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P1. Capital risk
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Risk description
The risk that the Group is unable to maintain appropriate, minimum regulatory capital or an internal management buffer to cover risk exposures and withstand a severe stress as defined in its risk appetite and in the ICAAP.
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Mitigating activities and other considerations
- The Group and bank operate within a defined capital risk appetite, with thresholds reported to and monitored by Group and bank Boards. The boards regularly review both the existing and forecast capital position to ensure that planned capital resources are sufficient for planned changes in the balance sheet.
- In line with the PRA’s requirements, the Group’s Internal Capital Adequacy Assessment Process (ICAAP) is updated at least annually and identifies the levels of capital required under the regulatory total capital requirement (consisting of Pillar 1 and Pillar 2A risks) and any PRA and confidential buffers (to the extent that any are required). The 2021 ICAAP evidenced that the Group and bank will continue to be able to meet their capital requirements including in stress scenarios over a five-year time horizon.
- In line with industry practice, to ensure preservation of capital and support business stability, the 2019 dividend was cancelled and no dividends were paid by the Group to its shareholders in respect of 2020. As the macroeconomic outlook has now improved and in line with the Group’s results, the Group is proposing a dividend in respect of 2021, to be paid in 2022.
- In October 2021, the Group’s first Tier 2 subordinated bond since 2005 was issued for an amount of £200m. It has a 10.25-year maturity that is callable at the Group’s discretion between 5 and 5.25 years, and pays a coupon of 8.875%. The issuance was written from the Group’s £2bn EMTN Programme and was oversubscribed by around 2 times in the market. The issuance represents an important milestone as the Group diversifies and optimises its sources of capital in support of future lending growth. The Group’s risk monitoring measures have been updated to take account of the Tier 2 issuance.
- At 31 December 2021, the Group’s CET1 ratio was 29.0% (2020: 34.2%) and the total capital ratio was 40.4% (2020: 34.2%). CET1 decreased over 2021 from £675m to £505m, reflecting the costs of closing CCD and the scheduled unwind of the IFRS 9 transitional relief in regulatory capital. Total capital increased over 2021 from £675m to £705m due to the issuance of Tier 2 debt capital and includes £121m of Tier 2 capital to pre-fund future balance sheet growth.
- On 13 December 2021, the Financial Policy Committee (FPC) announced an increase to the UK countercyclical capital buffer rate to 1%, to be implemented by 13 December 2022. Provided the UK economy continues to recover, the FPC expects to increase the rate further to 2% in quarter 2 of 2022, to take effect in quarter 2 of 2023. These increases are absorbed within the capital plans of the Group and bank.
- As previously reported, the Group and bank have elected to phase in the impact of adopting IFRS 9 over a five-year period. In response to Covid-19, the PRA ratified additional capital mitigation in 2020 which the Group also fully adopted.
- The Group and bank plans for the unwind of the IFRS 9 transitional adjustment as part of both regular capital planning and under stress scenarios.
- The Group’s Pillar 3 disclosures contain a comprehensive assessment of its capital requirement and resources. Pillar 3 disclosures for the year ended 31 December 2021 are published separately on the Group’s website, www.providentfinancial.com.
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P2. Funding and liquidity risk
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Risk description
The risk that the Group has insufficient liquidity to meet its obligations as they fall due, and/or is unable to maintain sufficient funding for its future needs.
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Mitigating activities and other considerations
- Liquidity and funding risk appetite is established at Group and bank level, with thresholds reported to and monitored by the Group and bank Boards.
- The Group’s current funding strategy is to maintain sufficient available funds and committed facilities to pre-fund the Group’s liquidity and funding requirements for at least the next 12 months, maintaining access to diversified sources of funding comprising: (i) external market funding, including retail bonds, institutional bonds and private placements; (ii) securitisation; (iii) retail deposits; and (iv) access to the Bank of England Liquidity and Funding Schemes at Vanquis Bank.
- The Group continued to utilise its auto loan securitisation warehouse facility, drawing a further £50m in February 2021, taking its total drawings to £200m. The warehouse was refinanced and restructured in July 2021 to improve the efficiency of the usage of collateral such that drawn funding increased to £275m with no significant increase in asset encumbrance. The facility also provides for a committed but currently undrawn amount of £50m which provides contingent liquidity.
