.0p. This results in a full year
dividend of 70.0p, an increase of 4.0p on 2018 (6.1%). The proposed
full year dividend is covered 0.7 times by basic earnings and 1.9
times by underlying earnings.
Capital expenditure
Overall, capital expenditure of GBP11.6 million in 2019 was up
GBP0.6 million compared to 2018, an increase of 5.5% as we
commenced investment in the initiatives outlined in our strategic
plan. These activities are expected to continue throughout 2020 and
2021, with a similar level of capital expenditure.
Premises related capital expenditure of GBP3.1 million was
slightly reduced from GBP3.3 million in 2018.
Underlying return on capital employed
The board monitors the underlying return on capital employed
(ROCE) as a key performance measure, which forms part of the
assessment of management's performance for remuneration purposes.
For monitoring purposes, underlying ROCE is defined as underlying
profit after tax expressed as a percentage of quarterly average
total equity across the year.
Assessment of underlying return on capital is a key
consideration for all investment decisions, particularly in
relation to acquired growth.
In 2019, underlying ROCE was 14.2%, a decrease of 2.7 percentage
points on 2018. Quarterly average total equity increased by GBP61.5
million in 2019 compared to 2018, reflecting a full year's impact
of the issue of GBP60 million of new share capital in June 2018 and
growth in retained earnings.
Outlook
The group's profitability remains closely linked with the
performance of investment markets and interest rates.
Following the successful migration of clients from Speirs &
Jeffrey to Rathbones' systems during 2019, cost synergies of
approximately GBP4.5 million are expected to be realised in 2020 as
planned. We also anticipate realising revenue synergies during the
deferred consideration period.
Staff costs in 2020 will reflect salary inflation, including
promotions, of approximately 3%, in addition to the full impact of
hiring activity in 2019.
As announced in October 2019, our medium term strategy is
focused on leveraging the core strengths of our business to
continue to provide a quality proposition to our clients. We will
invest in the people and processes that will enable us to support
our next phase of growth. Consequently, during the next two to
three years, we believe it is appropriate to operate the business
closer to a mid-twenties underlying operating margin.
However, announcements from the Financial Services Compensation
Scheme in December 2019 signal the group's share of levies could
increase again in 2020, by approximately GBP2 million.
We will continue to maintain our cost discipline, investing as
market conditions allow to support our growth strategy and ensure
that our infrastructure supports the business and manages
operational risks appropriately.
Other financial impacts
Deferred consideration payments to former shareholders of Speirs
& Jeffrey will be made in 2021 and 2022. The ultimate amounts
payable are conditional on performance against certain operational
targets. We currently expect to recognise a non-underlying charge
of approximately GBP18 million in 2020 in relation to these
deferred payments.
Segmental review
The group is managed through two key operating segments,
Investment Management and Unit Trusts.
Investment Management
The results of the Investment Management segment described below
include the trading results of Speirs & Jeffrey for the full
year in 2019, compared with only four months of trading results in
2018 post acquisition on 31 August 2018.
Investment Management income is largely driven by revenue
margins earned from funds under management and administration.
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 client loans.
Year-on-year changes in the key performance indicators for
Investment Management are shown in table 3.
Table 3. Investment Management - key performance indicators
2019 2018
--------------------------------------------------------------- --------- ---------
Funds under management and administration at 31 December1 GBP43.0bn GBP38.5bn
Underlying rate of net organic growth in Investment Management
funds under management and administration1 -1.5% 3.4%
Underlying rate of total net growth in Investment Management
funds under management and administration1 -0.9% 23.5%
Average net operating basis point return2 68.2 bps 71.4bps
Number of Investment Management clients ('000) 60 60
Number of investment managers3 297 295
--------------------------------------------------------------- --------- ---------
1. See table 4
2. See table 8
3. Comparatives have been restated to remove research analysts
and other non-client facing investment professionals
Funds under management and administration
Investment Management funds under management and administration
increased by 11.7% to GBP43.0 billion at 31 December 2019 from
GBP38.5 billion at the start of the year.
During 2019, Investment Management has continued to attract new
clients both organically and through acquisitions. However, the
level of client losses in 2019 increased following some investment
manager departures in recent years. The total number of clients (or
groups of closely related clients) remained at approximately 60,000
throughout the year.
During 2019, the total number of investment managers increased
to 297 at the end of the year, from 295 at the end of 2018.
Table 4. Investment Management - funds under management and
administration
2019 2018
GBPbn GBPbn
--------------------------------------- ------ ------
As at 1 January 38.5 33.8
Inflows 3.5 10.6
--------------------------------------- ------ ------
* organic1 3.3 3.8
* acquired2 0.2 6.8
--------------------------------------- ------ ------
Outflows(1) (3.9) (2.7)
Market adjustment3 4.9 (3.2)
--------------------------------------- ------ ------
As at 31 December 43.0 38.5
--------------------------------------- ------ ------
Net organic new business4 (0.6) 1.1
--------------------------------------- ------ ------
Underlying rate of net organic growth5 -1.5% 3.4%
--------------------------------------- ------ ------
Underlying rate of total net growth6 -0.9% 23.5%
--------------------------------------- ------ ------
1. Value at the date of transfer in/(out)
2. Value at date of acquisition
3. Represents the impact of market movements and investment
performance
4. Organic inflows less outflows
5. Net organic new business as a % of opening funds under
management and administration
6. Net organic new business and acquired inflows as a % of
opening funds under management and administration
Gross organic inflows of GBP3.3 billion remained resilient at
8.6% of opening funds under management and administration, with
approximately half coming from existing client relationships.
Organic inflows of GBP3.8 billion in 2018 included GBP0.4 billion
of short term mandates.
Acquired inflows of GBP0.2 billion in 2019 represented funds
introduced by teams who recently joined the group. Acquired inflows
of GBP6.8 billion in 2018 included GBP6.7 billion from the
acquisition of Speirs & Jeffrey.
Outflows of funds under management and administration were 10.1%
of the opening balance (2018: 8.0%). The increase on 2018 reflects
the repositioning of some pension and other institutional mandates
by their trustees, the impact of investment manager departures in
recent years and the exit of some lower margin mandates following
the integration of Speirs & Jeffrey.
As a result, net organic new business in our Investment
Management business was negative GBP0.6 billion during 2019,
representing a decrease by 1.5% of opening funds under management
and administration (2018: net organic growth of 3.4%).
Table 5. Investment Management - service level breakdown
2019 2018
GBPbn GBPbn
---------------------------------------- ------ ------
Direct 31.0 26.7
Financial adviser linked1 8.7 7.5
---------------------------------------- ------ ------
Total discretionary 39.7 34.2
Non-discretionary investment management 2.6 3.3
Execution only 2.4 2.1
---------------------------------------- ------ ------
Gross Investment Management FUMA 44.7 39.6
Discretionary wrapped funds2 (1.7) (1.1)
---------------------------------------- ------ ------
Total Investment Management FUMA 43.0 38.5
---------------------------------------- ------ ------
1. Comparative figure restated to exclude GBP0.3 billion held in
execution only accounts
2. Holdings of the group's mutual funds in Investment Management
client portfolios and mutual funds for which the management of the
assets is undertaken by Investment Management teams; the funds
under management and administration of which is reported within
Unit Trusts
Charity funds under management and administration continued to
grow strongly and reached GBP6.1 billion at 31 December 2019, up
15.1% from GBP5.3 billion at the start of the year.
As at 31 December 2019, Vision advised on client assets of
GBP1.9 billion, up 26.7% from 2018.
Overall 2019 was another volatile year for equity and bond
markets, which fixated during the year on the potential impacts of
US and China trade negotiations, Brexit related concerns and
general consumer confidence. Sentiment improved markedly in the
fourth quarter with the phase one US/China trade deal and the UK
election result allaying many fears. Reflecting these factors, the
MSCI PIMFA Balanced index finished the year up +13.1%.
The average investment return across all Investment Management
client portfolios was +13.7%, which outperformed the PIMFA index by
+0.6%. This outperformance was largely driven by UK equities;
boosted by the decisive UK election result and positive
advancements on Brexit, which drove expectations of capital flows
returning to the UK. Overall performance against other competitor
indices, such as the Private Client Indices published by ARC, was
again robust.
Financial performance
Table 6. Investment Management - financial performance
2019 2018
GBPm GBPm
---------------------------------------------- ------- -------
Net investment management fee income1 224.1 200.5
Net commission income 51.1 41.4
Net interest income 16.4 15.3
Fees from advisory services2 and other income 19.3 18.1
---------------------------------------------- ------- -------
Underlying operating income 310.9 275.3
Underlying operating expenses3 (232.5) (196.5)
---------------------------------------------- ------- -------
Underlying profit before tax 78.4 78.8
---------------------------------------------- ------- -------
Underlying operating margin4 25.2% 28.6%
---------------------------------------------- ------- -------
1. Net investment management fee income is stated after
deducting fees and commission expenses paid to introducers
2. Fees from advisory services includes income from trust, tax
and financial planning services (including Vision)
3. See table 9
4. Underlying profit before tax as a percentage of underlying
operating income
Net investment management fee income increased by 11.8% to
GBP224.1 million in 2019, benefiting from a full year of income in
Speirs & Jeffrey as well as positive markets throughout
year.
Fees are applied to the value of funds on quarterly charging
dates. Average funds under management and administration on these
billing dates in 2019 were GBP42.3 billion, up 15.6% from 2018 (see
table 7).
Table 7. Investment Management - average funds under management
and administration
2019 2018
GBPbn GBPbn
---------------------------- ------ ------
Valuation dates for billing
* 5 April 41.4 32.4
* 30 June 42.5 34.1
* 30 September1 42.2 41.3
* 31 December 43.0 38.5
---------------------------- ------ ------
Average 42.3 36.6
---------------------------- ------ ------
Average FTSE 100 level2 7456 7269
---------------------------- ------ ------
1. Funds under management and administration at 30 September
2018 included GBP6.7 billion in Speirs & Jeffrey, for which
only one month's fees accrued to the group post their
acquisition.
2. Based on the corresponding valuation dates for billing
In 2019, net commission income totalled GBP51.1 million; an
increase of 23.4% on 2018. Commission income from Speirs &
Jeffrey in 2019 totalled GBP11.0 million (2018: GBP4.2 million,
earned in the last four months of the year). Excluding Speirs &
Jeffrey, commission levels were GBP2.9 million higher than 2018,
reflecting more positive investor sentiment in the latter half of
the year.
Net interest income increased 7.2% to GBP16.4 million in 2019 as
a result of an increase to the interest rate in August 2018. Higher
average levels of liquidity in client portfolios and the full year
impact of Speirs & Jeffrey were partially offset by a GBP3.6
million interest charge following the adoption of IFRS 16 on 1
January 2019.
The investment management loan book remained broadly unchanged
at GBP132.0 million at the end of the year and contributed GBP4.0
million to net interest income in 2019 (2018: GBP3.5 million). Also
included in net interest income is GBP1.3 million (2018: GBP1.3
million) of interest payable on the Tier 2 notes which are callable
in August 2020.
Table 8. Investment Management - revenue margin
2019 2018
bps bps
---------------------------------------------------------------- ---- ----
Basis point return1 from:
* fee income 52.9 56.5
* commission 12.1 11.7
* interest 3.2 3.2
---------------------------------------------------------------- ---- ----
Basis point return on funds under management and administration 68.2 71.4
---------------------------------------------------------------- ---- ----
1. Underlying operating income (see table 6), excluding interest
on own reserves, interest payable on Tier 2 notes issued, interest
payable on lease assets, fees from advisory services and other
income, divided by the average funds under management and
administration on the quarterly billing dates (see table 7). Speirs
& Jeffrey funds under management and administration have been
included pro-rata for the period of ownership in 2018.
The average net operating basis point return on funds under
management and administration has decreased by 4.5 bps to 68.2 bps
in 2019, largely reflecting a full year of ownership of Speirs
& Jeffrey and the impact of tiered fee rates in higher average
market levels.
Fees from advisory services and other income increased 6.6% to
GBP19.3 million. This largely reflects a higher level of retained
advisory fees earned by Vision and growth in trust administration
revenues.
Underlying operating expenses in Investment Management for 2019
were GBP232.5 million, an increase of 18.3% compared to 2018. This
is highlighted in table 9.
Table 9. Investment Management - underlying operating
expenses
2018
2019 GBPm
GBPm (re-presented)(3)
------------------------------ ----- ------------------
Staff costs1
* fixed 78.6 66.5
* variable 49.7 40.7
------------------------------ ----- ------------------
Total staff costs 128.3 107.2
Other operating expenses 104.2 89.3
------------------------------ ----- ------------------
Underlying operating expenses 232.5 196.5
------------------------------ ----- ------------------
Underlying cost/income ratio2 74.8% 71.4%
------------------------------ ----- ------------------
1. Represents the costs of investment managers and teams
directly involved in client-facing activities
2. Underlying operating expenses as a % of underlying operating
income (see table 6)
3. In 2018, the cost of the Staff Equity Plan for Investment
Management staff was reported within centrally allocated costs. In
2019 these costs are reported as variable staff costs directly
incurred by the segment. Accordingly, the 2018 comparative figures
have been represented to present the costs on a consistent
basis.
Fixed staff costs of GBP78.6 million increased by 18.2%
year-on-year, principally reflecting a 13.5% increase in average
headcount (largely the full year impact of Speirs & Jeffrey)
and salary inflation.
Variable staff costs totalled GBP49.7 million in 2019, an
increase of GBP9.0 million on 2018. This includes the impact of a
full year charge for the Staff Equity Plan, which was launched in
May 2018, as well as a full year charge for Speirs & Jeffrey
and higher Investment Management teams' profitability during the
year.
Other operating expenses of GBP104.2 million include property,
depreciation, settlement, IT, finance and other central support
services costs. The year-to-year increase of GBP14.9 million
(16.7%) includes GBP3.1 million of impairment charges for some IT
developments, which are no longer planned to be put into use in the
business and GBP2.5 million of increased levies for the Financial
Services Compensation Scheme and regulatory change projects. 2019
cost growth also reflects increased investment in the business,
recruitment and higher variable awards in support departments in
line with overall business performance.
Unit Trusts
Table 10. Unit Trusts - funds
2019 2018
GBPm GBPm
-------------------------------------------- ----- -----
Rathbone Global Opportunities Fund 1,858 1,351
Rathbone Ethical Bond Fund 1,495 1,236
Rathbone Income Fund 1,134 1,091
Rathbone Multi Asset Portfolios 1,078 965
Offshore funds1 517 -
Rathbone Active Income Fund for Charities 210 179
Rathbone Strategic Bond Fund 207 145
Rathbone High Quality Bond Fund 203 52
Rathbone Core Investment Fund for Charities 121 95
Rathbone UK Opportunities Fund 47 48
Other funds 568 480
-------------------------------------------- ----- -----
7,438 5,642
-------------------------------------------- ----- -----
1. During 2019, our range of Luxembourg-based feeder funds were
converted to directly invested funds in preparation for the
potential loss of UCITS status of our onshore funds post Brexit
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
11.
Table 11. Unit Trusts - key performance indicators
2019 2018
--------------------------------------------------------- ----- -----
Funds under management at 31 December1 7.4 5.6
Underlying rate of net growth in Unit Trusts funds under
management1 16.7% 10.1%
Underlying profit before tax(2) 10.3 12.7
--------------------------------------------------------- ----- -----
1. See table 12
2. See table 14
Funds under management
Net retail sales in the asset management industry totalled
approximately GBP6.5 billion in 2019, as reported by the Investment
Association (IA), down around GBP0.5 billion on 2018. Industry-wide
funds under management increased 12.1% to GBP1.29 trillion at the
end of the year.
The Sterling strategic bond and Global equity sectors were the
two highest selling sectors in 2019. In total, the IA sectors in
which we manage funds saw net inflows of GBP7.71 billion, up from
GBP0.8 billion in 2018. Gross sales in those sectors were up 7.6%
at GBP138.2 billion in 2019.
Against this backdrop, the overall positive momentum in sales of
our funds increased in 2019, with gross sales up 21.0% in the year
to GBP2.3 billion. In contrast, redemptions remained in line with
2018 at GBP1.4 billion, resulting in net inflows of GBP0.9 billion
for the year (2018: GBP0.5 billion). This level of net retail sales
ranked 9th highest in the UK for 2019, according to the Pridham
Sales Report.
Net inflows continued to be spread across the range of funds.
The multi asset portfolios, Global Opportunities fund and Ethical
Bond fund continued to attract particularly strong net flows in the
year.
Unit Trusts funds under management closed the year up 32.1% at
GBP7.4 billion (see table 12).
Table 12. Unit Trusts - funds under management
2019 2018
GBPbn GBPbn
------------------------------- ------ ------
As at 1 January 5.6 5.3
Net inflows 0.9 0.5
------------------------------- ------ ------
* inflows1 2.3 1.9
* outflows1 (1.4) (1.4)
------------------------------- ------ ------
Market adjustments2 0.9 (0.2)
------------------------------- ------ ------
As at 31 December 7.4 5.6
------------------------------- ------ ------
Underlying rate of net growth3 16.7% 10.1%
------------------------------- ------ ------
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
In line with market sentiment, performance of the UK equity
funds (Income and UK Opportunities) was volatile over the period,
but both funds ended the year reasonably well as mid-cap stocks
rose following the election. The Ethical Bond and Global
Opportunities funds maintained their excellent track records and
both finished in the first quartile for performance, measured over
one, three and five years.
