CLOSE BROTHERS GROUP PLC 213800W73SYHR14I3X91 2020-08-01 2021-07-31 213800W73SYHR14I3X91 2021-08-01 2022-07-31 213800W73SYHR14I3X91 2022-07-31 213800W73SYHR14I3X91 2021-07-31 213800W73SYHR14I3X91 2020-07-31 213800W73SYHR14I3X91 2020-08-01 2021-07-31 ifrs-full:IssuedCapitalMember 213800W73SYHR14I3X91 2020-08-01 2021-07-31 ifrs-full:RetainedEarningsMember 213800W73SYHR14I3X91 2020-08-01 2021-07-31 ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember 213800W73SYHR14I3X91 2020-08-01 2021-07-31 ifrs-full:ReserveOfSharebasedPaymentsMember 213800W73SYHR14I3X91 2020-08-01 2021-07-31 ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember 213800W73SYHR14I3X91 2020-08-01 2021-07-31 ifrs-full:ReserveOfCashFlowHedgesMember 213800W73SYHR14I3X91 2020-08-01 2021-07-31 ifrs-full:EquityAttributableToOwnersOfParentMember 213800W73SYHR14I3X91 2020-08-01 2021-07-31 ifrs-full:NoncontrollingInterestsMember 213800W73SYHR14I3X91 2021-08-01 2022-07-31 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Gov ernance Report Financial Stat ements Strategic Report Strategic Report 03 Financial Highlights 04 Our Businesses 06 C hai rma n ’ s Sta t eme nt 08 Chief Execut ive ’ s Sta temen t 1 0 Business Model 1 4 Our St ak eholders 20 The Founda tions o f Our Business 21 O u r P u r p o s e 22 Ou r Cul ture 24 O u r S t r a t e g y 32 S trateg y and Key Per fo rm anc e Indi cators 34 Our Responsibility 35 Sustainability Repor t 42 T as k Force o n Cli mate-re lated Fi nan cia l Disclosures 60 Non-Financial Inf ormat ion Stat ement 6 1 Financial Overview 65 Banking 70 A s s e t M a n ag e m e nt 72 S e c u r i t i e s 7 4 Risk Repor t 93 G oin g Con ce rn St atemen t 94 Viabilit y Statement Gov ernance R eport 95 Board o f Direct ors 98 Executiv e Committee 99 Corporate Gov ernance Repor t 1 23 Dire ctors’ Re mun erati on Re por t 1 4 1 Directors ’ Repor t Financial Statements 1 44 Inde pe nde nt Audi tors’ Repo r t 1 5 1 Consolidat ed Income Sta temen t 15 2 Con soli dated Statem ent of Comprehensive Income 1 53 Consolidat ed Balance Sheet 1 5 4 Cons oli dated Statem ent of Changes in E quity 1 55 Consolidated Cash Flow Stat ement 1 56 Co mpa ny Bala nc e She et 1 57 Co mpa ny Statem ent of Ch an ges i n Equi t y 1 58 Th e Notes 20 7 Gl oss ar y and D eni tion of Key T e rm s 2 1 1 Inve stor R el ation s 2 1 1 Cau tiona r y Statem ent 2 1 2 C omp any Infor matio n Content s EVER Y ST E P O F T H E W A Y A t C los e Brothe rs, we a re he re to help th e pe opl e an d bus ine ss es of Br ita in thr ive ove r the lo ng ter m . Thi s me ans s upp or t i ng our co ll eagues , cust omers an d c li ents , a n d t h e com mun i t i es an d env i ronm ent i n w hi c h t h ey ope rate, fo r t he be n e t of all ou r s t akeholde r s . It mea ns he lp in g pe opl e and b usi nes se s unl oc k thei r potentia l an d p lan fo r the f uture w ith c ond en ce, buil din g relati ons hip s that sta nd th e t es t o f tim e . It a l so m ea n s th a t w e co ntin ue t o be th e r e f o r th e lon g term, wh atever the e con omi c clim ate, maki n g decisions tha t a re r i g h t f or t o d ay an d f or generat i ons t o come . Book 1.indb 1 27/09/2022 23:45:11 02 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 A GAI NS T AB A CKD ROP OF MA R K E T UNC ERT AIN T Y , WE HA VE DEL I V E R ED ASOL I D PE R F O R M A N C E Book 1.indb 2 27/09/2022 23:45:11 03 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report 2022 2021 2020 201 9 201 8 £234 .8m £2 70 . 7 m £1 4 4.0 m £270.5m £ 278. 6 m 2022 202 1 2020 2019 2018 111 . 5 p 14 0 . 4 p 74 . 5 p 13 6 .7p 14 0 . 2 p 2022 2021 2020 201 9 201 8 10. 6 % 1 4.5 % 8.0% 15 .7 % 17 . 0 % 2022 2021 2020 201 9 201 8 66. 0p 60. 0p 40. 0 p 66. 0 p 63. 0 p 2022 2021 2020 201 9 201 8 £23 2.8m £26 5.2 m £1 4 0. 9 m £26 4 . 7 m £2 7 1 .2m 2022 202 1 2020 2019 2018 11 0 . 4 p 13 4 . 8 p 72.8 p 13 3 . 5 p 13 6 . 2 p 2022 2021 2020 201 9 201 8 £165. 2 m £20 2. 1 m £1 09.5m £20 1 .6m £20 2. 3m Financial Highlights for t he year ended 3 1 July 2 02 2 Adjuste d 1 Operating Pr ot Adjuste d 1 Basic Earnin gs P er Share Return on Open ing Equit y 2 Ordinary Dividend P er Share 3 Op e ra t i ng Pr o t B efo r e T a x Basic Earnin gs P er Share Prot Att ributable to Shareholder s £2 3 4 . 8m 111 . 5 p 10 . 6 % 66 . 0 p £ 232 .8 m 11 0 . 4 p £ 1 6 5 .2m 1 Adj us ted m ea su re s ar e pre se nte d on a b as is c on si ste nt wi th p ri o r periods and exclude amor tisation of intangible assets on acq uisit ion, to present the performance o f the group’ s acquired bu si ne ss es c on si ste nt w ith i ts ot he r bu si ne ss es , an d any e xce pti on al a nd ot he r ad ju sti ng i tem s wh ic h do n ot re e ct u nd er ly in g t r adi ng p er for ma nc e. Pl ea se r efe r to pa ge 6 2 for f ur t he r de ta il s on items excluded from the adjusted per formance met rics. 2 Adjust ed operating pr ot attributable t o shareholders di vided by opening equity , excluding non-controlling interests . 3 Re pre s ent s th e n al d iv id en d pro po se d fo r the r es pe ct ive y ea rs to ge th er w ith t he i nte ri m di vi de nd d ec la re d an d pa id i n tho se ye ars. Book 1.indb 3 27/09/2022 23:45:12 04 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Our Businesse s Close Bro thers is a lea ding UK merchant banking gr oup pro viding lending, w e alth management ser vices and secur ities tr ading . W e employ appr o ximat ely 4 , 0 0 0 people acro ss 54o f ces , predominant ly in the UK and Ir eland. 1 In clu de s o pe rat in g le as e as se ts of £0. 5 mi lli on ( 31 Jul y 2021 : £1.3 mil li on) w hic h re la te to As se t Fi na nc e an d £23 9.5 mi ll io n (31 Jul y 2021 : £ 221.6 mill io n) to Invo ic e a nd Sp e ci al it y Fi na nc e. 2 T y pi ca l lo an m at ur iti es f or n ew bu si ne s s on a c ont ra ctu al b as is, e xce pt c ore I nvo ic e Fi na nc e wh ic h ar e on a b eh avi ou ra l ba si s . 3 Aver ag e lo an s ize a nd t y pi ca l lo an m at ur it y in cl ud e th e Invo ic e Fi na nc e bu si ne s s on ly. 4 Fol low in g th e str ate gi c rev ie w of No vi ta s’ pro du cts a nd s er vic e s, in J ul y 2021 th e gro up d ec id ed to c e ase p e rm an en tly t he a pp ro va l of l en di ng to n ew cu sto me r s acr os s al l of th e pr odu ct s of fe re d by Nov it as , a wh oll y ow ne d su bs id ia r y of C los e Br oth er s ac qu ir ed i n 201 7 , a n d wi thd raw f ro m th e le ga l se r vi ce s na nc ing m a rke t. Banking Commercial Retail Pr ope r t y Adjusted operating prot £9 1 . 