- As at 31 December 2020, the Group had a multi-currency RCF with a total facility size of approximately £148m. In line with the Group’s strategy of reducing reliance on the RCF, some of the new securitisation funds were used to reduce the Group’s RCF commitments, initially to £90m alongside an extension of the facility to July 2023. In line with the strategy to reduce its reliance on the RCF as a source of funding, the Group took the decision to early repay and cancel the facility in March 2022.
- In September 2021, the Group repaid its £65m, 6.0% retail bond in line with its contractual maturity.
- In October 2021, the Group successfully completed a liability management exercise involving the partial tender and repurchase of £71.5m of the then outstanding £175m 8.25% senior bonds maturing in June 2023, and the issue of £200m Tier 2 bonds (described in capital risk above).
- The above actions taken by the Group during 2021 extended the weighted average maturity of its non-bank funding.
- The bank accepts retail deposits and, in line with its regulatory requirements, maintains high-quality liquid assets to meet the liquidity coverage ratio (LCR) and its internal stress tests as stipulated within its Internal Liquidity Adequacy Assessment Process (ILAAP). The Group and bank monitor and report the LCR to the PRA on a consolidated and solo basis as applicable.
- The bank maintained a significant surplus of liquidity against its regulatory and internal requirements throughout 2021, and is managing this down in a prudent manner as the uncertainty arising from the pandemic is reduced.
- In January 2021, the bank completed its inaugural issue from its newly established credit card receivable master trust. The transaction has been rated (AAAsf/Aaa(sf)/AAAsf) by Fitch Ratings, Kroll Bond Rating Agency and Standard & Poor’s. The bonds are listed on the London Stock Exchange. These notes have enabled access to the Bank of England’s Liquidity and Funding Schemes. The majority of the senior rated notes have now been pledged to the Bank of England to support borrowing of £174m from the Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises (TFSME).
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P3. Market risk
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Risk description
The risk to the Group’s current and prospective capital and income position arising from adverse movements in interest rates.
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Mitigating activities and other considerations
- The Group and bank have established interest rate risk appetites, with thresholds reported to and monitored by Group and bank Boards.
- The Group and bank do not actively seek to take significant unmatched positions and do not operate a trading book.
- Analysis of an interest rate sensitivity gap is principally used to assess the Group’s exposure to interest rate risk by identifying unmatched duration positions.
- The Group and bank report their exposure to interest rate risk considering earnings at risk (EaR) and market value sensitivity (MVS). Risk appetite is assessed against a 100bps and 200bps parallel shock to interest curves respectively. Risk appetite has also been established for economic value of equity (EVE) which is monitored against a 200bps parallel shift in rates, as well as the six standardised shocks prescribed by the Basel Committee on Banking Supervision (effective from the 31 December 2021).
- The Group and bank also monitor their exposure to basis risk, with the Bank of England base rate and SONIA the only external reference rates for on-balance sheet positions. The Group no longer has any exposure to LIBOR having refinanced the RCF and Moneybarn’s securitisation facility in 2021, which included revision to the external reference rate to SONIA.
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P4. Credit risk
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Risk description
The risk of unexpected credit losses arising through either adverse macroeconomic factors or parties with whom the Group has contracted failing to meet their financial obligations.
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Mitigating activities and other considerations
- The Group has continued with a cautious approach to credit risk through the pandemic. Arrears have remained low as consumers continued to receive support via government initiatives, including the furlough scheme.
- Vanquis Bank has implemented a number of pre-emptive measures to manage exposures as government support is withdrawn. These include a limit decrease strategy for the up-to-date, active book and restriction of credit lines where external indicators of increasing financial stress are present.
- The Group has maintained prudent post-model adjustments in its provision calculations to compensate for the muting of credit risk indicators, driven by government support measures through the pandemic.
- Concentration risks arising from the pandemic have been considered by the Group’s divisions. Populations likely to be impacted by the pandemic have been identified and are subject to ongoing monitoring. The Group has continued to acquire additional data sources to support the identification of customers experiencing income shocks or other adverse financial impacts. This data has been integrated into lending decisions for our new and existing customers.
- Performance of risk models is being closely monitored, with adjustments implemented where any deviation from expected performance is evidenced.
- The Group continues to pursue opportunities to supplement existing data sources to enhance both credit and affordability risk, i.e. open banking.
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P5. Strategic risk
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Risk description
The risk of making poor strategic decisions related to acquisitions, products, distribution, etc. as a result of ineffective governance arrangements, processes and controls.
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Mitigating activities and other considerations
- The Board and its sub-committees make risk-based decisions in the formulation of business strategy, in line with the delegated authority framework and subject to independent oversight from the Risk function.