The more defensively positioned Strategic Bond Fund saw poorer
short-term performance measured over the year.
The recently launched High Quality Bond Fund and Global
Sustainability Fund both posted good returns over the year. The
multi-asset funds all beat their benchmarks and did well against
their peers.
Long term performance for our retail funds remains strong and
the funds are performing in line with expectations given their
investment mandates.
Table 13. Unit Trusts - performance1, 2
2019/(2018) Quartile ranking(3) over 1 year 3 years 5 years
------------------------------------- ------ ------- -------
Rathbone Ethical Bond Fund 1 (4) 1 (1) 1 (1)
Rathbone Global Opportunities Fund 1 (1) 1 (1) 1 (1)
Rathbone Income Fund 3 (2) 3 (3) 2 (1)
Rathbone UK Opportunities Fund 2 (4) 3 (4) 2 (4)
Rathbone Strategic Bond Fund 4 (1) 2 (1) 2 (2)
------------------------------------- ------ ------- -------
1. Quartile ranking data is sourced from FE Trustnet
2. Excludes multi-asset funds (for which quartile rankings are
prohibited by the IA), High Quality Bond Fund, which has no
relevant peer group against which to measure quartile performance,
non-publicly marketed funds and segregated mandates
3. Ranking of institutional share classes at 31 December 2018
and 2017 against other funds in the same IA sector, based on total
return performance, net of fees (consistent with investment
performance information reported in the funds' monthly
factsheets)
4. Funds included in the above table account for 64% of the
total FUM of the Unit Trusts business
As at 31 December 2019, 95% of holdings in Unit Trusts' retail
funds were in institutional units (31 December 2018: 88%).
During the year, the total number of investment professionals in
Unit Trusts increased to 15 at 31 December 2019 from 14 at the end
of 2018.
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 payable to intermediaries.
Unit Trusts also earned net dealing profits, the bid-offer
spread from sales and redemptions of units until 21 January 2019,
on which date all funds were converted to single priced units and
this income stream ceased.
Table 14. Unit Trusts - financial performance
2019 2018
GBPm GBPm
------------------------------- ------ ------
Net annual management charges 36.1 32.9
Net dealing profits 0.2 3.4
Interest and other income 0.9 0.4
------------------------------- ------ ------
Underlying operating income 37.2 36.7
Underlying operating expenses1 (26.9) (24.0)
------------------------------- ------ ------
Underlying profit before tax 10.3 12.7
------------------------------- ------ ------
Operating % margin2 27.7% 34.6%
------------------------------- ------ ------
1. See table 15
2. Underlying profit before tax divided by underlying operating
income
Net annual management charges increased 9.7% to GBP36.1 million
in 2019, driven principally by the rise in average funds under
management. Net annual management charges as a percentage of
average funds under management fell to 56 bps (2018: 58 bps)
reflecting the increased proportion of holdings in institutional
units and the continued growth in the fixed income mandate
funds.
Underlying operating income as a percentage of average funds
under management and administration fell to 56 bps in 2019 from 65
bps in 2018 reflecting the lost dealing profits.
Table 15. Unit Trusts - underlying operating expenses
2019 2018
GBPm GBPm
------------------------------ ----- -----
Staff costs
* Fixed 3.8 3.3
* Variable 8.7 7.6
------------------------------ ----- -----
Total staff costs 12.5 10.9
Other operating expenses 14.4 13.1
------------------------------ ----- -----
Underlying operating expenses 26.9 24.0
------------------------------ ----- -----
Underlying cost/income ratio1 72.3% 65.4%
------------------------------ ----- -----
1. Underlying operating expenses as a % of underlying operating
income (see table 14)
Fixed staff costs of GBP3.8 million for the year ended 31
December 2019 were 15.2% higher than 2018. This reflects salary
inflation and growth in headcount in response to regulatory
changes, including GBP0.2 million of staff costs supporting the
Brexit readiness project.
Variable staff costs of GBP8.7 million were 14.5% higher than
2018 as growth in gross sales drove increases in sales commissions.
Charges for deferred profit share awards made in prior years also
contributed to growth in variable staff costs.
Other operating expenses have increased by 9.9% to GBP14.4
million, largely reflecting higher marketing, distribution and
facilities costs in the growing business as well as increased
charges for research. Project costs of GBP0.2 million were also
incurred in preparation for Brexit.
Financial position
Table 16. Group's financial position
2019 2018
GBPm GBPm
(unless (unless
stated) stated)
----------------------------------------------- -------- --------
Own funds:
* Common Equity Tier 1 ratio1 22.0% 20.6%
* Total Own Funds ratio2 23.3% 22.0%
* Total equity 485.4 464.1
* Tier 2 subordinated loan notes3 19.9 19.8
* Risk-weighted assets 1,209.0 1,141.8
* Leverage ratio4 8.3% 8.9%
----------------------------------------------- -------- --------
Other resources:
* Total assets 3,398.7 2,867.7
* Treasury assets5 2,817.1 2,351.7
* Investment management loan book 132.0 131.7
* Intangible assets from acquired growth6 214.9 225.6
* Tangible assets and software7 28.4 30.2
----------------------------------------------- -------- --------
Liabilities:
* Due to customers8 2,668.6 2,225.5
* Net defined benefit pension liability 8.0 11.2
----------------------------------------------- -------- --------
1. Common Equity Tier 1 capital as a proportion of total risk
exposure amount
2. Total own funds (see table 17) as a proportion of total risk
exposure amount
3. Represents the carrying value of the Tier 2 loan notes
4. Common Equity Tier 1 capital as a % of total assets,
excluding intangible assets, plus certain off balance sheet
exposures
5. Balances with central banks, loans and advances to banks and
investment securities
6. Net book value of acquired client relationships and goodwill
(note 10)
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
Own funds
Rathbones is classified as a banking group for regulatory
capital purposes and is therefore required to operate within the
restrictions on capital resources and banking exposures prescribed
by the Capital Requirements Regulation, as applied in the UK by the
Prudential Regulation Authority (PRA).
At 31 December 2019, the group's regulatory own funds (including
verified profits for the year) were GBP282.2 million (2018:
GBP251.3 million).
Table 17. Regulatory own funds
2018
GBPm
(restated
2019 - note
GBPm 2)
------------------------------------- ------- ----------
Share capital and share premium 213.8 208.0
Reserves 313.6 288.8
Less:
Own shares (42.0) (32.7)
Intangible assets1 (218.9) (229.3)
------------------------------------- ------- ----------
Total Common Equity Tier 1 own funds 266.5 234.8
Tier 2 own funds 15.7 16.5
------------------------------------- ------- ----------
Total own funds 282.2 251.3
------------------------------------- ------- ----------
1. Net book value of goodwill, client relationship intangibles
and software are deducted directly from own funds, less any related
deferred tax
Common Equity Tier 1 (CET1) own funds increased by GBP31.7
million during 2019, due to the inclusion of verified retained
profits for the 2019 financial year and the issue of 603,913 shares
in respect of the contingent consideration from acquisition of
Speirs & Jeffrey, net of dividends paid in the year.
The CET1 ratio was 22.0%, an increase on the 20.6% reported at
the previous year end. Our consolidated CET1 ratio remains higher
than the banking industry norm, reflecting the low risk nature of
our banking activity.
The leverage ratio was 8.3% at 31 December 2019, compared to
8.9% at 31 December 2018. The leverage ratio represents our CET1
capital as a percentage of our total assets, excluding intangible
assets, plus certain off balance sheet exposures. The ratio has
fallen during the year due to the transition of Speirs &
Jeffrey clients to our banking terms of business, which has
increased the level of client deposits.
The business is primarily funded by equity, but also supported
by GBP20 million of 10 year Tier 2 subordinated loan notes. The
notes introduce a small amount of gearing into our balance sheet as
a way of financing future growth in a cost-effective and
capital-efficient manner. They 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 six-month LIBOR
thereafter.
The consolidated balance sheet total equity was GBP485.4 million
at 31 December 2019, up 4.6% from GBP464.1 million at the end of
2018, primarily reflecting the issue of new share capital and
retained profits for the year.
Own funds and liquidity requirements
As required under PRA rules, we perform an Internal Capital
Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy
Assessment Process (ILAAP) annually, which include 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.
We are required to hold capital to cover a range of own funds
requirements, classified as Pillar 1 and Pillar 2.
The group's own funds requirements were as follows:
Table 18. Group's own funds requirements1
2019 2018
GBPm GBPm
-------------------------------------------------------- ----- -----
Credit risk requirement 46.5 44.6
Market risk requirement 0.4 0.4
Operational risk requirement 49.8 46.3
-------------------------------------------------------- ----- -----
Pillar 1 own funds requirement 96.7 91.3
Pillar 2A own funds requirement 39.8 48.4
-------------------------------------------------------- ----- -----
Total Pillar 1 and 2A own funds requirements 136.5 139.7
CRD IV buffers:
* capital conservation buffer (CCB) 30.2 28.5
* countercyclical buffer (CCyB) 11.3 8.9
-------------------------------------------------------- ----- -----
Total Pillar 1 and 2A own funds requirements and CRD IV
buffers 178.0 177.1
-------------------------------------------------------- ----- -----
1. Own funds requirements stated above include the impact of
trading results and changes to requirements and buffers that were
known as at 31 December and which became effective prior to the
publication of the preliminary results.
Pillar 1 - minimum requirement for capital
Pillar 1 focuses on the determination of a total risk exposure
amount (also known as "risk-weighted assets") and expected losses
in respect of the group's exposure to credit, counterparty credit,
market and operational risks and sets a minimum requirement for
capital.
At 31 December 2019, the group's total risk exposure amount was
GBP1,209.0 million (2018: GBP1,141.8 million).
Pillar 2 - supervisory review process
Pillar 2 supplements the Pillar 1 minimum requirement with a
firm-specific Individual Capital Guidance (Pillar 2A) and a
framework of regulatory capital buffers (Pillar 2B).
The Pillar 2A own funds requirement (which is set by the PRA)
reflects those risks, specific to the firm, which are not fully
captured under the Pillar 1 own funds requirement.
Our Pillar 2A own funds requirement was reviewed by the PRA
during the year.
Pension obligation risk
The potential for additional unplanned capital strain or costs
that the group would incur in the event of a significant
deterioration in the funding position of the group's defined
benefit pension schemes.
Interest rate risk in the banking book
The potential losses in the non-trading book resulting from
interest rate changes or widening of the spread between Bank of
England base rates and LIBOR rates.
Concentration risk
Greater loss volatility arising from a higher level of loan
default correlation than is assumed by the Pillar 1 assessment.
The group is also required to maintain a number of Pillar 2B
regulatory capital buffers, all of which must be met with CET1
capital.
Capital conservation buffer (CCB)
The CCB is a general buffer, designed to provide for losses in
the event of a stress and was phased in over 4 years from 1 January
2016. On 1 January 2019, it increased to 2.5% of risk-weighted
assets, which was the final increase of this phasing.
Countercyclical capital buffer (CCyB)
The CCyB is designed to act as an incentive for banks to
constrain credit growth in times of heightened systemic risk. The
amount of the buffer is determined by reference to rates set by the
FPC from time to time, depending on prevailing market conditions,
for individual countries where the group has credit risk
exposures.
The buffer rate is currently set at 1.0% for the UK. The group
also has some small, relevant credit exposures in Australia,
Finland and Switzerland, all of whom have applicable buffer rates
of 0%, resulting in a weighted buffer rate of 0.94% of the group's
total risk exposure amount as at 31 December 2019.
In December 2019, the FPC announced that, as a result of a
review of the stability of the UK financial system, it intends to
raise the UK CCyB rate to 2.0%, with effect from December 2020.
Based on the group's balance sheet as at 31 December 2019, this
change would add approximately GBP10 million to the group's CRD IV
buffers.
PRA buffer
The PRA also determines whether any incremental firm-specific
buffer is required, in addition to the CCB and the CCyB. The PRA
requires any such buffer to remain confidential between the group
and the PRA.
The surplus of own funds (including verified profits for the
full year) over total Pillar 1 and 2A own funds requirements and
CRD IV buffers was GBP104.2 million, up from GBP74.2 million at the
end of 2018.
In managing the group's regulatory capital position over the
next few years, we will continue to be mindful of:
- future volatility in pension scheme valuations which affect
both the level of CET1 own funds and the value of the Pillar 2A
requirement for pension risk;
- regulatory developments; and
- the demands of future acquisitions which generate intangible
assets and, therefore, directly 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.
The group's Pillar 3 disclosures are published annually on our
website
(rathbones.com/investor-relations/results-and-presentations) and
provide further details about regulatory capital resources and
requirements.
Total assets
Total assets at 31 December 2019 were GBP3.4 billion (2018:
GBP2.9 billion), of which GBP2.7 billion (2018: GBP2.2 billion)
represents the investment in the money markets of 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 GBP2.7 billion (2018: GBP2.2 billion) represented 6.2% of total
Investment Management funds under management and administration at
31 December 2019, compared to 5.8% at the end of 2018. Cash held in
client money accounts was GBP5.7 million (2018: GBP3.0
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.
It 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 increased the share of treasury assets held
with the Bank of England to GBP1.9 billion from GBP1.2 billion at
31 December 2018. During the year, GBP0.3 billion from maturing
certificates of deposit was invested with the Bank of England due
to unattractive rates offered elsewhere in the market.
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, 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 who require bridging finance when moving home.
Loans advanced to clients totalled GBP132.0 million at the end
of 2019 (2018: GBP131.7 million).
Intangible assets
Intangible assets arise principally from acquired growth in
funds under management and administration and are categorised as
goodwill and client relationships. Intangible assets reported on
the balance sheet also include purchased and developed
software.
At 31 December 2019, the total carrying value of intangible
assets arising from acquired growth was GBP214.9 million (2018:
GBP225.6 million). During the year, client relationship intangible
assets of GBP5.3 million were capitalised (2018: GBP55.6 million,
including GBP54.3 million relating to the acquisition of Speirs
& Jeffrey). No goodwill was acquired in 2019 (2018: GBP28.1
million relating to the acquisition of Speirs & Jeffrey).
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 2019, including the impact of any lost
relationships, was GBP15.4 million (2018: GBP12.9 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 GBP0.6 million was recognised in relation to this element
of goodwill (2018: GBP0.3 million), which reduced its carrying
value to GBPnil. Further detail is provided in note 10.
Capital expenditure
During 2019, we have increased the level of investment in the
development of our systems and premises, with capital expenditure
for the year totalling GBP11.6 million (2018: GBP11.0 million).
Capital expenditure in 2018 included property related spend of
GBP3.2 million including the cost of moving to a new office in
Birmingham and the fit out of additional space in Liverpool. In
2019, property-related costs of GBP3.0 million included further
development of the Liverpool office, integration of the Speirs
& Jeffrey office in Glasgow and refurbishment work on the
Exeter and Winchester offices.
The level of spend on our systems and digital capabilities has
increased in 2019, as we continue to invest in our infrastructure
and client relationship management systems. Total costs for the
purchase and development of software were GBP8.6 million in the
year (2018: GBP7.7 million). New areas of investment during the
year included work towards the launch of the new client online
portal and mobile app.
Overall, new investment accounted for approximately 84% of total
capital expenditure in 2019, compared with 77% in 2018, with the
balance of total spend incurred for the maintenance and replacement
of existing software and equipment. Of the GBP8.3 million of new
investment, GBP3.4 million was linked to strategic initiatives
announced in October 2019.
Following the strategic review undertaken at the end of 2019, we
have looked closely at our IT infrastructure. This has resulted in
the decision to cease the development of certain systems and write
off the associated costs capitalised to date. This has resulted in
an impairment charge of GBP3.1 million in 2019.
Right-of-use assets
Following the adoption of IFRS 16, the group is required to
recognise all leases with a term of more than 12 months as a
right-of-use lease asset on its balance sheet, along with a
corresponding financial liability representing its obligation to
make future lease payments.
As at 1 January 2019, the group recognised right-of-use assets
of GBP53.9 million, largely representing the leases for premises
occupied by the group. During 2019, additions of GBP0.6 million
were made.
Right-of-use assets are generally depreciated over the lease
term (or the expected life of the asset, if shorter). The total
depreciation charge for right-of-use assets in 2019 was GBP4.9
million.
Defined benefit pension schemes
We operate two defined benefit pension schemes, both of which
have been closed to new members for several years. With effect from
30 June 2017, we closed both schemes, ceasing all future benefit
accrual and breaking the link to salary.
At 31 December 2019 the combined schemes' liabilities, measured
on an accounting basis, had increased to GBP159.1 million, up 8.6%
from GBP146.5 million at the end of 2018, primarily reflecting the
decrease in discount rate during the year. The reported position of
the schemes as at 31 December 2019 was a deficit of GBP8.0 million
(2018: deficit of GBP11.2 million).
Triennial funding valuations form the basis of the annual
contributions that we make into the schemes. Funding valuations of
the schemes as at 31 December 2019 will be carried out by the
scheme actuary during 2020.
Liquidity and cash flow
Table 19. Extracts from the consolidated statement of cash
flows
2019 2018
GBPm GBPm
------------------------------------------------- ------- -------
Cash and cash equivalents at the end of the year 2,148.0 1,408.5
Net cash inflows from operating activities 499.6 111.1
Net change in cash and cash equivalents 739.5 (159.2)
------------------------------------------------- ------- -------
Fees and commissions are 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 ILAAP 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 GBP1.9 billion at 31
December 2019 (2018: GBP1.2 billion).