0 m 2021 : £52.8 m The Commercial businesses lend pri nci pal ly to sm all a nd me di um-si zed enter pr ise s (“SME” ) , b oth throu gh the ir dire ct sa les fo rce a nd vi a third p ar t y di str ibu tion cha nn els. T he ir hi ghl y sp ec ial ist s al es forc e ope rates f rom of c es th roug hou t the UK , Ireland and Germany . The Asset Finance business has over 26,00 0 cu stom er s an d prov ide s commercial asset nancing, hire-purchase and l ea sin g so luti ons fo r a dive rs e ra nge of assets and se ctors , including the nancing of commer cial vehicles, machine tools, contract ors’ plan t, print ing equipment , company car eets, energy production, and air craft and marine vessels. Loan book 1 : £3.0 billion Averag e lo an si ze: £ 59 ,000 Ty p i c a l l o a n m a t u r i t y 2 : 3 to 4 ye ar s The I nvoi ce a n d S pe ci a li t y Fi n an ce business work s with c .5 , 7 0 0 small businesses, pro viding debt fact oring, inv oice discounting and asset-based le nding. It also includes our smaller specialist businesses such as No vitas Loans ( “Novitas ”) 4 , a spe ci ali st prov id er of nan ce fo r the le ga l se ctor , Brewe r y Re nta ls, w hic h prov ide s sol utio ns for b rewer y equi pme nt a nd container main tenance, and Vehicle Hire, wh ic h prov ide s he av y go od s, lig ht com me rcia l veh icl es a nd b use s on re nta l and contract hire t e rms. Loan book 1 : £1 .5 billion Averag e lo an s ize 3 : c.£540, 0 00 Ty p i c a l l o a n m a t u r i t y 2,3 : 3 months Adjusted operating prot £6 1 . 0 m 2021 : £71 . 9m The Reta il businesses pro vide loans to predominantly individuals and small businesses, thr ough a network o f int ermediaries. The Motor Fin ance business provides poi nt of sa le n anc e for th e acq uis itio n of pr edominantly used cars , mot orcycles and light commercial vehicles. It operat es thro ugh a ne t work o f over 5,000 independent mo tor dealers and has app roxim ately 282 ,0 0 0 custom er s in the UK, I rel and a nd th e Cha nne l Is lan ds. Loan b ook: £ 2 . 1 billion Averag e lo an si ze: £ 7 ,200 Ty p i c a l l o a n m a t u r i t y 2 : 4 yea r s The Premium Finance busines s nances insurance payments f o r around three million com pa nie s an d ind iv idu al s, vi a a net wor k of c . 1 ,500 insurance br okers, allowing their cus tomer s to spre ad the co st of in sura nc e premiums ov er a number of instalment s. Loan b ook: £1.0 billion Averag e lo an si ze: c.£500 Ty p i c a l l o a n m a t u r i t y 2 : 1 0 months Operating prot £ 7 5 .2m 2021 : £87 .8 m The Pro per t y business specialises in sho r t- term re si den tial d evel opm ent na nce through Proper ty Finance, and also offers refurbishment and bridging loans through Commercial A cceptances. The Property business operat es in London, the So uth Ea st an d se lec ted reg ion al locations, lending to c . 700 pro fessional prop er ty d evelo pe rs w ith a foc us on s ma ll to medium-siz ed residential de velopments. Loan b ook: £1.5 billion Averag e lo an si ze: £1 . 2 million Ty p i c a l l o a n m a t u r i t y 2 : 6 to 18 mo nt h s R ea d mo r e a bo ut B a nk i ng : Se e pag es 6 5 to 69 Book 1.indb 4 27/09/2022 23:45:12 05 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report As set Manageme nt Secur ities Close Bro thers Asset Management ( “CBAM”) Wint er ood Adjusted operating prot £2 1 . 7 m 2021 : £ 23.7m CBAM is a ver ti ca lly i ntegr ated top 20 UK wealth manager , providing nancial advice and inve stment ma nag eme nt ser vice s to pri vate clie nts in th e UK . Our c lie nts ra ng e fro m mid to hi gh ne t wor th i ndi vi dua ls. Our c ore c apa bi liti es ar e per so nal na nci al advic e, multi-asset investm ent man ageme nt and c ustod y , wh ic h we com bin e to crea te dif ferent propositions tailored t o client prefe ren ce a nd cli ent we al th. Our s trateg ic ai m is to gathe r as sets i nto our inve stment m anag eme nt an d plat for m through three main distribut ion channels : our ow n na nc ial a dv ise rs; our p ri vate clie nt inves tme nt ma nag er s; and v ia thi rd par ty nancial advisers. We are a nati ona l bus ine ss o pe ratin g out of 1 4 l oc ation s with 9 0 ad vi ser s, 70 investm ent profe ssi on als a nd c. 7 50 em ploye e s in total. T ota l cli ent a ss ets: £1 6.6 billion Managed asset s: £ 1 5.3 billion Clients : 22, 000 households R ea d mo r e a bo ut A s se t M an ag e me n t: Se e pag es 70 to 7 1 Operating prot £1 4. 1 m 2021 : £6 0.9 m The Securities division comprises Winter ood , a le adin g ma rket ma ker for re tail stockbrok er s and instit u tions. Win ter o od d ea ls in ove r 1 5,500 i nstr um ent s in the U K and ove rs ea s, and tr ade s with over 6 00 i nsti tuti ona l as set m ana ge rs, reta il stockbr okers , wealt h managers, plat forms and ot he r mark et counterparties, pr oviding continuous liquidity through its mark et - leading ex ecution ser vices, supported by stron g prop ri etar y techn olo gy . Its trad er s have ex ten si ve exp er ie nce of exe cu ting orde rs i n a ra nge of m ar ket con di tion s, ena bl ing i t to trade su cce ss fu lly a nd prot ab ly over m any ye ar s. We also of fer sa les tr adi ng se r vi ce s to insti tutio na l cli ents both he re in the U K and i n the Un ited St ates. Ou r inves tme nt tru st tea m provi de s the ful l ran ge of s er v ic es of c orp orate n anc e, cor po rate brok ing, s ale s an d rese arc h, as well a s mar ket-maki ng. We act as c orp orate broke r and a dv ise r to over 50 co rpo rate cli ents w ith a d ive rse r ang e of co nventi ona l and a lter nati ve ass et cl as ses. Averag e barg ain s pe r day: c. 81 ,000 Winterood Business Ser vices (“WBS”) has b ee n op erati ng for ove r 1 0 ye ar s an d provides out sourced dealing and cust od y sol utio ns to over 50 co rpo rate cli ents. Assets under administ ration: £7 .2 billion R ea d mo r e a bo ut S e cu r it i e s: Se e pag es 72 to 73 Book 1.indb 5 27/09/2022 23:45:13 06 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 CL OS E BRO T HER S’ CU L T U R E I S ON E OF T H E F O UND A T I ONS OF OU R LO N G - T E R M SU C CES S As thi s yea r com es to a cl ose, we a re transit ioning t o a post -pandemic w orld whilst ada pting to a more exi ble wo rk e nviro nme nt. At the sa me tim e, our cu stome rs a nd colleagues are facing increasing uncer tainty arising from recent geopolitical e vents and the rising cost of living. Against t his backdrop , our disciplined business model and distinctive culture remain important factors behind the grou p’ s p rogre ss a nd i ts abi lit y to nav igate throu gh a di f cu lt e nviro nme nt. In the 2022 nan cia l yea r , our l en din g business continued to deliv e r good loan boo k grow th a nd a stro ng net i ntere st margin . The Asset Management division continued to attra ct client assets and ge ne rated im pre ss ive n et in ows. Foll owin g an exce ptio nal p er form anc e in the p ri or yea r , W inter oo d’ s pro t was im pac ted by redu ce d tradi ng ac tiv it y , he ighte ned vo latil it y and falling market s, particularly in the sec on d hal f of the ye ar . As a res ult, ad juste d ope ratin g prot de cre ase d 1 3% to £234.8 millio n (202 1 : £27 0. 