TIDMRAT
RNS Number : 1018R
Rathbone Brothers PLC
04 March 2021
Preliminary results for the twelve months ended 31 December
2020
A resilient 2020 performance
Paul Stockton, chief executive, said:
"Rathbones delivered a resilient performance in an immensely
challenging year. We continued to deliver a high-quality service to
clients, whilst prioritising the safety and wellbeing of our
employees, advancing our strategy and keeping a close eye on
operating costs.
Funds under management and administration (FUMA) grew by 8.5% to
reach GBP54.7 billion at 31 December 2020, reflecting both strong
investment performance and growth. Underlying profit before tax
increased by 4.3% to GBP92.5 million, delivering an underlying
operating margin of 25.3% that was consistent with the prior year
despite lower investment markets.
As a consequence, the board is announcing a final 2020 dividend
of 47 pence per share, which brings the total dividend to 72 pence
per share, an increase of 2.9% over 2019. 2020 marks the 11(th)
consecutive year in which we have increased our total annual
dividend.
Whilst we expect 2021 to remain volatile, our balance sheet is
robust with a strong capital position. Our near-term focus is to
execute our growth strategy, to build our market share, to balance
ongoing investment in the business, and to continue to apply strict
cost discipline. Rathbones will emerge stronger after the
challenges of the pandemic begin to subside."
Financial highlights
- Total FUMA reached GBP54.7 billion at 31 December 2020, up
8.5% from GBP50.4 billion at 31 December 2019
- GBP44.9 billion in the Investment Management business, up 4.4%
(2019: GBP43.0 billion)
- GBP9.8 billion in the funds business, up 32.4% (2019: GBP7.4
billion)
- Total net inflows across the group were GBP2.1 billion (2019:
GBP0.6 billion), representing a growth rate of 4.2% (2019:
1.3%)
- Gross organic inflows in Investment Management were consistent
at GBP3.3 billion in 2020 compared to GBP3.3 billion in the prior
year
- Acquired inflows of GBP0.6 billion in Investment Management
largely reflect the transfer of assets from Barclays Wealth (GBP0.4
billion)
- Investment Management outflows for the year totalled GBP3.3
billion (2019: GBP3.9 billion)
- Net inflows in our funds business were GBP1.5 billion (2019:
GBP0.9 billion)
- Profit before tax for the twelve months to 31 December 2020
was GBP43.8 million (2019: GBP39.7 million). Basic earnings per
share totalled 49.6p (2019: 50.3p)
- Operating income totalled GBP366.1 million, 5.2% ahead of the
prior year (2019: GBP348.1 million)
- Operating income in Investment Management totalled GBP320.6
million, an increase of 3.1% on the prior period (2019: GBP310.9
million)
- Operating income in our funds business totalled GBP45.4
million, an increase of 22.0% on the GBP37.2 million reported in
2019
- Underlying(1) profit before tax totalled GBP92.5 million, an
increase of 4.3% (2019: GBP88.7 million); underlying operating
margin of 25.3% (2019: 25.5%)
- Underlying1 earnings per share totalled 133.3p (2019:
132.8p)
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 47p for 2020 (2019:
45p), making a total of 72p for the year (2019: 70p), an increase
of 2.9% on 2019. This reflects confidence in the outlook for the
business and its strong capital position. The dividend will be paid
on
11 May 2021, subject to shareholder approval at our 2021 Annual
General Meeting, to shareholders on the register on 23 April
2021.
2020 results presentation
A presentation detailing Rathbones 2020 results is available on
the investor relations website
(www.rathbones.com/investor-relations).
A virtual presentation to analysts and investors will take place
this morning at 11am. Participants that wish to join the
presentation can do so by either joining the video webcast
(www.investis-live.com/rathbone-brothers/602548d79a13881000d4e0f9/gwrw)
or by dialling in using the conference call details below:
United Kingdom: 0800 640 6441
United Kingdom (Local) : 020 3936 2999
All other locations : +44 203 936 2999
Participant access code: 889712
A Q&A session will follow the presentation. Participants
will be able to ask their questions either via the webcast by
typing them in or via the conference call line.
A recording of the presentation will be available later today on
our website at:
www.rathbones.com/investor-relations/results-and-presentations.
Issued on 4 March 2021
For further information contact:
Rathbone Brothers Plc
Tel: 020 7399 0000
email: dominic.lagan@rathbones.com
Paul Stockton, Chief Executive
Jennifer Mathias, Group Finance Director
Dominic Lagan, Head of Investor Relations
Camarco
Tel: 020 3757 4984
email: ed.gascoigne-pees@camarco.co.uk
Ed Gascoigne-Pees
Julia Tilley
Rathbone Brothers Plc
Rathbones provides individual investment and wealth management
services for private clients, charities, trustees and professional
partners. We have been trusted for generations to manage and
preserve our clients' wealth. Our tradition of investing and acting
responsibly has been with us from the beginning and continues to
lead us forward. Our ambition is to be recognised as the UK's most
responsible wealth manager.
Rathbones has over 1,500 staff in 15 UK locations and Jersey;
its headquarters is 8 Finsbury Circus, London.
rathbones.com
Chairman's statement
A review of 2020
2020 was an extraordinary year. Initial optimism in financial
markets was curtailed by the rapid advance of the COVID-19 pandemic
and resulting lockdowns, which had a devastating impact on
societies and economies worldwide. Financial markets crashed
initially but then rallied following massive interventions by
central banks and governments resulting in US markets hitting new
highs with technology stocks driving the advance.
The response from Rathbones was speedy and effective. We
established a crisis committee in early March which oversaw a
seamless transition to remote working for the vast majority of our
people and we provided ongoing support to them through high levels
of engagement and a number of wellbeing initiatives. We also
increased communication with our clients to ensure an enhanced
service, including both support and advice. We were able to take
advantage of our first-class strategic asset allocation and
research capabilities to provide our investment managers with the
best strategies and ideas for a hugely volatile market. As a
result, our investment performance was strong across the group,
which serves to reinforce the benefits of active investment
management in turbulent times.
Our strong investment performance helped ensure that,
notwithstanding the significant market volatility during the year,
our funds under management and administration grew by 8.5% to
GBP54.7 billion.
Profit before tax totalled GBP43.8 million (2019: GBP39.7
million) reflecting anticipated costs associated with the
acquisition of Speirs & Jeffrey. Basic earnings per share
decreased to 49.6p from 50.3p in 2019.
Underlying profit before tax totalled GBP92.5 million (2019:
GBP88.7m), resulting in an underlying operating margin of 25.3%
(2019: 25.5%). Underlying earnings per share in the period totalled
133.3p (2019: 132.8p).
In line with our generally progressive dividend policy and
reflecting confidence in the outlook for the business and its
strong capital position, the board is pleased to recommend a final
dividend of 47p per share. This brings the total dividend for the
year to 72p per share, 2.9% ahead of 2019.
Our purpose and culture
As I mentioned in my statement last year, we completed a
firm-wide exercise in 2019 to encapsulate the purpose of Rathbones.
We concluded that our purpose is to think, act and invest
responsibly. This has been embraced by our employees.
Rathbones has a distinctive client-centric, collaborative and
entrepreneurial culture which represents a key strength. A strong
culture is fundamental to our success over the long term and our
board reporting includes increasingly sophisticated management
information on this.
Environmental, social and governance (ESG)
ESG continued to grow in importance as the global effects of the
pandemic and climate change have become obvious, with a consequent
impact on social inequalities. The pandemic has also accelerated
interest among our clients in responsible investing. We have long
been at the forefront in this area through Rathbone Greenbank
Investments, which has been creating bespoke ethical, sustainable
and impact portfolios for clients for over 20 years. We are now
making good progress towards fully integrating ESG into our
investment process across the group and are developing
market-leading propositions through the specialist funds offered by
Rathbones Unit Trust Management. Our ambition is to be recognised
as the UK's most responsible wealth manager.
We believe it is in our clients' best interests to ensure that
the companies in which we invest on their behalf adopt best
practice in promoting a constructive ESG agenda. Our highly
regarded stewardship team proactively engages with companies to
discuss ESG issues.
Finally, the board is strongly committed to corporate governance
and firmly believes that a robust governance framework is vital to
the long-term success of the firm and the achievement of its
strategy. We recognise that strong corporate governance is not just
about complying with the UK Corporate Governance code - it is also
about our firm's culture, our behaviours and how we service our
clients.
Strategy
As we invest to grow the business organically by deepening our
investment expertise, improving our client service and proposition,
driving productivity and efficiency, and inspiring our people, we
are doing so responsibly by ensuring that all strategic decisions
are taken in the best interests of all our stakeholders.
The pandemic has not altered our strategy, rather it has helped
to accelerate our plans in many areas. During the year we made good
progress on digital infrastructure initiatives and the automation
of client administration processes. In addition, we strengthened
our specialist capabilities by growing our charities team and
completing the acquisition of the Barclays Wealth Court of
Protection business. Progressing our digital transformation agenda
will be a key strategic focus in 2021.
Engaging with our people and shareholders
Rathbones is fundamentally a people business. Our key priority
during 2020 was to support the mental health and wellbeing of our
people to ensure that they remained engaged. Our annual employee
engagement survey had an overall engagement score of 91%, compared
to 86% in 2019.
Last year, as our response to the workforce engagement
initiative, Sarah Gentleman and Colin Clark were nominated to be
responsible for gathering feedback from employees and they have
continued their efforts this year with enthusiasm, meeting with a
broad spectrum of employees and reporting back to the board on all
aspects of their discussions.
Rathbones is an equal opportunities employer and it is our
policy to ensure that all job applicants and employees are treated
fairly and on merit. We continue to focus on addressing our gender
and ethnicity balance, improving our insight and awareness in
relation to diversity and inclusion, and reflecting this in our
working practices.
Maintaining a transparent and constructive dialogue with our
shareholders is a very important mechanism for providing useful
feedback to the board. This year I have enjoyed discussions with
shareholders on our strategy, dividend policy and governance
initiatives. The chair of our remuneration committee also undertook
an extensive shareholder engagement programme to discuss the
proposals for our new executive remuneration scheme which will be
brought to shareholders for approval at our 2021 Annual General
Meeting (AGM).
The board and succession
As I mentioned in my statement last year, I have served as a
non-executive director for over 10 years and as chairman since May
2011. My tenure therefore exceeds the requirements outlined in the
UK Corporate Governance Code. The board initiated a process during
2020 for the appointment of my successor. The search was
successful, and Clive Bannister will succeed me as chairman at the
conclusion of the 2021 AGM on 6 May, subject to shareholder and
regulatory approval. Clive has had an extensive career in financial
services and will bring a wealth of strategic, commercial and
financial experience to the board.
Jim Pettigrew has also indicated that he will step down at the
2021 AGM. Jim has made a huge contribution to the board, both as
non-executive director and senior independent director, and I am
particularly grateful for his wise advice. As part of the board's
succession plans, I am pleased that Colin Clark has been appointed
to succeed Jim as senior independent director.
In addition, as part of our review of board effectiveness and
succession planning, we constantly monitor the breadth and depth of
knowledge, industry experience and diversity within the board and
assess what new skills are necessary to continue constructive
challenge and guidance to the executive team. As a result, we have
initiated a process to appoint an additional non-executive director
in 2021.
Looking back
Rathbones has enjoyed a remarkably successful year, delivering a
resilient financial performance and making good strategic progress
in what has been a highly uncertain environment.
On behalf of the board I would like to thank the management team
and staff for their dedication and support during the year. I would
also like to thank our clients and shareholders for their ongoing
commitment to Rathbones.
It has been a pleasure and privilege to work with such
high-calibre colleagues at Rathbones over the last 10 years, and I
am tremendously proud of what the business has achieved during that
time.
Looking ahead
The outlook for 2021 is uncertain and we can expect continuing
volatility. Although the ebbs and flows in the struggle to contain
the pandemic are likely to be the dominant factor throughout the
year, the global geopolitical landscape remains as uncertain as
ever and the real implications of Brexit have yet to emerge. That
said, Rathbones is well-positioned with a strong balance sheet and
the right strategy in place. There is strong momentum building in
the business and I have the utmost confidence that we are
well-placed to go from strength to strength.
Mark Nicholls
Chairman
3 March 2021
Chief executive's review
Introduction
External events are always part of what defines the success of
any wealth management business, and 2020 saw more than its fair
share. In responding to the combined impacts of market volatility,
COVID-19 and Brexit, alongside some significant economic and
political change, our focus throughout has been on delivering a
high-quality client service, keeping our employees safe, and
actively managing our operating margin. We have also taken many
positive strides in delivering strategic change.
Continued growth in funds under management and administration
(FUMA)
Market volatility was reflected in most indices in 2020. The
FTSE 100 Index ended the year at 6461, down 14.3% from the start of
the year, while the MSCI PIMFA Private Investor Balanced Index was
flat year-on-year. Our continuing growth and strong investment
performance more than offset lower market levels, resulting in
total FUMA of GBP54.7 billion at the end of the year (2019: GBP50.4
billion). Total net inflows across the group were GBP2.1 billion
(2019: GBP0.6 billion), representing a growth rate of 4.2% (2019:
1.3%).
Investment Management FUMA grew by 4.4% to GBP44.9 billion
(2019: GBP43.0 billion). Gross organic inflows in Investment
Management were GBP3.3 billion, consistent with the prior year, and
a steady performance considering the prominence of face-to-face
sales in our business model.
Outflows in Investment Management totalled GBP3.3 billion in
2020 (2019: GBP3.9 billion), reflecting better retention, but
somewhat offset by continuing client demand for liquidity and the
impact of planned repricing. Outflows from closed accounts as a
percentage of opening FUMA reduced from 4.7% in 2019 to 3.0% in
2020. Approximately 18% of outflows during 2020 related to
lower-margin or short-term cash mandate business compared to 15% in
2019.
Our funds business had a very successful year with funds under
management (FUM) reaching GBP9.8 billion at 31 December 2020 (2019:
GBP7.4 billion). Net inflows totalled GBP1,498 million (2019:
GBP943 million), representing 20.1% of opening FUM (2019: 16.7%).
Rathbones was ranked in ninth position for overall net retail unit
trust sales in the UK in both 2020 and 2019 (source: Pridham
Report), maintaining its top 10 position for seven consecutive
quarters. Our funds business comprises core single-strategy funds
and multi-asset funds that provide a comprehensive suite of wealth
solutions for financial advisers and their clients. Our multi-asset
funds also underpin our offering for clients with smaller values to
invest. Single-strategy funds grew 28.6% to GBP8.1 billion in 2020
(2019: GBP6.3 billion) while our multi-asset funds grew by 54.5% to
GBP1.7 billion (2019: GBP1.1 billion).
Rathbone funds received several accolades during the year. These
included being named best investment fund provider at the
Investment Life & Pensions Moneyfacts awards; our Ethical Bond
Fund was awarded Best Sustainable & ESG Bond Fund in the
Investment Week Sustainable and ESG Investment Awards; our
Strategic Growth Fund received the City of London Wealth Management
award for Best Fund 2020, and our Global Sustainability Fund won
the Best ESG Investment Fund - Wealth Manager at the ESG Investing
Awards 2021.
A resilient financial performance
Operating income across the group totalled GBP366.1 million in
2020, 5.2% ahead of the prior year (2019: GBP348.1 million). Fee
income growth reflected market movements as well as planned post
acquisition repricing of ex Speirs & Jeffrey clients. Strong
commission income was driven by market volatility, particularly
during the first half of the year. This was partly offset by a
reduction in net interest income as a result of Bank of England
base rate reductions made in March 2020. Fees from advisory and
other services were GBP21.1 million in 2020, up 3.4% on the prior
year (2019: GBP20.4 million) despite lower market levels.
Underlying profit before tax of GBP92.5 million at 31 December
2020 was 4.3% ahead of the GBP88.7 million reported a year ago
despite Financial Services Compensation Scheme (FSCS) levies
increasing to GBP6.3 million (2019: GBP4.5 million). The full year
cost for 2021 is currently expected to be in line with 2020. We
continue to lobby alongside industry groups to find a more
equitable way of managing this cost, which now represents 6.8% of
underlying profit before tax (2019: 5.1%). Cost synergies relating
to Speirs & Jeffrey amounted to GBP5.0 million in 2020, ahead
of our target of GBP4.5 million. Our underlying operating margin
was consistent with the prior year at 25.3% (2019: 25.5%).
Underlying profit after tax was GBP71.6 million (2019: GBP71.1
million), which results in an underlying earnings per share of
133.3p (2019: 132.8p).
Profit before tax of GBP43.8 million (2019: GBP39.7 million)
reflects a number of expected items, primarily in relation to the
acquisition of Speirs & Jeffrey (S&J). S&J acquisition
costs totalled GBP34.3 million (2019: GBP30.8 million) comprising
of GBP32.3 million in relation to the first tranche of deferred
consideration payments to the former shareholders of the business
(treated as remuneration, given their continuing employment), and
integration costs of GBP2.0 million. Basic earnings per share
totalled 49.6p (2019: 50.3p).