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 16).
Consequently, cash flows include the impact of capital flows in
treasury assets.
Net cash flows from operating activities reflect a GBP442.6
million increase in banking client deposits (2018: GBP54.2 million
increase), as a result of the migration of cash held in the
portfolios of Speirs & Jeffrey clients onto a banking basis and
a slight increase in the proportion of funds under management and
administration held as cash.
Cash flows from investing activities also included a net inflow
of GBP303.9 million from the proceeds from the sale and redemption
of certificates of deposit (2018: purchase of GBP203.8 million), as
we increased the proportion of treasury assets held with the Bank
of England.
The most significant non-operating cash flows during the year
were as follows:
- outflows relating to the payment of dividends of GBP36.0
million (2018: GBP32.7 million);
- outflows relating to payments to acquire intangible assets
(other than as part of a business combination) of GBP14.9 million
(2018: GBP15.1 million);
- net cash outflows of GBP4.3 million from a net repurchase of
shares during the year (2018: net issue of GBP57.4 million);
and
- GBP3.5 million of capital expenditure on property, plant and
equipment (2018: GBP3.2 million).
Risk management and control
During the year, we have continued to evolve and strengthen our
risk management framework in support of our 'three lines of
defence' model. Our approach to risk governance, risk processes and
risk infrastructure ensures that risk management across the group
considers both existing and emerging challenges to our purpose,
values and strategic objectives. Going forward into 2020, we will
continue our approach and focus on managing risk effectively in
accordance with our risk appetite and over the long term for all of
our stakeholders.
Risk culture
We believe an embedded risk culture enhances the effectiveness
of risk management and decision making across the group. The board
is responsible for setting the right tone, which supports a strong
risk culture and, through our senior management team, encouraging
appropriate behaviours and collaboration on managing risk across
the business. Risk management is accepted as being part of
everyone's day-to-day responsibilities and activities; it is linked
to performance and development, as well as to the group's
remuneration and reward schemes. Our approach through this is to
create an open and transparent working environment, encouraging
employees to engage positively in risk management and support the
effective achievement of our strategic objectives.
Risk appetite
We define risk appetite as the amount and type of risk the group
is prepared to take or accept in pursuit of our long-term strategic
objectives.
Our appetite is subject to regular review and, at least
annually, the board, executive committee and group risk committee
formally review and approve the group's risk appetite statement,
ensuring it remains consistent with our strategy. In 2019, our
appetite framework has developed in line with the group's overall
prudential requirements for financial and non-financial risk
(conduct and operational). Alongside this, specific appetite
measures for each principal risk continue to be set. Risks which
have triggered key risk indicators or risk appetite measures are
reported and escalated in accordance with our framework to the
executive committee, group risk committee and the board so that
risk mitigation can be reviewed and strengthened if
appropriate.
Following the strategic update this year, and with consideration
to the evolving and future regulatory landscape within the sector,
the board remains committed to having a relatively low overall
appetite for risk and ensuring that our internal controls mitigate
risk to appropriate levels. The board recognises that our
performance is susceptible to fluctuations in investment markets
and has the potential to bear losses from financial and operational
risks from time to time, either as reductions in income or
increases in operating costs.
Managing risk
The board is ultimately accountable for risk management and
regularly considers the most significant risks and emerging threats
to the group's strategy. In addition, the audit and group risk
committees exercise further oversight and challenge of existing
risk management and internal control. Day to day, the group chief
executive and executive committee are responsible for managing risk
and the regular review of key risks facing the group. Our executive
risk committee provides further challenge and oversight of
non-financial risk (conduct and operational risk) complementing the
banking committee that oversees financial risk management. Both
committees meet monthly, reporting into both the executive
committee and group risk committee.
Throughout the group, all employees have a responsibility for
managing risk and adhering to our control framework.
Three lines of defence
Our three lines of defence model operates across the group in
support of the risk management framework and outlines our
requirements across all employees, with responsibility and
accountability for risk management broken down as follows.
First line
Senior management, business operations and support functions are
responsible for managing risks, by developing and maintaining
effective internal controls to mitigate risk in line with risk
appetite.
Second line
Risk, compliance and anti-money laundering functions maintain a
level of independence from the first line and are responsible for
providing oversight of and challenge to the first line's day-to-day
management, monitoring and reporting of risks to both senior
management and governing bodies.
Third line
Our internal audit function is responsible for providing
independent assurance to both senior management, the board and
board committees as to the effectiveness of the group's governance,
risk management and internal controls.
Outside of our internal lines of defence, external independent
assurance is obtained, primarily the annual statutory audit along
with other ad hoc engagements which may be required during the
year.
Identification and profiling of principal risks
We undertake regular reviews to ensure we identify all known
material risks which have the potential to impact future
performance and delivery of our strategic objectives and business
priorities. These risks are classified using a hierarchical
approach with our highest level of risk (Level 1) comprising
financial, regulatory conduct and operational risks. Our next level
(Level 2) contains 17 risk categories, which are allocated to a
Level 1 risk and reflect the current and future risk profile of the
group. Detailed risks (Level 3) are identified as sub-sets of Level
2 risks. Level 3 risks are captured and maintained within our group
risk register.
We recognise that some Level 2 and Level 3 risks have features
which need to be considered under more than one Level 1 risk, and
this is facilitated in our framework through a system of primary
and secondary considerations. Our risk exposures and overall risk
profile are reviewed and monitored regularly, considering the
potential impact, existing internal controls and management actions
required to mitigate the impact of emerging issues and likelihood
of future events. To ensure we identify and manage our principal
risks, reviews take place with risk owners, senior management and
business units across the group. The risk function conducts these
reviews regularly during the year.
As part of our approach, senior management also maintain a watch
list to record any current, emerging or future issues, threats,
business developments and regulatory or legislative change, which
will or could have the potential to impact the firm's current or
future risk profile and therefore may require active risk
management, usually through process changes, systems development or
regulatory changes. The group's risk profile, risk register and
watch list are regularly reviewed by the executive, senior
management, group risk committee and the board.
Risk assessment process
The board and senior management are actively involved in a
continuous risk assessment process as part of our risk management
framework, supported by the annual Internal Capital Adequacy
Assessment Process (ICAAP) and Internal Liquidity Adequacy
Assessment Process (ILAAP) work, which assesses the principal risks
facing the group.
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 our
assessment of Level 2 risk categories and detailed Level 3 risks is
challenged and reviewed on a regular basis. The board, executive
committee and executive risk committee receive regular reports and
information from senior management, operational business units,
risk oversight functions and specific risk committees.
Each Level 3 risk is assessed for the inherent likelihood of its
occurrence in a three-year period and against a number of different
impact criteria, including financial, client, operations,
reputation, strategy and regulation indicators. A residual risk
exposure and overall risk profile rating of high, medium, low or
very low is then derived for the three-year period by taking into
account an assessment of the internal control environment and/or
insurance mitigation. The assessment of our control environment,
undertaken by senior management within the firm, includes
contributions from first, second and third line people, data,
monitoring and/or assurance activity.
Stress tests include consideration of the impact of a number of
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 likelihood of the underlying risks
materialising.
The executive risk committee, executive committee, group risk
committee and other key risk-focused committees consider the risk
assessments and stress tests, providing challenge on their
appropriateness, which is reported through the governance framework
and ultimately considered by the board.
Profile and mitigation of principal risks
As explained above, our risks are classified hierarchically in a
three-level model. There are three Level 1 risks, 17 Level 2 risks
and 47 Level 3 risks, all of which form the basis of the group's
risk register. Our approach to managing risk continues to be
underpinned by an understanding of our current risk exposures and
consideration of how risks change over time. For 2019, the
underlying risk profile and ratings for the majority of Level 2
risks have remained reasonably stable despite the challenging year
faced by the wealth management sector. There have, however, been
some changes to risk ratings and the following table summarises the
most important of these.
Based upon the risk assessment processes identified above, the
board believes that the principal risks and uncertainties facing
the group which could impact the delivery of our strategic
objectives, have been identified below. These reflect the
continuing focus on client suitability, the on-going cyber threat
to the financial services sector landscape, the macroeconomic
environment and continuing political challenges for the UK. These
were regular areas of focus for the firm in 2019, together with the
operational integration of Speirs & Jeffrey. The board remains
vigilant to the risks associated with the pension schemes' deficit.
Other key risks are operational risks that arise from growth and
regulatory risks that, in turn, may arise from the continuing
development of law, regulation and standards in our sector.
Our overall risk profile and control environment for principal
risks are described below. The board receives assurance from first
line senior management 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.
We include in the tables the potential impacts (I) the firm
might face and our assessment of the likelihood (L) of each
principal risk crystallising. These assessments take into account
the controls in place to mitigate the risks. However, as is 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, low and very low in this
risk assessment. We perceive as high-risk items those which have
the potential to impact the delivery of strategic objectives, with
medium-, low- and very low-rated items having proportionately less
impact on the firm. Likelihood is similarly based on a qualitative
assessment.
Emerging risks and threats
Emerging risks, including legislative and regulatory change,
which have the potential to impact the group and delivery of our
strategic objectives are monitored through our watch list. During
the year, the executive committee continued to recognise and
respond to a number of emerging risks and threats to the financial
services sector as a whole and to our business.
The board and executive also recognise that actions will be
required to better understand longer-term climate change risks,
both physical and transitional, along with sustainability risks
associated with our strategy, business model and operations. This
will be an area of specific focus during 2020.
The group's view is that we can reasonably expect current market
conditions and uncertainties to remain throughout 2020, given the
implications of Brexit and the UK political environment. Other
evolving risks remain stable however continue to include, cyber
threats, changing regulatory expectations and further scenarios
potentially arising from geopolitical developments, along with
continuing tensions and uncertainty around global trade.
Brexit
We are continuing to monitor the potential consequences of
Brexit very closely. Our current assessment is that the direct
impacts of Brexit as currently proposed continue to be manageable
given our largely UK-based business model. However, we are
conscious that the position is uncertain, has the potential to
change and may raise unexpected challenges and implications for the
firm, possibly extending to our supply chain. The firm's income is
correlated to market levels, which are expected to be impacted by
Brexit and other areas of political uncertainty.
Key changes to risk profile
Risk
change
Risk Description of change in 2019
---------------------- ------------------------------------------------------------ ---------------
Business model This risk which includes the impacts arising from No change
(including Brexit) changing market conditions, as a result of political
uncertainty and the global economy, has somewhat
stabilised, however remains a key risk.
Although the firm's potential exposure to Brexit
remains low risk, business model continues to be
a principal risk, as any impact of a disorderly
exit from the European Union on investment markets
will also affect the value of our funds under management
and administration.
---------------------- ------------------------------------------------------------ ---------------
Suitability and In 2018, our forward-looking risk assessment increased, No change
advice largely reflecting regulatory drivers. This year
it has remained stable as process improvements have
been implemented to simplify the workflows involved
for our clients and employees.
---------------------- ------------------------------------------------------------ ---------------
Change Following integration of Speirs & Jeffrey, we have Down
reduced our risk assessment, however it remains
a principal risk as a reflection of the firm's future
change plans.
---------------------- ------------------------------------------------------------ ---------------
Information security We have maintained our risk rating in this area, No change
and cyber cognisant of the continued external threat profile,
however we recognise continuing investment and improvements
in staff awareness, preparedness and technology.
---------------------- ------------------------------------------------------------ ---------------
People Having increased in 2018 reflecting industry wide Down
trends, this risk has reduced in 2019 reflecting
a number of management actions and our view of the
external environment. That said, we continue to
recognise the importance of addressing the drivers
behind our gender pay gap over the coming years.
---------------------- ------------------------------------------------------------ ---------------
Pension The funding deficit decreased materially due to Down
the closure of the schemes in 2017, with a significant
number of members transferring benefits out of the
schemes. However, this remains an important risk
for the firm to manage.
---------------------- ------------------------------------------------------------ ---------------
Principal risks
The most significant risks which could impact the delivery of
our strategy and annual business plans are detailed below. The
potential impacts (I) the firm might face and our assessment of the
likelihood (L) of each principal risk crystallising are included in
the table.
Residual
rating
------------------
Principal How the
risk risk arises I L Control environment
------------------- ------------------ -------- -------- -----------------------------------------------------------
Financial
------------------- ------------------ -------- -------- -----------------------------------------------------------
Credit This risk can High Low
The risk that one arise * Banking committee oversight
or more from placing
counterparties funds
fail to fulfil with other banks * Counterparty limits and credit reviews
contractual and holding
obligations, interest-bearing
including stock securities. * Treasury policy and procedures
settlement There
is also a
limited * Active monitoring of exposures
level of lending
to clients
* Client loan policy and procedures
* Annual ICAAP
------------------- ------------------ -------- -------- -----------------------------------------------------------
Pension This risk can High Med
The risk that the arise * Board, senior management and trustee oversight
cost of funding through a
our defined sustained
benefit deficit between * Monthly valuation estimates
pension schemes the schemes'
increases, or assets
their and liabilities. * Triennial independent actuarial valuations
valuation affects A number of
dividends, factors
reserves impact a * Investment policy
and capital deficit,
including
increased * Senior management review and defined management
life expectancy, actions
falling interest
rates and
falling * Annual ICAAP
asset values
------------------- ------------------ -------- -------- -----------------------------------------------------------
Regulatory conduct
------------------------------------------------------------------------------------------------------------------------
Business model This risk can High Med
The risk that the arise * Board and executive oversight
business model from strategic
does not respond decisions,
in an optimal which fail to * A documented strategy
manner consider
to changing the current
market operating * Annual business targets, subject to regular review
conditions such environment, or and challenge
that sustainable can be
growth, market influenced
share or by external * Regular reviews of pricing structure
profitability factors
is adversely such as material
affected changes in * Continued investment in the investment process,
regulation service standards and marketing
or legislation
within
the financial * Trade body participation
services
sector
* Regular competitor benchmarking and analysis
------------------- ------------------ -------- -------- -----------------------------------------------------------
Suitability and This risk can High Med
advice arise * Investment governance and structured committee
The risk that through failure oversight
clients to appropriately
receive understand the
inappropriate wealth * Management oversight and segregated quality assurance
financial, trust management needs and performance teams
or investment of our clients,
advice, or failure to
inadequate apply * Performance measurement and attribution analysis
documentation suitable advice
or unsuitable or investment
portfolios strategies * Know your client (KYC) suitability processes
* Weekly investment management meetings
* Investment manager reviews through independent
sampling
* Compliance monitoring
------------------- ------------------ -------- -------- -----------------------------------------------------------
Regulatory This risk can High Med
The risk of arise * Board and executive oversight
failure from failures by
by the group or the business to
a subsidiary to comply with * Active involvement with industry bodies
fulfil regulatory existing
requirements and regulation or
comply with the failure * Compliance monitoring programme to examine the
introduction of to identify and control of key regulatory risks
new, or changes react to
to existing, regulatory
regulation change * Separate anti-money laundering function with specific
responsibility
* Oversight of industry and regulatory developments
* Documented policies and procedures
* Staff training and development
------------------- ------------------ -------- -------- -----------------------------------------------------------
Operational
------------------------------------------------------------------------------------------------------------------------
Change This risk can High Med
The risk that the arise * Executive and board oversight of material change
planning or if the business programmes
implementation is too
of change is aggressive
ineffective and unstructured * Dedicated change delivery function, use of internal
or fails to in its change and, where required, external subject matter experts
deliver programme
desired outcomes, to manage
the impact of project * Documented business plans and IT strategy
which risks, or fails
may lead to to make
unmitigated available * Two-stage assessment, challenge and approval of
financial the capacity and project plans
exposures capabilities to
deliver business
benefits * Documented project and change procedures
------------------- ------------------ -------- -------- -----------------------------------------------------------
Information This risk can High Med
security arise * Data security committee oversight
and cyber from the firm
The risk of a failing
lack to maintain and * Information security policy, data protection policy
of integrity of, keep secure and associated procedures
inappropriate sensitive
access and confidential
to, or disclosure data through its * System access controls and encryption
of, client or operating
company-sensitive infrastructure,
information including the * Penetration testing and multi-layer network security
activities
of employees,
and * Training and employee awareness programmes
through the
management
of cyber threats * Physical security
------------------- ------------------ -------- -------- -----------------------------------------------------------
People This risk can High Med
The risk of loss arise * Executive oversight
of key staff, across all areas
lack of the business
of skilled as a result of * Succession and contingency planning
resources resource
and inappropriate management
behaviour or failures * Transparent, consistent and competitive remuneration
actions. or from external schemes
This could lead factors such as
to lack of increased
capacity competition * Contractual clauses with restrictive covenants
or capability or material
threatening changes
the delivery of in regulation * Continual investment in staff training and
business development
objectives,
or to behaviour
leading to * Employee engagement survey
complaints,
regulatory action
or litigation * Appropriate balanced performance measurement system
* Culture monitoring and reporting
------------------- ------------------ -------- -------- -----------------------------------------------------------
Assessment of the company's prospects
The board prepares or reviews its strategic plan annually,
completing the ICAAP and ILAAP work, which form the basis for
capital planning and regular discussion with the Prudential
Regulation Authority (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 could impact the business and the 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 our
response to all Pillar 1 risks (credit, market and operational
risks) to the required regulatory standards. In addition, the
crystallisation of the following events were areas of focus for
enhanced stress testing: an equity market fall, a loss of business
to a competitor, business expansion, pension obligation and a
combined market fall and reputational event.