7 mil lio n) , w ith a retur n on o pen ing equ it y of 1 0.6 % (202 1 : 1 4.5 %) . In li ght of this ye ar’s solid p er fo rm anc e an d to ree ct th e boa rd’ s c ontin ue d con de nc e in the b usi ne ss mo de l, we are pl eas ed to rec omm en d a na l div id end of 4 4.0p per sha re. If ap prove d at the An nu al Ge ne ra l Meeting, this will take the full- year divi dend to 66.0p pe r sh are, a 1 0% i ncre as e on las t yea r , a nd wou ld ma rk a retu rn to ou r pre-pandemic dividend le vel. Chairman ’ s Statement Book 1.indb 6 27/09/2022 23:45:18 07 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Our Commitment to Deliver Disciplined Gro w th I rema in c ond ent th at we have the r ight business model t o continue delivering t o all of our s take hol de rs. A s suc h, it is a key pr io rit y for the b oard to e nsure th e mod el’ s con tinu it y and c on siste ncy . Fo ll owin g the evol utio n of the gro up’ s s trateg y to reec t its in cre ase d focu s on d eli ver ing d isc ipl ine d grow th, I a m ple as ed to see th e prog res s ach ieve d in ide ntif ying b oth inc rem ent al a nd new g row th opportunities. One such area is the signicant commercial opportunity presented by the na nci ng of gre e n and tr ans itio n as sets as the UK h ead s towards a n et zero c ar bon ec ono my . O ther a re as are th e potent ial expa ns ion of o ur pro du ct of fe ri ng into ad jac ent mar kets that t with o ur Ba nk ing b usi nes s mod el a nd the c onti nue d deve lo pme nt of Wint er ood Business Ser vices. Th e grou p has a s trong c ap ita l po siti on, which supports our ability t o nance such growth opportunities. The board is acutely aware of it s resp ons ibi lit y to mon itor the man age me nt an d all oc ation of th e gro up’ s ca pita l res ourc es i n the be st in terest of o ur sha reh old er s. We beli eve that the se str ategic growth opportunities, combined with disciplined loan book gr ow th in t he existing Banking businesses , rep resent t he best use of o ur s hare ho lde rs’ ca pi tal. T he bo ard rema ins c om mit ted to payi ng a pro gres si ve and sustainable dividend while maintaining a pr ude nt leve l of di vi den d cove r , i n lin e with the gr oup ’ s dividend policy . Our Mo st Va luable Asset Clo se Broth er s’ cultu re is on e of the foun dati ons of o ur lo ng-term s uc ce ss. It i s the ex per tise of ou r pe opl e an d a rel entl es s focu s on d eli ver in g excel le nt cu stome r ser vic e that is th e cor ne rston e of our business model . We have rece ntl y con duc ted ou r latest emp loye e opi nio n sur vey (“EOS”) a nd I was ple as ed to see th at we have reta ine d hig h leve ls of e mpl oyee e ng ag em ent a t 86%, whi ch i s clo se to pre- pan de mic l evel s. We are committed t o fostering a culture that a t tracts and re tai ns ta len t, whil st al so grow ing a nd bui ldi ng the ex pe r tis e of our p eo pl e. 9 7% of col lea gue s say th at they be lieve th ey have the sk il ls an d kn owle dg e to do thei r job we ll. We also p rom ote teamwor k in a fa ir a nd ope n env iro nme nt, whe re in div id ual s an d thei r con trib utio ns ar e valu ed a nd res pe cted. Agai n, 9 7% of co lle agu es ag ree that th eir imm edi ate teams wo rk we ll togeth er to get the jo b don e. Th es e stron g num be rs sh ow the gro up’ s cul ture a nd val ue s are d ee ply emb ed ded i n the org an isati on. Y ou ca n rea d more a bou t the EOS h igh lig hts on pag e 23 of this report. Board Changes Dur in g the ye ar , we were p lea se d to welcome P atricia Halliday and T racey Gra ha m as i nde pe nd en t non -exec uti ve dire ctors w ith ef fe ct f rom 1 Aug ust 2021 and 22 M arc h 2022, respe ctive ly. Patric ia h as ove r 30 ye ars’ exp er ie nc e in risk management across the in vestment , corporat e and r etail banking sect ors, bot h in the U K and i ntern ation all y , wi th a de ep und er stan din g of the reg ulator y , r isk a nd gover na nce e nvi ronm ent i n whi ch th e grou p ope rates. O n joi ning th e boa rd on 1 Aug ust 202 1 , s he wa s ap poi nted as a m em be r of the bo ard’s Risk an d Audi t Co mmi tte es. T racey is an experienced non-ex ecutive dire ctor , hav ing se r ve d on a nu mbe r of liste d com pan ie s and m utu al bo ard s. She was a ppo inted a s a me mb er of the b oa rd’ s Remuneration and Risk Committees and brings signicant comme rcial , operational and cus tome r ser vic e exp er t ise g ain ed a cros s a range of sectors, including from ex ecutive and non-ex e cutiv e roles in nancial ser vices and other customer -facing businesses. After nine y ears’ dedicat ed ser vice on the boa rd, Les ley Jo ne s and B ri dge t Mac as ki ll wil l retire fro m the bo ard at the c on clu sio n of the A nnu al G ene ra l Me eting (“ AGM ”). I would like to than k both Le sley a nd Br id get for th ei r hug e co ntri bu tion to the g rou p over th at tim e. Patric ia w ill as su me the ro le of ch air of th e Ris k Com mi tte e from th e date of the AGM. Th e app ointm ents of Patr ic ia an d T r acey fur ther c ontr ibu te t o the stre ng then ing a nd dive rs it y of the r an ge of sk il ls, bac kgrou nds and ex pe ri en ce on th e bo ard. I am a lso ver y p le ase d that we c omp ly wi th the recommendations of the Park er Review in term s of the co mpo si tion of th e boa rd. Ma ki n g a La s ti n g Pos it i ve Im pa ct , Bot h N ow a nd i nt o t he Fu tu r e Dur in g the yea r , the bo ard a nd ma nag em ent team h ave mai nta ine d a stron g focu s on the gro up’ s sus tai nab ili t y age nd a. I am par ticul arl y pl eas ed w ith the p rogre ss we have mad e towards m eeti ng ou r clim ate res pons ibi liti es a s I rm ly be lieve th at we have an impor tant role to play in suppor ting our c ustom er s and c lie nts tra nsi tio nin g to a low -carbon economy . We have fur ther d evel ope d our c lim ate strat egy and signicantly improved our understanding o f our impact on the e nviro nme nt, cover in g not jus t our operational emissions, but also the implications acr os s our nanced activities. As a gro up we a re sup por tive of the g oal s of the Par is Ag ree me nt to achi eve net ze ro by 2050. We have set o urs el ves a mbi tio us targ ets for o ur op erati ona l em is sio ns an d are now set ti ng ou rs el ves a w ide r an d lon ge r - term a mbi tion to al ign o ur op er ation al a nd attributable greenhouse gas emissions from our lending and investment por t folios with pathways to net ze ro by 2050. T