Enhancing our investment proposition and services
One of the positives of remote working has been that it has
provided more opportunity for digital client engagement. This has
not only been through more screen-based contact with clients, but
also by us taking advantage of the chance to distribute market
commentaries and other marketing materials to a much wider client
and adviser audience. Consistent historical investment in our
research capability has translated into improved quality of output
and enhanced coverage of overseas stocks. Investment performance
was strong in the year with the Global Investment Performance
Standards (GIPS) accredited performance as an average return of all
risk levels combined, outperforming both the PIMFA and ARC indices
over one, three and five years. Performance in our funds business
across both single-strategy and multi-asset funds was also
strong.
The quality of our core discretionary service continues to be
recognised by our clients. In a recent Aon UK client experience
survey, Rathbones was ranked number one for overall client
satisfaction, including a number one ranking in 10 of the 14 survey
KPIs, and achieved a net promoter score of 60% compared to a
benchmark score of 38%. Rathbones was also named Private Client
Asset Manager of the Year at the 2020 Citywealth Magic Circle
Awards. Our scores as measured by Defaqto in the 2020 discretionary
fund management (DFM) satisfaction study (based on feedback from
adviser firms) showed strong improvements, but also recognised the
need to improve our digital client lifecycle capability.
To that end, we launched our new web portal, known as
'MyRathbones' in December to a small number of clients. The portal
provides clients with more holistic communication and online access
options and will be rolled out fully towards the end of the first
quarter of 2021, adding a version for advisers and a mobile app.
'MyRathbones' is the digital doorway into Rathbones, complementing
the investment manager - client relationship and providing clients
with a straightforward, flexible and safe experience for everyday
tasks. We are adopting an agile approach for future enhancements
with many planned for the remainder of 2021.
Rathbone Select Portfolio (RSP) was launched in the fourth
quarter of 2020. RSP is a cost-effective execution-only investment
management solution in circumstances where a bespoke discretionary
service may not be appropriate. Clients can choose an appropriate
risk-rated investment strategy, with each strategy delivered
through a single Rathbone Multi-Asset Portfolio fund. RSP adds to
our range of solutions for smaller value portfolios and will
improve investment manager capacity as it is rolled out more widely
in 2021.
During June 2020, we added two new funds to our Rathbone
Multi-Asset Portfolio range, the Rathbone Multi-Asset Defensive
Growth Portfolio and the Rathbone Multi-Asset Dynamic Growth
Portfolio, providing advisers with cost-effective access to target
return profiles across the risk spectrum.
Investing for growth and productivity
Our strategy includes a multi-pronged approach to delivering
growth by adding investment manager capacity, investing in business
development and specialist markets, driving sales to the adviser
market and growing our financial planning capability.
In 2020 we welcomed 23 new investment professionals to Rathbones
from a number of competitor firms (2019: 18), and all have settled
in well. We are targeting a similar level of recruitment during
2021 to support growth, alongside an ongoing graduate recruitment
and training programme. In 2020 we realigned remuneration for
investment teams to have a much clearer line of sight to organic
growth, recognising that other elements of awards encourage high
service standards and client retention. We have also restructured
how our Investment Management business is organised at a senior
level with the creation of two dedicated managing director roles
focussing firstly on growth and client service delivery, and
secondly the development of our investment process and responsible
business agenda.
Our intermediated distribution team, which oversees the
provision of a new, integrated 'adviser as adviser' proposition to
IFA firms, has been successful in building new relationships,
onboarding a total of 58 new adviser firms during the year and
bringing the total to 82 since launch in July 2019. At 31 December
2020 the amount of FUMA linked to an adviser was GBP9.9 billion (31
December 2019: GBP9.2 billion).
Another part of our growth strategy is serving specialised
markets. We successfully completed the acquisition of a specialist
team and GBP440 million of client assets in the Court of Protection
sector from Barclays Wealth, increasing our assets to around GBP1.0
billion and making Rathbones the leading discretionary investment
management firm in this area. Charity FUMA at 31 December 2020
reached GBP6.5 billion (2019: GBP6.1 billion) including the
addition of several substantial mandates in the first half of 2020.
Rathbones was named as Charity Investment Manager of the Year at
the Citywealth Magic Circle Awards (Gold award) in November.
Our specialist ethical, sustainable and impact research team
Rathbone Greenbank Investments (Greenbank) had GBP1.9 billion of
funds under management at 31 December 2020 (2019: GBP1.6 billion)
while our award-winning Ethical Bond Fund continues to deliver
strong investment performance, growing by 40% to reach GBP2.1
billion at 31 December 2020 (2019: GBP1.5 billion). We have begun
to leverage the expertise and experience of Greenbank more widely
into our overall investment process, setting investment selection
criteria, demonstrating active stewardship and building training
and awareness.
Rathbone Funds plans to launch Rathbone Greenbank Multi-Asset
Portfolios (RGMAPs) towards the end of the first quarter of 2021.
The RGMAPS funds will be a range of four new risk-rated,
risk-targeted, sustainable investment funds managed by Rathbones'
acclaimed multi-asset team and supported by Greenbank. This
proposition will underpin Rathbones' continued leadership in the
fast-growing private client responsible investment market and
presents an opportunity to add wider choice to our Rathbone Select
Portfolio proposition.
Building our advice offering
Financial advice is an increasingly important part of our wealth
proposition and we access the advice market in three ways: firstly,
by providing discretionary fund management services to
approximately 12,000 IFAs and their clients; secondly, an
independent IFA network, Vision Independent Financial Planning
(Vision) and; thirdly, via our in-house planning capability,
Rathbone Financial Planning (RFP), that works alongside our
investment teams. Through the combination of Vision and RFP we
provide clients with access to 167 financial planners and
paraplanners (2019: 165) working with investment teams across the
country and advising on GBP3.6 billion of client funds (2019:
GBP3.2 billion).
Speirs & Jeffrey
The acquisition of Speirs & Jeffrey has added considerable
skills and capabilities to Rathbones as well as creating a leading
market presence in Scotland. Clients have welcomed access to the
full array of our services and deeper research capability. The
majority of clients were transferred to our discretionary fee-only
tariff on 1 October 2020 which substantially completed the
alignment with the wider Rathbones group.
Deferred consideration to the vendors of Speirs & Jeffrey,
as well as related incentivisation awards to other staff, is
dependent on operational and financial targets being met by 31
December 2020 and 31 December 2021. The amount of qualifying funds
under management for the year ended 31 December 2020 was GBP5.1
billion, exceeding the earn-out threshold of GBP4.5 billion. Under
the terms of the sale and purchase agreement, this will result in
the crystallisation of the first tranche of deferred consideration,
payable in March 2021. This amount will be satisfied through the
issuance of 881,737 new shares and using 421,722 existing owned
shares.
Based on our current estimate, we expect that the P&L charge
for the second tranche of deferred consideration and related
incentivisation awards for the year ending 31 December 2021 will
amount to GBP9 million. This will continue to depend on market
conditions during 2021 as well as the further client conversion to
qualifying funds under management.
At the time of the acquisition in 2018, we outlined the
following financial targets for 2021: expected underlying EPS
accretion from the acquisition of at least 8%, and an underlying
return on investment of approximately 13%. Despite more challenging
markets, as at 31 December 2020 we are on track to exceed both
targets.
Inspiring our people
Our priority during the year was to ensure the safety and
wellbeing of our people. During 2020 we have focused on employee
engagement, offering multiple forums for our staff to interact
together and share any concerns they have.
Worldwide events during 2020 highlighted the critical importance
of addressing social imbalances. Our policy is to ensure that all
employees and prospective employees are provided with equal
opportunities. In 2020 we changed HR practices and offered some
welcomed events and forums where diversity and inclusion issues
could be explored.
Risk management
The COVID-19 pandemic increased our risk exposure in several
areas, most notably our staff, our operations and the ability to
service our clients. We have been agile in the management and
mitigation of these risks.
We continued to focus on the management of potential cyber
threats, cognisant of the increased frequency of cyber-attacks on
our industry. We continue to invest in this area.
While a degree of uncertainty remains around a deal on financial
services between the UK and the EU, there has not been a
significant impact on our business model to date.
Outlook
Rathbones has had a successful year, despite the many
challenges, which is testament to our brand strength, the quality
of our client relationships, our people and the robustness and
agility of our business model. Whilst we expect investment markets
to remain volatile, our balance sheet is robust with a strong
capital position. Our near-term focus is to continue executing our
growth strategy to build our market share, through ongoing
investment in the business with strict cost discipline, to emerge
stronger after the challenges of the pandemic begin to subside.
Paul Stockton
Chief Executive
3 March 2021
Financial performance
Overview of financial performance
The group's financial performance for the year to 31 December
2020 remained strong during a turbulent year for financial
markets.
Underlying profit before tax was GBP92.5 million (2019: GBP88.7
million) reflecting growth in total revenue, despite market
conditions, and the continuation of investment in the strategic
plans announced in October 2019. The underlying operating margin,
which is calculated as the ratio of underlying profit before tax to
underlying operating income, was 25.3% (2019: 25.5%).
Statutory profit before tax of GBP43.8 million in 2020 increased
10% from GBP39.7 million in 2019. This included planned costs of
GBP32.3 million relating to the acquisition of Speirs &
Jeffrey; which was higher than previous guidance following a very
successful exercise to bring clients on our standard discretionary
terms of business.
The board primarily considers underlying measures of income,
expenditure and earnings when assessing the performance of the
group. These are considered 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
2020 2019
GBPm GBPm
(unless (unless
stated) stated)
---------------------------------------------------- -------- --------
Operating income (and underlying operating income1) 366.1 348.1
Underlying operating expenses1 (273.6) (259.4)
Underlying profit before tax1 92.5 88.7
Underlying operating margin1 25.3% 25.5%
Profit before tax 43.8 39.7
Effective tax rate 39.0% 32.2%
Taxation (17.1) (12.8)
Profit after tax 26.7 26.9
Underlying earnings per share1 133.3p 132.8p
Earnings per share 49.6p 50.3p
Dividend per share2 72.0p 70.0p
Return on capital employed (ROCE) 5.3% 5.7%
Underlying return on capital employed1 13.6% 14.2%
---------------------------------------------------- -------- --------
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
COVID-19 pandemic
The uncertainty caused by the emergence of the COVID-19 pandemic
during the early part of the year had a profound impact on
financial markets and broader business conditions. The rapid falls
in the value of Western financial markets from mid-February through
to late March reduced the value of funds under management and
administration (FUMA) and investment management fees. Following a
small recovery at the end of March, markets then remained at these
lower valuations for much of the year until the announcement of
successful vaccine trials in November, at which point they
recovered further, with the FTSE 100 Index ending the year c. 14%
down on the start of the year.
Early in the pandemic, central banks cut interest rates further
to provide additional support to the economy. The Bank of England
reduced its base rate to 0.1%, which put further downward pressure
on banking margins.
Like many financial services businesses, the group successfully
transitioned almost its entire workforce to remote working
arrangements during March and early April. This was enabled by
leveraging our existing technology but was supported through the
year by the group-wide roll out of portable IT solutions for all
staff. Surplus existing technology is being reconditioned and
donated to charities supporting disadvantaged children where
possible.
The rapid adoption of technology-based solutions for
communication and remote working across much of the developed world
drove a significant rotation in the value of companies, in favour
of technology-based companies and online retailers at the expense
of hospitality, travel and traditional consumer-led businesses.
This followed the impacts of the mandated restrictions on mobility
and consequent falls in consumer income. This significant change in
the relative value of entire sectors of investments drove
significant transactional activity as investor portfolios were
rebalanced.
The group did not need to make use of any of the Government
schemes available to support businesses and their employees through
the pandemic. Plans for investment were slowed temporarily at the
peak of the downturn whilst the business assessed the financial
outlook. Consequently, hiring activity has been slower, but not
halted, than originally planned during the year.
The impacts of the pandemic on the credit quality of the group's
loan and treasury books was very limited, reflecting the low
appetite for credit risk in our investment and lending decisions.
Client loans remain well covered by assets held in client
portfolios. Treasury exposures are spread across highly rated
counterparties, with the largest exposure (GBP1.8 billion at 31
December 2020) being to the Bank of England.
Underlying operating income
No adjustments have been made to operating income as reported
under IFRS to calculate underlying operating income for 2020 or
2019.
Operating income increased 5.2% in 2020 to GBP366.1 million.
This reflects a change in the mix of income as a result of the
impacts of COVID-19 and, in the fourth quarter, adoption of
standard tariffs for our discretionary and advisory services for
clients who joined from Speirs & Jeffrey.
Fee income of GBP274.2 million in 2020 increased 5.4% compared
to GBP260.2 million in 2019. Fees represented 74.9% of underlying
operating income in 2020, which was in line with 2019. The
resilience of fee income during the year reflects the impact of
positive investment performance on the value of FUMA and strong
growth in the Funds business.
Net commission income increased 21.9% to GBP62.3 million in 2020
(2019: GBP51.1 million). Commission income was high throughout the
year as investment managers monitored and responded to changes in
the outlook for companies and sectors as the effect of the pandemic
developed throughout 2020. The transition of clients to fee-only
tariffs in the fourth quarter reduced this impact slightly.
Net interest income decreased 48.8% to GBP8.4 million,
reflecting the cut to the Bank of England's base rate in March.
Underlying operating expenses
Operating expenses increased from GBP308.4 million to GBP322.3
million during the year. Operating expenses are adjusted to exclude
expenditure falling into the three categories explained under Table
2.
Underlying operating expenses increased by 5.5% to GBP273.6
million. This includes cost savings of some GBP5 million on travel,
subsistence, events and entertainment related expenses as a result
of the pandemic restrictions, partially offset by GBP0.8 million of
expenses enabling remote working.
Regulation continued to drive cost growth with additional
Financial Services Compensation Scheme levies adding GBP1.8 million
to costs in 2020. Spend on our systems and infrastructure increased
by GBP3.7 million in the year as we advanced our strategic plans to
invest in our digital capability.
Planned additions to headcount in 2019 and 2020 and market-led
salary increases increased fixed staff costs by 6.0% to GBP117.5
million. Of this, GBP1.0 million related to strategic investment in
front office hires. This increase also includes synergies of GBP3.3
million realised following the integration of Speirs & Jeffrey.
In total, average headcount increased by 1.7% to 1,535 in 2020.
Fixed staff costs also include an additional accrual of GBP1.2
million for unused staff holiday entitlement as a result of the
pandemic restrictions.
Total variable staff costs increased by 16.4% to GBP77.7
million. Growth in performance-based awards of GBP6.8 million
reflects the high level of sales and profit in the Funds business,
as well as the strong performance of our investment management
client portfolios. The GBP4.1 million increase in the cost of other
variable staff costs is driven by a number of specific charges in
2020 for share-based employment and other awards.
Alternative performance measures
Table 2. Reconciliation of underlying performance measures to
closest equivalent IFRS measures
2020 2019
GBPm GBPm
(unless (unless
stated) stated)
--------------------------------------------------------- -------- --------
Operating income (and underlying operating income) 366.1 348.1
Operating expenses (322.3) (308.4)
Charges in relation to client relationships and goodwill 14.3 15.9
--------------------------------------------------------- -------- --------
Acquisition-related costs 34.4 33.1
--------------------------------------------------------- -------- --------
Underlying operating expenses (273.6) (259.4)
--------------------------------------------------------- -------- --------
Profit before tax 43.8 39.7
--------------------------------------------------------- -------- --------
Underlying profit before tax(1) 92.5 88.7
--------------------------------------------------------- -------- --------
Operating margin 12.0% 11.4%
--------------------------------------------------------- -------- --------
Underlying operating margin(2) 25.3% 25.5%
--------------------------------------------------------- -------- --------
Taxation (17.1) (12.8)
--------------------------------------------------------- -------- --------
Tax on non-underlying expenses (3.8) (4.8)
--------------------------------------------------------- -------- --------
Underlying taxation (20.9) (17.6)
--------------------------------------------------------- -------- --------
Profit after tax 26.7 26.9
--------------------------------------------------------- -------- --------
Underlying profit after tax(3) 71.6 71.1
--------------------------------------------------------- -------- --------
Weighted average number of shares in issue 53.7m 53.6m
--------------------------------------------------------- -------- --------
Earnings per share 49.6 50.3p
--------------------------------------------------------- -------- --------
Underlying earnings per share(4) 133.3 132.8p
--------------------------------------------------------- -------- --------
Underlying quarterly average total equity 520.5 498.9
--------------------------------------------------------- -------- --------
ROCE 5.3% 5.7%
--------------------------------------------------------- -------- --------
Underlying ROCE(5) 13.6% 14.2%
--------------------------------------------------------- -------- --------
1. Underlying operating income less underlying operating
expenses
2. Underlying profit before tax as a percentage 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 underlying
quarterly average total equity
Charges in relation to client relationships and goodwill (note
8)
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
the cost of securing client contracts that is 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. Research analysts commonly exclude
these costs when comparing the performance of firms in the wealth
management industry.