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.
The business is almost wholly UK-situated and it does not suffer
from any material client, geographical or counterparty
concentrations.
While these stress tests do not consider all of the risks that
the group may face, the directors consider that these stress
testing-based assessments of the group's prospects are reasonable
in the circumstances of the inherent uncertainty 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. 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 both the
principal risks facing the group, and stress tests and scenarios
that would threaten the sustainability of its business model,
future performance, solvency or liquidity.
The board provided a strategic update in October covering a
five-year period. The board also considers five-year projections as
part of its annual regulatory reporting cycle, which includes
strategic and investment plans and its opinion of the likelihood of
risks materialising. However, given the recent and future changes
expected to the economic and regulatory landscape, along with
uncertainties associated with predicting the future impact of
investment markets on the business over a longer period, the
directors have determined that a three-year period to 31 December
2022 continues to constitute an appropriate and prudent period over
which to provide its viability statement. This is also more closely
aligned to its detailed stress testing and capital planning
activity.
Stress testing analysis shows that under scenarios such as a 42%
fall in FTSE 100 levels, the group would remain profitable and is
able to withstand the impact of such scenarios. We see these
scenarios as also incorporating the potential adverse indirect
impact of a disorderly Brexit on the firm. An example of a
mitigating action in such scenarios would be a reduction in costs,
specifically around change initiatives, along with a reduction in
dividend.
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 fall due over the period
to 31 December 2022.
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 in the chairman's statement, chief executive's review,
financial performance and segmental review.
Consolidated statement
of comprehensive income
for the year ended 31 December 2019
2019 2018
Note GBP'000 GBP'000
--------------------------------------------------------- ---- --------- ---------
Interest and similar income 28,553 20,968
Interest expense and similar charges (12,141) (5,647)
--------------------------------------------------------- ---- --------- ---------
Net interest income 16,412 15,321
--------------------------------------------------------- ---- --------- ---------
Fee and commission income 352,519 314,013
Fee and commission expense (23,547) (22,903)
--------------------------------------------------------- ---- --------- ---------
Net fee and commission income 328,972 291,110
--------------------------------------------------------- ---- --------- ---------
Net trading income 170 3,405
Other operating income 2,517 2,127
--------------------------------------------------------- ---- --------- ---------
Operating income 348,071 311,963
--------------------------------------------------------- ---- --------- ---------
Charges in relation to client relationships and goodwill (15,964) (13,188)
Acquisition-related costs 7 (33,057) (19,925)
Head office relocation costs - 2,861
Other operating expenses (259,398) (220,405)
--------------------------------------------------------- ---- --------- ---------
Operating expenses (308,419) (250,657)
--------------------------------------------------------- ---- --------- ---------
Profit before tax 39,652 61,306
Taxation 8 (12,729) (15,137)
--------------------------------------------------------- ---- --------- ---------
Profit after tax 26,923 46,169
--------------------------------------------------------- ---- --------- ---------
Profit for the year attributable to equity holders
of the company 26,923 46,169
--------------------------------------------------------- ---- --------- ---------
Other comprehensive income:
Items that will not be reclassified to profit or
loss
Net remeasurement of defined benefit liability 12 310 1,219
Deferred tax relating to net remeasurement of defined
benefit liability (53) (207)
Other comprehensive income net of tax 257 1,012
--------------------------------------------------------- ---- --------- ---------
Total comprehensive income for the year net of tax
attributable to equity holders of the company 27,180 47,181
--------------------------------------------------------- ---- --------- ---------
Dividends paid and proposed for the year per ordinary
share 9 70.0p 66.0p
Dividends paid and proposed for the year 37,714 35,204
Earnings per share for the year attributable to equity
holders of the company: 14
* basic 50.3p 88.7p
* diluted 48.7p 86.2p
--------------------------------------------------------- ---- --------- ---------
Consolidated statement
of changes in equity
for the year ended 31 December 2019
Share Share Merger Own Retained Total
capital premium reserve shares earnings equity
Note GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------- ---- -------- -------- -------- -------- --------- --------
At 1 January 2018 2,566 143,089 31,835 (4,864) 198,947 371,573
Profit for the year 46,169 46,169
===================================== ==== ======== ======== ======== ======== ========= ========
Net remeasurement of defined benefit
liability 12 1,219 1,219
Deferred tax relating to components
of other comprehensive income (207) (207)
===================================== ==== ======== ======== ======== ======== ========= ========
Other comprehensive income net of
tax - - - - 1,012 1,012
Dividends paid 9 (32,691) (32,691)
Issue of share capital 194 87,134 87,328
Prior period adjustment (note 2) (24,950) 24,950 -
Share-based payments:
* value of employee services 20,279 20,279
* cost of own shares acquired (29,888) (29,888)
* cost of own shares vesting 2,015 (2,015) -
* tax on share-based payments 358 358
------------------------------------- ---- -------- -------- -------- -------- --------- --------
At 31 December 2018 (restated) 2,760 205,273 56,785 (32,737) 232,059 464,140
Profit for the year 26,923 26,923
===================================== ==== ======== ======== ======== ======== ========= ========
Net remeasurement of defined benefit
liability 12 310 310
Deferred tax relating to components
of other comprehensive income (53) (53)
===================================== ==== ======== ======== ======== ======== ========= ========
Other comprehensive income net of
tax - - - - 257 257
Dividends paid 9 (35,959) (35,959)
Issue of share capital 58 5,666 14,971 20,695
Share-based payments:
* value of employee services 19,387 19,387
* cost of own shares acquired (10,033) (10,033)
* cost of own shares vesting 799 (799) -
* tax on share-based payments (17) (17)
------------------------------------- ---- -------- -------- -------- -------- --------- --------
At 31 December 2019 2,818 210,939 71,756 (41,971) 241,851 485,393
------------------------------------- ---- -------- -------- -------- -------- --------- --------
Consolidated balance sheet
as at 31 December 2019
2018
2019 GBP'000
(restated
- note
Note GBP'000 2)
--------------------------------------------- ---- --------- -----------
Assets
Cash and balances with central banks 1,932,997 1,198,479
Settlement balances 52,520 39,754
Loans and advances to banks 177,832 166,200
Loans and advances to customers 138,412 138,959
Investment securities:
* fair value through profit or loss 105,967 79,797
* amortised cost 600,261 907,225
Prepayments, accrued income and other assets 95,390 81,552
Property, plant and equipment 15,432 16,838
Right
of use assets 49,480 -
Net deferred tax asset 2,636 -
Intangible assets 10 227,807 238,918
--------------------------------------------- ---- --------- -----------
Total assets 3,398,734 2,867,722
--------------------------------------------- ---- --------- -----------
Liabilities
Deposits by banks 28 491
Settlement balances 57,694 36,692
Due to customers 2,668,645 2,225,536
Accruals, provisions and other liabilities 11 93,263 103,393
Lease liabilities 61,004 -
Current tax liabilities 4,766 5,985
Net deferred tax liability - 481
Subordinated loan notes 19,927 19,807
Retirement benefit obligations 12 8,014 11,197
--------------------------------------------- ---- --------- -----------
Total liabilities 2,913,341 2,403,582
--------------------------------------------- ---- --------- -----------
Equity
Share capital 2,818 2,760
Share premium 210,939 205,273
Merger reserve 71,756 56,785
Own shares (41,971) (32,737)
Retained earnings 241,851 232,059
--------------------------------------------- ---- --------- -----------
Total equity 485,393 464,140
--------------------------------------------- ---- --------- -----------
Total liabilities and equity 3,398,734 2,867,722
--------------------------------------------- ---- --------- -----------
Company registered number: 01000403
Consolidated statement of cash flows
for the year ended 31 December 2019
2019 2018
Note GBP'000 GBP'000
------------------------------------------------------------- ---- --------- -----------
Cash flows from operating activities
Profit before tax 39,652 61,306
Change in fair value through profit or loss (410) 185
Net interest income (16,412) (15,321)
Impairment losses on financial instruments 103 44
Net charge/(credit) for provisions 11 3,572 (1,498)
Loss on disposal of property, plant and equipment 428 1
Depreciation, amortisation and impairment 33,799 21,673
Foreign exchange movements 2,152 (2,297)
Defined benefit pension scheme charges 12 255 491
Defined benefit pension contributions paid 12 (3,128) (3,673)
Share-based payment charges 31,012 19,838
Interest paid (11,421) (3,892)
Interest received 28,264 21,362
------------------------------------------------------------- ---- --------- -----------
107,866 98,219
Changes in operating assets and liabilities:
* net increase in loans and advances to banks and
customers (31,076) (10,482)
* net (increase)/decrease in settlement balance debtors (12,765) 7,030
* net increase in prepayments, accrued income and other
assets (13,725) (3,887)
* net increase in amounts due to customers and deposits
by banks 442,646 54,191
* net increase/(decrease) in settlement balance
creditors 21,002 (17,760)
* net increase/(decrease) in accruals, deferred income,
provisions and other liabilities 2,802 (222)
------------------------------------------------------------- ---- --------- -----------
Cash generated from operations 516,750 127,089
Tax paid (17,133) (14,697)
------------------------------------------------------------- ---- --------- -----------
Net cash inflow from operating activities 499,617 112,392
------------------------------------------------------------- ---- --------- -----------
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired - (72,914)
Purchase of property, plant, equipment and intangible
assets (17,705) (18,338)
Proceeds from sale of property, plant and equipment (239) -
Purchase of investment securities (754,958) (1,051,150)
Proceeds from sale and redemption of investment securities 1,058,874 847,323
------------------------------------------------------------- ---- --------- -----------
Net cash generated from/(used in) investing activities 285,972 (295,079)
------------------------------------------------------------- ---- --------- -----------
Cash flows from financing activities
Net (repurchase)/issue of ordinary shares 16 (4,340) 57,440
Dividends paid 9 (35,959) (32,691)
Payment of lease liabilities (4,623) -
Interest paid (1,171) (1,283)
------------------------------------------------------------- ---- --------- -----------
Net cash (used in)/generated from financing activities (46,093) 23,466
------------------------------------------------------------- ---- --------- -----------
Net increase/(decrease) in cash and cash equivalents 739,496 (159,221)
Cash and cash equivalents at the beginning of the year 1,408,537 1,567,758
------------------------------------------------------------- ---- --------- -----------
Cash and cash equivalents at the end of the year 16 2,148,033 1,408,537
------------------------------------------------------------- ---- --------- -----------
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 2019. The accounting policies have
been applied consistently to all periods presented in this
statement, except as detailed below.
2 Prior period adjustment
Following the issue of contingent consideration shares to the
vendors of Speirs & Jeffrey, the group revisited the terms
attaching to the initial consideration shares issued in the prior
year (note 6). Having concluded that both share issuances were, in
fact, in pursuance of the arrangement to acquire the shares in
Speirs & Jeffrey, any premiums on the issuance of these shares
should be recognised within the merger reserve. Premiums on
issuance of the initial consideration shares were previously
reported as share premium. The group has restated comparative
information as at 31 December 2018 to report this amount within
merger reserve. As at 31 December 2018, merger reserve has
increased by GBP24,950,000 and share premium has decreased by the
same amount. There is no impact on total equity as at that date and
no impact on profit before tax or earnings per share for the period
then ended.
3 Changes in significant accounting policies
The group has adopted IFRS 16 'Leases' with effect from 1
January 2019.
IFRS 16 'Leases'
IFRS 16 removes the classification of leases as either operating
leases or finance leases for lessees. The standard introduces a
single, on-balance sheet accounting model, which requires:
- recognition of a right of use asset and corresponding lease
liability with respect to all lease arrangements in which the group
is the lessee, except for short term leases and leases of low value
assets;
- recognition of a depreciation charge on the right of use asset
on a straight line basis over the shorter of the expected life of
the asset and the lease term;
- recognition of an interest charge arising from the unwinding
of the discounted lease liability over the lease term; and
- recognition of a finance lease in respect of the group acting
as an intermediate lessor in a sub-lease agreement.
Transition
On transition to IFRS 16, the group was permitted to choose from
the following transition approaches:
- full retrospective transition method, whereby IFRS 16 is
applied to all of its contracts as if it had always applied; or
- a modified retrospective approach with optional practical
expedients.
The group has chosen to apply IFRS 16 using the modified
retrospective approach, under which the cumulative effect of
initial application is recognised as an adjustment to the opening
balance sheet. There is no restatement of the comparative
information which continues to be reported under IAS 17 and IFRIC
4.
On adoption, lease agreements have given rise to both a right of
use ('ROU') asset and a lease liability. For leases previously
classified as operating leases under IAS 17, lease liabilities were
measured at the present value of the remaining lease payments,
discounted at the group's incremental borrowing rate as at 1
January 2019. The group's weighted average lessee's incremental
borrowing rate as at 1 January 2019 was 5.86%. ROU assets were
measured at an amount equal to the lease liability, adjusted by the
amount of any prepaid or accrued lease payments on the group
balance sheet at the date of transition. There were no onerous
lease contracts that would have required an adjustment to the ROU
assets at the date of initial application.
The group has identified the leases for which it holds an option
to terminate the contract early. The group has assessed the
likelihood of exercising these options and has concluded that it is
reasonably certain to exercise this option on one of these leases.
The group has reflected these revised lease terms in its
calculation of the lease liabilities.
The group has used the following practical expedients when
applying IFRS 16 to leases previously classified as operating
leases under IAS 17:
- applied the practical expedient to grandfather the assessment
of which contracts are leases and applied IFRS 16 only to those
that were previously identified as leases. Contracts not identified
as leases under IAS 17 and IFRIC 4 were not reassessed for whether
there is a lease. The identification of a lease under IFRS 16 was
therefore only applied to contracts entered into (or modified) on
or after 1 January 2019;
- applied a single discount rate to a portfolio of leases with
similar characteristics; and
- applied the exemption not to recognise right of use assets and
liabilities for leases with less than a 12 month lease term and
leases of low value assets. The group recognises the lease payments
associated with these leases as an expense on a straight line basis
over the lease term.
As a lessor
Accounting requirements for lessors are largely unchanged from
IAS 17 'Leases'. The group is not required to make any adjustments
on transition to IFRS 16 for leases in which it acts as a lessor,
except for instances in which it acts as a sub-lessor. The group
sub-leases a property in Jersey.
At the date of application to IFRS 16 the group is required to
assess the classification of a sub-lease with reference to the ROU
asset. As the sub-lease is for the whole of the remaining term of
the head lease, the group reassessed the classification of its
sub-lease contract, previously classified as an operating lease
under IAS 17, to a finance lease under IFRS 16 from the date of
initial application.
The tables below show the impact on each financial statement
line item affected by the application of IFRS 16 at the date of
transition.
Impact on the consolidated balance sheet as at 1 January
2019
As reported As restated
31 December 1 January
2018 Adjustments 2019
GBP'000 GBP'000 GBP'000
------------------------------------------------------------ ------------ ----------- -----------
Assets
Prepayments, accrued income and other assets 81,552 (174) 81,378
Right of use assets - 53,846 53,846
------------------------------------------------------------ ------------ ----------- -----------
Total assets 2,867,722 53,672 2,921,394
------------------------------------------------------------ ------------ ----------- -----------
Liabilities
Accruals, deferred income, provisions and other liabilities 103,393 (11,486) 91,907
Lease liabilities - 65,158 65,158
------------------------------------------------------------ ------------ ----------- -----------
Total liabilities 2,403,582 53,672 2,457,254
------------------------------------------------------------ ------------ ----------- -----------
Equity
Retained earnings 232,059 - 232,059
------------------------------------------------------------ ------------ ----------- -----------
Total equity 464,140 - 464,140
------------------------------------------------------------ ------------ ----------- -----------
Total liabilities and equity 2,867,722 53,672 2,921,394
------------------------------------------------------------ ------------ ----------- -----------
The adjustments to the consolidated balance sheet reflect the
initial application of IFRS 16.
The below table presents the impact of IFRS 16 on profit and on
one of our key performance indicators during the year.
Impact on profit for the year GBP'000
------------------------------------------------------------ -------
Increase in finance costs 3,640
Increase in depreciation 4,895
Expenses relating to short-term leases and low-value assets 371
Increase in finance income 75
Decrease in other expenses 7,124
------------------------------------------------------------ -------
Impact on earnings per share
------------------------------- ----
Decrease in earnings per share
Basic 3.2p
Diluted 3.2p
------------------------------- ----
Lease liabilities
The group is required to identify the difference between the
present value of its operating lease commitments disclosed at 31
December 2018 under IAS 17, discounted by using the group's
incremental borrowing rate, and its lease liabilities recognised at
the date of initial application to IFRS 16. This reconciliation has
been presented below:
GBP'000
------------------------------------------------------------------ --------
Operating lease commitment at 31 December 2018 as disclosed in
the group's consolidated financial statements 90,548
Impact of discounting at the incremental borrowing rate (27,027)
------------------------------------------------------------------ --------
Discounted using the incremental borrowing rate at 1 January 2019 63,521
Recognition exemption for:
* Leases of low-value assets (18)
* Extension options reasonably certain to be exercised 1,655
------------------------------------------------------------------ --------
Lease liabilities at 1 January 2019 65,158
------------------------------------------------------------------ --------
4 Critical accounting judgements and key sources of estimation and uncertainty
The group makes judgements and estimates that affect the
application of the group's accounting policies and reported amounts
of assets, liabilities, income and expenses within the next
financial year. Estimates and assumptions are continually evaluated
and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable
under the circumstances.