o this e nd, I am pl ea sed to rep or t th at we have rec entl y joi ned a s a sig nator y to the N et Zero B an kin g All ia nce. Y ou c an re ad more a bo ut ou r cli mate disc los ure s on pag es 42 to 5 7 of this report. Our P eople Ou r peo pl e are key in d riv in g the lo ng-term suc ce ss of th is org ani sati on an d I woul d like to than k them fo r the ir co mmi tmen t and ded ic ation. T oge ther , I am c ond ent th at we wil l con tinu e to del ive r on ou r pur po se. Mi ch a el N . B ig gs Chairman 27 Septem ber 2022 Book 1.indb 7 27/09/2022 23:45:18 08 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 FOC U S O N MA XIMIS ING DISCI PL I NE D GRO W T H We have del ive red a so lid p er fo rm anc e thi s yea r . T he B ank in g di vis ion h as p er fo rm ed well a s we conti nue d to see g ood d em and across our lending businesses and stron g marg ins. C BAM was af fected by fal ling m ar kets but c ontin ue d to attrac t cli ent a ss ets. Wi nter o od fa ce d de cli nin g mar kets an d redu ce d tradi ng ac tivi t y , in sha rp c ontr ast to the exce ptio nal ly stro ng con diti ons i n the pr io r yea r . Al thou gh we are awa re of the p res sure s that the r isi ng in ation a nd inte rest r ates wil l have on o ur cu stome rs a nd c oll eag ue s, I am co nd ent th at our p roven a nd res ili ent business model, strong nancial posit ion and d ee p exp er tise l eave us we ll p osi tio ned to contin ue to supp or t th em now a nd in to thefu ture. Finan cial Per for manc e Th e grou p’ s in co me red uc ed 2% to £936. 1 million ( 202 1 : £95 2 .6 million ). The Banking division achiev e d a 1 0% incr e ase in income , ree ctin g a stron g net intere st m argi n of 7 .8% (2 02 1 : 7 .7 %) and 5.0% year - on-ye ar loa n boo k grow th. In th e sec on d hal f, we saw lo an b ook grow th of 3.0% as momentum pick ed up . Income gr ew 6 % in As set M an age me nt as we c onti nue d to attr act c lie nt as sets de sp ite the im pac t of volat ile market conditions on wider clien t sen time nt, with n et in ows of 5 % (2021 : 7% ). Win ter o od saw a 4 8% reduc tion i n inc om e, ree ctin g a ma rket-wide sl owdown i n tradi ng activity fr om elevat ed lev e ls durin g th e pan de mic a nd a ch an ge in th e mix of tr adin g volu me s, exac er bate d by pe rio ds of vo lati lit y in falling market s. Adju sted op er ating ex pe nse s were br oadl y stable as a signicant reduction in variable cos ts in W inter oo d was of f set by c onti nue d inves tme nt, as wel l as hi ghe r staf f costs pri mar il y ree ctin g the cu rre nt in ation ar y env iron men t, acros s the Ba nk ing a nd As set Management divisions . Th e bad de bt rati o 1 of 1 . 2% ( 202 1 : 1 . 1 %) remained broa dly stable. Excluding No vitas, the bad d ebt r atio was 0.5% ( 2021 : 0.2% ) a nd ree cted th e rele as e of Covi d- 1 9 p rovi sio ns and th e ong oin g revi ew of provi sio ns an d cover age a cros s ou r loa n po r t foli os. Wh ils t we are n ot yet se ein g a si gni c ant im pac t fro m 1 Ba d de bt ra tio r ep re se nts i mp ai rm en t lo ss es i n th e yea r a s a pe rce nt ag e of ave ra ge n et l oa ns a nd a dva nc e s to cu stom e rs a nd operating lease assets . Chief E xecutive ’ s Statement ris ing i natio n and i ntere st rates a nd the ir ef fect on cust omers on our credit per formance, we are a ler t to the high ly u nce r ta in macroeconomic environmen t and continue to mon itor cl ose ly th e per form anc e of the b ook. As a re sul t, adjuste d ope ratin g prot wa s down 1 3% to £234.8 millio n (202 1 : £ 27 0. 7 mi lli on) , and we d el ivere d a retur n on o pe nin g equ it y of 1 0.6% ( 2021 : 1 4.5 %) , ree ctin g the re duc tion in Wi nter ood’s prot and c onti nue d grow th in the eq uit y b ase. T he retu rn on ave rag e tan gib le equ it y was 1 2.2% (202 1 : 16.5 % ). Foll owin g the gro up’ s sol id n an cia l pe r for ma nce i n the yea r an d stron g ca pit al pos itio n, and to ree ct ou r co ntinu ed con de nce i n the bu sin es s mod el, the b oard is pro pos ing a na l div id en d of 44.0p pe r sha re. Th is wi ll res ult i n a ful l-year d iv ide nd pe r sha re of 66.0p (2021 : 6 0.0p) , retu rn ing to the pre -pa nd emi c leve l. Th e grou p ma inta ine d stro ng ca pi tal, f und ing and l iqu idi t y pos itio ns, wi th ou r com mon equ it y tie r 1 (“CE T1 ”) c ap ita l ratio of 1 4.6% (3 1 Jul y 2021 : 1 5.8% ) sig ni ca ntl y above th e applicable minimum r e gulat or y requirements. Capital Management Framew ork Th e pru de nt ma nag em ent of th e grou p’ s na nci al re sou rce s is a co re par t of our bus ine ss m od el. Ou r pr ima r y ob je ctivei s to deploy capital to support disciplined loan boo k grow th i n Ban ki ng an d to make the most of strategic opportunities. Th e boa rd rem ain s com mit ted to the gr oup’ s dividend policy , which aims t o provide sustainable dividend growth year -on-y e ar , whi le m aint ain ing a p ru de nt leve l of di vi den d cover . Fur ther capital distributions to shareholders will be considered depending on futur e oppor tunities. We are con sid er ing th e fu r the r optim isa tion of our c ap ita l str uctu re, inc lud ing th e iss ua nce of d ebt c ap ita l ma rket se cu riti es i f appropriat e, target ing a CET1 capital ratio ran ge of 1 2% to 1 3% over th e me diu m ter m. In th e sho r t ter m, we woul d expe ct to ope rate ab ove the 1 2% to 1 3% CE T 1 ca pit al ratio ta rget r ang e, in ligh t of the he ighte ned macroeconomic uncer tainty and po tential growth opportunities a vailable t o us. Book 1.indb 8 27/09/2022 23:45:30 09 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Pr ote c t in g Ou r B us i ne s s Mo de l a nd Maximising F uture Income Generation We contin ue to del ive r aga inst o ur str ategi c pri or itie s to “Protec t” , “Grow ” an d “Su sta in” our business model . Ou r mul ti-yea r inves tme nt pro gr amm es a re prog res si ng wel l and e na bl e us to protect our business, as well as enhance ef ciency and futur e -proo f our income generat ion ca pab ili ties. We ar e see in g tan gib le be ne ts fro m thes e inve stme nts. In o ur Sav in gs fra nc hise, inve stm ent in th e cus tomer d ep osi t platform allo wed us to broaden our product of fer in g and d rove si gni ca nt grow th in our retai l dep osi ts, up mo re than 50% si nce th e launch of the platform in Dece mber 2 0 1 8. Th e total ba lan ce of F ixed R ate ISAs n ow stands at c. £350 million, suppor ting lower cost of f unds and funding diversication. We conti nue d to inves t in ou r tech no log y and d igi ta l ca pab ili tie s to make ou r exp er ts even mo re valu ab le, em power ing th em w ith key data i nsi ghts a nd au tomated p roce s ses. In