Acquisition-related costs (note 5)
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 are required to 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 2020, GBP32.3 million of deferred consideration payments
for Speirs & Jeffrey (2019: GBP26.0 million) were charged to
the income statement and are considered separately for executive
remuneration purposes. A further GBP2.0 million of integration
costs were also incurred in 2020.
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 (2019: GBP0.2 million).
The final payment in respect of the acquisition of Vision
Independent Financial Planning and Castle Investment Solutions,
which were completed on 31 December 2015, were made to the vendors
at the end of 2019. These amounts represent the cost of payments to
vendors of the business who remained in employment with the
group.
Taxation
The corporation tax charge for 2020 was GBP17.1 million (2019:
GBP12.8 million) (see note 6). The effective tax rate of 39.0%
(2019: 32.1%) reflects the disallowable costs of deferred
consideration payments for the acquisition of Speirs & Jeffrey.
The effective tax rate in 2021 is expected to begin to trend back
towards the statutory rate of tax, as the level of the disallowable
cost for deferred consideration in 2021 is expected to be much
lower. Thereafter, the group expects it to return to 1-2 percentage
points above the statutory rate.
The previously planned reduction of corporation tax to 17% from
19% was reversed by the Government during 2020. Deferred tax
balances have therefore been calculated at a rate of 19% (2019:
17%) where timing differences are forecast to unwind in future
years. The budget on 3 March 2021 signalled an increase in the rate
of corporation tax to 25% in 2023. We will reflect this rate in the
deferred tax calculations when the change receives Royal
Assent.
Basic earnings per share
Basic earnings per share for the year ended 31 December 2020
were 49.6p compared to 50.3p in 2019. This reflects the full impact
of non-underlying charges in relation to the acquisition of Speirs
& Jeffrey. On an underlying basis, earnings per share were
133.3p in 2020, compared to 132.8p in 2019 (see note 12).
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, requires that the company must have
sufficient distributable reserves to pay the dividend; and
- regulatory capital requirements, which require the group to
maintain at least a minimum level of own funds.
The company's distributable reserves are primarily dependent
on:
- 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 2020 the company's distributable reserves were
GBP93.7 million (2019: GBP72.0 million).
In setting the proposed dividend for 2020, the board has
considered the group's performance in 2020 and the strong balance
sheet position, balanced with the need to continue our investment
programme and the ongoing uncertainty in the economic outlook. As a
result, the board is proposing a final dividend for 2020 of 47p;
resulting in a full year dividend of 72p (an increase of 2p on
2019).
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 GBP11.7 million in 2020 was
consistent with levels spent in 2019. Spend on regulatory driven
projects and property improvements reduced by a total of GBP1.3m,
whilst the same amount was re-invested in technology solutions to
enable remote working for our employees.
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 2020, underlying ROCE was 13.6% (2019: 14.2%). Quarterly
average total equity increased by GBP25.6 million in 2020 compared
to 2019, reflecting growth in retained earnings.
Outlook
The group's profitability remains closely linked with the
performance of global investment markets and UK interest rates.
We continue to work to deliver on our medium-term strategy. As
we enter year two of our investment plan, momentum will increase in
the investment in our people and digital solutions. These
investments will enrich the client experience and support process
efficiency; which, over the medium term, will drive the next phase
of growth. Consequently, during the next two to three years, we
will continue to maintain a mid 20s underlying operating
margin.
Acquisition synergies will continue to yield a full year revenue
impact in 2021 following the adoption of standard tariffs for
clients from Speirs & Jeffery from the last quarter of 2020,
along with further cost synergies of approximately GBP0.4m, adding
to the GBP5m delivered in 2020.
Staff costs in 2021 will reflect salary inflation, including
promotions, of approximately 1.5%, in addition to the full impact
of hiring activity in 2020 and further joiners planned in 2021 in
support of the strategic initiatives.
Announcements from the Financial Services Compensation Scheme in
January 2021 signal the group's share of levies are not expected to
reduce and could even increase again in 2021. We await further
information.
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
Final deferred consideration payments to former shareholders of
Speirs & Jeffrey will be calculated at the end of 2021. The
amounts payable are conditional on performance against certain
operational targets. We currently expect to recognise a
non-underlying charge of approximately GBP9 million in 2021 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 Rathbone Trust Company and Vision
Independent Financial Planning.
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
2020 2019
--------------------------------------------------------------- --------- ---------
Funds under management and administration at 31 December(1) GBP44.9bn GBP43.0bn
Underlying rate of net organic growth in Investment Management
funds under management and administration(1) 0.1% -1.5%
Underlying rate of total net growth in Investment Management
funds under management and administration(1) 1.4% -0.9%
Average net operating basis point return(2) 72.7 bps 68.2 bps
Number of Investment Management clients ('000) 61 60
Number of investment managers 304 297
--------------------------------------------------------------- --------- ---------
1. See table 4 (percentages calculated on unrounded figures)
2. See table 8
Funds under management and administration
Investment Management funds under management and administration
increased by 4.4% to GBP44.9 billion at 31 December 2020, with
growth and investment performance offsetting lower market levels at
the end of the year.
Despite the impacts of the pandemic, Investment Management has
continued to attract new clients both organically and through
acquisitions. The level of client losses in 2020 reduced as the
impact of investment manager departures in recent years
subsided.
During 2020, the total number of investment managers increased
to 304 at the end of the year, from 297 at the end of 2019. The
total number of clients (or groups of closely related clients) at
the end of the year was approximately 61,000 (2019: 60,000).
Table 4. Investment Management - funds under management and
administration
2020 2019
GBPbn GBPbn
-------------------------------------- ------ ------
As at 1 January 43.0 38.5
Inflows 3.9 3.5
-------------------------------------- ------ ------
organic(1) 3.3 3.3
acquired(2) 0.6 0.2
-------------------------------------- ------ ------
Outflows(1) (3.3) (3.9)
Market adjustment(3) 1.3 4.9
-------------------------------------- ------ ------
As at 31 December 44.9 43.0
-------------------------------------- ------ ------
Net organic new business 0.0 (0.6)
-------------------------------------- ------ ------
Underlying rate of net organic growth 0.1% -1.5%
-------------------------------------- ------ ------
Underlying rate of total net growth 1.4% -0.9%
-------------------------------------- ------ ------
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 percentage of opening funds
under management and administration
6. Net organic new business and acquired inflows as a percentage
of opening funds under management and administration
Gross organic inflows of GBP3.3 billion remained resilient at
7.7% of opening funds under management and administration. 54% of
total gross organic inflows related to existing client
relationships. This represents a good performance considering the
prominence of face-to-face sales in our business model.
Acquired inflows of GBP0.6 billion in 2020 reflected the
successful acquisition of the Personal Injury and Court of
Protection assets from Barclays Wealth and funds introduced by
teams who recently joined the group on an earn-out arrangement.
Outflows of funds under management and administration were 7.7%
of the opening balance (2019: 10.1%). Of this, approximately 40%
related to accounts that were closed with the remainder being
drawings from capital to supplement income or for
inter-generational transfers. The decrease on 2019 reflects a
much-reduced impact of recent investment manager departures on
closed accounts.
As a result, total Investment Management new business was GBP0.6
billion during 2020, representing an increase by 1.4% of opening
funds under management and administration (2019: net total
reduction of 0.9%).
2020 was another volatile year for equity and bond markets, with
the impacts of the emerging pandemic, the US election and the
announcement of a Brexit trade deal providing a range of
conflicting stimuli to investment markets. Sentiment improved
markedly in the fourth quarter, with the announcement of effective
vaccines providing some hope for a faster return to stability.
Reflecting these factors, the MSCI PIMFA Balanced Index finished
the year largely unchanged from its opening level.
The average investment return across all Investment Management
client portfolios, after all fees, was +3.4%, which outperformed
the PIMFA index by 3.5%. The outperformance was largely driven by
US and Worldwide Equities, as the release of positive economic data
combined with elevated excess cash levels propelled global indices
higher, which attracted significant momentum over time. This meant
our conviction in highly cyclical growth names performed
particularly strongly with Technology, Sustainability and Smaller
Cap holdings leading the way. Overall company performance was also
slightly ahead of the Private Client Indices published by ARC.
2020 was a strong year for our specialist teams. Charity funds
under management and administration continued to grow strongly and
reached GBP6.5 billion at 31 December 2020, up 6.6% from GBP6.1
billion at the start of the year. The Personal Injury and Court of
Protection business ended 2020 with GBP1.0 billion of funds under
management and administration. Rathbone Greenbank Investments grew
funds under management and administration nearly 19% to GBP1.9
billion at 31 December 2020.
As at 31 December 2020, Vision Independent Financial Planning
advised on client assets of GBP2.2 billion, up 1.5% from 2019.
Table 5. Investment Management - service level breakdown
2020 2019
GBPbn GBPbn
---------------------------------------- ------ ------
Direct 33.7 31.0
Financial adviser linked 9.3 8.7
---------------------------------------- ------ ------
Total discretionary 43.0 39.7
Non-discretionary investment management 1.4 2.6
Execution only 2.7 2.4
---------------------------------------- ------ ------
Gross Investment Management FUMA 47.1 44.7
Discretionary wrapped funds(1) (2.2) (1.7)
---------------------------------------- ------ ------
Total Investment Management FUMA 44.9 43.0
---------------------------------------- ------ ------
1. 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
corresponding funds under management and administration is reported
within Funds
During 2020, clients who joined as part of the acquisition of
Speirs & Jeffrey converted some GBP1.0 billion of funds under
administration from non-discretionary to discretionary
mandates.
Financial performance
Table 6. Investment Management - financial performance
2020 2019
GBPm GBPm
------------------------------------------------ ------- -------
Net investment management fee income(1) 230.3 224.1
Net commission income 62.3 51.1
Net interest income 8.4 16.4
Fees from advisory services(2) and other income 19.6 19.3
------------------------------------------------ ------- -------
Underlying operating income 320.6 310.9
Underlying operating expenses(3) (241.2) (232.5)
------------------------------------------------ ------- -------
Underlying profit before tax 79.4 78.4
------------------------------------------------ ------- -------
Underlying operating margin 24.8% 25.2%
------------------------------------------------ ------- -------
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
The effect of the pandemic on investment markets and the wider
economy resulted in a change in the mix of revenues in 2020.
Lower average funds under management and administration levels
on our principal charging dates during 2020 (see table 7) weighed
on net investment management fee income for the first three
quarters. Strong investment performance and the repricing of
mandates to a fee-only rate card for clients who joined from Speirs
& Jeffrey in the fourth quarter offset this; and net investment
management fee income increased by 2.8% to GBP230.3 million in
2020.
Table 7. Investment Management - average funds under management
and administration
2020 2019
GBPbn GBPbn
---------------------------- ------ -------
Valuation dates for billing
* 5 April 35.9 41.4
* 30 June 41.3 42.5
* 30 September 41.8 42.2
* 31 December 44.9 43.0
---------------------------- ------ -------
Average 41.0 42.3
---------------------------- ------ -------
Average FTSE 100 level1 5,978 7,456
---------------------------- ------ -------
1. Based on the corresponding valuation dates for billing
Net commission income increased 21.9% to GBP62.3 million in
2020, as the impact of the pandemic on economic prospects in
various sectors led to a substantial rotation from value stocks to
growth stocks. This drove increased transactional activity as
investment managers rebalanced client portfolios to reflect the
change in outlook.
The cut in the Bank of England base rate to 0.1% in March 2020
reduced the margin available on our treasury book and net interest
income consequently decreased 48.7% to GBP8.4 million in 2020.
The investment management loan book increased to GBP158 million
at the end of 2020 (2019: GBP132 million) and contributed GBP3.4
million to net interest income (2019: GBP4.0 million). Also
included in net interest income is GBP1.3 million (2019: GBP1.3
million) of interest payable on the group's Tier 2 notes, which are
callable annually in August, and a charge of GBP3.4 million in
relation to the group's premises leases (2019: GBP3.6 million).
Table 8. Investment Management - revenue margin
2020 2019
bps bps
---------------------------------------------------------------- ---- ----
Basis point return(1) from:
* fee income 56.2 52.9
* commission 15.2 12.1
* interest 1.3 3.2
---------------------------------------------------------------- ---- ----
Basis point return on funds under management and administration 72.7 68.2
---------------------------------------------------------------- ---- ----
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.
As a result of the factors described above, the average net
operating basis point return on funds under management and
administration has increased by 4.5 bps to 72.7 bps in 2020.
Fees from advisory services and other income increased
marginally to GBP19.6 million, reflecting the impacts of the
pandemic on growth in our complementary services.
Underlying operating expenses in Investment Management for 2020
were GBP241.2 million, an increase of 3.7% compared to 2019. This
is highlighted in table 9.
Table 9. Investment Management - underlying operating
expenses
2020 2019
GBPm GBPm
-------------------------------- ----- -----
Staff costs(1)
* fixed 83.7 78.6
* variable 56.4 49.7
-------------------------------- ----- -----
Total staff costs 140.1 128.3
Other operating expenses 101.1 104.2
-------------------------------- ----- -----
Underlying operating expenses 241.2 232.5
-------------------------------- ----- -----
Underlying cost/income ratio(2) 75.2% 74.8%
-------------------------------- ----- -----
1. Represents the costs of investment managers and teams
directly involved in client-facing activities
2. Underlying operating expenses as a percentage of underlying
operating income (see table 5)
Fixed staff costs of GBP83.7 million increased by 6.5%
year-on-year. Synergies of GBP3.3 million following the integration
of Speirs & Jeffrey were offset by an 8% growth in headcount
and market-driven salary inflation. Incremental accruals of GBP1.0
million were also recognised for unused holiday entitlement as a
result of the pandemic.
Variable staff costs totalled GBP56.4 million in 2020, an
increase of GBP6.7 million on 2019. This principally reflects a
higher charge for growth-based awards following strong investment
performance in 2020 as well as the cost of staff withdrawing from
the Save As You Earn scheme and awards for new investment
management teams.
Other operating expenses of GBP101.1 million include property,
depreciation, settlement, IT, finance and other central support
services costs.
Savings in the year of approximately GBP5 million arose from the
impact of the pandemic on entertaining, travel, events and
subsistence spend, as well as reduced use of the group's office
space. The total cost for 2020 also includes the impact of GBP1.7
million of synergies from the Speirs & Jeffrey integration.
The savings were partially offset by additional levies for the
Financial Services Compensation Scheme, which increased by GBP1.6
million in 2020.
Unit Trusts
Table 10. Unit Trusts - funds
2020 2019
GBPm GBPm
-------------------------------------------- ----- -----
Rathbone Global Opportunities Fund 3,202 1,858
Rathbone Ethical Bond Fund 2,088 1,495
Rathbone Multi-Asset Portfolios 1,714 1,134
Rathbone Income Fund 811 1,078
Offshore funds 578 517
Rathbone High Quality Bond Fund 283 210
Rathbone Active Income Fund for Charities 227 207
Rathbone Strategic Bond Fund 204 203
Rathbone Core Investment Fund for Charities 129 121
Rathbone UK Opportunities Fund 49 47
Rathbone Global Sustainability Fund 44 11
Other funds 491 557
-------------------------------------------- ----- -----
9,820 7,438
-------------------------------------------- ----- -----
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
2020 2019
--------------------------------------------------------- -------- --------
Funds under management at 31 December(1) GBP9.8bn GBP7.4bn
Underlying rate of net growth in Unit Trusts funds under
management(1) 20.1% 16.7%
Underlying profit before tax(2) GBP13.1m GBP10.3m
--------------------------------------------------------- -------- --------
1. See table 12
2. See table 14
Funds under management
Net retail sales in the asset management industry totalled
approximately GBP30.8 billion in 2020, as reported by the
Investment Association (IA), up around GBP24.3 billion on 2019.
Industry-wide funds under management increased 8.5% to GBP1.4
trillion at the end of the year.
Globally, equities was the top seller in 2020 at GBP10.4 billion
- a very significant increase on the GBP2.9 billion outflow from
equities in 2019; although UK equities were a notable exception to
this, with net outflows in the year. Two-thirds of the total
industry inflows came in November and December, showing the
significant response to the news of a vaccine and the resulting
boost to stock market returns. The IA Global sector (containing
Rathbone Global Opportunities Fund and Rathbone Global
Sustainability Fund) was the highest selling equity sector with
annual flows of GBP8.2 billion.
The positive momentum in sales accelerated in 2020, with gross
sales up 56.5% in the year to GBP3.6 billion. Redemptions also
increased in the year, particularly in March when investors
initially retreated from investment markets, totalling GBP2.1
billion for the full year. As a result, net inflows of GBP1.5
billion for the year were up 67% on GBP0.9 billion in 2019.