The following key accounting policies involve critical
judgements made in applying the accounting policy and involve
estimations; care has been taken to distinguish between the
two.
4.1 Client relationship intangibles (note 10)
Critical judgements
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 combination in IFRS 3. In
particular, consideration is given to the scale of the operations
subject to the transaction and whether ownership of a corporate
entity has been acquired, 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. If these
payments are incremental costs of acquiring investment management
contracts and are deemed to be recoverable (i.e. through future
revenues earned from the funds that transfer), they are capitalised
as client relationship intangibles. Otherwise, they are judged to
be in relation to the provision of ongoing services and are
expensed in the period in which they are incurred. Upfront payments
made to investment managers upon joining are expensed as they are
not judged to be incremental costs for acquiring the client
relationships.
Estimation uncertainty
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 that these will continue in the future. During the
year, client relationship intangible assets were amortised over a
10 to 15 year period.
Amortisation of GBP15,369,000 (2018: GBP12,919,000) was charged
during the year. At 31 December 2019, the carrying value of client
relationship intangibles was GBP124,456,000 (2018:
GBP134,556,000).
A reduction of three years in the amortisation period of those
client relationship intangible assets currently amortised over 15
years would increase the annual amortisation charge by GBP4.5
million.
4.2 Retirement benefit obligations (note 12)
Estimation uncertainty
The principal assumptions underlying the reported deficit of
GBP8,014,000 (2018: GBP11,197,000 deficit) are set out in note
12.
In setting these assumptions, 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 subjective 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.
The sensitivity of the retirement benefit obligations to changes
in all of the underlying estimates are set out in note 12. Of
these, the most sensitive assumption is the discount rate used to
measure the defined benefit obligation. Increasing the discount
rate by 1.0% would decrease the schemes' liabilities by
GBP28,701,000 (2018: GBP25,610,000). A 1.0% decrease would have an
equal and opposite effect.
4.3 Business combinations (note 6)
Critical judgement
Treatment and fair value of consideration transferred
On 31 August 2018, the group acquired the entire share capital
of Speirs & Jeffrey ("S&J"). The group accounted for the
transaction as a business combination.
As described in note 6, the purchase price payable for the
acquisition is split into a number of different parts. The payment
of certain elements has been deferred. At 31 December 2019, two
elements of deferred consideration remained unvested and subject to
ongoing vesting conditions.
Vesting of the GBP25,000,000 initial share consideration is
contingent on continued employment of the vendors and this amount
is being charged to profit or loss as a share based payment for
employee services over the vesting period.
Vesting of earn out consideration is also payable in shares and
conditional on achieving certain operational and financial targets
and the continued employment of the vendors.
Estimation uncertainty
Valuation of the earn out consideration and incentivisation
awards
The value of earn out consideration, as well as related
incentivisation awards to other staff, is variable, dependent on
performance by the acquired business against certain operational
and financial targets by 31 December 2020 and 31 December 2021. The
estimated value of earn out consideration and incentivisation
awards that will be payable at these dates is GBP26.4 million,
based on projections of growth in qualifying funds under management
over that period. As a result, accumulated charges of GBP12.9
million have been recognised since acquisition with a corresponding
credit to equity, based on forecast qualifying funds under
management of GBP4.8 billion at the end of 2020; with an associated
charge to profit or loss during 2019 of GBP9.7 million (note
6).
If qualifying funds under management do not exceed GBP4.5
billion then no earn out consideration or incentivisation awards
are payable. If qualifying funds under management at 31 December
2020 are GBP100 million higher or lower than management's estimate
then the accumulated charges as at 31 December 2019 for earn out
consideration and incentivisation awards would be GBP1.5 million
higher or lower and the charge to profit or loss in 2019 would be
GBP1.5 million higher or lower.
Under the terms of the agreements, the maximum possible payment
under the earn out and incentivisation awards is capped at
GBP128,750,000; which represents qualifying funds under management
of approximately GBP10 billion at the end of 2021.
5 Segmental information
For management purposes, the group is organised into two
operating divisions: Investment Management and Unit Trusts.
Centrally incurred indirect expenses are allocated to these
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 administration
and the segment's total revenue. The allocation of these costs is
shown in a separate column in the table below, alongside the
information presented for internal reporting to the group executive
committee, which is the group's chief operating decision maker.
Investment Indirect
Management Unit Trusts expenses Total
31 December 2019 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------------------- ----------- ----------- --------- ---------
Net investment management fee income 224,135 36,073 - 260,208
Net commission income 51,132 - - 51,132
Net interest income 16,412 - - 16,412
Fees from advisory services and other income 19,247 1,072 - 20,319
------------------------------------------------- ----------- ----------- --------- ---------
Underlying operating income 310,926 37,145 - 348,071
------------------------------------------------- ----------- ----------- --------- ---------
Staff costs - fixed (78,562) (3,783) (28,477) (110,822)
Staff costs - variable (49,711) (8,710) (8,353) (66,774)
------------------------------------------------- ----------- ----------- --------- ---------
Total staff costs (128,273) (12,493) (36,830) (177,596)
Other direct expenses (40,392) (7,299) (34,111) (81,802)
Allocation of indirect expenses (63,842) (7,099) 70,941 -
------------------------------------------------- ----------- ----------- --------- ---------
Underlying operating expenses (232,507) (26,891) - (259,398)
------------------------------------------------- ----------- ----------- --------- ---------
Underlying profit before tax 78,419 10,254 - 88,673
Charges in relation to client relationships
and goodwill (note 10) (15,964) - - (15,964)
Acquisition-related costs (note 7) (28,246) - (4,811) (33,057)
------------------------------------------------- ----------- ----------- --------- ---------
Segment profit before tax 34,209 10,254 (4,811) 39,652
------------------------------------------------- ----------- ----------- --------- ---------
Profit before tax attributable to equity holders
of the company 39,652
Taxation (note 8) (12,729)
------------------------------------------------- ----------- ----------- --------- ---------
Profit for the year attributable to equity
holders of the company 26,923
------------------------------------------------- ----------- ----------- --------- ---------
Investment
Management Unit Trusts Total
GBP'000 GBP'000 GBP'000
------------------------------------------------- ----------- ----------- --------- ---------
Segment total assets 3,303,691 89,937 3,393,628
Unallocated assets 5,106
------------------------------------------------- ----------- ----------- --------- ---------
Total assets 3,398,734
------------------------------------------------- ----------- ----------- --------- ---------
Investment Indirect
Management Unit Trusts expenses Total
31 December 2018 (re-presented*) GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------------------- ----------- ----------- --------- ---------
Net investment management fee income 200,530 32,865 - 233,395
Net commission income 41,439 - - 41,439
Net interest income 15,321 - - 15,321
Fees from advisory services and other income 18,019 3,789 - 21,808
------------------------------------------------- ----------- ----------- --------- ---------
Underlying operating income 275,309 36,654 - 311,963
------------------------------------------------- ----------- ----------- --------- ---------
Staff costs - fixed (66,512) (3,300) (26,152) (95,964)
Staff costs - variable (40,656) (7,552) (6,886) (55,094)
------------------------------------------------- ----------- ----------- --------- ---------
Total staff costs (107,168) (10,852) (33,038) (151,058)
------------------------------------------------- ----------- ----------- --------- ---------
Other direct expenses (27,629) (6,950) (34,768) (69,347)
Allocation of indirect expenses (61,676) (6,130) 67,806 -
------------------------------------------------- ----------- ----------- --------- ---------
Underlying operating expenses (196,473) (23,932) - (220,405)
------------------------------------------------- ----------- ----------- --------- ---------
Underlying profit before tax 78,836 12,722 - 91,558
------------------------------------------------- ----------- ----------- --------- ---------
Charges in relation to client relationships
and goodwill (note 10) (13,188) - - (13,188)
Acquisition-related costs (note 7) (16,228) - (3,697) (19,925)
------------------------------------------------- ----------- ----------- --------- ---------
Segment profit before tax 49,420 12,722 (3,697) 58,445
Head office relocation costs 2,861
------------------------------------------------- ----------- ----------- --------- ---------
Profit before tax attributable to equity holders
of the company 61,306
Taxation (note 8) (15,137)
------------------------------------------------- ----------- ----------- --------- ---------
Profit for the year attributable to equity
holders of the company 46,169
------------------------------------------------- ----------- ----------- --------- ---------
Investment
Management Unit Trusts Total
GBP'000 GBP'000 GBP'000
------------------------------------------------- ----------- ----------- --------- ---------
Segment total assets 2,786,718 81,004 2,867,722
Unallocated assets -
------------------------------------------------- ----------- ----------- --------- ---------
Total assets 2,867,722
------------------------------------------------- ----------- ----------- --------- ---------
* In 2018, the cost of the Staff Equity Plan for Investment
Management staff was originally reported within the allocation of
indirect expenses. In 2019, these costs are reported as variable
staff costs directly incurred by the segment. Accordingly, the 2018
comparative figures have been re-presented to show the costs on a
consistent basis
Underlying operating income is equal to operating income for the
year ended 31 December 2019 (2018: equal).
The following table reconciles underlying operating expenses to
operating expenses:
2019 2018
GBP'000 GBP'000
--------------------------------------------------------- -------- --------
Underlying operating expenses 259,398 220,405
Charges in relation to client relationships and goodwill
(note 10) 15,964 13,188
Acquisition-related costs (note 7) 33,057 19,925
Head office relocation costs - (2,861)
--------------------------------------------------------- -------- --------
Operating expenses 308,419 250,657
--------------------------------------------------------- -------- --------
Geographic analysis
The following table presents operating income analysed by the
geographical location of the group entity providing the
service:
2019 2018
GBP'000 GBP'000
----------------- -------- --------
United Kingdom 335,732 301,029
Jersey 12,339 10,934
----------------- -------- --------
Operating income 348,071 311,963
----------------- -------- --------
The following is an analysis of the carrying amount of
non-current assets analysed by the geographical location of the
assets:
2019 2018
GBP'000 GBP'000
------------------- -------- --------
United Kingdom 239,056 251,429
Jersey 4,183 4,327
------------------- -------- --------
Non-current assets 243,239 255,756
------------------- -------- --------
Timing of revenue recognition
The following table presents operating income analysed by the
timing of revenue recognition of the operating segment providing
the service:
2019 2018
------------------------ ------------------------
Investment Investment
Management Unit Trusts Management Unit Trusts
GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------------------- ----------- ----------- ----------- -----------
Products and services transferred at a point
in time 53,599 172 44,392 3,431
Products and services transferred over time 257,327 36,973 230,917 33,223
--------------------------------------------- ----------- ----------- ----------- -----------
Underlying operating income 310,926 37,145 275,309 36,654
--------------------------------------------- ----------- ----------- ----------- -----------
Major clients
The group is not reliant on any one client or group of connected
clients for generation of revenues.
6 Business combinations
Speirs & Jeffrey
On 31 August 2018, the group acquired 100% of the ordinary share
capital of Speirs & Jeffrey Limited ('Speirs &
Jeffrey').
Contingent consideration
Contingent consideration of GBP15,000,000 was paid in May 2019,
following the satisfaction of certain operational targets. Of this,
GBP1,050,000 was treated as consideration in the acquisition
accounting, as it was paid to vendors who were not required to
remain in employment with the group. The amount paid was equal to
what was provided for as at the date of acquisition; therefore, no
measurement period adjustment has been reflected against the cost
of acquisition. The remaining GBP13,950,000 was paid to vendors
required to remain in employment with the group until the targets
were met. Hence, it has been treated as remuneration for
post-combination services and the grant date fair value charged to
profit and loss. The contingent consideration payment was made 100%
in shares.
Other deferred payments
The group continues to provide for the cost of other deferred
and contingent payments to be made to vendors for the sale of the
shares of Speirs and Jeffrey, as well as related incentivisation
awards for other staff. These payments require the vendors to
remain in employment with the group for the duration of the
respective deferral periods. Hence, they are being treated as
remuneration for post-combination services and the grant date fair
value charged to profit and loss over the respective vesting
periods.
These payments are to be made 100% in shares and are being
accounted for as equity-settled share-based payments under IFRS
2.
- Initial share consideration was payable on completion.
However, although the shares were issued on the date of
acquisition, they do not vest until the third anniversary of the
acquisition date, subject to the vendors remaining employed until
this date.
- Earn Out consideration and related incentivisation awards are
payable in two parts in the third and fourth years following the
acquisition date. Payment is subject to the delivery of certain
operational and financial performance targets.
Further details of each of these elements is as follows:
Grant date Expected
Gross amount fair value vesting
GBP'000 Grant date GBP'000 date
------------------------------------------- ------------ ---------- ----------- -----------
31 August 31 August
Initial share consideration 25,000 2018 23,462 2021
Earn Out consideration and incentivisation 31 August 31 December
awards 26,400 2018 26,790 2020/21
------------------------------------------- ------------ ---------- ----------- -----------
The gross amount in respect of the earn out consideration and
incentivisation awards represents management's best estimate as to
the extent to which the performance targets will be achieved. The
maximum amount payable under this element, which represents a
considerable stretch against the targets, is GBP128,750,000 (note
4.3).
The charge recognised in profit or loss for the year ended 31
December 2019 for the above elements is as follows:
2019 2018
GBP'000 GBP'000
-------------------------------------------------- -------- --------
Initial share consideration 8,402 2,607
Contingent consideration 6,015 8,021
Earn Out consideration and incentivisation awards 9,724 3,144
Other
deferred awards 1,885 942
-------------------------------------------------- -------- --------
26,026 14,714
-------------------------------------------------- -------- --------
Other deferred awards represent cash amounts paid one year
following the acquisition date.
These costs are being reported as staff costs within
acquisition-related costs (see note 7).
7 Acquisition-related costs
2019 2018
GBP'000 GBP'000
---------------------------------------------------------- -------- --------
Acquisition of Speirs & Jeffrey 30,837 18,411
Acquisition of Vision and Castle 2,041 1,514
Acquisition of Barclay's Wealth Personal Injury and Court
of Protection business 179 -
---------------------------------------------------------- -------- --------
Acquisition-related costs 33,057 19,925
---------------------------------------------------------- -------- --------
Costs relating to the acquisition of Speirs & Jeffrey
The group has incurred the following costs in relation to the
2018 acquisition of Speirs & Jeffrey, summarised by the
classification within the income statement:
2019 2018
GBP'000 GBP'000
------------------------------- -------- --------
Acquisition costs:
* Staff costs (note 6) 26,026 14,714
* Legal and advisory fees 103 2,465
* Stamp duty - 653
Integration costs 4,708 579
------------------------------- -------- --------
30,837 18,411
------------------------------- -------- --------
Non-staff acquisition costs of GBP103,000 (2018: GBP3,118,000)
and integration costs of GBP4,708,000 (2018: GBP579,000) have not
been allocated to a specific operating segment (note 5).
Costs relating to the acquisition of Vision Independent
Financial Planning and Castle Investment Solutions
The group has incurred the following costs in relation to the
2015 acquisition of Vision Independent Financial Planning and
Castle Investment Solutions, summarised by the classification with
the income statement:
2019 2018
GBP'000 GBP'000
----------------- -------- --------
Staff costs 1,375 1,074
Interest expense 666 440
----------------- -------- --------
2,041 1,514
----------------- -------- --------
Amounts reported in staff costs relate to deferred payments to
previous owners who were required to remain in employment with the
acquired companies until payment. The payment was settled at the
end of 2019 (see note 11).
Costs relating to the acquisition of Barclays Wealth's Personal
Injury and Court of Protection business
On 27 November 2019, the group announced that it had agreed to
acquire the Personal Injury and Court of Protection business of
Barclays Wealth, subject to regulatory approvals. The group
incurred professional services costs of GBP179,000 (2018: GBPnil)
in relation to the acquisition in the year ended 31 December
2019.
8 Income tax expense
2019 2018
GBP'000 GBP'000
--------------------------------------------- -------- --------
Current tax:
* charge for the year 16,809 16,830
* adjustments in respect of prior years (893) (1,599)
Deferred tax:
* credit for the year (3,767) (1,049)
* adjustments in respect of prior years 580 955
--------------------------------------------- -------- --------
12,729 15,137
--------------------------------------------- -------- --------
The tax charge is calculated based on our best estimate of the
amount payable as at the balance sheet date. Any subsequent
differences between these estimates and the actual amounts paid are
recorded as adjustments in respect of prior years.