Motor Fi na nce, ou r inve stme nt in di git al and te chn olo gy h as al lowe d us to make the most of oppor tunities in the second hand ca r mar ket. Thro ugh o ur pa r tne rs hip w ith Auto T rad er , we are p rovi din g our d ea ler s wi th real- time insights on vehicle demand and pricing, a unique pr oposition that has won the Inn ovation Award at th e Car Fi na nce Award s 2022. W e h ave als o deve lop ed A ppl ic ation Progr amm ing Inte r fac es (“ APIs”) th at en abl e us to c o nn e c t s e a ml e s s l y i nto st ra te gi c partners and pro vide our nance of fering at var iou s poi nts of the cu stome r jou rn ey . In CBA M, we have un de r ta ken a ma jor re-platforming project t o rationalise legacy syst e ms and impr ove ef ciency , while adding a digital portal t o impro ve functionality and cus tome r exp er ie nce. We are a ls o de live ri ng a new cu stome r po r ta l in As set F ina nc e and are au tomati ng el em ents of o ur pr oce ss es to enhance cust omer experien ce. Focus on Maximising Disciplined Growt h We remai n focu se d on ma x im isin g disciplined growth in our existing and adj ace nt ma rkets. T his ye ar , we have conducted a fur ther re view of po tential growth opportunities and ha ve a str ong pip eli ne of id enti ed t arge t are as that a re aligned with our business model. We recognise a signicant opportunity in broadening our sustainable nance offering as the U K he ads toward s a net ze ro ca rbo n ec ono my . Ou r cur ren t le ndin g alre ad y spa ns a diverse array o f assets including wind and solar generation , batter y electric v ehicles and gri d inf rastr uc ture. Ove r the c omin g yea rs, we wil l con tinu e to buil d fu r the r ou r exp er ti se in gre en a nd tra nsi tion a ss ets, ce menti ng our re pu tatio n for sp ec ial ist k now led ge. We are a thr ough-the-cycle lender and will con tinu e to suppo r t ou r cus tomer s as they loo k for n an cing of g ree n an d tran siti on assets. In par ticular , we are seeing gr ow th acro ss a ra ng e of bat ter y e le ctri c veh icl es, predominant ly thr ough our Commer cial business, as the UK’ s economy mo ves to ele ctr if y all for ms of tra ns por t. As we devel op our green gr owth strat egy , we ha ve set our se lve s an in iti al gre e n na nc e amb itio n. We aim to prov ide £1 .0 bill ion of f un din g for bat ter y ele ctr ic ve hic le s over the n ex t veye ar s. In add itio n, we are pi lotin g a spe ci ali st buy-to-le t ex tens ion to ou r exis ting Pro pe r t y bridging nance cust omers. We have also ex tend ed o ur se ctor c overa ge i n Ass et Fin anc e wi th the add itio n of sp eci ali st mater ia ls ha nd ling a nd a gri cul tur al equipment t e ams. In Invoice Finance , we con tinue to pursue oppor tunities in the Asset -Based Lending (“ ABL ”) space, including identif ying syndication oppor tunities , partnering with o ther lenders. Our A ss et Ma nag em ent bu sin es s is we ll ali gne d wi th the lo ng-term tre nds i n the wea lth ma nag em ent s pac e and we w ill continue to invest t o suppor t its gr ow th pot e ntial . We remain committed to bui ldi ng on o ur exce lle nt trac k rec ord of increasing clien t asse ts organically , thr ough the co ntin ued s el ecti ve hir in g of wea lth management pr ofessionals , as w e ll as through in-ll acquisitions. Winterood Business Ser vices (“WBS”) has d el ivere d an othe r stron g per form anc e, with i nco me u p 1 2% fro m £9. 1 m illi on to £1 0.2m illi on a nd as sets u nde r adm ini strati on up 1 6% f rom £6.2 b ill ion to £7 .2 bi llio n. Ou r awar d-winning proprie tar y t e chnology is highly scalable and we see signicant gro w th potenti al in th is bu sin es s, with a s oli d pip eli ne of client s expected to increase assets under adm inis trati on in exce ss of £1 0 b illi on in th e 2023 n an cia l ye ar . Ou r Ro le i n S u pp or ti n g th e T r a ns i t io n to a Sustainable Future We have an im por tant ro le to play i n he lpi ng people and businesses t ransition t o a lo wer ca rbo n futu re an d this re spo nsib ili ty i s at the foref ront of ou r min ds. I a m ple as ed wi th the si gni c ant pro gre ss we have m ade i n deve lop ing o ur cl imate str ategy , c over ing not ju st ou r ope ratio na l imp acts, b ut al so understanding the implicat ions across our nanced activities . Th is yea r , we have ca rr ie d ou t an as ses sm ent of o ur in dire ct Sc op e 3 emissions a cross all ca tegories o f opera tional emissions as w ell as a rst assessment of our nanced emissions, initially focused on our loan book . Initial ndings ar e av ailable in ou r inau gu ral T as k Force o n Cli mate- relat e d Financial Disclosur es (“T CFD”) report fro m page 42 , wh ere we a lso set ou t ou r prog res s this ye ar a nd are as of f utu re focu s with re ga rd to the integr ation of c limate r isk int o our governance infrastructure, business strateg y an d ris k man age me nt fr amewo rk. Not with sta ndi ng the ef for ts al read y mad e, we rema in at th e star t of a long j our ney a nd rec ogn ise th ere is m ore to do to devel op ou r own tra nsi tion p la ns, targ ets an d metr ic s. Th is al so in clu de s our a bi lit y to add res s challenges around da ta and modelling as we conti nue to wor k acro ss in dus tr y an d alongside our cust omers, t o enhance both understanding and our capabilities. As a gro up we a re sup por tive of the g oal s of the Par is Ag ree me nt to achi eve net ze ro emissions by 2050. Having previously set amb iti ous s hor t -ter m net ze ro targ ets for o ur Sco pe 1 a nd 2 op er ation al e mis sio ns, we a re now set ti ng ou rs el ves a w ide r an d lon ge r - term a mbi tio n to align a ll of ou r op erati ona l and attributable gr e enhouse gas (“ GHG”) emissions from our lending and investment por tfo lio s on a path to ne t zero by 2050. T o th is en d, I am ple as ed to repo r t that we have rec en tly jo ine d 1 16 banks gl oba ll y as a sig nator y to the N et Zero B ank in g All ia nce. In CBA M, we have mo bi lise d a Su sta ina bil it y Progr amm e wi th ded ic ated ini tiati ves to emb ed th e Prin cip le s for Re spo nsi ble Inves tme nt (“PRI ”) an d steward shi p acro ss all f acets of o ur bu si nes s, an d as pa r t of thi s, have rec entl y be com e a sig nator y to the U K Ste wardship Code . Outlook We have del ive red a so lid p er form anc e this ye ar a nd we st ar t th e 2023 nan ci al yea r aga ins t a hi ghl y un ce r ta in ex ter na l env iron men t. Altho ugh we a re al er t to the imp act of r isi ng in ation a nd in teres t rates on ou r cus tome rs a nd wi de r na nc ial mar ket co ndi tion s, we rema in we ll pl ace d to continue delivering on our long track record