Rathbone Unit Trust Management consistently ranked in the top 10
for net UK sales throughout the year according to the quarterly
Pridham Sales Reports.
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 32.4% at
GBP9.8 billion (see table 12).
Table 12. Unit Trusts - funds under management
2020 2019
GBPbn GBPbn
--------------------------------- ------ ------
As at 1 January 7.4 5.6
Net inflows 1.5 0.9
--------------------------------- ------ ------
* inflows(1) 3.6 2.3
* outflows(1) (2.1) (1.4)
--------------------------------- ------ ------
Market adjustments(2) 0.9 0.9
--------------------------------- ------ ------
As at 31 December 9.8 7.4
--------------------------------- ------ ------
Underlying rate of net growth(3) 20.1% 16.7%
--------------------------------- ------ ------
1. Valued at the date of transfer in/(out)
2. Impact of market movements and relative performance
3. Net inflows as a percentage of opening funds under
management
The Ethical Bond and Global Opportunities funds maintained their
excellent long-term track records and both finished in the first
quartile for performance, measured over three and five years. The
UK Opportunities Fund ended the year with top decile performance
for 2020 and an improved long-term track record. The multi-asset
funds similarly beat their benchmarks and did well against their
peers.
UK Income funds were hit by the large cuts in dividends by UK
stocks as a result of the pandemic, and the Income Fund cut its
dividend in the year by 20% (compared to c.40% cut for the FTSE All
Share).
The High Quality Bond Fund posted good returns over the year,
performing well against its cash-plus based benchmark.
The more defensively positioned Strategic Bond Fund recovered
much of the poorer short-term performance measured over the prior
year.
Long term performance for our retail funds remains strong and
the funds are performing in line with expectations and their
benchmarks.
Table 13. Unit Trusts - performance1, 2
2020/(2019) Quartile ranking(3) over 1 year 3 years 5 years
--------------------------------------- ------ ------- -------
Rathbone Ethical Bond Fund 2 (1) 1 (1) 1 (1)
Rathbone Global Opportunities Fund 1 (1) 1 (1) 1 (1)
Rathbone Global Sustainability Fund(4) 1 (-) - (-) - (-)
Rathbone Income Fund 2 (3) 2 (3) 3 (2)
Rathbone Strategic Bond Fund 2 (4) 2 (2) 2 (2)
Rathbone UK Opportunities Fund 1 (2) 2 (3) 2 (2)
--------------------------------------- ------ ------- -------
1. Quartile ranking data is sourced from FE Trustnet
2. Excludes multi-asset funds (for which quartile rankings are
prohibited by the Investment Association (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 2020
and 2019 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. Rathbone Global Sustainability Fund was launched on 19 July
2018, therefore performance figures for periods beyond one year are
not available. Over the period since launch, the fund is ranked in
the 1st quartile.
5. Funds included in the above table account for 65% of the
total FUM of the Unit Trusts business
As at 31 December 2020, 97% of holdings in Unit Trusts' retail
funds were in institutional units (31 December 2019: 95%).
During the year, the total number of investment professionals in
Unit Trusts increased to 18 at 31 December 2020 from 15 at the end
of 2019.
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.
Table 14. Unit Trusts - financial performance
2020 2019
GBPm GBPm
--------------------------------- ------ ------
Net annual management charges 43.9 36.1
Net dealing profits 0.0 0.2
Interest and other income 1.5 0.9
--------------------------------- ------ ------
Underlying operating income 45.4 37.2
Underlying operating expenses(1) (32.3) (26.9)
--------------------------------- ------ ------
Underlying profit before tax 13.1 10.3
--------------------------------- ------ ------
Operating % margin(2) 28.9% 27.7%
--------------------------------- ------ ------
1. See table 15
2. Underlying profit before tax divided by underlying operating
income
Net annual management charges increased 21.6% to GBP43.9 million
in 2020, driven principally by the rise in average funds under
management. Net annual management charges as a percentage of
average funds under management fell to 54 bps (2019: 56 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 55 bps in 2020 from 56
bps in 2019 for the same reasons.
Table 15. Unit Trusts - underlying operating expenses
2020 2019
GBPm GBPm
-------------------------------- ----- -----
Staff costs
* Fixed 4.1 3.8
* Variable 12.0 8.7
-------------------------------- ----- -----
Total staff costs 16.1 12.5
Other operating expenses 16.2 14.4
-------------------------------- ----- -----
Underlying operating expenses 32.3 26.9
-------------------------------- ----- -----
Underlying cost/income ratio(1) 71.1% 72.3%
-------------------------------- ----- -----
1. Underlying operating expenses as a percentage of underlying
operating income
(see table 14)
Fixed staff costs of GBP4.1 million for the year ended 31
December 2020 were 7.9% higher than 2019. This reflects salary
inflation and growth in headcount in response to regulatory changes
and growth in the business.
Variable staff costs of GBP12.0 million were 37.9% higher than
2019 as a result of growth in profit and the higher value of gross
sales, which drove increases in sales commissions.
Other operating expenses have increased by 12.5% to GBP16.2
million in 2020. Growth in administration costs of GBP0.6 million,
driven by higher levels of funds under management and sales, was
contained by negotiation of more competitive rates with third-party
service providers early in the year. Regulatory costs also grew by
GBP0.3 million, reflecting the growth in levies for the Financial
Services Compensation Scheme.
Financial position
Table 16. Group's financial position
2020 2019
GBPm GBPm
(unless (unless
stated) stated)
---------------------------------------------- -------- --------
Own funds:
* Common Equity Tier 1 ratio(1) 23.5% 22.0%
* Total Own Funds ratio(2) 24.3% 23.3%
* Total equity 513.8 485.4
* Tier 2 subordinated loan notes(3) 19.8 19.9
* Total risk exposure amount 1,247.8 1,209.0
* Leverage ratio 9.2% 8.3%
---------------------------------------------- -------- --------
Other resources:
* Total assets 3,370.6 3,398.7
* Treasury assets 2,721.1 2,817.1
* Investment management loan book 158.0 132.0
* Intangible assets from acquired growth 218.0 214.9
* Tangible assets and software 28.0 28.4
---------------------------------------------- -------- --------
Liabilities:
* Due to customers 2,561.8 2,668.6
* Net defined benefit pension liability 9.8 8.0
---------------------------------------------- -------- --------
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 percentage 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 8)
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 2020, the group's regulatory own funds (including
verified profits for the year) were GBP304 million (2019: GBP282
million).
Table 17. Regulatory own funds
2020 2019
GBPm GBPm
-------------------------------- ------- -------
Share capital and share premium 218.0 213.8
Reserves 342.6 313.6
Less:
Own shares (46.7) (42.0)
Intangible assets(1) (220.7) (218.9)
-------------------------------- ------- -------
Common Equity Tier 1 own funds 293.2 266.5
Tier 2 own funds 10.7 15.7
-------------------------------- ------- -------
Total own funds 303.9 282.2
-------------------------------- ------- -------
1. Net book value of goodwill, client relationship intangibles
and software is deducted directly from own funds, less any related
deferred tax
Common Equity Tier 1 (CET1) own funds increased by GBP26.5
million during 2020, due to the inclusion of verified retained
profits for the 2020 financial year.
The CET1 ratio was 23.5%, an increase on the 22.0% 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 9.2% at 31 December 2020, compared to
8.3% at 31 December 2019. 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
increased during the year in line with the increase in CET1
capital.
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 annually each August. Interest is
payable at a fixed margin of 4.375% over six-month LIBOR. As they
are now within 5 years of their maturity date, they are amortised
on a straight-line basis for capital eligibility purposes over
these last 5 years.
The consolidated balance sheet total equity was GBP514 million
at 31 December 2020, up 5.9% from GBP485 million at the end of
2019, primarily reflecting the 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.
Table 18. Group's own funds requirements(1)
2020 2019
GBPm GBPm
------------------------------------------------------ ----- -----
Credit risk requirement 46.9 46.5
Market risk requirement 0.6 0.4
Operational risk requirement 52.4 49.8
------------------------------------------------------ ----- -----
Pillar 1 own funds requirement 99.9 96.7
Pillar 2A own funds requirement 40.0 39.8
------------------------------------------------------ ----- -----
Total Capital Requirement ('TCR') 139.9 136.5
Combined buffer:
* capital conservation buffer (CCB) 31.1 30.2
* countercyclical capital buffer (CCyB) 0.1 11.3
------------------------------------------------------ ----- -----
Total Capital Requirement ('TCR') and Combined buffer 171.1 178.0
------------------------------------------------------ ----- -----
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 2020, the group's total risk exposure amount was
GBP1,248 million (2019: GBP1,209 million).
Pillar 2 - supervisory review process
Pillar 2 supplements the Pillar 1 minimum requirement with
firm-specific Pillar 2A requirements and a framework of regulatory
capital buffers.
The Pillar 2A own funds requirement (which is set by the PRA and
the calculation of which remains confidential with 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 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 represents 2.5% of the group's total
risk exposure amount as at 31 December 2020.
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 0% for the UK. The group
also has some small, relevant credit exposures in other
jurisdictions, resulting in a weighted buffer rate of 0.01% of the
group's total risk exposure amount as at 31 December 2020.
The surplus of own funds (including verified profits for the
full year) over Total Capital Requirement and Combined buffer was
GBP133 million, up from GBP104 million at the end of 2019.
Pillar 2B 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.
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 2020 were GBP3.4 billion (2019:
GBP3.4 billion), of which GBP2.6 billion (2019: GBP2.7 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 GBP2.6 billion (2019: GBP2.7 billion) represented 5.7% of total
Investment Management funds under management and administration at
31 December 2020, compared to 6.2% at the end of 2019. Cash held in
client money accounts was GBP5.5 million (2019: GBP5.7
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 at the time of investment and
are regularly reviewed by the banking committee.
During the year, the share of treasury assets held with the Bank
of England reduced to GBP1.8 billion from GBP1.9 billion at 31
December 2019. Liquidity in client portfolios fell towards the end
of the year and we increased our holdings in certificates of
deposit by GBP50 million over the course of the year.
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.
Our ability to provide such loans is a valuable additional
service, for example, to clients who require bridging finance when
buying and selling their homes.
Loans advanced to clients increased to GBP158.0 million at end
of 2020 (2019: GBP132.0 million) as clients demand for bridging
finance increased in favour of drawing down from investment
portfolios at a time of market volatility.
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 2020, the total carrying value of intangible
assets arising from acquired growth was GBP218 million (2019:
GBP215 million). During the year, client relationship intangible
assets of GBP11.0 million were capitalised (2019: GBP5.3 million),
including GBP6.9 million in relation to the Personal Injury and
Court of Protection business of Barclays. Goodwill of GBP6.5
million was acquired during the year in relation to this
acquisition (2019: GBPnil).
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 2020, including the impact of any lost
relationships, was GBP14.3 million (2019: GBP15.4 million).
Goodwill, which arises from business combinations, is not
amortised but is subject to a test for impairment at least
annually. During the prior 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. No
goodwill was identified as impaired during the year. Further detail
is provided in note 8.
Capital expenditure
During 2020, we have maintained the overall level of investment
in the development of our systems and premises, with capital
expenditure for the year totalling GBP11.7 million (2019: GBP11.6
million). Capital expenditure in 2020 included GBP1.4 million to
facilitate remote working. The level of capital spend on regulatory
driven projects and premises improvements reduced by a commensurate
amount.
Total costs for the purchase and development of software were
GBP7.9 million in the year (2019: GBP8.6 million) as work continued
on the development of our digital capability.
Overall, new investment accounted for approximately 88% of total
capital expenditure in 2020, compared with 84% in 2019, with the
balance of total spend incurred for the maintenance and replacement
of existing software and equipment.
Right-of-use assets
Following the adoption of IFRS 16, the group is required to
recognise each lease 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 2020, the group recognised right-of-use assets
of GBP54.3 million, largely representing the leases for premises
occupied by the group. During 2020, additions of GBP0.3 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 2020 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 2020 the combined schemes' liabilities, measured
on an accounting basis, had increased to GBP165.4 million, up 4.0%
from GBP159.1 million at the end of 2019, primarily reflecting the
decrease in interest rates used to discount the liabilities during
the year. The reported position of the schemes as at 31 December
2020 was a deficit of GBP9.8 million (2019: deficit of GBP8.0
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 were completed during the year.
Having reviewed the long-term plan for the schemes, we have agreed
with the trustees a target to fund the schemes to a self-sufficient
basis over the medium term. This targets a level of assets in the
scheme sufficient to fund future cash flows from interest and
maturities of the scheme assets, reducing the reliance on equity
returns to meet the schemes' requirements. This will significantly
reduce the volatility of the schemes and the future burden on the
group. Reflecting this, we agreed a schedule of contributions
totalling GBP25 million over the next six years. This schedule will
be reviewed at the next triennial valuations, as at 31 December
2022.
Liquidity and cash flow
Table 19. Extracts from the consolidated statement of cash
flows
2020 2019
GBPm GBPm
------------------------------------------------- ------- -------
Cash and cash equivalents at the end of the year 2,056.7 2,148.0
Net cash inflows from operating activities 32.0 499.6
Net change in cash and cash equivalents (44.6) 739.5
------------------------------------------------- ------- -------
Fees and commissions are largely collected directly from client
portfolios and a significant proportion of expenses 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 GBP1.8 billion at 31
December 2020 (2019: GBP1.9 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. Consequently, cash
flows include the impact of capital flows in treasury assets.
Net cash flows from operating activities reflect a GBP106.0
million decrease in banking client deposits (2019: GBP442.6 million
increase), as a result of asset allocation decisions to reduce the
proportion of funds under management and administration held as
cash in clients' portfolios, reflecting market conditions at the
year end.
Cash flows from investing activities also included a net outflow
of GBP53.1 million from the purchase of certificates of deposit
(2019: net inflow of GBP303.9 million), as we reduced 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 GBP37.8
million (2019: GBP36.0 million);
- payments made (net of cash acquired) in business combinations
of GBP12.0 million (2019: GBPnil);
- outflows relating to payments to acquire intangible assets
(other than as part of a business combination) of GBP9.5 million
(2019: GBP14.9 million); and
- GBP3.8 million of capital expenditure on tangible property,
plant and equipment (2019: GBP3.5 million).
Risk management and control
Our approach to risk management continued to develop in 2020,
and we have adapted to the impact COVID-19 has had on the firm. Our
risk governance, processes and infrastructure ensured that risk
management across the group was appropriate to existing and
emerging challenges to the firm's strategic objectives and
day-to-day activities. Our primary focus going into 2021 will be to
continue managing risk effectively in accordance with our risk
appetite and for the long term, to meet the expectations of all of
our stakeholders.
Responding to COVID-19
We faced multiple risks arising from the COVID-19 pandemic. We
focused on service to clients, the reliability of business
operations and the wellbeing of our colleagues, although this
required some agility as the risk profile changed. Overall, the
firm has responded well so far, although we remain alert to future
uncertainty and will adapt as required to the changing landscape.
The board, executive and risk committees have been fully supportive
and engaged throughout to ensure that our staff are protected, our
operations are resilient and the risk of material disruption to our
client services has been mitigated.
Risk culture
The risk culture embedded across the group continues to enhance
the effectiveness of risk management and decision-making at all
levels. The board sets the right tone, which supports a strong risk
culture and, through our senior management team, encourages
appropriate behaviours and collaboration on managing risk across
the business. Risk management is 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 creates an open and transparent working
environment, encouraging employees to engage positively in risk
management and support the achievement of our strategic
objectives.
Risk appetite
Risk appetite is defined as the amount and type of risk the
group is prepared to take or accept in pursuit of our long-term
strategic objectives.
The board, executive committee and group risk committee
regularly review and, at least annually, formally approve the
group's risk appetite statement, ensuring it remains consistent
with our strategy and objectives. Our appetite framework is aligned
with the group's overall prudential requirements for strategic,
financial and non-financial risk (conduct and operational), and
specific appetite measures are set for each principal risk. 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 as
appropriate, so that risk mitigation can be reviewed and
strengthened if needed.
In line with our strategy, the current economic outlook and the
evolving 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 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 and objectives. In addition, the audit and
group risk committees exercise further oversight of and challenge
to existing risk management and internal control. The board
delegates day-to-day responsibility for managing risk across the
business to the chief executive and executive committee. Our
executive risk committee provides further challenge to and
oversight of financial and non-financial risks (conduct and
operational risk), while the banking committee 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
We operate a three lines of defence model across the group to
support governance and risk management. The comments below outline
our expectations across the firm, 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, including 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 senior management, the board and board
committees as to the effectiveness of the group's governance, risk
management and internal controls.
Outside our internal lines of defence, external independent
assurance is obtained, primarily through the annual statutory audit
along with other ad hoc engagements which may be required during
the year.