The tax charge on profit for the year is higher (2018: higher)
than the standard rate of corporation tax in the UK of 19.0% (2018:
19.0%). The differences are explained below:
2019 2018
GBP'000 GBP'000
------------------------------------------------------------ -------- --------
Tax on profit from ordinary activities at the standard rate
of 19.0% (2018: 19.0%) effects of: 7,534 11,650
* disallowable expenses 537 1,210
* share-based payments 410 211
* tax on overseas earnings (233) (190)
* adjustments in respect of prior year (313) (644)
* deferred payments to previous owners of acquired
companies (note 7) 4,508 2,904
* other 22 (36)
* Effect of change in corporation tax rate on deferred
tax 264 32
------------------------------------------------------------ -------- --------
12,729 15,137
------------------------------------------------------------ -------- --------
9 Dividends
2019 2018
GBP'000 GBP'000
------------------------------------------------------------- -------- --------
Amounts recognised as distributions to equity holders in
the year:
* final dividend for the year ended 31 December 2018 of
42.0p (2017: 39.0p) per share 22,433 19,858
* interim dividend for the year ended 31 December 2019
of 25.0p (2018: 24.0p) per share 13,526 12,833
------------------------------------------------------------- -------- --------
Dividends paid in the year of 67.0p (2018: 63.0p) per share 35,959 32,691
------------------------------------------------------------- -------- --------
Proposed final dividend for the year ended 31 December
2019 of 45.0p (2018: 42.0p) per share 24,188 22,371
------------------------------------------------------------- -------- --------
An interim dividend of 25.0p per share was paid on 1 October
2019 to shareholders on the register at the close of business on 6
September 2019 (2018: 24.0p).
A final dividend declared of 45.0p per share (2018: 42.0p) is
payable on 12 May 2020 to shareholders on the register at the close
of business on 24 April 2020. The final dividend is subject to
approval by shareholders at the Annual General Meeting on 7 May
2020 and has not been included as a liability in the financial
statements.
10 Intangible assets
2019 2018
GBP'000 GBP'000
------------------------ -------- --------
Goodwill 90,405 91,000
Other intangible assets 137,402 147,918
------------------------ -------- --------
227,807 238,918
------------------------ -------- --------
Goodwill
Goodwill acquired in a business combination is allocated, at
acquisition, to the groups of cash generating units (CGUs) that are
expected to benefit from that business combination. During the
year, the group revised its methodology by which it defines its
CGUs and how it allocated goodwill to groups of CGUs. This resulted
in goodwill of GBP227,000 previously allocated to the Rooper &
Whately CGU being re-allocated to the investment management group
of CGUs. Under this revised methodology, the carrying amount of
goodwill has been allocated as follows:
Investment
management Trust Total
GBP'000 GBP'000 GBP'000
--------------------------------------- ----------- -------- --------
Cost
At 1 January 2018 62,318 1,954 64,272
Acquired through business combinations 28,087 - 28,087
--------------------------------------- ----------- -------- --------
At 1 January 2019 and 31 December 2019 90,405 1,954 92,359
--------------------------------------- ----------- -------- --------
Impairment
At 1 January 2018 - 1,090 1,090
Charge in the year - 269 269
--------------------------------------- ----------- -------- --------
At 1 January 2019 - 1,359 1,359
Charge in the year - 595 595
--------------------------------------- ----------- -------- --------
At 31 December 2019 - 1,954 1,954
--------------------------------------- ----------- -------- --------
Carrying amount at 31 December 2019 90,405 - 90,405
--------------------------------------- ----------- -------- --------
Carrying amount at 31 December 2018 90,405 595 91,000
--------------------------------------- ----------- -------- --------
Carrying amount at 1 January 2018 62,318 864 63,182
--------------------------------------- ----------- -------- --------
Goodwill acquired through business combinations in 2018
comprised goodwill arising on the acquisition of Speirs &
Jeffrey. The goodwill was allocated to the investment management
group of CGUs. The group do not believe there are any key
assumptions where reasonable changes could occur which could give
rise to a material adjustment in the carrying value.
The recoverable amounts of the groups of CGUs to which goodwill
is allocated are assessed using value-in-use calculations. The
group prepares cash flow forecasts derived from the most recent
financial budgets approved by the board, covering the forthcoming
and future years. The key assumptions underlying the budgets are
that organic growth rates, revenue margins and profit margins are
in line with recent historical rates and equity markets will not
change significantly in the forthcoming year. Budgets are
extrapolated for 5 years based on annual revenue and cost growth
for each group of CGUs (see table below), as well as the group's
expectation of future industry growth rates. A 5 year extrapolation
period is chosen as this aligns with the period covered by the
group's ICAAP modelling. A terminal growth rate is applied to year
5 cash flows, which takes into account the net growth forecasts
over the extrapolation period and the long-term average growth rate
for the industry. The group estimates discount rates using pre-tax
rates that reflect current market assessments of the time value of
money and the risks specific to the group of CGUs.
The pre-tax rate used to discount the forecast cash flows for
each group of CGU is shown in the table below; these are based on a
risk-adjusted weighted average cost of capital. The group judges
that these discount rates appropriately reflect the markets in
which the group of CGUs operate and, in particular, the relatively
small size of the Trust group of CGUs.
Investment management Trust
----------------------- --------------
At 31 December 2019 2018 2019 2018
---------------------- ------------ --------- ------ ------
Discount rate 8.7% 12.3% 10.7% 14.3%
Annual revenue growth
rate 3.0% 5.0% (1.0)% (1.0)%
Terminal growth rate (2.0)% n/a (3.0)% n/a
------------------------ ------------ --------- ------ ------
During the year ended 31 December 2019, the group recognised an
impairment charge of GBP595,000 in relation to goodwill allocated
to the trust group of CGUs. The recoverable amount of the group of
CGUs was lower than the carrying value, which reflected the fact
that the business associated with this goodwill is contracting.
This reduced the carrying value of the goodwill allocated to the
trust group of CGUs to GBPnil. The impairment was recognised in the
Investment Management segment in the segmental analysis.
No reasonably foreseeable changes to the assumptions used in the
value-in-use calculation for the investment management group of
CGUs, including management's assessment of the impact of Brexit,
would result in an impairment of the goodwill allocated to it.
Other intangible assets
Software
Client development Purchased
relationships costs software Total
GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------------- -------------- ------------ --------- --------
Cost
At 1 January 2018 155,103 5,759 30,590 191,452
Internally developed in the year - 1,450 - 1,450
Acquired through business combinations 54,337 - - 54,337
Purchased in the year 1,298 - 6,297 7,595
Disposals (2,182) - - (2,182)
Revaluation of assets (4,939) - - (4,939)
--------------------------------------- -------------- ------------ --------- --------
At 1 January 2019 203,617 7,209 36,887 247,713
Internally developed in the year - 1,485 - 1,485
Purchased in the year 5,269 - 7,012 12,281
Disposals (1,750) (512) (2,751) (5,013)
--------------------------------------- -------------- ------------ --------- --------
At 31 December 2019 207,136 8,182 41,148 256,466
--------------------------------------- -------------- ------------ --------- --------
Amortisation and impairment
At 1 January 2018 58,324 4,529 21,536 84,389
Amortisation charge 12,919 686 3,983 17,588
Disposals (2,182) - - (2,182)
--------------------------------------- -------------- ------------ --------- --------
At 1 January 2019 69,061 5,215 25,519 99,795
Impairment charge - 415 2,727 3,142
Amortisation charge 15,369 919 4,843 21,131
Disposals (1,750) (512) (2,742) (5,004)
--------------------------------------- -------------- ------------ --------- --------
At 31 December 2019 82,680 6,037 30,347 119,064
--------------------------------------- -------------- ------------ --------- --------
Carrying amount at 31 December 2019 124,456 2,145 10,801 137,402
--------------------------------------- -------------- ------------ --------- --------
Carrying amount at 31 December 2018 134,556 1,994 11,368 147,918
--------------------------------------- -------------- ------------ --------- --------
Carrying amount at 1 January 2018 96,779 1,230 9,054 107,063
--------------------------------------- -------------- ------------ --------- --------
Client relationships acquired through business combinations in
2018 relate to the acquisition of Speirs & Jeffrey (note
6).
Purchases of client relationships of GBP5,269,000 (2018:
GBP1,298,000) in the year relate to payments made to investment
managers and third parties for the introduction of client
relationships.
The total amount charged to profit or loss in the year, in
relation to goodwill and client relationships, was GBP15,369,000
(2018: GBP13,188,000).
In 2018 the value of certain awards related to client
relationships were reduced by GBP4,939,000 as not all performance
conditions were ultimately met.
Purchased software with a cost of GBP20,373,000 (2018:
GBP18,769,000) has been fully amortised but is still in use.
11 Provisions
2019 2018
GBP'000 GBP'000
----------------------------- -------- --------
Trade creditors 4,001 2,513
Other creditors 7,680 20,395
Accruals 72,850 68,701
Other provisions (see below) 8,732 11,784
----------------------------- -------- --------
93,263 103,393
----------------------------- -------- --------
Deferred,
variable Deferred
costs and
to acquire contingent
client consideration Legal
relationship in business and Property-
intangibles combinations compensation related Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------ ------------- -------------- ------------- --------- --------
At 1 January 2018 12,147 1,220 677 13,743 27,787
==================================== ============= ============== ============= ========= ========
Charged to profit or loss - - 449 1,836 2,285
Unused amount credited to profit or
loss - - (57) (3,726) (3,783)
==================================== ============= ============== ============= ========= ========
Net credit to profit or loss - - 392 (1,890) (1,498)
Other movements (3,641) 3,158 - 600 117
Utilised/paid during the year (7,445) (2,000) (260) (4,917) (14,622)
------------------------------------ ------------- -------------- ------------- --------- --------
At 1 January 2019 1,061 2,378 809 7,536 11,784
==================================== ============= ============== ============= ========= ========
Charged to profit or loss - - 2,852 1,350 4,202
Unused amount credited to profit or
loss - - (320) (310) (630)
==================================== ============= ============== ============= ========= ========
Net charge to profit or loss - - 2,532 1,040 3,572
Other movements 5,269 179 - - 5,448
Utilised/paid during the year (5,011) (2,557) (1,166) (3,338) (12,072)
------------------------------------ ------------- -------------- ------------- --------- --------
At 31 December 2019 1,319 - 2,175 5,238 8,732
------------------------------------ ------------- -------------- ------------- --------- --------
Payable within 1 year 590 - 2,175 845 3,610
Payable after 1 year 729 - - 4,393 5,122
------------------------------------ ------------- -------------- ------------- --------- --------
1,319 - 2,175 5,238 8,732
------------------------------------ ------------- -------------- ------------- --------- --------
Deferred, variable costs to acquire client relationship
intangibles
Other movements in provisions relate to deferred payments to
investment managers and third parties for the introduction of
client relationships, which have been capitalised in the year. In
2018, there was a net release of GBP3,641,000 in relation to the
value of certain payments where not all performance conditions were
ultimately met.
Deferred and contingent consideration in business
combinations
Following the satisfaction of certain operational targets,
contingent consideration of GBP1,050,000 was paid to vendors of
Speirs & Jeffrey in May 2019 (see note 6). In addition,
contingent consideration of GBP1,507,000 was paid in October 2019
in respect of the acquisition of Vision Independent Financial
Planning and Castle Investment Solutions.
Legal and compensation
During the ordinary course of business the group may, from
time-to-time, be subject to complaints, as well as threatened and
actual legal proceedings (which may include lawsuits brought on
behalf of clients or other third parties) both in the UK and
overseas. Any such material matters are periodically reassessed,
with the assistance of external professional advisers where
appropriate, to determine the likelihood of the group incurring a
liability. In those instances where it is concluded that it is more
likely than not that a payment will be made, a provision is
established to the group's best estimate of the amount required to
settle the obligation at the relevant balance sheet date. The
timing of settlement of provisions for client compensation or
litigation is dependent, in part, on the duration of negotiations
with third parties.
Property-related
Property-related provisions of GBP5,238,000 relate to
dilapidation provisions expected to arise on leasehold premises
held by the group; and monies due under the contract with the
assignee of leases on the group's former property at 1 Curzon
Street (2018: GBP7,536,000).
Dilapidation provisions are calculated using a discounted cash
flow model; during the year ended 31 December 2019, dilapidation
provisions increased by GBP677,000 (2018: increased by
GBP1,449,000). The group utilised GBP3,338,000 (2018: GBP912,000)
of the dilapidations provision held for the surplus property at 1
Curzon Street during the year. The impact of discounting led to an
additional GBP1,364,000 (2018: GBP125,000) being provided for over
the year.
Amounts payable after one year
Property-related provisions of GBP4,393,000 are expected to be
settled within 14 years of the balance sheet date, which
corresponds to the longest lease for which a dilapidations
provision is being held. Remaining provisions payable after one
year are expected to be settled within two years of the balance
sheet date.
12 Long-term employee benefits
Defined contribution pension scheme
The group operates a defined contribution group personal pension
scheme and contributes to various other personal pension
arrangements for certain directors and employees. The total of
contributions made to these schemes during the year was
GBP9,726,000 (2018: GBP7,959,000). The group also operates a
defined contribution scheme for overseas employees, for which the
total contributions were GBP58,000 (2018: GBP36,000).
Defined benefit pension schemes
The group operates two defined benefit pension schemes that
operate within the UK legal and regulatory framework; the Rathbone
1987 Scheme and the Laurence Keen Retirement Benefit Scheme. The
schemes are currently both clients of Rathbone Investment
Management, with investments managed on a discretionary basis, in
accordance with the statements of investment principles agreed by
the trustees. Scheme assets are held separately from those of the
group.
The trustees of the schemes are required to act in the best
interest of the schemes' beneficiaries. The appointment of trustees
is determined by the schemes' trust documentation and legislation.
The group has a policy that one third of all trustees should be
nominated by members of the schemes.
Following a high court ruling in 2018, the cost of equalising
pension benefits for the impact of unequal Guaranteed Minimum
Pensions (GMP) has been recognised. Only the Laurence Keen Scheme
was impacted. The Rathbone 1987 Scheme was never contracted out,
meaning there are no GMP benefits in this scheme. Ahead of a
specific method for equalisation being agreed with the scheme
trustees, the cost has been estimated using a method consistent
with that deemed by the high court to be the minimum necessary
requirements to achieve equality.
The Laurence Keen Scheme was closed to new entrants and future
accrual with effect from 30 September 1999. Past service benefits
continue to be calculated by reference to final pensionable
salaries. From 1 October 1999, all the active members of the
Laurence Keen Scheme were included under the Rathbone 1987 Scheme
for accrual of retirement benefits for further service. The
Rathbone 1987 Scheme was closed to new entrants with effect from 31
March 2002 and to future accrual from 30 June 2017.
The schemes are valued by independent actuaries at least every
three years using the projected unit credit method, which looks at
the value of benefits accruing over the years following the
valuation date based on projected salary to the date of termination
of services, discounted to a present value using a rate that
reflects the characteristics of the liability. The valuations are
updated at each balance sheet date in between full valuations. The
latest full actuarial valuations were carried out as at the
following dates:
Rathbone 1987 Scheme 31 December 2016
Laurence Keen Scheme 31 December 2016
The next triennial valuations of the two schemes will be carried
out as at 31 December 2019, and may result in changes to the
funding commitments.
The assumptions used by the actuaries, to estimate the schemes'
liabilities, are the best estimates chosen from a range of possible
actuarial assumptions. Due to the timescale covered by the
liability, these assumptions may not necessarily be borne out in
practice.
The principal actuarial assumptions used, which reflect the
different membership profiles of the schemes, were:
Laurence Keen Rathbone 1987
Scheme Scheme
-------------------- --------------------
2019 2018 2019 2018
% % % %
(unless (unless (unless (unless
stated) stated) stated) stated)
----------------------------------------------- --------- --------- --------- ---------
Rate of increase of salaries n/a n/a n/a n/a
Rate of increase of pensions in payment 3.40 3.60 3.10 3.30
Rate of increase of deferred pensions 3.10 3.40 3.10 3.40
Discount rate 2.05 2.85 2.05 2.85
Inflation* 3.10 3.40 3.10 3.40
Percentage of members transferring out of
the schemes per annum 3.00 3.00 3.00 3.00
Average age of members at date of transferring
out (years) 52.5 52.5 52.5 52.5
----------------------------------------------- --------- --------- --------- ---------
* Inflation assumptions are based on the Retail Price Index
Over the year, the financial assumptions have been amended to
reflect changes in market conditions. Specifically:
1. the discount rate has been decreased by 0.8% to reflect a
decrease in the yields available on AA-rated Corporate Bonds;
2. the assumed rate of future inflation has decreased by 0.3%
and reflects expectations of long-term inflation as implied by
changes in the fixed-interest and index-linked gilts market;
and
3. the assumed rates of future increases to pensions in payment
have decreased by 0.2% for both schemes, consistent with the
assumed rate of future inflation.
Over the year the demographic assumptions adopted remain
unchanged, other than updating the CMI model used to project future
improvements in mortality from the 2017 version to the 2018
version.
The assumed duration of the liabilities for the Laurence Keen
Scheme is 19 years (2018: 17 years) and the assumed duration for
the Rathbone 1987 Scheme is 22 years (2018: 21 years).