of prot abi lit y a nd di sci pli ned g row th. In Ba nk ing, we a re focu se d on ma ximi sin g opp or tu nit ies i n the cu rre nt cyc le an d delivering continued growth at str o ng marg ins. We are c ond ent in th e lon g-term grow th p rosp ec ts of ou r bus ine ss es a nd w ill conti nue to as se ss op por tuni tie s to deli ver disciplined gro w th. In As set M an age me nt, we con tinu e to inves t to supp or t th e lon g-term g row th potenti al of the business . Whilst t he business is sensitive to nancial market conditions, we remain committed t o driving gro w th both organically and th roug h the c ontin ued s el ect ive hir in g of advisers and in vestment managers, and through in-ll acquisitions. As a da il y tradi ng bu sin es s, Win ter o od is hig hly s en siti ve to cha nge s in the m ar ket env ironm en t, but rem ain s well p osi tion ed to continue trading pr otably , taking advantage of retur nin g inves tor app etite. We see sig ni ca nt grow th pote ntial i n WBS, w ith a sol id pi pe line of c lie nts ex pec ted to inc rea se as sets un de r adm ini strati on in exc es s of £1 0 bil lio n in the 2023 n anc ia l yea r . Ou r proven a nd re sil ie nt mod el a nd stro ng bal anc e sh eet, co mb ine d with o ur d ee p exp er ie nce i n navi gati ng a w ide r ang e of ec ono mic c on diti ons, l eave u s wel l pla ce d to continue supporting our collea gues, cus tomer s an d cli ent s over the l ong te rm. Adrian Sainsbury Chief Execut ive 27 Septem ber 2022 Book 1.indb 9 27/09/2022 23:45:31 10 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Busines s Model Close Bro thers has a pr ov en and resilien t business model , delivering e x cellent ser vice in sect ors we know and underst and. Disciplined under writing and pricing thr ough the cy cle In Ba nk ing, o ur su cc es s is su ppo r ted by o ur di sci pli ne d pri cin g an d und er w ri ting c ri teri a. We con siste ntly a ppl y the se cr iter ia at al l stag es of th e ec ono mic c ycle. Ou r lending is predominan tly secured or struct urally pro tected, with c ons er vative loa n to valu e ratio s, sma ll lo an s izes a nd sho r t matu riti es. We do not o per ate in the un dif fe ren tiated, volu me -dr ive n ma rkets w hic h are d omi nated by th e la rger ban ks, an d pr ior itis e pr ici ng an d ma rgin s over vol um e. Prudent management o f nancial resources We take a pr ude nt a ppro ach to ma na gin g our nan ci al resources. A fundamental part of our business model is ens ur ing we h ave a stron g cap ita l po siti on wh ic h all ows us to grow , inve st a nd me et al l reg ulator y requ irem ents. We als o take a co nse r vative a ppr oach to liq uid it y ma nag eme nt and funding, as we focus on diversity of funding sour ces and a p ru de nt matu rit y p role. T his e na bl es us to prote ct, grow a nd su sta in ou r bus ine ss m od el. Ser vice, e x per tise and rela tionships Ou r focu s on se r v ice a nd p er son al a ppro ach g ive s us a de ep un de rs tan din g of the ne ed s of our c ustom er s, cli en ts and p ar t ner s. It al lows u s to offe r hi gh se r v ic e level s an d exi ble s olu tio ns ac ross a ll of ou r bus ine s ses. I n Ban ki ng, this leads to fast lending decisions and access to funds whe n cu stome rs n ee d them m ost. Cl ose B rothe rs As set Ma nag em ent a nd W inter ood a re stro ng exa mp le s of the ex per tise of ou r pe op le in th eir s pe cia li st e lds, w hic h und er pin s thei r suc ce ss i n weal th ma nag em ent a nd trad ing. We comb ine i ndu str y expe r tis e and d igi ta l ca pab ili tie s to suppor t our customer -centric approach . Distinct ive cult ure A key ass et of Cl ose B rothe rs is o ur di stin cti ve cul ture. It bri ngs o ut th e ver y b es t in ou r pe opl e an d our c ustom er - ce ntri c and l on g-term ap pro ach to ever y thin g we do is embedded thr oughout the or ganisation . Our people ar e eng age d in the b usi ne ss an d em bod y the val ue s that en abl e us to he lp ou r cus tomer s thr ive. O ur cu lture i s key to the foun datio ns of ou r suc ce ss ful b us ine ss m ode l an d in driving our strong nancial performance. Diversied por t folio o f businesse s Ou r dive rs ie d po r t foli o of bu sin es se s is an i mpo r ta nt par t of our su cc es s and re si lie nc e over the ye ar s. We len d in a var iet y of s ec tors, lo cati ons a nd a ss et cla ss es, a nd also pro vide wealth management services and securities trading . Close Brot hers Asset Management and Winterood provi de ad diti ona l in com e strea ms a nd co ntri bute to the diversication of the gr oup. This div e rsication suppor ts t he stability of earnings and dividends, particularly in challenging time s, wh ile a lso a ll owin g us to con tinu e inve stin g to grow the business through the cycle . Our distinctive strengths Supporting our long-term track recor d of growth and protability High net int erest margin and lo w bad debt r at io in Bank ing We do not ma nag e our b usi ne ss es to a grow th ta rget, bu t ins tead prioritise the consistency of our le nding crit eria and maintaining stron g retur ns. Th e con sis tent ap pli catio n of und er w ri ting d isci pli ne and re sp ons ibl e le ndi ng cr iter ia ha s res ulte d in a low ba d debt r atio ran gin g fro m 0.6 % to 2 .3% over th e las t 1 0 ye ar s. Book 1.indb 10 27/09/2022 23:45:31 11 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Lon g-t e rm g row th Loan b ook 1 (£ million ) 0 2,5 0 0 5 ,000 7, 5 0 0 1 0, 000 08 09 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 9 18 2 0 2 1 2 2 1 Loa n bo ok gu re s in cl ud e op er ati ng l ea se a ss ets . Long -t erm dividend tr ack recor d Di vid en d pe r sha re ( p) 0 20 40 60 80 08 09 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 9 18 2 0 2 1 2 2 Stro ng retur n s th rou gh the cyc le Retur n on o pe nin g equ it y (% ) 0 5 10 15 20 08 09 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 9 18 2 0 2 1 2 2 A k ey point o f dif f erence at Close Br others i s our long- term approach and t he rigorous discipline behind our pro ven and resil ient business model . T his ensur es we are w ell positioned t o deliv e r f or all o f our stak eholders and contin ue our long- term tr ack record o f gro w t h, pr otabil ity and re turns . Our track recor d Ea ch o f ou r d is t in c ti ve s t re n gt h s ha s co nt r ib u te d to o ur l on g -te rm t r ac k re co r d, e n ab li n g us t o de li ve r loa n b ook g r ow t h, p r o t ability an d r et ur n s to s ha r eh ol d er s ove r ma ny ye a rs , w it h e ac h of o ur b u si ne s se s su p po r t i ng o ur ove r al l p er for ma n ce a s a gr ou p . Str ong net ino ws in CBAM We have see n stro ng grow th in our