- Strategic redirection from high-cost to medium-cost lending following the closure of CCD and SOA to cap potential liabilities that would adversely affect the Group.
- Board governance manual and Delegated Authorities Manual (DAM) in place to provide framework for key decision making at all levels across the Group and divisions.
- Executive director scorecards in place with reward incentives based on a combination of financial and non-financial measures.
- Group risk appetite framework in place with agreed measures and thresholds approved by the Group Board.
- Strategic and emerging risks reported to the GERC and GRC on any areas of concern.
- Risk overlay completed annually by the Group CRO on behalf of the RemCo to provide recommendations on adjustments to variable reward where governance has failed.
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P6. Climate risk
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Risk description
The physical risk of the impacts of climate change and the business risk posed to the Group and its counterparties related to non-compliance costs and financial loss associated with the process of adjusting to a low-carbon economy.
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Mitigating activities and other considerations
- Climate risk adopted as a Group principal risk, with supporting risk appetite established to provide greater focus on compliance with the Task Force for Climate-related Financial Disclosures (TCFD) recommendations, forming the basis for the development of science-based targets from 2022 onwards.
- Group-wide climate strategy and policy in place to ensure appropriate governance, controls and processes are in place to support compliance with TCFD recommendations and broader ESG strategy (including net-zero targets).
- Climate Risk Committee operational, supported by Climate Risk and Environmental Working Groups, facilitating integration of climate considerations into the Group’s broader Risk Management Framework through its reporting lines into the Customer, Culture and Ethics Committee and Group Executive Committee.
- New scenario analysis and stress testing framework in development to drive enhanced monitoring of PFG’s exposure to material short and long-term impacts of transition and physical climate-related risks, and to inform forward-looking strategy. ICAAP activity continues to take account of material climate-related financial impacts, meeting PRA requirements.
- Monitoring of material supplier emissions and colleague and customer impacts, such as altered commuting activity and changes to living costs, including energy price increases.
- Continued offsetting of direct operational (scope 1 and 2) greenhouse gas emissions via investment in sustainable development projects and all the Group’s main premises certified to the environmental management standard ISO 14001:2015.
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P7. Legal and governance risk
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Risk description
The risk that the Group is exposed to financial loss, fines, censure or enforcement action due to failing to comply with legal and governance requirements as a result of ineffective arrangements, processes and controls.
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Mitigating activities and other considerations
- Board governance manual and Delegated Authorities Manual (DAM) in place to provide framework for key decision making at all levels across the Group and divisions.
- Board effectiveness is assessed on annual basis with action plans in place to promote a culture of continuous improvement.
- Explicit approval from the Group Board is required before decisions and actions that could result in risks outside of appetite are made.
- Conflicts of Interest Policy and processes in place to ensure all employees meet their fiduciary responsibilities.
- All regulatory interactions are recorded and tracked, with regular reporting through our executive and Board committees to ensure consistency and read across through a Group lens.
- The Group proactively engages with regulatory authorities and industry bodies on forthcoming regulatory changes.
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P8. Financial crime risk
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Risk description
The risk that the Group’s products and services are used to facilitate financial crime against the Group, customers or third parties.
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Mitigating activities and other considerations
- The Group is committed to operating a strong and risk-proportionate set of systems and controls to manage the risk within appetite.
- Financial crime improvement programme in Vanquis, primarily focused on implementing enhanced surveillance technology, has largely been completed.
- Financial crime risk appetite statement and metrics refreshed providing improved insight of the key risks to senior management.
- Regulatory actions and notifications are managed/monitored in line with relevant timescales and regular horizon scanning is in place to identify relevant and significant regulatory change.
- New financial crime risk assessment methodology implemented which will enhance identification of financial crime risks and threats and how these are mitigated through the organisation. This has begun with Vanquis and will be rolled out across the Group.
- System investment for PSD II and better decision making science within the ruleset resulting in less losses and victims of fraud within Vanquis.
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P9. Conduct and regulatory risk
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· Risk description
· Conduct risk: The risk of customer detriment due to poor design, distribution and execution of products and services or other activities which could lead to unfair customer outcomes or regulatory censure.
· Regulatory risk: The risk that the Group is exposed to financial loss, fines, censure or enforcement action due to failing to comply with laws or regulations (including handbooks, codes of conduct, and statutory and regulatory guidance).
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- Mitigating activities and other considerations
- Conduct risk appetite refreshed providing greater focus on outcome measures.