The normal retirement age for members of the Laurence Keen
Scheme is 65 (60 for certain former directors). The normal
retirement age for members of the Rathbone 1987 Scheme is 60 for
service prior to 1 July 2009 and 65 thereafter, following the
introduction of pension benefits based on Career Average Revalued
Earnings (CARE) from that date. The assumed life expectancy for the
membership of both schemes is based on the S2NA actuarial tables
(2018: S2NA tables). The assumed life expectations on retirement
were:
2019 2018
-------------- --------------
Males Females Males Females
---------------------- -------- ----- ------- ----- -------
Retiring today: aged 60 27.9 30.0 28.4 30.5
aged 65 23.1 25.1 23.6 25.6
Retiring in 20 years: aged 60 29.7 31.9 30.3 32.3
aged 65 24.7 26.9 25.3 27.3
------------------------------- ----- ------- ----- -------
The amount included in the balance sheet arising from the
group's assets in respect of the schemes is as follows:
2019 2018
------------------------------ ------------------------------
Laurence Rathbone Laurence Rathbone
Keen 1987 Keen 1987
Scheme Scheme Total Scheme Scheme Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------- -------- --------- --------- -------- --------- ---------
Present value of defined benefit
obligations (12,726) (146,398) (159,124) (12,383) (134,150) (146,533)
Fair value of scheme assets 12,178 138,932 151,110 11,624 123,712 135,336
--------------------------------- -------- --------- --------- -------- --------- ---------
Net defined benefit liability (548) (7,466) (8,014) (759) (10,438) (11,197)
--------------------------------- -------- --------- --------- -------- --------- ---------
The amounts recognised in profit or loss, within operating
expenses, are as follows:
2019 2018
---------------------------- ----------------------------
Laurence Rathbone Laurence Rathbone
Keen 1987 Keen 1987
Scheme Scheme Total Scheme Scheme Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------ -------- -------- -------- -------- -------- --------
Net interest on net liability 15 240 255 14 352 366
Past service cost - - - 125 - 125
------------------------------ -------- -------- -------- -------- -------- --------
15 240 255 139 352 491
------------------------------ -------- -------- -------- -------- -------- --------
Remeasurements of the net defined benefit liability have been
reported in other comprehensive income. The actual return on scheme
assets was a rise in value of GBP1,380,000 (2018: GBP280,000 fall)
for the Laurence Keen Scheme and a rise in value of GBP18,357,000
(2018: GBP6,279,000 fall) for the Rathbone 1987 Scheme.
Movements in the present value of defined benefit obligations
were as follows:
2019 2018
---------------------------- ----------------------------
Laurence Rathbone Laurence Rathbone
Keen 1987 Keen 1987
Scheme Scheme Total Scheme Scheme Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------- -------- -------- -------- -------- -------- --------
At 1 January 12,383 134,150 146,533 12,980 151,133 164,113
Service cost (employer's part) - - - - - -
Interest cost 336 3,739 4,075 334 3,879 4,213
Contributions from members - - - - - -
Actuarial experience gains 10 121 131 106 (5,446) (5,340)
Actuarial (gains)/losses arising
from:
* demographic assumptions (293) (3,243) (3,536) 103 1,817 1,920
* financial assumptions 1,452 17,560 19,012 (487) (7,720) (8,207)
Past service cost - - - 125 - 125
Benefits paid (1,162) (5,929) (7,091) (778) (9,513) (10,291)
--------------------------------- -------- -------- -------- -------- -------- --------
At 31 December 12,726 146,398 159,124 12,383 134,150 146,533
--------------------------------- -------- -------- -------- -------- -------- --------
Movements in the fair value of scheme assets were as
follows:
2019 2018
---------------------------- ----------------------------
Laurence Rathbone Laurence Rathbone
Keen 1987 Keen 1987
Scheme Scheme Total Scheme Scheme Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------------------------------------------- -------- -------- -------- -------- -------- --------
At 1 January 11,624 123,712 135,336 12,278 136,235 148,513
Remeasurement of net defined
benefit liability:
* interest income 321 3,499 3,820 320 3,527 3,847
* return on scheme assets (excluding amounts included
in interest income) 1,059 14,858 15,917 (600) (9,806) (10,406)
Contributions from the sponsoring
companies 336 2,792 3,128 404 3,269 3,673
Contributions from scheme members - - - - - -
Benefits paid (1,162) (5,929) (7,091) (778) (9,513) (10,291)
---------------------------------------------------------- -------- -------- -------- -------- -------- --------
At 31 December 12,178 138,932 151,110 11,624 123,712 135,336
---------------------------------------------------------- -------- -------- -------- -------- -------- --------
The statements of investment principles set by the trustees of
both schemes were revised in 2015. They require that the assets of
the schemes are invested in a diversified portfolio of assets,
split between growth assets (primarily equities) and safer assets
(gilts, index-linked gilts, corporate bonds and other fixed income
investments) with a switch to a greater percentage of safer assets
over time as the schemes mature.
In the Rathbone 1987 Scheme, the target date for the 100%
allocation to safer assets is 31 December 2048. The scheme also
seeks to hedge around 50% of its interest rate and inflation risk
by using Liability Driven Investment (LDI) strategies.
In the Laurence Keen Scheme the target date for the 100%
allocation to safer assets is 31 December 2040.
The expected asset allocations at 31 December 2019 as set out in
the statements of investment principles are as follows:
Laurence Rathbone
Keen 1987
Target asset allocation at 31 December 2019 Scheme Scheme
-------------------------------------------- -------- --------
Benchmark
Safer assets 58% 46%
Growth assets 42% 54%
Range
52% - 40% -
Safer assets 64% 52%
36% - 48% -
Growth assets 48% 60%
-------------------------------------------- -------- --------
The analysis of the scheme assets, measured at bid prices, at
the balance sheet date was as follows:
2019 2018 2019 2018
Fair Fair Current Current
value value allocation allocation
Laurence Keen Scheme GBP'000 GBP'000 % %
--------------------------------------- -------- -------- ----------- -----------
Equity instruments:
* United Kingdom 3,320 3,007
* Eurozone 408 377
* North America 696 588
* Other 704 734
--------------------------------------- -------- -------- ----------- -----------
5,128 4,706 42 40
Debt instruments:
* United Kingdom government bonds 4,693 4,475
* Overseas corporate bonds 158 -
* United Kingdom corporate bonds 1,847 1,993
--------------------------------------- -------- -------- ----------- -----------
6,698 6,468 55 56
Cash 79 84 1 1
Other 273 366 2 3
--------------------------------------- -------- -------- ----------- -----------
At 31 December 12,178 11,624 100 100
--------------------------------------- -------- -------- ----------- -----------
2019 2018 2019 2018
Fair Fair Current Current
value value allocation allocation
Rathbone 1987 Scheme GBP'000 GBP'000 % %
--------------------------------------- -------- -------- ----------- -----------
Equity instruments:
* United Kingdom 42,518 34,367
* Eurozone 6,769 6,110
* North America 9,492 8,958
* Other 8,887 7,081
--------------------------------------- -------- -------- ----------- -----------
67,666 56,516 48 45
Debt instruments:
* United Kingdom government bonds 37,184 36,055
* Overseas government bonds 1,324 2,042
* United Kingdom corporate bonds 11,198 8,809
* Overseas corporate bonds - -
--------------------------------------- -------- -------- ----------- -----------
49,706 46,906 36 38
Derivatives:
* Interest rate swap funds 14,615 15,734
--------------------------------------- -------- -------- ----------- -----------
14,615 15,734 11 13
Cash 6,945 4,556 5 4
Other - - - -
--------------------------------------- -------- -------- ----------- -----------
At 31 December 138,932 123,712 100 100
--------------------------------------- -------- -------- ----------- -----------
During 2019, the Rathbone 1987 Scheme held shares in real time
inflation-linked interest rate swap funds, which had a fair value
of GBP14,615,000 at the year end (2018: GBP15,734,000). The value
of these investments is expected to increase when the value of the
scheme's liabilities increase (and vice versa). They therefore act
to reduce the group's exposure to changes in net defined benefit
pension obligations arising from changes in interest rates and
inflation. The funds are selected so that their average duration is
intended to broadly align with the duration of the scheme's
liabilities.
All equity and debt instruments have quoted prices in active
markets. The majority of government bonds are issued by governments
of the United Kingdom, the United States of America and Germany all
of which are rated AAA, AA+ or AA, based on credit ratings awarded
by Fitch Ratings Limited (Fitch) or Moody's as at the balance sheet
date. Other scheme assets comprise commodities and property funds,
both of which also have quoted prices in active markets.
The key assumptions affecting the results of the valuation are
the discount rate, future inflation, mortality, the rate of members
transferring out and the average age at the time of transferring
out. In order to demonstrate the sensitivity of the results to
these assumptions, the actuary has recalculated the defined benefit
obligations for each scheme by varying each of these assumptions in
isolation whilst leaving the other assumptions unchanged. For
example, in order to demonstrate the sensitivity of the results to
the discount rate, the actuary has recalculated the defined benefit
obligations for each scheme using a discount rate that is 1.0%
higher (and lower) than used for calculating the disclosed figures.
A similar approach has been taken to demonstrate the sensitivity of
the results to the other key assumptions. A summary of the
sensitivities in respect of the total of the two schemes' defined
benefit obligations are set out below. As a result of the change in
the discount rate during the year, the sensitivity analysis
demonstrates the impact of a 1.0% change in discount rate, compared
to a 0.5% change in the disclosures in the 2018 report and
accounts.
Combined impact
on
schemes' liabilities
------------------------
(Decrease)/ (Decrease)/
increase increase
GBP'000 %
---------------------------------------------------------- ----------- -----------
1.0% increase in:
* discount rate (28,701) (18.0%)
0.5% increase in:
* rate of inflation 10,015 6.3%
Reduce allowance for future transfers to nil 1,417 0.9%
1 year increase to:
* longevity at 60 7,167 4.5%
* average age of members at the time of transferring
out 708 0.4%
---------------------------------------------------------- ----------- -----------
The total contributions made by the group to the Rathbone 1987
Scheme during the year were GBP2,792,000 (2018: GBP3,269,000). The
group has committed to pay deficit reducing contributions of
GBP1,750,000 by 28 February each year from 2020 to 2022 (inclusive)
and a further GBP1,000,000 by 31 August in each of those years, so
long as that scheme remains in deficit. The deficit funding plan
will be reviewed following the next triennial valuation, as at 31
December 2019.
The total contributions made by the group to the Laurence Keen
Scheme during the year were GBP336,000 (2018: GBP404,000). The
group has a commitment to pay deficit reducing contributions of
GBP168,000 by 28 February each year from 2020 to 2021 (inclusive)
and a further GBP168,000 by 31 August in each of those years, so
long as that scheme remains in deficit.
No allowance has been made for a minimum funding requirement
under IFRIC 14. The funding plans only require further
contributions if the schemes remain in deficit.
13 Fair values
The table below analyses financial instruments measured at fair
value into a fair value hierarchy based on the valuation technique
used to determine the fair value.
- Level 1: quoted prices (unadjusted) in active markets for
identical assets or liabilities.
- Level 2: inputs other than quoted prices included within level
1 that are observable for the asset or liability, either directly
or indirectly.
- Level 3: inputs for the asset or liability that are not based
on observable market data.
Level Level Level
1 2 3 Total
At 31 December 2019 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------- -------- -------- -------- --------
Assets
Fair value through profit or loss:
* equity securities 4,587 - 1,186 5,773
* money market funds - 100,194 - 100,194
----------------------------------- -------- -------- -------- --------
4,587 100,194 1,186 105,967
----------------------------------- -------- -------- -------- --------
Level Level Level
1 2 3 Total
At 31 December 2018 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------- -------- -------- -------- --------
Assets
Fair value through profit or loss:
* equity securities 3,205 - 1,259 4,464
* money market funds - 75,333 - 75,333
----------------------------------- -------- -------- -------- --------
3,205 75,333 1,259 79,797
----------------------------------- -------- -------- -------- --------
The group recognises transfers between levels of the fair value
hierarchy at the end of the reporting period during which the
change has occurred. There have been no transfers between levels
during the year (2018: none).
The fair value of listed equity securities is their quoted
price. Money market funds are demand securities and changes to
estimates of interest rates will not affect their fair value. The
fair value of money market funds is their daily redemption
value.
The fair values of the group's other financial assets and
liabilities are not materially different from their carrying
values, with the exception of the following:
- Investment debt securities measured at amortised cost comprise
bank and building society certificates of deposit, which have fixed
coupons. The fair value of debt securities at 31 December 2019 was
GBP604,462,000 (2018: GBP911,190,000) and the carrying value was
GBP600,291,000 (2018: GBP907,259,000). Fair value of debt
securities is based on market bid prices, and hence would be
categorised as level 1 within the fair value hierarchy.
- Subordinated loan notes comprise Tier 2 loan notes. The fair
value of the loan notes at 31 December 2019 was GBP21,302,000
(2018: GBP20,217,000) and the carrying value was GBP19,927,000
(2018: GBP19,807,000). Fair value of the loan notes is based on
discounted future cash flows using current market rates for debts
with similar remaining maturity, and hence would be categorised as
level 2 in the fair value hierarchy.
14 Earnings per share
Earnings used to calculate earnings per share on the bases
reported in the financial statements were:
2019 2018
-------- -------- -------- -------- -------- --------
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 88,673 (17,535) 71,138 91,558 (17,388) 74,170
Charges in relation to client
relationships and goodwill (note
10) (15,964) 3,033 (12,931) (13,188) 2,506 (10,682)
Acquisition-related costs (note
7) (33,057) 1,773 (31,284) (19,925) 289 (19,636)
Head office relocation costs - - - 2,861 (544) 2,317
------------------------------------ -------- -------- -------- -------- -------- --------
Profit attributable to shareholders 39,652 (12,729) 26,923 61,306 (15,137) 46,169
------------------------------------ -------- -------- -------- -------- -------- --------
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
53,566,271 (2018: 52,050,979).
Diluted earnings per share is the basic earnings per share,
adjusted for the effect of contingently issuable shares under the
S&J initial share consideration and Executive 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:
2019 2018
----------------------------------------------------------- ---------- ----------
Weighted average number of ordinary shares in issue
during the year - basic 53,566,271 52,050,979
Effect of ordinary share options/Save As You Earn 97,495 148,564
Effect of dilutive shares issuable under the Share
Incentive Plan 570 474
Effect of contingently issuable shares under the Executive
Incentive Plan 574,393 375,759
Effect of contingently issuable shares under S&J initial
share consideration (note 6) 1,006,522 1,006,522
----------------------------------------------------------- ---------- ----------
Diluted ordinary shares 55,245,251 53,582,298
----------------------------------------------------------- ---------- ----------
2019 2018
--------------------------------------------------------------- ------ ------
Earnings per share for the year attributable to equity holders
of the company:
* basic 50.3p 88.7p
* diluted 48.7p 86.2p
Underlying earnings per share for the year attributable
to equity holders of the company:
* basic 132.8p 142.5p
* diluted 128.8p 138.4p
--------------------------------------------------------------- ------ ------
Underlying earnings per share is calculated in the same way as
earnings per share, but by reference to underlying profit
attributable to shareholders.
15 Related party transactions
Transactions with key management personnel
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.
Gains on options exercised by directors during the year totalled
GBP7,000 (2018: GBP19,000).
2019 2018
GBP'000 GBP'000
----------------------------- -------- --------
Short term employee benefits 14,176 12,434
Post-employment benefits 296 184
Other long term benefits 2,695 2,934
Share-based payments 3,408 5,640
----------------------------- -------- --------
20,575 21,192
----------------------------- -------- --------
Dividends totalling GBP95,000 were paid in the year (2018:
GBP247,000) in respect of ordinary shares held by key management
personnel and their close family members.
As at 31 December 2019, the group had outstanding interest-free
season ticket loans of GBPnil (2018: GBPnil) issued to key
management personnel.
At 31 December 2019, key management personnel and their close
family members had gross outstanding deposits of GBP636,000 (2018:
GBP778,000) and gross outstanding banking loans of GBPnil (2018:
GBPnil), all of which (2018: all) were made on normal business
terms. A number of the group's key management personnel and their
close family members make use of the services provided by companies
within the group. Charges for such services are made at various
staff rates.
Other related party transactions
The group's transactions with the pension funds are described in
note 12. At 31 December 2019, no amounts were outstanding with
either the Laurence Keen Scheme or the Rathbone 1987 Scheme (2018:
GBPnil).
One group subsidiary, Rathbone Unit Trust Management, has
authority to manage the investments within a number of unit trusts.
Another group company, Rathbone Investment Management
International, acted as investment manager for a protected cell
company offering unitised private client portfolio services. During
2019, the group managed 27 unit trusts, Sociétés d'Investissement à
Capital Variable (SICAVs) and open-ended investment companies
(OEICs) (together, 'collectives') (2018: 27 unit trusts and
OEICs).
The group charges each fund an annual management fee for these
services, but does not earn any performance fees on the unit
trusts. The management charges are calculated on the bases
published in the individual fund prospectuses, which also state the
terms and conditions of the management contract with the group.
The following transactions and balances relate to the group's
interest in the unit trusts:
2019 2018
Year ended 31 December GBP'000 GBP'000
---------------------------------- -------- --------
Total management fees 40,111 37,608
---------------------------------- -------- --------
2019 2018
As at 31 December GBP'000 GBP'000
---------------------------------- -------- --------
Management fees owed to the group 3,904 3,629
Holdings in unit trusts 4,587 3,205
---------------------------------- -------- --------
8,491 6,834
---------------------------------- -------- --------
Total management fees are included within 'fee and commission
income' in the consolidated statement of comprehensive income.
Management fees owed to the group are included within 'accrued
income' and holdings in unit trusts are classified as 'fair value
through profit or loss equity securities' in the consolidated
balance sheet. The maximum exposure to loss is limited to the
carrying amount on the balance sheet as disclosed above.
All amounts outstanding with related parties are unsecured and
will be settled in cash. No guarantees have been given or received.
No expected credit loss provisions have been made in respect of the
amounts owed by related parties.