Identification of risks
Regular reviews are undertaken to ensure we identify and
understand all relevant material risks which have the potential to
impact future performance and the delivery of our strategic
objectives and business priorities. We use a three-level
hierarchical model and this year have enhanced our risk
classification, so that it continues to reflect the current and
future risk profile of the group. Our highest level of risk (Level
1) comprises business and strategic, financial, conduct and
operational risks. Our next level (Level 2) contains 20 risk
categories allocated to a Level 1 risk. 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
our framework facilitates this through a system of primary and
secondary considerations. Risk exposures and our overall risk
profile are reviewed and monitored regularly, with risk owners,
senior management and business units across the group considering
the potential impact, existing internal controls and management
actions required to mitigate the impact and likelihood of emerging
issues and future events.
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 Internal Capital Adequacy Assessment
Process (ICAAP) and Internal Liquidity Adequacy Assessment Process
(ILAAP) work, which assesses the principal risks facing the
group.
Across the year our risk assessment process considers both the
impact and likelihood of risk events materialising which could
affect 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 to support this
assessment.
We have a consistent approach to identifying and assessing our
Level 3 risks on both an inherent and residual basis over 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 including consideration 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.
Senior management also maintain a watch list as part of our
approach to identify and assess 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. Any material
changes may require active risk management, usually through process
changes or systems development. The group's risk profile, risk
register and watch list are regularly reviewed by the executive,
senior management, group risk committee and the board.
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
Our risks are classified hierarchically in a three-level model.
Following a review of our risk taxonomy in 2020 we have established
four Level 1 risks, 20 Level 2 risks and 53 Level 3 risks. This
approach to managing risk is underpinned by an understanding of our
current risk exposures and consideration of how risks change over
time. Our risks form the basis of the group's risk register, and to
identify and manage our principal risks, reviews take place with
risk owners, senior management, business units and committees
across the group. The firm's senior management and risk function
conduct these reviews regularly during the year.
The group's underlying risk profile has fluctuated during this
extraordinary year; however, ratings for the majority of Level 2
risks have stabilised, given our ability to respond and adapt to
the challenges presented by the COVID-19 pandemic and the UK
Government's actions impacting firms. We prioritised client
service, operational resilience and employee wellbeing, adjusting
our operating model and processes to ensure we continued to
effectively manage client assets and focus on volatile investment
markets. In addition, the firm has continually monitored and
responded to the uncertainty implied by the potential for a hard
Brexit at the end of the transition period. While a degree of
uncertainty remains around a deal on financial services between the
UK and EU, our business operating model has not been seriously
impacted. We will however continue to monitor how the future
longer-term relationship between the UK and EU evolves. The
following table identifies the most important changes to risk
ratings during the year.
Based upon our risk assessment processes and notwithstanding the
impact on business and wider society of COVID-19, 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 risks reflect the continued focus
in 2020 on our strategic initiatives, the sustainability of our
business model and client suitability in general; and more
specifically towards environmental and societal challenges, the
ever-changing cyber threat landscape, operational resilience in
relation to our suppliers, and the macroeconomic environment. The
board remains as vigilant as ever to risks that arise from the
longer-term impact of COVID-19 on our business, society and the
economy, and also to regulatory risks that, in turn, may arise from
the continuing development of law, regulation and standards in our
sector.
Our overall risk profile and the 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
In 2020, we developed a new approach to monitor strategic risks
and horizon threats. This was reviewed by the Board and the
approach will be maintained in 2021.
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 2021 and will include
maintaining a climate change risk assessment as part of the wider
risk management framework and process.
The group's view is that we can reasonably expect current market
conditions and uncertainties to remain throughout 2021, given the
implications of COVID-19 and Brexit. We are also monitoring the
political discussion around Scottish independence. Other evolving
risks remain stable and 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.
Key changes to risk profile
Risk Description of change Risk change
in 2020
-------------- ---------------------------------------------------------- -----------
Sustainability This risk was developed in our taxonomy in 2020 ->
and was defined as the risk that the business model
does not respond in an optimal manner to changing
market conditions, including environmental and social
factors, such that sustainable growth, market share
or profitability is adversely affected.
-------------- ---------------------------------------------------------- -----------
People People risk increased in 2020 as a direct result ->
of the pandemic. Although this has been mitigated
by management action, and employee feedback during
the year has been positive.
-------------- ---------------------------------------------------------- -----------
Information Although the external threat landscape continues ->
security and to evolve, we continue to invest in improving our
cyber security posture, including staff awareness, preparedness
and technology developments.
-------------- ---------------------------------------------------------- -----------
Suitability Process improvements have been made in 2020, in ->
part to simplify workflows as a result of COVID-19.
Further enhancements are expected in 2021.
-------------- ---------------------------------------------------------- -----------
Third party This risk increased during 2020 as a result of the
supplier COVID-19 pandemic and Brexit, and also in part due
to legislative changes which could have impacted
on service. However, our key suppliers have been
able to maintain service and together we have mitigated
the risk of any material disruption to our operations.
-------------- ---------------------------------------------------------- -----------
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. Some of these risks increased at some stage in 2020,
although they have since stabilised.
Residual
rating
----------
Level 2 risk How the risk arises I L Control environment
--------------------- --------------------- ----- --- ------------------------------------------------------------
Credit This risk can arise High Low
The risk that one from placing funds * Banking committee and senior management oversight
or more with other banks and
counterparties holding
fail to fulfil interest-bearing * Counterparty limits and credit reviews
contractual securities. There
obligations, is also a limited
including stock level of lending to * Treasury policy and procedures
settlement clients
* Client lending policy and procedures
* Active monitoring of exposures
* Annual ICAAP
--------------------- --------------------- ----- --- ------------------------------------------------------------
Pension This risk can arise High Med
The risk that the through a sustained * Board, senior management and trustee oversight
cost of funding deficit between the
our defined benefit schemes' assets and
pension schemes liabilities. A number * Monthly valuation estimates
increases, or their of factors impact
valuation affects a deficit, including
dividends, reserves increased life * Triennial independent actuarial valuations
and regulatory expectancy,
own funds falling interest
rates * Investment policy
and falling asset
values
* Senior management review and defined management
actions
* Annual ICAAP
--------------------- --------------------- ----- --- ------------------------------------------------------------
Change This risk can arise High Med
The risk that the if the business is * Executive and board oversight of material change
change portfolio too aggressive and programmes
does not support unstructured in its
delivery of the change programme to
group's strategy manage project risks, * Transformation Office Programme Board oversight and
or fails to make delivery-focused operating model
available
the capacity and
capabilities * Documented strategic and business change programmes
to deliver business
benefits
* Dedicated change delivery function, use of internal
and, where required, external subject matter experts
* Two-stage assessment, challenge and approval of
project plans
* Documented project and change procedures
--------------------- --------------------- ----- --- ------------------------------------------------------------
Sustainability This risk can arise High Med
The risk that the from strategic * Board, executive and responsible business committee
business model decisions oversight
does not respond which fail to
in an optimal manner consider
to changing market the current operating * A documented strategy, including responsible
conditions, including environment, our investment policy
environmental and stakeholders'
social factors, expectations, or can
such that sustainable be influenced by * Annual business targets, subject to regular review
growth, market external and challenge
share or factors such as
profitability environmental
is adversely affected and social factors, * Regular reviews of pricing structure
material changes in
regulation or
legislation * Continued investment in the investment process,
within the financial service standards and marketing
services sector
* Trade body participation
* Regular competitor benchmarking and analysis
--------------------- --------------------- ----- --- ------------------------------------------------------------
Regulatory compliance This risk can arise High Med
and legal from failures by the * Board and executive oversight
The risk of failure business to comply
by the group or with existing
a subsidiary to regulation * Management oversight and active involvement with
fulfil its regulatory or failure to industry bodies
or legal requirements identify
and comply with and react to
the introduction regulatory * Compliance monitoring programme to examine the
of new or updated change control of key regulatory risks
regulations and
laws
* Separate anti-money laundering function with specific
responsibility
* Oversight of industry and regulatory developments
* Documented policies and procedures
* Staff training and development
--------------------- --------------------- ----- --- ------------------------------------------------------------
Suitability This risk can arise High Med
The risk of an through failure to * Board, executive and general managers committee
unsuitable client appropriately oversight
outcome either understand
through service, the wealth management
investment mandate, needs of our clients, * Investment governance and structured committee
investment decisions or failure to apply oversight
taken, investment suitable advice or
recommendations investment strategies
made or portfolio * Management oversight and segregated quality assurance
or fund construction and performance teams
* Performance measurement and attribution analysis
* 'Know your client' (KYC) suitability processes
* Weekly investment management meetings
* Investment manager reviews through supervisor
sampling
* Compliance monitoring
--------------------- --------------------- ----- --- ------------------------------------------------------------
Information security This risk can arise High Med
and cyber from the firm failing * Board and executive oversight
The risk of to maintain and keep
inappropriate secure sensitive and
access to, confidential data * Data governance committee oversight
manipulation, through its operating
or disclosure of, infrastructure,
client or including * Information security policy, data protection policy
company-sensitive the activities of and associated procedures
information employees, and
through
the management of * System access controls and encryption
cyber threats
* Penetration testing and multi-layer network security
* Training and employee awareness programmes
* Physical security
--------------------- --------------------- ----- --- ------------------------------------------------------------
People This risk can arise High Med
The risk of loss across all areas of * Board and executive oversight
of key staff, lack the business as a
of skilled resources result of resource
or inappropriate management failures * Succession and contingency planning
behaviour or actions. or from external
This could lead factors
to lack of capacity such as increased * Transparent, consistent and competitive remuneration
or capability competition or schemes
threatening material
the delivery of changes in regulation
business objectives, * Contractual clauses with restrictive covenants
or to behaviour
leading to
complaints, * Continual investment in staff training and
litigation or development
regulatory
action
* Employee engagement survey
* Appropriate balanced performance measurement system
* Culture monitoring and reporting
--------------------- --------------------- ----- --- ------------------------------------------------------------
Third-party supplier This risk can arise High Med
The risk of one when the firm does * Board and executive oversight
or more third-party not have appropriate
suppliers failing governance and
to provide or perform oversight * Senior dedicated relationship managers
authorised and/or of its supplier
outsourced services relationships,
to standards expected in particular those * Supplier contracts and defined service level
by the group, considered key and agreements/KPIs
impacting material to the
the ability to operational
deliver core resilience of * New supplier due diligence and approval process
services. business
This includes services provided
intra-group to clients or * Close liaison and regular service review meetings
outsourcing activity investors
* Documented procedures
--------------------- --------------------- ----- --- ------------------------------------------------------------
Assessment of the company's prospects
The board reviews its strategic plan annually. This, alongside
the ICAAP and ILAAP, forms the basis for capital planning which is
discussed periodically 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 (defined as credit, market and
operational risks) to the required regulatory standards. In
addition, the crystallisation of the following events were focused
on for enhanced stress testing: an equity market fall, a loss of
business/competitive threat, business expansion, pension obligation
and a combined market fall and reputational event. The economic and
commercial impacts of the global pandemic on the prospects of the
company were also factored into the assessment.
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.
Although the business is almost wholly UK-situated, it does not
suffer from any material client, geographical or counterparty
concentrations.
While this stress test does not consider all of the risks that
the group may face, the directors consider that this stress testing
based assessment of the group's prospects is reasonable in the
circumstances of the inherent 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 considering the risk assessments identified
above. The directors have considered 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, and
its future performance, solvency or liquidity.
The board regularly reviews business performance and at least
annually its current strategic plan through to 2024, alongside a
strategic risk assessment. The board also considers five-year
projections as part of its annual regulatory reporting cycle,
including strategic and investment plans. However, the directors
have determined and continue to believe that a three-year period to
31 December 2023 constitutes an appropriate and prudent period over
which to provide its viability statement given the uncertainties
associated with the global pandemic, as well as economic and
political factors and their potential impact on investment markets
over a longer period. This three-year view is also more aligned to
the firm's detailed stress testing and capital planning
activity.
Stress testing and scenario analysis shows that under scenarios
such as a 42% fall in FTSE 100 levels or a major reputational risk
event, the group would remain profitable and able to withstand the
impact of such scenarios. 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 2023.
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.
The group companies are regulated by the Prudential Regulation
Authority (PRA) and/or the Financial Conduct Authority (FCA) and
perform annual capital adequacy assessments, which include the
modelling of certain extreme stress scenarios. The company
publishes Pillar 3 disclosures annually on its website, which
provide detail about its regulatory capital re-sources and
requirements. In July 2015, Rathbone Investment Management issued
GBP20 million of 10-year subordinated loan notes to finance future
growth. The group has no other external borrowings.
The directors believe that the company is well placed to manage
its business risks successfully despite the continuing un-certain
economic and political outlook. As the directors have a reasonable
expectation that the company has adequate resources to continue in
operational existence for the foreseeable future, they continue to
adopt the going concern basis of accounting in preparing the annual
financial statements.