- New Conduct Risk Framework is being developed to provide improved monitoring of customer outcomes across all high-risk interactions including lending, forbearance, vulnerability and complaints.
- Conduct policies and procedures in place at a divisional level to ensure appropriate controls and processes that deliver fair customer outcomes.
- New Group Responsible Lending Policy has been developed providing overarching principles for all the divisions in response to the changing regulatory environment and requirements around sustainable lending.
- During the pandemic we have ensured that our customers continue to receive the service they need during these difficult times, in particular the provision of payment deferrals in line with FCA guidance.
- A number of regulatory programmes remain under close management, most notably Persistent Debt and PSD II (SCA). Projects are in place to oversee delivery and updates provided to the regulators as required.
- Establishment of Group Complaints Forum and reporting to ensure we are learning from complaints trends across the divisions, including any FOS referrals or upholds and actions of claims management companies. This has resulted in a number of strategic changes outlined in our emerging risks ‘Threats to our business model’ and ‘Responsible lending’.
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P10. People risk
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Risk description
The risk that the Group fails to provide an appropriate colleague and customer-centric culture, supported by robust reward and wellbeing policies and processes, effective leadership to manage colleague resources, effective talent and succession management, and robust controls to ensure all colleague-related requirements are met.
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Mitigating activities and other considerations
- Harmonisation of People and Human Resource functions into central shared service.
- Move to Group-consistent framework for performance management including the roll-out of ‘Be Better’ objective setting.
- Succession plans completed and in place for all executive and senior management.
- Balanced scorecards introduced and aligned across the Group and divisions with clear frameworks and evaluation criteria established through RemCo for variable pay.
- A number of ongoing communications have been and continue to be shared with colleagues at a Group and divisional level to keep them informed of business changes to support wellbeing.
- Full health and safety risk assessment completed of all our key work locations with mitigating actions completed.
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P11. Technology and information security risk
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Risk description
The risk arising from compromised or inadequate technology, security and data that could affect the confidentiality, integrity or availability of the Group’s data or systems.
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Mitigating activities and other considerations
- An IT First Line Controls Review (FLCR) is in progress which will baseline and standardise risk management and control across the Group’s IT functions.
- Group-wide security improvement programme has been initiated to deliver an ISO 27001 aligned framework.
- The investment and development of a new Group IT platform capable of housing multiple products, the new Sunflower Loans business being the first, and addressing technical debt/legacy issues being faced/experienced across the Group.
- Data Protection Officer (DPO) reporting transferred to the Group Risk function to reinforce independence of office covering oversight arrangements.
- Group governance and centres of excellence/communities of interest have been established for security, architecture, resilience and risk (GRC).
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P12. Operational risk
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Risk description
The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
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Mitigating activities and other considerations
- The 3LOD model throughout the Group ensures there are clear lines of accountability between management which owns the risks, oversight by the Risk function and independent assurance provided by Internal Audit.
- Operating arrangements put in place in response to the Covid-19 pandemic have become business-as-usual practice as we continue to operate in an agile manner.
- Risk Harmonisation Programme launched to build out single ERMF including control self‑assessment, consolidated risk policy taxonomy, and risk reporting.
- The operational risk and control self-assessment methodology has been enhanced and expanded to cover the full suite of risks facing the Group with more timely reporting, monitoring and escalation.
- Vanquis Risk Enhancement Programme to enhance first line risk and control activity established and significantly progressed against its objectives.
- Group Transformation function has been established to provide central change and programme management capabilities.
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P13. Model risk
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Risk description
The risk of loss as a consequence of decisions that are based on incorrect or misused model outputs and poor governance or errors in the development, implementation, or use of models.
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Mitigating activities and other considerations
- Further embedding of the new Group Model Risk Management Framework and Model Risk Policy as well as the development and implementation of necessary supporting modelling standards.
- Material models across the Group are independently validated as required in the policy and as per the independent model validation plan.
- Group model inventory, containing key models across the Group, is reviewed and updated on a regular basis and has all the necessary information to enable effective model risk reporting and planning.
- High-risk issues and findings on material models are addressed urgently and outstanding model risk issues and findings are monitored and reported to relevant governance forums across the Group.
- Group Model Governance Forum meets regularly and effectively provides model risk oversight and drives standardised approach to model development and governance across the Group.
- Model risk target operating model delivered including the recruitment of additional resources to enhance the current model validation and governance capability.
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