16 Consolidated statement of cash flows
For the purposes of the consolidated statement of cash flows,
cash and cash equivalents comprise the following balances with less
than three months until maturity from the date of acquisition:
2019 2018
GBP'000 GBP'000
-------------------------------------------------------- --------- ---------
Cash and balances at central banks 1,930,000 1,197,001
Loans and advances to banks 117,839 136,203
Fair value through profit or loss investment securities 100,194 75,333
-------------------------------------------------------- --------- ---------
At 31 December 2,148,033 1,408,537
-------------------------------------------------------- --------- ---------
Fair value thought profit or loss investment securities are
amounts invested in money market funds, which are realisable on
demand.
Cash flows arising from the (repurchase)/issue of ordinary
shares comprise:
2018
2019 GBP'000
(restated
- note
GBP'000 2)
----------------------------------------------------------- --------- -----------
Share capital issued 58 194
Share premium on shares issued 5,666 62,184
Merger reserve on shares issued 14,971 24,950
Shares issued in relation to share-based schemes for which
no cash consideration was received (15,001) (25,000)
Shares issued in relation to share buybacks (10,034) (4,888)
----------------------------------------------------------- --------- -----------
(4,340) 57,440
----------------------------------------------------------- --------- -----------
A reconciliation of the movements of liabilities to cash flows
arising from financing activities were as follows:
Liabilities Equity
------------ ------------------------------
Share
Subordinated capital/ Retained
loan notes premium Reserves earnings Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------------ ------------ --------- -------- --------- --------
At 1 January 2019 (restated) 19,807 208,033 24,048 232,059 483,947
Changes from financing cash flows
Proceeds from issue of share capital - 5,694 - 5,694
Proceeds from sale of treasury shares - - (9,234) (799) (10,033)
Dividends paid - - - (35,959) (35,959)
------------------------------------------ ------------ --------- -------- --------- --------
Total changes from financing cash flows - 5,694 (9,234) (36,758) (40,298)
------------------------------------------ ------------ --------- -------- --------- --------
The effect of changes in foreign exchange
rates - - - - -
------------------------------------------ ------------ --------- -------- --------- --------
Changes in fair value - - - - -
------------------------------------------ ------------ --------- -------- --------- --------
Other changes
Liability-related
Interest expense 1,291 - - - 1,291
Interest paid (1,171) - - - (1,171)
------------------------------------------ ------------ --------- -------- --------- --------
Total liability-related changes 120 - - - 120
------------------------------------------ ------------ --------- -------- --------- --------
Total equity-related other changes - 30 14,971 46,550 61,551
------------------------------------------ ------------ --------- -------- --------- --------
At 31 December 2019 19,927 213,757 29,785 241,851 505,320
------------------------------------------ ------------ --------- -------- --------- --------
Liabilities Equity
------------ ------------------------------ --------
Share
Subordinated capital/ Retained
loan notes premium Reserves earnings Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------------ ------------ --------- -------- --------- --------
At 1 January 2018 19,695 145,655 26,971 198,947 391,268
Changes from financing cash flows
Proceeds from issue of share capital
(restated - note 2) - 62,378 24,950 - 87,328
Proceeds from sale of treasury shares - - (27,873) (2,015) (29,888)
Dividends paid - - - (32,691) (32,691)
------------------------------------------ ------------ --------- -------- --------- --------
Total changes from financing cash flows - 62,378 (2,923) (34,706) 24,749
------------------------------------------ ------------ --------- -------- --------- --------
The effect of changes in foreign exchange
rates - - - - -
------------------------------------------ ------------ --------- -------- --------- --------
Changes in fair value - - - - -
------------------------------------------ ------------ --------- -------- --------- --------
Other changes
Liability-related
Interest expense 1,283 - - - 1,283
Interest paid (1,171) - - - (1,171)
------------------------------------------ ------------ --------- -------- --------- --------
Total liability-related changes 112 - - - 112
------------------------------------------ ------------ --------- -------- --------- --------
Total equity-related other changes - - 67,818 67,818
------------------------------------------ ------------ --------- -------- --------- --------
At 31 December 2018 (restated) 19,807 208,033 24,048 232,059 483,947
------------------------------------------ ------------ --------- -------- --------- --------
17 Events after the balance sheet date
There have been no material events occurring between the balance
sheet date and the date of signing this report.
18 Financial information
The financial information set out in this preliminary
announcement has been extracted from the Group's financial
statements, which have been approved by the Board of directors and
agreed with the Company's auditor.
The financial information set out above does not constitute the
Company's statutory financial statements for the years ended 31
December 2019 or 2018. Statutory financial statements for 2018 have
been delivered to the Registrar of Companies. Statutory financial
statements for 2019 will be delivered to the Registrar of Companies
following the Company's Annual General Meeting. The auditor has
reported on both the 2018 and 2019 financial statements. Their
reports were unqualified and did not draw attention to any matters
by way of emphasis. They also did not contain statements under
Section 498 of the Companies Act 2006
19 Forward-looking statements
This announcement contains certain forward-looking statements,
which are made by the directors in good faith based on the
information available to them at the time of their approval of the
2019 annual report. Statements contained within this announcement
should be treated with some caution due to the inherent
uncertainties (including but not limited to those arising from
economic, regulatory and business risk factors) underlying any such
forward-looking statements. This announcement has been prepared by
Rathbone Brothers Plc to provide information to its shareholders
and should not be relied upon for any other purpose.
Independent auditor's report to the shareholders of Rathbone
Brothers PLC on the preliminary announcement of Rathbone Brothers
PLC
As the independent auditor of Rathbone Brothers PLC we are
required by UK Listing Rule LR 9.7A.1(2)R to agree to the
publication of Rathbone Brothers PLC's preliminary announcement
statement of annual results for the period ended 31 December
2019.
The preliminary statement of annual results for the period ended
31 December 2019 includes:
- Disclosures required by the Listing Rules
- Chairman's statement
- Chief executive's review
- Overview of financial performance
- Consolidated statement of comprehensive income
- Consolidated statement of changes in equity
- Consolidated balance sheet
- Consolidated statement of cash flows; and
- Notes to the preliminary announcement.
We are not required to agree to the publication of presentations
to analysts, trading statement, interim management statement or
half-yearly financial report.
The directors of Rathbone Brothers PLC are responsible for the
preparation, presentation and publication of the preliminary
statement of annual results in accordance with the UK Listing
Rules.
We are responsible for agreeing to the publication of the
preliminary statement of annual results, having regard to the
Financial Reporting Council's Bulletin "The Auditor's Association
with Preliminary Announcements made in accordance with UK Listing
Rules".
Status of our audit of the financial statements
Our audit of the annual financial statements of Rathbone
Brothers PLC is complete and we signed our auditor's report on 19
February 2020. Our auditor's report is not modified and contains no
emphasis of matter paragraph.
Our audit report on the full financial statements sets out the
following key audit matters which had the greatest effect on our
overall audit strategy; the allocation of resources in our audit;
and directing the efforts of the engagement team, together with how
our audit responded to those key audit matters and the key
observations arising from our work:
Impairment of client relationship intangibles and goodwill
Key audit matter description
The group holds client relationship intangibles of GBP124.5m
(2018: GBP134.6m) and goodwill of GBP90.4m (2018: GBP91.0m),
comprising both relationships acquired through business
combinations and those through acquisition of individual investment
managers and their client portfolios.
As detailed in the summary of principal accounting policies in
note 1 and note 24 (included within note 10 to this announcement)
to the financial statements, client relationships are reviewed for
indicators of impairment at each balance sheet date and, if an
indicator of impairment exists, an impairment test is performed.
Goodwill is tested for impairment at least annually, whether or not
indicators of impairment exist.
For client relationship intangibles, in determining the
appropriate impairment triggers for each portfolio, there is a
degree of significant management judgement. This assessment is
based on movements in the value of funds under management and the
loss of client relationships in advance of the amortisation
period.
For goodwill, the impairment assessment is performed by
comparing the carrying amount of each cash generating unit ("CGU")
to its recoverable amount from its value-in-use, calculated using a
discounted cash flow method. In determining the value-in-use for
the CGUs management is required to make assumptions in relation to
an appropriate income growth rate, expenditure growth rate and the
discount rate. Management must also make a judgement on the CGUs
that are appropriate to recognise.
How our audit responded to this key audit matter
We evaluated the design and implementation of the key controls
in relation to the impairment review process for client
relationship intangibles for both acquired portfolios and
individual relationships and for goodwill. We assessed the design
and implementation and tested the operating effectiveness of the
controls in place over FUM values which form the basis of the
impairment assessment.
For client relationship intangibles, we specifically tested the
calculations prepared by management as part of the impairment
review exercise to assess whether they meet the requirements of IAS
36 "Impairment of Assets" and that the relevant assumptions and
judgements made were appropriate. We agreed a sample of FUM for
capitalised client relationships through to third party sources. We
challenged the completeness and appropriateness of the impairment
trigger thresholds used by management and independently considered
whether there is indication of an impairment event as at the
year-end.
For goodwill, we challenged the completeness of the CGU's
identified by management through independently assessing what CGU's
should be recognised, in line with IAS 36. In order to challenge
the appropriateness of the income and expenditure growth
assumptions used in the value-in-use calculation, we have
back-tested the assumptions used by management against historical
performance and challenged the appropriateness of forward looking
assumptions, checking consistency with forecasts used elsewhere in
the business.
We independently challenged the determination of the discount
rate applied by benchmarking to appropriate market rates of
interest.
We have also performed sensitivity analysis to assess the risk
that reasonably possible changes in assumptions used by management
could give rise to an impairment and if relevant, ensured that
appropriate disclosures are provided in the notes to the financial
statements.
Furthermore, we have performed a review of the disclosures
included within the financial statements to determine whether all
required information has been included for client relationship
intangibles and goodwill.
Key observations
For client relationship intangibles, through our testing, we
concluded that no impairment was required.
As set out in note 24 to the financial statements (included
within note 10 to this announcement), based on our challenge,
management updated their methodology for defining a CGU during the
year. Following this update, through our testing, we concluded that
no impairment of goodwill was required given the amount of headroom
available against the carrying value.
We observed that the underlying assumptions applied by
management in determining whether any impairment of client
relationship intangibles or goodwill should be recognised are
conservative.
Defined benefit pension scheme liability
Key audit matter description
The group has recognised a net defined benefit pension scheme
liability of GBP8.0m (2018: GBP11.2m). The net liability comprises
assets of GBP151.1m (2018: GBP135.3m) and liabilities of GBP159.1m
(2018: GBP146.5m).
The calculation of the liability is sensitive to changes in
underlying assumptions and is considered to be a key source of
estimation uncertainty for the group as detailed in note 3 and
disclosed in note 31 to the financial statements (included within
notes 4.2 and 12 to this announcement).
The key assumptions are in respect of the discount rate,
inflation rate and mortality rate where small changes to these
assumptions could result in a material change to the valuation of
the pension scheme liability.
How our audit responded to this key audit matter
In order to evaluate the appropriateness of the assumptions used
by management, we assessed the design and implementation of
controls over the appropriate determination of assumptions and the
calculation of the liability to be recognised in the financial
statements.
With the involvement of our in-house actuarial specialists, we
made direct enquiries of the group's actuary to review and
challenge each of the key assumptions used in the IAS 19 ("Employee
Benefits") pension valuation. In particular, we compared each
assumption used by management against independently determined
benchmarks derived using market and other data.
Key observations
We concluded that each of the assumptions used by management to
estimate the defined benefit pension scheme liability are
consistent with the requirements of IAS 19 and fall within the
middle of a reasonable range when compared to our internal
benchmarks.
Investment management ("IM") fee revenue
Key audit matter description
As detailed in the summary of principal accounting policies in
note 1 and in note 4 (included within note 5 to this announcement)
to the financial statements, operating income comprises net
investment management fee income of GBP260.2m (2018: GBP233.4m),
net commission income of GBP51.1m (2018: GBP41.4m), net interest
income of GBP16.4m (2018: GBP15.3m) and fees from advisory services
and other income of GBP20.4m (2018: GBP21.8m).
Investment management fees from the IM segment account for
approximately 64% of total operating income and are based on a
percentage of an individual client's funds under management
("FUM"). Due to its many long standing client relationships and
history of acquisitions, the number of fee schedules managed by the
group is high. This means that fee amendments can require a degree
of manual intervention.
During the year ended 31 December 2018, the group acquired a new
subsidiary, Speirs & Jeffrey Limited, also an investment
management company. The clients of Speirs & Jeffrey Limited
have been migrated onto Rathbones core platform.
As a result, we identified a key audit matter relating to the
risk that, whether due to error or fraud, incorrect rates could be
used to calculate management fees, or that manual amendments are
inaccurate, incomplete or invalid.
How our audit responded to this key audit matter
We evaluated the design and implementation and tested the
operating effectiveness of controls over the calculation of
investment management fees. This included controls relating to the
set-up of client fee rates, rate card amendments, the valuation of
FUM and the system generated investment management fees, including
associated IT controls.
We used data analytics to recalculate the system generated
amount for the total fee population. We agreed a sample of client
fee rates through to client contracts and the value of FUM to third
party sources.
We inspected evidence of authority and rationale for a sample of
manual amendments made to system generated fees.
We also performed specific testing on the migration of Speirs
& Jeffrey Limited clients onto the Rathbones core platform, to
check that their fees were calculated in line with their
contractual terms.
Key observations
We concluded that the investment management fee revenue is
appropriately recognised for the year ended 31 December 2019.
Speirs and Jeffrey Deferred consideration
Key audit matter description
On 31 August 2018, the group acquired a 100% equity interest in
Speirs & Jeffrey Limited ("Speirs & Jeffery").
The consideration includes a variable element which is dependent
on certain operational and financial targets linked to the value of
Speirs & Jeffrey FUM which is determined to be "Qualifying"
under the terms of the sale and purchase agreement. The
determination of the total deferred consideration will be set based
on the qualifying FUM as at 31 December 2020 and 31 December 2021.
If qualifying FUM does not exceed GBP4.5bn no deferred
consideration is payable.
The estimate of what the level of qualifying FUM will be
requires significant management judgement. The assumptions
underpinning this estimate are considered to be a key source of
estimation uncertainty for the Group, as detailed in note 3 and
disclosed in note 9 to the financial statements (included within
notes 4.3 and 6 to this announcement).
The expected pay-out of the consideration is accrued over the
period from acquisition up until pay-out in 2022, therefore
spreading the P&L charge over this period.
At each reporting date, management update their estimate of the
expected pay-out of the consideration and prospectively adjust the
P&L charge. As a result, we identified a key audit matter
relating to the risk that, whether due to error or fraud,
management's estimate of the expected pay-out of the consideration
at each financial reporting date may be materially misstated.
How our audit responded to this key audit matter
We evaluated the design and implementation of key controls over
the determination of the key assumptions in the FUM conversion
model.
We held targeted meetings with management and key personnel
within the business, including a sample of Investment Managers, to
challenge the appropriateness of the qualifying FUM estimate.
We challenged the consistency and validity of management's
estimate by checking it was consistent with forecasts used
elsewhere in the business.
We have also performed focussed benchmarking against the
investment management market, in order to challenge the potential
impact of external factors on achieving management's estimate of
qualifying FUM.
We independently re-performed the calculation of the estimate
for deferred consideration and we assessed the appropriateness of
the related disclosures including the sensitivity assumptions for
the range of estimates included in the disclosure.
Key observations
The determination of the deferred consideration that could be
payable is a critical accounting estimate. We concluded that the
assumptions used by management to estimate the expected level of
qualifying FUM as at 31 December 2020 and 2021 are reasonable as at
the current reporting date.
As more experience and empirical data becomes available during
2020, these assumptions may need to be updated. The disclosure in
respect of this critical accounting estimate for deferred
consideration payable, as set out in note 3.3 to the financial
statements (included within note 4.3 to this announcement), shows
the sensitivity, for each GBP100m movement in qualifying FUM, to
the eventual amount that could be payable.
These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we did not provide a separate opinion on these
matters.
Procedures performed to agree to the preliminary announcement of
annual results
In order to agree to the publication of the preliminary
announcement of annual results of Rathbone Brothers PLC we carried
out the following procedures:
(a) checked that the figures in the preliminary announcement
covering the full year have been accurately extracted from the
audited or draft financial statements and reflect the presentation
to be adopted in the audited financial statements;
(b) considered whether the information (including the management
commentary) is consistent with other expected contents of the
annual report;
(c) considered whether the financial information in the
preliminary announcement is misstated;
(d) considered whether the preliminary announcement includes a
statement by directors as required by section 435 of CA 2006 and
whether the preliminary announcement includes the minimum
information required by UKLA Listing Rule 9.7A.1;
(e) where the preliminary announcement includes alternative
performance measures ("APMs"), considered whether appropriate
prominence is given to statutory financial information and
whether:
- the use, relevance and reliability of APMs has been
explained;
- the APMs used have been clearly defined, and have been given
meaningful labels reflecting their content and basis of
calculation;
- the APMs have been reconciled to the most directly
reconcilable line item, subtotal or total presented in the
financial statements of the corresponding period; and
- comparatives have been included, and where the basis of
calculation has changed over time this is explained.
(f) read the management commentary, any other narrative
disclosures and any final interim period figures and considered
whether they are fair, balanced and understandable.
Use of our report
Our liability for this report, and for our full audit report on
the financial statements is to the company's members as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the
company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company's members as a body,
for our audit work, for our audit report or this report, or for the
opinions we have formed.
Manbhinder Rana FCA (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
19 February 2020
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR BRGDDGSBDGGC
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