Consolidated statement
of comprehensive income
for the year ended 31 December 2020
2020 2019
Note GBP'000 GBP'000
------------------------------------------------------ ---- --------- ---------
Interest and similar income 14,976 28,553
Interest expense and similar charges (6,554) (12,141)
------------------------------------------------------ ---- --------- ---------
Net interest income 8,422 16,412
------------------------------------------------------ ---- --------- ---------
Fee and commission income 378,240 352,519
Fee and commission expense (24,491) (23,547)
------------------------------------------------------ ---- --------- ---------
Net fee and commission income 353,749 328,972
------------------------------------------------------ ---- --------- ---------
Net trading income (12) 170
Other operating income 3,929 2,517
------------------------------------------------------ ---- --------- ---------
Operating income 366,088 348,071
------------------------------------------------------ ---- --------- ---------
Charges in relation to client relationships and
goodwill (14,302) (15,964)
Acquisition-related costs 5 (34,449) (33,057)
Other operating expenses (273,558) (259,398)
------------------------------------------------------ ---- --------- ---------
Operating expenses (322,309) (308,419)
------------------------------------------------------ ---- --------- ---------
Profit before tax 43,779 39,652
Taxation 6 (17,127) (12,729)
------------------------------------------------------ ---- --------- ---------
Profit after tax 26,652 26,923
------------------------------------------------------ ---- --------- ---------
Profit for the year attributable to equity holders
of the company 26,652 26,923
------------------------------------------------------ ---- --------- ---------
Other comprehensive income:
Items that will not be reclassified to profit or
loss
Net remeasurement of defined benefit liability 10 (4,682) 310
Deferred tax relating to net remeasurement of defined
benefit liability 1,668 (53)
Other comprehensive income net of tax (3,014) 257
------------------------------------------------------ ---- --------- ---------
Total comprehensive income for the year net of tax
attributable to equity holders of the company 23,638 27,180
------------------------------------------------------ ---- --------- ---------
Dividends paid and proposed for the year per ordinary
share 7 72.0p 70.0p
Dividends paid and proposed for the year 38,728 37,714
Earnings per share for the year attributable to
equity holders of the company: 12
* basic 49.6p 50.3p
* diluted 47.6p 48.7p
------------------------------------------------------ ---- --------- ---------
Consolidated statement
of changes in equity
for the year ended 31 December 2020
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 2019 (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 10 310 310
Deferred tax relating to components
of other comprehensive income (53) (53)
====================================== ==== ======== ======== ======== ======== ========= ========
Other comprehensive income net of tax - - - - 257 257
Dividends paid 7 (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
Profit for the year 26,652 26,652
====================================== ==== ======== ======== ======== ======== ========= ========
Net remeasurement of defined benefit
liability 10 (4,682) (4,682)
Deferred tax relating to components
of other comprehensive income 1,668 1,668
====================================== ==== ======== ======== ======== ======== ========= ========
Other comprehensive income net of tax - - - - (3,014) (3,014)
Dividends paid 7 (37,831) (37,831)
Issue of share capital 56 4,153 - 4,209
Share-based payments:
* value of employee services 43,635 43,635
* cost of own shares acquired (5,077) (5,077)
* cost of own shares vesting 304 (304) -
* tax on share-based payments (140) (140)
-------------------------------------- ---- -------- -------- -------- -------- --------- --------
At 31 December 2020 2,874 215,092 71,756 (46,744) 270,849 513,827
-------------------------------------- ---- -------- -------- -------- -------- --------- --------
Consolidated balance sheet
as at 31 December 2020
2020 2019
Note GBP'000 GBP'000
--------------------------------------------- ---- --------- ---------
Assets
Cash and balances with central banks 1,802,706 1,932,997
Settlement balances 90,373 52,520
Loans and advances to banks 159,430 177,832
Loans and advances to customers 166,221 138,412
Investment securities:
* fair value through profit or loss 107,559 105,967
* amortised cost 651,427 600,261
Prepayments, accrued income and other assets 98,714 95,390
Property, plant and equipment 14,846 15,432
Right-of-use
assets 44,856 49,480
Net deferred tax asset 3,342 2,636
Intangible assets 8 231,144 227,807
--------------------------------------------- ---- --------- ---------
Total assets 3,370,618 3,398,734
--------------------------------------------- ---- --------- ---------
Liabilities
Deposits by banks 893 28
Settlement balances 95,412 57,694
Due to customers 2,561,767 2,668,645
Accruals, provisions and other liabilities 9 112,071 93,263
Lease liabilities 56,124 61,004
Current tax liabilities 971 4,766
Subordinated loan notes 19,768 19,927
Retirement benefit obligations 10 9,785 8,014
--------------------------------------------- ---- --------- ---------
Total liabilities 2,856,791 2,913,341
--------------------------------------------- ---- --------- ---------
Equity
Share capital 2,874 2,818
Share premium 215,092 210,939
Merger reserve 71,756 71,756
Own shares (46,744) (41,971)
Retained earnings 270,849 241,851
--------------------------------------------- ---- --------- ---------
Total equity 513,827 485,393
--------------------------------------------- ---- --------- ---------
Total liabilities and equity 3,370,618 3,398,734
--------------------------------------------- ---- --------- ---------
Company registered number: 01000403
Consolidated statement of cash flows
for the year ended 31 December 2020
2020 2019
Note GBP'000 GBP'000
------------------------------------------------------------- ---- --------- ---------
Cash flows from operating activities
Profit before tax 43,779 39,652
Change in fair value through profit or loss (1,881) (410)
Net interest income (8,422) (16,412)
Impairment losses on financial instruments 582 103
Net charge for provisions 9 143 3,572
Loss/(profit) on disposal of property, plant and equipment - 428
Depreciation, amortisation and impairment 31,229 33,799
Foreign exchange movements 1,245 2,152
Defined benefit pension scheme charges 10 200 255
Defined benefit pension contributions paid 10 (3,111) (3,128)
Share-based payment charges 39,986 31,012
Interest paid (5,300) (11,421)
Interest received 12,376 28,264
------------------------------------------------------------- ---- --------- ---------
110,826 107,866
Changes in operating assets and liabilities:
* net decrease/(increase) in loans and advances to
banks and customers 29,852 (31,076)
* net increase in settlement balance debtors (37,852) (12,765)
* net increase in prepayments, accrued income and other
assets (722) (13,725)
* net (decrease)/increase in amounts due to customers
and deposits by banks (106,013) 442,646
* net increase in settlement balance creditors 37,718 21,002
* net increase in accruals, deferred income, provisions
and other liabilities 19,616 2,802
------------------------------------------------------------- ---- --------- ---------
Cash generated from operations 53,425 516,750
Tax paid (21,410) (17,133)
------------------------------------------------------------- ---- --------- ---------
Net cash inflow from operating activities 32,015 499,617
------------------------------------------------------------- ---- --------- ---------
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired (12,048) -
Purchase of property, plant, equipment and intangible
assets (13,294) (17,705)
Purchase/(disposal) of right-of-use assets (238) -
Proceeds from sale of property, plant and equipment - (239)
Purchase of investment securities (886,847) (754,958)
Proceeds from sale and redemption of investment securities 833,712 1,058,874
------------------------------------------------------------- ---- --------- ---------
Net cash (used in)/generated from investing activities (78,715) 285,972
------------------------------------------------------------- ---- --------- ---------
Cash flows from financing activities
Net (repurchase)/issue of ordinary shares 14 (868) (4,340)
Dividends paid 7 (37,831) (35,959)
Payment of lease liabilities (4,880) (4,623)
Interest paid (1,060) (1,171)
------------------------------------------------------------- ---- --------- ---------
Net cash used in financing activities (44,639) (46,093)
------------------------------------------------------------- ---- --------- ---------
Net (decrease)/increase in cash and cash equivalents (91,339) 739,496
Cash and cash equivalents at the beginning of the year 2,148,033 1,408,537
------------------------------------------------------------- ---- --------- ---------
Cash and cash equivalents at the end of the year 14 2,056,694 2,148,033
------------------------------------------------------------- ---- --------- ---------
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 2020. The accounting policies have
been applied consistently to all periods presented in this
statement, except as detailed below.
2 Critical accounting judgements and key sources of estimation 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.
2.1 Client relationship intangibles (note 8)
Critical judgements
Client relations hip 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 GBP14,302,000 (2019: GBP15,369,000) was charged
during the year. At 31 December 2020, the carrying value of client
relationship intangibles was GBP121,129,000 (2019:
GBP124,456,000).
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 GBP5.9
million.
2.2 Retirement benefit obligations (note 10)
Estimation uncertainty
The principal assumptions underlying the reported deficit of
GBP9,785,000 (2019: GBP8,014,000 deficit) are set out in note
10.
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 10. 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
GBP15,689,000 (2019: GBP28,701,000). A 1.0% decrease would have an
equal and opposite effect.
2.3 Business combinations (note 4)
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 4, 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 2020, one
element of the 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 the earn-out consideration is payable in shares and
is 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
During the year, the group revised its valuation of the-earn out
consideration and related incentivisation awards, which are
dependent on performance by the acquired business against certain
operational and financial targets by 31 December 2020 and 31
December 2021.
The group estimates the total amount payable on these dates to
be GBP44.7 million, based on agreed qualifying funds under
management of GBP5.1 billion at 31 December 2020, and forecast
incremental qualifying funds under management of GBP0.5 billion at
31 December 2021. As a result, accumulated charges of GBP35.3
million have been recognised since the acquisition in August 2018
with a corresponding credit to equity. An additional GBP0.6 million
has been recognised as a provision on the balance sheet in respect
of incentivisation awards to be settled in cash. The associated
charge to profit or loss during the year was GBP23.1 million (note
4).
The value of incremental qualifying funds under management at
the end of 2021 has been derived from a probability-weighted
scenario analysis, which considers assumptions of forecast client
attrition, and the rate at which existing clients will convert from
non-discretionary to discretionary mandates.
In the prior year, the group's results were based on forecast
qualifying funds under management of GBP4.8 billion at the end of
2020, and incremental qualifying funds under management of GBP48.0
million at the end of 2021. The material increase in forecast total
qualifying funds under management during the year is due to lower
than expected client attrition following the application of the
group's standardised fee rates, and a higher market level at 31
December 2020. The group recognised an additional charge of GBP15.9
million in profit or loss during the period in relation to the
increase in total forecast qualifying funds under management.
If qualifying funds under management at 31 December 2021 are
GBP100 million higher or lower than management's estimate then the
accumulated charges as at 31 December 2020 for earn-out
consideration and incentivisation awards would be GBP1.25 million
higher or lower and the charge to profit or loss in 2020 would be
GBP1.25 million higher or lower.
Under the terms of the agreements, the maximum possible payment
for the second earn-out and incentivisation awards is capped at
GBP91,600,000; which represents incremental qualifying funds under
management of approximately GBP3.7 billion at the end of 2021.
3 Segmental information
For management purposes, the group is organised into two
operating divisions: Investment Management and Funds. Centrally
incurred indirect expenses are allocated to these operating
segments on the basis of the cost drivers that generate the
expenditure; principally, these are 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 Funds expenses Total
31 December 2020 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------------------- ----------- -------- --------- ---------
Net investment management fee income 230,309 43,929 - 274,238
Net commission income 62,297 - - 62,297
Net interest income 8,422 - - 8,422
Fees from advisory services and other income 19,629 1,502 - 21,131
------------------------------------------------- ----------- -------- --------- ---------
Underlying operating income 320,657 45,431 - 366,088
------------------------------------------------- ----------- -------- --------- ---------
Staff costs - fixed (83,673) (4,118) (29,697) (117,488)
Staff costs - variable (56,414) (12,015) (9,299) (77,728)
------------------------------------------------- ----------- -------- --------- ---------
Total staff costs (140,087) (16,133) (38,996) (195,216)
Other direct expenses (33,371) (8,693) (36,278) (78,342)
Allocation of indirect expenses (67,753) (7,521) 75,274 -
------------------------------------------------- ----------- -------- --------- ---------
Underlying operating expenses (241,211) (32,347) - (273,558)
------------------------------------------------- ----------- -------- --------- ---------
Underlying profit before tax 79,446 13,084 - 92,530
Charges in relation to client relationships
and goodwill (note 8) (14,302) - - (14,302)
Acquisition-related costs (note 5) (32,433) - (2,016) (34,449)
------------------------------------------------- ----------- -------- --------- ---------
Segment profit before tax 32,711 13,084 (2,016) 43,779
------------------------------------------------- ----------- -------- --------- ---------
Profit before tax attributable to equity holders
of the company 43,779
Taxation (note 6) (17,127)
------------------------------------------------- ----------- -------- --------- ---------
Profit for the year attributable to equity
holders of the company 26,652
------------------------------------------------- ----------- -------- --------- ---------
Investment
Management Funds Total
GBP'000 GBP'000 GBP'000
------------------------------------------------- ----------- -------- --------- ---------
Segment total assets 3,243,198 121,320 3,364,518
Unallocated assets 6,100
------------------------------------------------- ----------- -------- --------- ---------
Total assets 3,370,618
------------------------------------------------- ----------- -------- --------- ---------
Investment Indirect
Management Funds 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 8) (15,964) - - (15,964)
Acquisition-related costs (note 5) (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 6) (12,729)
------------------------------------------------- ----------- -------- --------- ---------
Profit for the year attributable to equity
holders of the company 26,923
------------------------------------------------- ----------- -------- --------- ---------
Investment
Management Funds 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
------------------------------------------------- ----------- -------- --------- ---------
Underlying operating income is equal to operating income for the
year ended 31 December 2020 (2019: equal).
The following table reconciles underlying operating expenses to
operating expenses:
2020 2019
GBP'000 GBP'000
--------------------------------------------------------- -------- --------
Underlying operating expenses 273,558 259,398
Charges in relation to client relationships and goodwill
(note 8) 14,302 15,964
Acquisition-related costs (note 5) 34,449 33,057
--------------------------------------------------------- -------- --------
Operating expenses 322,309 308,419
--------------------------------------------------------- -------- --------
Geographic analysis
The following table presents operating income analysed by the
geographical location of the group entity providing the
service:
2020 2019
GBP'000 GBP'000
----------------- -------- --------
United Kingdom 353,712 335,732
Jersey 12,376 12,339
----------------- -------- --------
Operating income 366,088 348,071
----------------- -------- --------
The following is an analysis of the carrying amount of
non-current assets analysed by the geographical location of the
assets:
2020 2019
GBP'000 GBP'000
------------------- -------- --------
United Kingdom 286,409 239,056
Jersey 4,437 4,183
------------------- -------- --------
Non-current assets 290,846 243,239
------------------- -------- --------
Timing of revenue recognition
The following table presents operating income analysed by the
timing of revenue recognition of the operating segment providing
the service:
2020 2019
--------------------- ---------------------
Investment Investment
Management Funds Management Funds
GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------------------- ----------- -------- ----------- --------
Products and services transferred at a point
in time 56,300 (12) 53,599 172
Products and services transferred over time 264,851 44,949 257,327 36,973
--------------------------------------------- ----------- -------- ----------- --------
Underlying operating income 321,151 44,937 310,926 37,145
--------------------------------------------- ----------- -------- ----------- --------
Major clients
The group is not reliant on any one client or group of connected
clients for generation of revenues.
4 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 & 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 is charged to profit and loss over the respective vesting
periods.
During the year, the group replaced a share-based
incentivisation award for support staff with a cash award. The
accumulated charge recognised in equity over the related vesting
period has been reversed during the year, and a provision has been
recognised at the year end in respect of the cash award. The award
is expected to be settled within one year.
The remainder of payments are to be made 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
Gross amount fair value Expected vesting
GBP'000 Grant date GBP'000 date
------------------------------------------- ------------ -------------- ----------- -------------------
Initial share consideration 25,000 31 August 2018 23,462 31 August 2021
Earn-out consideration and incentivisation
awards 44,680 31 August 2018 45,344 31 December 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 charge recognised in profit or loss for the year ended 31
December 2020 for the above elements is as follows:
2020 2019
GBP'000 GBP'000
-------------------------------------------------- -------- --------
Initial share consideration 9,215 8,402
Contingent consideration - 6,015
Earn-out consideration and incentivisation awards 23,042 9,724
Other
deferred awards - 1,885
-------------------------------------------------- -------- --------
32,257 26,026
-------------------------------------------------- -------- --------
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 5).
Barclays Wealth's Personal Injury and Court of Protection
business
On 3 April 2020, the group acquired the trade and assets of
Barclays Wealth's Personal Injury and Court of Protection business.
The acquired trade relates to the provision of discretionary
investment management services to Personal Injury and Court of
Protection clients.
Cash consideration of GBP12,048,000 was transferred on the date
of acquisition. The sale and purchase agreement also comprises an
employee incentive plan that is payable in two tranches. The awards
under this plan are considered to be directly attributable costs of
acquiring new client relationships, hence these costs have been
capitalised in line with IFRS 15 (note 8).
Identifiable assets acquired and liabilities assumed
The identifiable net assets of the acquired business at the
acquisition date were as follows:
Fair value
GBP'000
-------------------------- ----------
Intangible assets 6,890
Deferred tax liabilities (1,309)
-------------------------- ----------
Total net assets acquired 5,581
-------------------------- ----------
The fair value of the client relationship intangible assets has
been measured using a multi-period earnings method (note 8). The
model uses estimates of client longevity and investment performance
to derive a series of cash flows, which are discounted to a present
value to determine the fair value of the client relationships
acquired. The deferred tax liability arises on recognition of the
client relationship intangible assets, and is equal to its carrying
value.
Goodwill
Goodwill arising from the acquisition has been recognised as
follows:
GBP'000
----------------------------------------------------------- -------
Total consideration (see above) 12,048
Fair value of identifiable net assets acquired (see above) (5,581)
----------------------------------------------------------- -------
6,467
----------------------------------------------------------- -------
Goodwill of GBP6,467,000 arises as a result of the acquired
workforce, expected future growth, and operational synergies
arising post integration. The group does not believe there are any
key assumptions where reasonable changes could occur which could
give rise to a material adjustment in the carrying value.
5 Acquisition-related costs
2020 2019
GBP'000 GBP'000
---------------------------------------------------------- -------- --------
Acquisition of Speirs & Jeffrey 34,273 30,837
Acquisition of Vision and Castle - 2,041
Acquisition of Barclay's Wealth Personal Injury and Court
of Protection business 176 179
---------------------------------------------------------- -------- --------
Acquisition-related costs 34,449 33,057
---------------------------------------------------------- -------- --------
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
following classification within the income statement:
2020 2019
GBP'000 GBP'000
------------------------------- -------- --------
Acquisition costs:
* Staff costs 32,257 26,026
* Legal and advisory fees 20 103
Integration costs 1,996 4,708
------------------------------- -------- --------
34,273 30,837
------------------------------- -------- --------
Non-staff acquisition costs of GBP20,000 (2019: GBP103,000) and
integration costs of GBP1,996,000 (2019: GBP4,708,000) have not
been allocated to a specific operating segment (note 3).
Costs relating to the acquisition of Vision Independent
Financial Planning and Castle Investment Solutions
The group made the final payment in relation to the 2015
acquisition of Vision Independent Financial Planning and Castle
Investment Solutions at the end of 2019. 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 following classification with the income
statement:
2020 2019
GBP'000 GBP'000
----------------- -------- --------
Staff costs - 1,375
Interest expense - 666
----------------- -------- --------
- 2,041
----------------- -------- --------
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 (note 9).
Costs relating to the acquisition of Barclays Wealth's Personal
Injury and Court of Protection business
On 3 April 2020, the group acquired the trade and assets of
Barclays Wealth's Personal Injury and Court of Protection business.
The group incurred professional services costs of GBP176,000 (2019:
GBP179,000) in relation to the acquisition during the year.
6 Income tax expense
2020 2019
GBP'000 GBP'000
--------------------------------------------- -------- --------
Current tax:
* charge for the year 18,247 16,809
* adjustments in respect of prior years (727) (893)
Deferred tax:
* credit for the year (1,495) (3,767)
* adjustments in respect of prior years 1,102 580
--------------------------------------------- -------- --------
17,127 12,729
--------------------------------------------- -------- --------
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 (2019: higher)
than the standard rate of corporation tax in the UK of 19.0% (2019:
19.0%).