A ss et Ma nag em ent b usi ne ss with n et in ow rates r ang ing f rom 5% to 1 2% over the pa st ve yea rs. We co ntinu e to work to im prove the l ong -term sc al e and prot abi lit y of th e Ass et Ma nag em e nt division, capitalising on our vertically integrat ed and multi-channel distribution . Long -t erm income generat ion in Wint er ood Win ter o od ha s a lon g trac k rec ord of pro tab le tra din g and g ood leve ls of in com e ge ne ratio n in a wi de ra ng e of ma rket co ndi tio ns. Th e bus ine ss m ade th e most of th e vol atilit y a nd su rge in re tai l tradi ng se en d ur ing C ovid- 1 9 a nd, de spi te the imp act of fa lli ng mar kets in thi s na nc ial ye ar , it re ma ins we ll pl ace d to navig ate cha nge s in th e mar ket envi ronm ent. Wi nter o od co ntinu es to dive rs if y i ts revenu e stre ams a nd we ar e con dent i n acc el erati ng the grow th tra je ctor y of W BS, ba lan ci ng the cyc lic al it y se en in th e trad ing business. We have a strong tr ack re co rd of de live ri ng dis cip lin ed gro w th by ma xi mi si ng t he o p po r tu n it y i n ex is ti ng m a rke ts, as well as continuously e xploring new opportunities t hat t wi th our m od el. 1 Cust omer satisfaction scor e (“ CSA T”). 2 Pr opert y Finance net promoter score (“NPS” ) ex cludes the Commercial Acceptances busine ss. 3 Mot or Finance Dealers net pr omoter score (“NPS”) . We listen to ou r custom er s, pu tti ng the ir n ee ds at the h ea r t of our b usi ne ss. Ou r cus tome r -c entr ic a ppro ach is re ec ted in the stro ng cu stome r sati sfac tion a nd n et prom oter sc ore s we con tinu e to achi eve acro ss ou r bus ine ss es. Wh ile d ivi de nd d eci sio ns in th e 2020 an d 202 1 na nc ial ye ar s have ree cted the u npr ece de nted un ce r ta int y cau sed by C ovi d- 1 9, we aim to retur n to deli ver in g long -term, prog res si ve and s usta ina bl e div id end g row th in the f utu re, in lin e with o ur po lic y . Th e dis cip lin ed a ppl icati on of ou r bu sin es s mod el a nd diversied portfolio of businesses ha ve supported consist ently stron g retur ns at all s tag es of the nan cia l cycl e. Str ong customer scor e s Lat est scor es As s et F in a nc e CSA T 1 +8 8 Pr op e r t y F in a nc e NPS 2 +8 7 Motor Financ e NPS 3 +7 3 Book 1.indb 11 27/09/2022 23:45:32 12 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 INVESTMENT IN TECHNO LOG Y R E L A T I O N S H I P S S E R V I C E E X P E R T I S E How ou r in vestments in technology are ma ki n g ou r exp e r t s even m or e va lu a bl e Ou r suc ce ss ful b us ine ss m ode l is b uil t arou nd th e de ep ex pe r tise of o ur p eo ple, our personal and exible ser vice, and our long-standing r elationships, which are all focu se d on de li ver ing o n the ne ed s of our customers , clients and par tners. Using data insights to enhance our proposition and r espond to changing customer needs Adding functionality to improve the service and experience we can provide for our customers Creating ef cient and scalable platforms to support the growth of our business We are inve stin g in ou r tech no log y an d dig ita l ca pab ili tie s to make ou r expe r ts eve n more va lua bl e. We are emp ower ing the m with unique data insights and automating processes t o opt imise their time . We are co mbi nin g the de e p expe r ti se of ou r pe opl e with i nnovati ve techn olo gy to add re al valu e to our cu stome rs, c lie nts an d par tner s. Combining indust r y e xper tise and digit al capabilities t o suppor t our cust omer -centric appr oach . Bus ines s Model continued Book 1.indb 12 27/09/2022 23:45:32 Broadening our pr oposition for our Motor Finance dealer partners with real-time data and market insights, in partnership with AutoT rader Providing mor e routes to customers and dealers via API links, enabling us to seamlessly offer our pr oducts at various stages of the customer journey Th is un iqu e prop os itio n me ans we c an p rovi de de al er s with real- time insights , both locally and nationally , on vehicle demand, optim um pr ici ng a nd tim e to sell, al l bas ed on c ons ume r se arc h and purchase trends. Com bi ned w ith o ur ow n data o n loa n vol ume s, ac ce pta nce rates a nd stoc k fu ndi ng po siti on, we ca n prov ide d ea le rs w ith data-b acke d insi ghts, e nab lin g them to stoc k thei r forec ou r ts effectively and ef ciently . This unique and v alue -adding pr oposition won the Innovation Award at the Ca r Fin an ce Award s 2022 . As cust omer behaviour changes, wit h increasing use of digital cha nn els, we a re ada ptin g our M otor Fin anc e mod el. We have devel op ed a se t of APIs that e na ble u s to con nec t seamlessly int o strat egic par tners and provide our nance of fer ing at va ri ous p oin ts of the cu stome r jou rne y . We have par tn ere d with i Vendi, Auto T ra de r and oth er s to enab le de ale rs to pos iti on n anc e optio ns on th eir a dve r tisi ng pl at form s and w ebsites . Enhancing customer experience and improving contr ol in our Asset Management business T ransforming platforms in Asset Finance to improve customer service outcomes and process ef ciency Expanding our Savings business by diversifying our product of fering and growing customer numbers through the Customer Deposit transformation programme Our multi -year Asse t Management technology transformation ha s i nc lu de d th e d e li ve r y of a cu sto me r r el ati o ns hi p m an ag e me nt (“CRM ”) pl at form, w hic h prov ide s si gni ca nt b ene ts for o ur cli ents a nd c oll eag ue s, whi lst s upp or ti ng ou r grow th a mbi tion s. We have integr ated the pl at form w ith ou r cli ent p or t al to imp rove dig ita l en gag em ent, have de li vere d a new m obi le ap pli cati on an d have red es ign ed o ur an nua l cl ien t review p ack, a ll of w hic h have con trib uted to a si gni ca nt red uc tion i n pap er u sag e. On a n ope rati ona l leve l, we have intro duc ed i mprove d autom ated anti- mon ey lau nde ri ng an d ban k ver ic atio n che cks a nd have rolled out consist ent onboarding pract ice s. The in tegration between our platforms has generated pr oductivity gains and with sig ni ca ntly fewer d ata e ntr y po ints ac ross th e Adv ice p roc es s, we have red uc ed r isk a nd im prove d our c ontro l env iron men t. Ou r Ass et Fin an ce tra nsfo rm ation h as a llowe d us to automa te non-v alue-adding parts of t he cust omer journey , whilst building rich customer insights , and r espond t o changing cust omer behaviour through our new cust omer relationship managemen t system . We are deve lop ing a c ustom er po r ta l that w ill al low cu stome rs to choo se the s er v ic es they re ce ive ba se d