The differences are explained below:
2020 2019
GBP'000 GBP'000
------------------------------------------------------------ -------- --------
Tax on profit from ordinary activities at the standard rate
of 19.0% (2019: 19.0%) effects of: 8,318 7,534
* disallowable expenses 454 537
* share-based payments 2,228 410
* tax on overseas earnings (225) (233)
* adjustments in respect of prior year 375 (313)
* deferred payments to previous owners of acquired
companies (note 5) 5,455 4,508
* other (49) 22
* Effect of change in corporation tax rate on deferred
tax 571 264
------------------------------------------------------------ -------- --------
17,127 12,729
------------------------------------------------------------ -------- --------
7 Dividends
2020 2019
GBP'000 GBP'000
------------------------------------------------------------- -------- --------
Amounts recognised as distributions to equity holders in
the year:
* final dividend for the year ended 31 December 2019 of
45.0p (2018: 42.0p) per share 24,316 22,433
* interim dividend for the year ended 31 December 2020
of 25.0p (2019: 25.0p) per share 13,515 13,526
------------------------------------------------------------- -------- --------
Dividends paid in the year of 70.0p (2019: 67.0p) per share 37,831 35,959
------------------------------------------------------------- -------- --------
Proposed final dividend for the year ended 31 December
2020 of 47.0p (2019: 45.0p) per share 25,213 24,188
------------------------------------------------------------- -------- --------
An interim dividend of 25.0p per share was paid on 6 October
2020 to shareholders on the register at the close of business on 4
September 2020 (2019: 25.0p).
A final dividend declared of 47.0p per share (2019: 45.0p) is
payable on 11 May 2021 to shareholders on the register at the close
of business on 23 April 2021. The final dividend is subject to
approval by shareholders at the Annual General Meeting on 6 May
2021 and has not been included as a liability in the financial
statements.
8 Intangible assets
2020 2019
GBP'000 GBP'000
------------------------ -------- --------
Goodwill 96,872 90,405
Other intangible assets 134,272 137,402
------------------------ -------- --------
231,144 227,807
------------------------ -------- --------
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 2019,
the group revised its methodology by which it defines its CGUs and
how it allocates goodwill to groups of CGUs. This resulted in
goodwill of GBP227,000 previously allocated to the Rooper &
Whately CGU being reallocated to the Investment Management group of
CGUs.
Under this 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 2019 and 1 January 2020 90,405 1,954 92,359
Acquired through business combinations 6,467 - 6,467
--------------------------------------- ----------- -------- --------
At 31 December 2020 96,872 1,954 98,826
--------------------------------------- ----------- -------- --------
Impairment
At 1 January 2019 - 1,359 1,359
Charge in the year - 595 595
--------------------------------------- ----------- -------- --------
At 1 January 2020 - 1,954 1,954
Charge in the year - - -
--------------------------------------- ----------- -------- --------
At 31 December 2020 - 1,954 1,954
--------------------------------------- ----------- -------- --------
Carrying amount at 31 December 2020 96,872 - 96,872
--------------------------------------- ----------- -------- --------
Carrying amount at 31 December 2019 90,405 - 90,405
--------------------------------------- ----------- -------- --------
Carrying amount at 1 January 2019 90,405 595 91,000
--------------------------------------- ----------- -------- --------
Goodwill acquired through business combinations in the period
relates to the acquisition of the Barclays Wealth's Personal Injury
and Court of Protection business (note 4). This has been allocated
to the Investment Management group of CGUs. The group does not
believe there are any key assumptions where reasonable changes
could occur which could give rise to a material adjustment in the
carrying value.
Impairment
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. Budgets are extrapolated for five 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 five-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 five 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 each group of CGUs operate.
There was no impairment to the goodwill allocated to the
Investment Management group of CGUs during the period. The group
has considered any reasonably foreseeable changes to the
assumptions used in the value-in-use calculation for the Investment
Management group of CGUs, including the impact of climate change
and COVID-19 to its cash flow projections and the level of risk
associated with those cash flows. Based on this assessment, no such
change would result in an impairment of the goodwill allocated to
this CGU.
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 in 2019 to GBPnil.
Investment Management Trust
----------------------- ------------
At 31 December 2020 2019 2020 2019
--------------------------- ---------- ----------- ---- ------
Discount rate 12.2% 8.7% - 10.7%
Annual revenue growth rate 5.0% 3.0% - (1.0)%
Terminal growth rate 1.0% (2.0)% - (3.0)%
----------------------------- ---------- ----------- ---- ------
Other intangible assets
Software
Client development Purchased
relationships costs software Total
GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------------- -------------- ------------ --------- --------
Cost
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 1 January 2020 207,136 8,182 41,148 256,466
Internally developed in the year - 1,613 - 1,613
Acquired through business combinations 6,890 - - 6,890
Purchased in the year 4,085 - 6,269 10,354
Disposals (1,858) - (1,228) (3,086)
--------------------------------------- -------------- ------------ --------- --------
At 31 December 2020 216,253 9,795 46,189 272,237
--------------------------------------- -------------- ------------ --------- --------
Amortisation and impairment
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 1 January 2020 82,680 6,037 30,347 119,064
Impairment charge - - - -
Amortisation charge 14,302 1,197 6,488 21,987
Disposals (1,858) - (1,228) (3,086)
--------------------------------------- -------------- ------------ --------- --------
At 31 December 2020 95,124 7,234 35,607 137,965
--------------------------------------- -------------- ------------ --------- --------
Carrying amount at 31 December 2020 121,129 2,561 10,582 134,272
--------------------------------------- -------------- ------------ --------- --------
Carrying amount at 31 December 2019 124,456 2,145 10,801 137,402
--------------------------------------- -------------- ------------ --------- --------
Carrying amount at 1 January 2019 134,556 1,994 11,368 147,918
--------------------------------------- -------------- ------------ --------- --------
Client relationships of GBP6,890,000 acquired through business
combinations in the period relate to the acquisition of the
Barclays Wealth's Personal Injury and Court of Protection business
(note 4).
Purchases of client relationships of GBP4,085,000 (2019:
GBP5,269,000) 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 GBP14,302,000
(2019: GBP15,369,000).
Purchased software with a cost of GBP23,803,000 (2019:
GBP20,373,000) has been fully amortised but is still in use.
9 Provisions
Accruals, deferred income, provisions and other liabilities
2020 2019
GBP'000 GBP'000
----------------------------- -------- --------
Trade creditors 785 4,001
Other creditors 20,766 7,680
Accruals 81,805 72,850
Other provisions (see below) 8,715 8,732
----------------------------- -------- --------
112,071 93,263
----------------------------- -------- --------
Other provisions
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 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 1 January 2020 1,319 - 2,175 5,238 8,732
==================================== ============= ============== ============= ========= ========
Charged to profit or loss 588 639 (642) 585
Unused amount credited to profit or
loss - - (419) (23) (442)
==================================== ============= ============== ============= ========= ========
Net charge to profit or loss - 588 220 (665) 143
Other movements 3,857 - - - 3,857
Utilised/paid during the year (1,391) - (1,801) (825) (4,017)
------------------------------------ ------------- -------------- ------------- --------- --------
At 31 December 2020 3,785 588 594 3,748 8,715
------------------------------------ ------------- -------------- ------------- --------- --------
Payable within 1 year 1,289 588 594 - 2,471
Payable after 1 year 2,496 - - 3,748 6,244
------------------------------------ ------------- -------------- ------------- --------- --------
3,785 588 594 3,748 8,715
------------------------------------ ------------- -------------- ------------- --------- --------
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.
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 4). 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 GBP3,748,000 relate to
dilapidation provisions expected to arise on leasehold premises
held by the group (2019: GBP5,238,000). Prior-year balances also
included monies due under the contract with the assignee of leases
on the group's former property at 1 Curzon Street, which was fully
utilised in the year.
Dilapidation provisions are calculated using a discounted cash
flow model; during the year ended 31 December 2020, dilapidation
provisions decreased by GBP645,000 (2019: increased by GBP677,000).
The group utilised GBP825,000 (2019: GBP3,338,000) of the
dilapidations provision held for the surplus property at 1 Curzon
Street during the year. The impact of discounting led to an
additional credit of GBP645,000 (2019: additional charge of
GBP1,364,000) being recognised during the year.
Amounts payable after one year
Property-related provisions of GBP3,748,000 are expected to be
settled within 13 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 three years of the balance
sheet date.
10 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
GBP10,411,000 (2019: GBP9,726,000). The group also operates a
defined contribution scheme for overseas employees, for which the
total contributions were GBP67,000 (2019: GBP58,000).
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 (GMPs) 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 to
achieve equality. The High Court made a further ruling in November
2020 relating to members with GMPs that had previously transferred
out, whereby the scheme remains liable for paying any required
adjustments arising from GMP equalisation. An estimate of the
additional payment has been recognised as a past service cost in
the year.
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 31 December
2019.
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
-------------------- --------------------
2020 2019 2020 2019
% % % %
(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 3.40 3.00 3.10
Rate of increase of deferred pensions 3.00 3.10 3.00 3.10
Discount rate 1.30 2.05 1.30 2.05
Inflation* 3.00 3.10 3.00 3.10
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 Prices 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 0.75% to reflect a
decrease in the yields available on AA-rated corporate bonds
2. the assumed rate of future inflation has decreased by 0.1%
and reflects expectations of long-term inflation as implied by
changes in the Bank of England inflation yield curve
3. the assumed rates of future increases to pensions in payment
has decreased by 0.1% for the Rathbone 1987 Scheme, consistent with
the assumed rate of future inflation. For the Laurence Keen Scheme
they have remained the same (once rounded).
Over the year the mortality assumptions have been updated. The
CMI model used to project future improvements in mortality has been
updated from the 2018 version to the 2019 version, and the
mortality base tables have been updated from the S2NxA tables with
an 85% scaling factor to the S3PxA 'Light' tables with no scaling
factor. Other demographic assumptions have remained unchanged.
The assumed duration of the liabilities for the Laurence Keen
Scheme is 16 years (2019: 19 years) and the assumed duration for
the Rathbone 1987 Scheme is 21 years (2019: 22 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 S3PA 'Light' actuarial
tables (2019: S2NA tables) with improvements in line with the CMI
2019 tables with a long-term rate of improvement of 1.5% p.a. The
assumed life expectancies on retirement were:
2020 2019
-------------- --------------
Males Females Males Females
---------------------- -------- ----- ------- ----- -------
Retiring today: aged 60 28.2 29.8 27.9 30.0
aged 65 23.3 24.8 23.1 25.1
Retiring in 20 years: aged 60 29.9 31.5 29.7 31.9
aged 65 24.8 26.5 24.7 26.9
------------------------------- ----- ------- ----- -------
The amount included in the balance sheet arising from the
group's assets in respect of the schemes is as follows:
2020 2019
------------------------------ ------------------------------
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 (12,374) (153,030) (165,404) (12,726) (146,398) (159,124)
Fair value of scheme assets 12,592 143,027 155,619 12,178 138,932 151,110
--------------------------------- -------- --------- --------- -------- --------- ---------
Net defined benefit liability 218 (10,003) (9,785) (548) (7,466) (8,014)
--------------------------------- -------- --------- --------- -------- --------- ---------
The amounts recognised in profit or loss, within operating
expenses, are as follows:
2020 2019
---------------------------- ----------------------------
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 7 117 124 15 240 255
Past service cost 76 - 76 - -
------------------------------ -------- -------- -------- -------- -------- --------
83 117 200 15 240 255
------------------------------ -------- -------- -------- -------- -------- --------
Remeasurements of the net defined benefit asset have been
reported in other comprehensive income. The actual return on scheme
assets was a rise in value of GBP451,000 (2019: GBP1,380,000 rise)
for the Laurence Keen Scheme and a rise in value of GBP9,660,000
(2019: GBP18,357,000 rise) for the Rathbone 1987 Scheme.
Movements in the present value of defined benefit obligations
were as follows:
2020 2019
---------------------------- ----------------------------
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 12,726 146,398 159,124 12,383 134,150 146,533
Service cost (employer's part) - - - - - -
Interest cost 257 2,916 3,173 336 3,739 4,075
Contributions from members - - - - - -
Actuarial experience gains (1,081) (3,272) (4,353) 10 121 131
Actuarial (gains)/losses arising
from:
* demographic assumptions (389) (5,154) (5,543) (293) (3,243) (3,536)
* financial assumptions 1,158 20,482 21,640 1,452 17,560 19,012
Past service cost 76 - 76 - - -
Benefits paid (373) (8,340) (8,713) (1,162) (5,929) (7,091)
--------------------------------- -------- -------- -------- -------- -------- --------
At 31 December 12,374 153,030 165,404 12,726 146,398 159,124
--------------------------------- -------- -------- -------- -------- -------- --------
Movements in the fair value of scheme assets were as
follows:
2020 2019
---------------------------- ----------------------------
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 12,178 138,932 151,110 11,624 123,712 135,336
Remeasurement of net defined
benefit liability:
* interest income 250 2,799 3,049 321 3,499 3,820
* return on scheme assets (excluding amounts included
in interest income) 201 6,861 7,062 1,059 14,858 15,917
Contributions from the sponsoring
companies 336 2,775 3,111 336 2,792 3,128
Contributions from scheme members - - - - - -
Benefits paid (373) (8,340) (8,713) (1,162) (5,929) (7,091)
---------------------------------------------------------- -------- -------- -------- -------- -------- --------
At 31 December 12,592 143,027 155,619 12,178 138,932 151,110
---------------------------------------------------------- -------- -------- -------- -------- -------- --------
The statements of investment principles set by the trustees of
both schemes were revised in 2020. They require that the assets of
the schemes are invested in a diversified portfolio of assets,
split between return-seeking assets (primarily equities) and safer
assets (corporate bonds and liability-driven investments).
The expected asset allocations at 31 December 2020 as set out in
the statements of investment principles are as follows:
Laurence Rathbone
Keen 1987
Target asset allocation at 31 December 2020 Scheme Scheme
-------------------------------------------- -------- --------
Benchmark
Safer assets 60% 60%
Growth assets 40% 40%
Range
50% - 50% -
Safer assets 70% 70%
30% - 30% -
Growth assets 50% 50%
-------------------------------------------- -------- --------
The analysis of the scheme assets, measured at bid prices, at
the balance sheet date was as follows:
2020 2019 2020 2019
Fair Fair Current Current
value value allocation allocation
Laurence Keen Scheme GBP'000 GBP'000 % %
--------------------------------------- -------- -------- ----------- -----------
Equity instruments:
* United Kingdom 485 3,320
* Eurozone 555 408
* North America 2,284 696
* Other 2,048 704
--------------------------------------- -------- -------- ----------- -----------
5,372 5,128 43 42
Debt instruments:
* United Kingdom government bonds - 4,693
* Overseas corporate bonds - 158
* United Kingdom corporate bonds 4,489 1,847
--------------------------------------- -------- -------- ----------- -----------
4,489 6,698 36 55
Liability-driven investments 2,441 - 19 -
Cash 161 79 1 1
Other 129 273 1 2
--------------------------------------- -------- -------- ----------- -----------
At 31 December 12,592 12,178 100 100
--------------------------------------- -------- -------- ----------- -----------
2020 2019 2020 2019
Fair Fair Current Current
value value allocation allocation
Rathbone 1987 Scheme GBP'000 GBP'000 % %
--------------------------------------- -------- -------- ----------- -----------
Equity instruments:
* United Kingdom 29,299 42,518
* Eurozone 5,948 6,769
* North America 15,978 9,492
* Other 15,497 8,887
--------------------------------------- -------- -------- ----------- -----------
66,722 67,666 46 48
Debt instruments:
* United Kingdom government bonds - 37,184
* Overseas government bonds - 1,324
* United Kingdom corporate bonds 41,509 11,198
* Overseas corporate bonds - -
--------------------------------------- -------- -------- ----------- -----------
41,509 49,706 29 36
Derivatives:
* Interest rate swap funds - 14,615
--------------------------------------- -------- -------- ----------- -----------
- 14,615 - 11
Liability-driven investments 32,700 - 24 -
Cash 2,096 6,945 1 5
Other - - - -
--------------------------------------- -------- -------- ----------- -----------
At 31 December 143,027 138,932 100 100
--------------------------------------- -------- -------- ----------- -----------
All equity instruments have quoted prices in active markets.
'Other' scheme assets comprise commodities (2019: comprise
commodities and property funds). Buy and maintain credit funds have
been classified as UK corporate bonds.
The Rathbone 1987 Scheme previously held shares in real-time
inflation-linked interest rate swap funds, which had a fair value
of GBP14,615,000 at 31 December 2019. During the year, a proportion
of assets were transferred to new fund managers, Legal and General
Investment Management, and the interest rate swap instrument was
subsequently sold. The Scheme now holds liability-driven
investments, which act to reduce the group's exposure to changes in
net defined benefit pension obligations arising from changes in
interest rates and inflation.
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 0.5%
higher than that 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 is set out below.
Combined impact
on schemes' liabilities
----------------------------------------
(Decrease)/increase (Decrease)/increase
GBP'000 %
---------------------------------------------------------- ------------------- -------------------
1.0% increase in:
* discount rate (15,689) (9.5%)
0.5% increase in: 11,608 7.0%
* rate of inflation
Reduce allowance for future transfers to nil 3,189 1.9%
1-year increase to:
* longevity at 60 7,356 4.4%
* average age of members at the time of transferring
out 872 0.5%
---------------------------------------------------------- ------------------- -------------------
The total contributions made by the group to the 1987 Scheme
during the year were GBP2,775,000 (2019: GBP2,792,000). The group
has a commitment to pay deficit-reducing contributions of
GBP4,750,000 by 31 August 2021, GBP3,750,000 by 31 August 2022 and
a further GBP2,750,000 by 31 August 2023 and each subsequent 31
August up to and including 31 August 2026, so long as that scheme
remains in deficit. The deficit funding plan will be reviewed
following the next triennial valuation, as at 31 December 2022.
The total contributions made by the group to the Laurence Keen
Scheme during the year were GBP336,000 (2019: GBP336,000). The
group has a commitment to pay deficit-reducing contributions of
GBP168,000 by 28 February each year from 2021 to 2026 (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.
11 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 2020 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------- -------- -------- -------- --------
Assets
Fair value through profit or loss:
* equity securities 5,728 - 2,569 8,297
* money market funds - 99,262 - 99,262
----------------------------------- -------- -------- -------- --------
5,728 99,262 2,569 107,559
----------------------------------- -------- -------- -------- --------
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
----------------------------------- -------- -------- -------- --------
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 (2019: 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 2020 was
GBP654,769,000 (2019: GBP604,462,000) and the carrying value was
GBP651,533,000 (2019: GBP600,291,000). 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 2020 was GBP21,726,000
(2019: GBP21,302,000) and the carrying value was GBP19,768,000
(2019: GBP19,927,000). 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.
Level 3 financial instruments
Fair value through profit or loss
The group holds 1,809 shares in Euroclear Holdings SA, which are
classed as level 3 in the fair value hierarchy since no observable
market data is available. At 31 December 2019, the fair value of
these shares was calculated with reference to the last buyback
event in May 2017 when shares were sold at EUR774.
In the current period, the valuation of EUR1,586 per share has
been calculated by reference to the most readily available data,
which is the indicative price derived from recent transactions of
the shares in the market. The valuation at the balance sheet date
has been adjusted for movements in exchange rates since the
acquisition date. A 10% weakening of the euro against sterling,
occurring on 31 December 2020, would have reduced equity and profit
after tax by GBP208,000 (2019: GBP96,000). A 10% strengthening of
the euro against sterling would have had an equal and opposite
effect.
Changes in the fair values of financial instruments categorised
as level 3 within the fair value hierarchy were as follows:
2020 2019
-------------------------------------------------------- ----- -----
At 1 January 1,186 1,259
Total unrealised (losses)/gains recognised in profit or
loss 1,383 (73)
-------------------------------------------------------- ----- -----
At 31 December 2,569 1,186
-------------------------------------------------------- ----- -----
The gains or losses relating to the fair value through profit or
loss equity securities is included within 'other operating income'
in the consolidated statement of comprehensive income.
There were no other gains or losses arising from changes in the
fair value of financial instruments categorised as level 3 within
the fair value hierarchy.
12 Earnings per share
Earnings used to calculate earnings per share on the bases
reported in the financial statements were:
2020 2019
-------- -------- -------- -------- -------- --------
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 92,530 (20,928) 71,602 88,673 (17,535) 71,138
Charges in relation to client
relationships and goodwill (note
8) (14,302) 2,717 (11,585) (15,964) 3,033 (12,931)
Acquisition-related costs (note
5) (34,449) 1,084 (33,365) (33,057) 1,773 (31,284)
------------------------------------ -------- -------- -------- -------- -------- --------
Profit attributable to shareholders 43,779 (17,127) 26,652 39,652 (12,729) 26,923
------------------------------------ -------- -------- -------- -------- -------- --------
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
53,720,680 (2019: 53,566,271).
Diluted earnings per share is the basic earnings per share,
adjusted for the effect of contingently issuable shares under the
Speirs & Jeffrey 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:
2020 2019
----------------------------------------------------------- ---------- ----------
Weighted average number of ordinary shares in issue
during the year - basic 53,720,680 53,566,271
Effect of ordinary share options/Save As You Earn 231,259 97,495
Effect of dilutive shares issuable under the Share
Incentive Plan 73,990 570
Effect of contingently issuable shares under the Executive
Incentive Plan 929,457 574,393
Effect of contingently issuable shares under Speirs
& Jeffrey initial share consideration (note 4) 1,006,522 1,006,522
----------------------------------------------------------- ---------- ----------
Diluted ordinary shares 55,961,908 55,245,251
----------------------------------------------------------- ---------- ----------
2020 2019
--------------------------------------------------------------- ------ ------
Earnings per share for the year attributable to equity holders
of the company:
* basic 49.6p 50.3p
* diluted 47.6p 48.7p
Underlying earnings per share for the year attributable
to equity holders of the company:
* basic 133.3p 132.8p
* diluted 127.9p 128.8p
--------------------------------------------------------------- ------ ------
Underlying earnings per share is calculated in the same way as
earnings per share, but by reference to underlying profit
attributable to shareholders.
13 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
GBPnil (2019: GBP7,000).
2020 2019
GBP'000 GBP'000
----------------------------- -------- --------
Short-term employee benefits 9,829 14,176
Post-employment benefits 298 296
Other long-term benefits 941 2,695
Share-based payments 3,170 3,408
----------------------------- -------- --------
14,238 20,575
----------------------------- -------- --------
Dividends totalling GBP98,000 were paid in the year (2019:
GBP95,000) in respect of ordinary shares held by key management
personnel and their close family members.
As at 31 December 2020, the group had outstanding interest-free
season ticket loans of nil (2019: nil) issued to key management
personnel.
At 31 December 2020, key management personnel and their close
family members had gross outstanding deposits of GBP616,000 (2019:
GBP636,000) and gross outstanding banking loans of nil (2019: nil),
all of which (2019: 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 10. At 31 December 2020, no amounts were outstanding with
either the Laurence Keen Scheme or the Rathbone 1987 Scheme (2019:
none).
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
2020, the group managed 28 unit trusts, Sociétés d'Investissement Ã
Capital Variable (SICAVs) and open-ended investment companies
(OEICs) (together, 'collectives') (2019: 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:
2020 2019
Year ended 31 December GBP'000 GBP'000
---------------------------------- -------- --------
Total management fees 45,657 40,111
---------------------------------- -------- --------
2020 2019
As at 31 December GBP'000 GBP'000
---------------------------------- -------- --------
Management fees owed to the group 4,885 3,904
Holdings in unit trusts 5,728 4,587
---------------------------------- -------- --------
10,613 8,491
---------------------------------- -------- --------
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.
14 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:
2020 2019
GBP'000 GBP'000
-------------------------------------------------------- --------- ---------
Cash and balances at central banks 1,798,000 1,930,000
Loans and advances to banks 159,432 117,839
Fair value through profit or loss investment securities 99,262 100,194
-------------------------------------------------------- --------- ---------
At 31 December 2,056,694 2,148,033
-------------------------------------------------------- --------- ---------
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:
2020 2019
GBP'000 GBP'000
----------------------------------------------------------- -------- --------
Share capital issued 56 58
Share premium on shares issued 4,153 5,666
Merger reserve on shares issued - 14,971
Shares issued in relation to share-based schemes for which
no cash consideration was received - (15,001)
Shares issued in relation to share buybacks (5,077) (10,034)
----------------------------------------------------------- -------- --------
(868) (4,340)
----------------------------------------------------------- -------- --------
A reconciliation of the movements of liabilities to cash flows
arising from financing activities was 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 2020 19,927 213,757 29,785 241,851 505,320
Changes from financing cash flows
Proceeds from issue of share capital - 4,209 - - 4,209
Proceeds from sale of treasury shares - - (4,773) (304) (5,077)
Dividends paid - - - (37,831) (37,831)
------------------------------------------ ------------ --------- -------- --------- --------
Total changes from financing cash flows - 4,209 (4,773) (38,135) (38,699)
------------------------------------------ ------------ --------- -------- --------- --------
The effect of changes in foreign exchange
rates - - - - -
------------------------------------------ ------------ --------- -------- --------- --------
Changes in fair value - - - - -
------------------------------------------ ------------ --------- -------- --------- --------
Other changes (393) - - - (393)
Liability-related
Interest expense 1,294 - - - 1,294
Interest paid (1,060) - - - (1,060)
------------------------------------------ ------------ --------- -------- --------- --------
Total liability-related changes (159) - - - (159)
------------------------------------------ ------------ --------- -------- --------- --------
Total equity-related other changes - - - 67,133 67,133
------------------------------------------ ------------ --------- -------- --------- --------
At 31 December 2020 19,768 217,966 25,012 270,849 533,595
------------------------------------------ ------------ --------- -------- --------- --------
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
------------------------------------------ ------------ --------- -------- --------- --------
15 Events after the balance sheet date
In the budget on 3 Mach 2021, the Chancellor announced his
intention to increase the rate of corporation tax to 25% in 2023,
from the current rate of 19%. We will reflect this rate in the
deferred tax calculations when the change receives Royal Assent and
is thereby enacted.
16 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 2020 or 2019. Statutory financial statements for 2019 have
been delivered to the Registrar of Companies. Statutory financial
statements for 2020 will be delivered to the Registrar of Companies
following the Company's Annual General Meeting. The auditor has
reported on both the 2019 and 2020 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.
17 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
2020 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
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
2020.
The preliminary statement of annual results for the period ended
31 December 2020 includes:
- Disclosures required by the Listing Rules;
- Chairman's statement;
- Chief executive's review;
- Overview of financial performance;
- Overview of risk management and control;
- 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 3
March 2021. 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:
Investment management fee income
Key audit matter description
As detailed in the summary of principal accounting policies in
note 1 and in note 3 to the financial statements (included within
note 3 to this announcement), revenue comprises net investment
management fee income of GBP274.2m (2019: GBP260.2m), net
commission income of GBP62.3m (2019: GBP51.1m), net interest income
of GBP8.4m (2019: GBP16.4m) and fees from advisory services and
other income of GBP21.1m (2019: GBP20.3m).
Investment management ("IM") fees from the IM segment account
for approximately 80% of total revenue 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, the group acquired the Barclays Wealth Court of
Protection business ("Barclays Wealth") and have migrated all
clients onto the group's core technology platform. In October 2020,
the group also migrated all Speirs & Jeffrey ("S&J")
clients onto the set rate card.
As a result, we identified a key audit matter relating to the
risk that, whether due to error or fraud, incorrect fee rates could
be used to calculate investment management fees, or that manual
amendments are inaccurate, incomplete or invalid.
How our audit responded to this key audit matter
We tested 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 fee rate amendments made to system generated fees.
We also performed specific testing on the migration of Barclays
Wealth clients onto the group's core technology platform, and the
migration of S&J clients onto the set rate card, 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 2020.
Defined benefit pension scheme liability
Key audit matter description
The group has recognised a defined benefit pension scheme
liability of GBP9.8m (2019: GBP8.0m). The net liability comprises
assets of GBP155.6m (2019: GBP151.1m) and liabilities of GBP165.4m
(2019: GBP159.1m).
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 2,
disclosed in note 29 to the financial statements (included within
note 10 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 obtained an understanding of relevant 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 key assumptions used by management
to estimate the defined benefit pension scheme liability are
consistent with the requirements of IAS 19 and that the valuation
of the defined pension scheme liability has been appropriately
determined.
Impairment of client relationship intangibles and goodwill
Key audit matter description
The group holds client relationship intangibles of GBP121.1
million (2019: GBP124.5 million) and goodwill of GBP96.9 million
(2019: GBP90.4 million) comprising both relationships acquired
through business combinations and through acquisition of individual
investment managers and their client portfolios. We have identified
this matter as a fraud risk, given the inherent judgement and level
of estimation in the annual impairment review.
As detailed in the summary of principal accounting policies in
note 1 and note 2 to the financial statements (included within note
8 to this announcement), 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. The discount rate, annual growth rate and terminal
growth rate used were 12.2%, 5% and 1 % respectively as disclosed
in note 22 to the financial statements.
How our audit responded to this key audit matter
We obtained an understanding of relevant controls in relation to
the impairment review process for client relationship intangibles
for both acquired portfolios and individual relationships and for
goodwill. We tested controls in place over Funds Under Management
("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". Where the review indicated that an
impairment trigger had occurred, we assessed the relevant
assumptions and judgements made by management in determining
whether an impairment needed to be recognised. We have challenged
the key assumptions around the impairment triggers identified for
each portfolio, which we have assessed for reasonableness and
evaluated the accuracy of the inputs used by management.
For goodwill, 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 checked for consistency with
forecasts used elsewhere in the business. We challenged the
determination of the discount rate applied by benchmarking to
appropriate market rates of interest and recalculation. We have
also independently re-performed management's value-in-use
calculation.
Focusing on those assumptions where the impairment test was most
sensitive, we also performed sensitivity analysis to assess the
risk that reasonably possible changes in assumptions used by
management could give rise to an impairment. We challenged with
reference to recent trading performance, taking into account the
impact of Covid-19 and the group's strategy.
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
Through our testing for client relationship intangibles and
goodwill, we concluded that management's approach and conclusion
was appropriate.
Speirs and Jeffrey deferred consideration
Key audit matter description
On 31 August 2018, the group acquired a 100% equity interest in
S&J.
The consideration includes a variable element which is dependent
on certain operational and financial targets linked to the value of
S&J Funds Under Management ("FUM") which is determined to be
"Qualifying" under the terms of the sale and purchase agreement.
The determination of the total deferred consideration is set based
on the qualifying FUM as at the first tranche date of 31 December
2020 and the second tranche date of 31 December 2021. If qualifying
FUM does not exceed GBP4.5bn no deferred consideration is
payable.
The expected pay-out of the consideration is accrued over the
period from acquisition up until pay-out in 2022, with the P&L
charge spread over this period.
The first tranche date has now elapsed, with S&J achieving
total qualifying FUM of GBP5.1bn as at 31 December 2020, resulting
in total consideration of GBP35.0m through to the first tranche
date, with a total expense charge of GBP15.8m in 2020. In order to
determine the level of qualifying FUM, the group have had to assess
a significant volume of individual client accounts to understand if
the required operational and financial targets have been met.
For the second tranche date of 31 December 2021, there remains
significant management judgement involved in estimating the level
of qualifying FUM. The assumptions underpinning this estimate are
considered to be a key source of estimation uncertainty for the
Group, as detailed in note 2, disclosed in note 8 to the financial
statements (included within note 4 to this announcement). For the
second date, management have updated their estimate of the expected
pay-out of the consideration and have prospectively adjusted the
P&L charge.
The disclosure in respect of this critical accounting estimate
for deferred consideration payable, as set out in note 2 to the
financial statements, shows the sensitivity, for each GBP100m
movement in qualifying FUM, to the eventual amount that could be
payable.
Therefore, we have identified a key audit matter relating to the
risk that, whether due to error or fraud, management's calculation
of the pay-out to 31 December 2020 and estimate of the pay-out to
31 December 2021, may be materially misstated.
How our audit responded to this key audit matter
For the first tranche date of 31 December 2020, we obtained
understanding of relevant controls over the underlying data used to
determine the final value of qualifying FUM and controls around the
calculation of the final consideration due.
For the first tranche date, we also challenged management on
whether the increase in estimate should be recognised as a prior
period adjustment, considering the number of highly sensitive
assumptions to the estimate, which were largely out of the group's
control and were not foreseeable as at the prior year-end.
We selected a sample of client accounts from the S&J FUM
listing and agreed through to contract and external client
communication. We then assessed if the client account met the
operational and financial targets to be deemed qualifying FUM. We
have also reviewed minutes of meetings of those charged with
governance, to follow through the decision making process and
verify the governance process that has taken place.
For the second tranche date of 31 December 2021, we obtained an
understanding of controls over the determination of the key
assumptions used in the FUM conversion model.
We performed sensitivity analysis to understand which
assumptions the estimate is most sensitive to and therefore, have
an increased risk of material misstatement. We considered empirical
evidence available, including the outcome of the first tranche date
qualifying FUM and benchmarked against the investment management
market, to challenge on the potential impact of external factors in
achieving the group's estimate of qualifying FUM.
We also 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 for 31
December 2021.
We independently re-performed the calculation of the deferred
consideration estimate through to 31 December 2021 and we assessed
the appropriateness of the related disclosures including the
sensitivity assumptions for the range of estimates included in the
disclosure.
Key observations
Given the sensitivity of the underlying assumptions to the
estimate calculated as at 31 December 2019, we do not consider the
increase in estimate for first tranche date to require a prior
period adjustment.
We have concluded satisfactorily that the group's calculation of
the pay-out to 31 December 2020 is not materially misstated.
Furthermore, we have concluded that the assumptions used by
management to estimate the pay-out as at 31 December 2021 are
appropriate.
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
3 March 2021
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