on the ir ne ed s and imp rovi ng the ir u ser ex pe ri en ce. As a re sul t of our tra nsfo rm ation p rog ram me, dur ing C ovi d- 1 9, we were a ble to bu ild, test a nd l aun ch ou r CBI LS por tal w hic h inc lud ed autom ated el igi bili t y testin g, with in 1 0 d ays, as we co ntinu ed to suppor t our cust omers during this challenging period . We are al so de li ver ing a “p ropo sa l to payout ” so luti on, wh ic h en abl es i ntegrati on d irec tly in to ser v ic e provi de rs su ch a s cre dit refer ence agencies, and of fers additional f unctionality such as e-d oc ume nts an d e-s ign ature. Launch of new insight tools in Premium Finance that help our insurance brokers make better decisions Fore sig ht is a ne w mod el w hic h prov ide s un iqu e po int of qu ote customer be haviour insigh ts to suppor t personal lines broker commercial decision mak ing. Fore sig ht has b ee n bu ilt u sin g mac hin e le ar ning m od els o n our ex te nsi ve Premi um Fi na nce d ata, s upp le men ted wi th a broa derm ar ket ins ura nc e pol icy d atas et. Th e mod els p red ict the li kelih ood of c ustom er s ca nce lli ng befo re the e nd of the ir polic y t erm. Focu s 36 0 is a new too l avai lab le fo r our c om mer cia l broke rs, with re al-tim e na nc e, credi t an d ope ratio nal d ata s umm ari se d into an inte rac tive da shb oa rd to help th em un de rst and h ow Premi um Fi na nce i s pe r for min g. Broke rs al so ge t acc es s to pee r be nch ma rk ing d ata to un de rst and a rea s of im prove men t for new business opportunities. Th e prog ram me i nvolve d a rep lac em ent of o ur ba ck of ce syste ms, whi ch e nha nce d ou r resi lie nc e and re du ced m anu al p roce ss ing, whi lst c reati ng a stro ng fou ndati on f rom wh ic h to grow our s avin gs prop osi tion. S inc e the la unc h of the pl atfo rm, we have b road ene d our p rodu ct ra ng e, brin gin g to mar ket new noti ce ac co unt a nd ISA prod uct r ang es. O ur o nli ne po r ta l als o of fer s an a lter native c ha nne l for ou r cus tomer s to com mun icate w ith us, a s we ada pt to our customers ’ preferences. Pro viding strong customer ser vice remains core to the b usi ne ss a nd we have m ain tai ned ve r y h igh l evel s of ser vic e, with a c ustom er s atisf acti on sc ore of 8 4 %. Th is inve stme nt ha s su ppo r ted si gni c ant g row th in ou r reta il de pos its, w hic h are u p 1 6% yea r -o n-yea r , fo llow ing s imi la rl y stron g grow th i n previ ous ye ar s. Th is grow th is sup por ted by the onl ine c ha nne l, wh ich n ow has ove r 50% of cu stome rs s ign ed up for s el f-ser v ice, se tti ng us u p for sc al ab ilit y i n fu ture yea rs. 13 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Book 1.indb 13 27/09/2022 23:45:32 14 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 A t Close Bro thers, w e hav e a long- term t rack r ecord o f creat ing val ue and deliv e ring positiv e out comes for all o f our stak eholders. We work ha rd to und er sta nd an d me et the ne ed s of ou r dif feren t sta keho lde r grou ps, e nga gin g with th em a nd ad aptin g our s er v ic e and of fer ing to cre ate valu e for th em. We unde r ta ke a com pre hen si ve prog ram me of st akeh old er e nga gem ent a nd co nsi de r the fe edb ack provi de d, emb ed ding th is in th e de cis ion- mak in g proc es s thro ugh out th e grou p. Our S takeholders Deliv e ring for our s takeholders Colleagues With a pp roximate ly 4,00 0 emp loye es a roun d the UK , Irel an d, the Ch an nel I sla nd s and G er ma ny , we have a di ver se a nd motivate d work force w hic h de live rs th e hig he st leve ls of se r v ice to our cu stome rs, c lie nts a nd pa r tne rs. We a re com mi tte d to the deve lop men t of our c oll eag ue s, ens ur ing th ey are suppor ted and engaged. Key pr i or it i es o f ou r c ol le ag u es • A safe wo rk ing e nvi ronm ent • A fai r , s upp or ti ve, dive rs e and i ncl us ive cu ltur e whe re em ploye e fee dba ck is va lue d • Be ing a pprop ri ately rewa rded fo r thei r contr ibu tion s • Opportunities for t raining and development • Long -term suc ce ss ful p er form anc e of the gro up Engaging with our colleagues Eng age me nt with e mp loyee s he lps to at trac t, build a nd ret ain a hig h ca libr e tal ent p ool a nd e nsu re that ou r emp loye es re mai n enthusiastic about their work and Close Br others. Eng age me nt take s pla ce da il y throu gh lin e ma nag er s, with sen ior m an age me nt reg ula rl y spe ak ing at T ow n Hal ls an d othe r bus ine ss -wide fo ru ms. L isten ing to ou r col le agu es a nd acti ng up on the ir fe edb ack i s es sen tial to ma inta ini ng e mpl oyee engagement , whether t his is t hrough undertak ing regular em ploye e op ini on su r veys o r man age me nt le ad ing e nga ge me nt activities t o pro v ide updat es on business performance. T raining and m entor in g prog ram me s are in p lac e to supp or t th e deve lop me nt of al l em pl oyee s. Ke y engagement during the year We ran ou r lates t Emp loyee O pi nio n Sur vey , w hi ch cl ose d in M arc h 2022, t o g athe r fee dbac k fro m our c oll ea gue s an d prov ide th em with a p lat for m to anony mou sl y sha re the ir vi ews on wo rk ing at Clo se Broth er s. We listen ed cl ose ly to this fe ed bac k and h el d a ser ie s of T own Ha lls a nd te am me etin gs w ith ou r co lle agu es to dis cus s the re sul ts and c ons id er any a ctio ns to take. We also donat ed £2 per survey comple ted to our sta f f-nominat ed charities, Can ce r Res ea rch UK a nd M ake-a-Wi sh. Wa ys we have created v alue • Established new Gender Balance, Social Mobilit y , and Work ing Pa rent s and Ca rer s Net wo rks as p ar t of o ur D ive rsi t y and Inclusion init iatives. • He ld even ts and o nli ne wor ks hops o n a var iet y of top ics inc lud ing In tern ation al Wome n’ s D ay , LGBT Q+ Histor y Month, Rac e Equ ali t y Week, T im e to T al k Day , B lac k His tor y Mo nth and Nat ional Inclusion Week . R ea d mo r e a bo ut h ow we s u p po r t o ur c o ll ea g ue s Se e pag es 3 6 to 39 Cust ome rs, Clients and P ar t ners T he ne ed s of our c ustom er s, cli ents a nd p ar tn er s are at th e he ar t of o ur bu sin es s an d are c ore to our p ur pos e. Our a im is to be ther e for ou r cus tomer s ac ross a ll ma rket c ond itio ns to hel p the m mee t thei r goa ls wi th ea se an d con de nce th at ea rn s thei r loyal t y and e nsu res we b uil d lon g-la stin g custom er relationships . Ke y priorities of our customers, clients and partners • Building and maintaining strong personal r e lationships base d on trust , understanding and specialist e xper tise • Understanding, treating and valuing them as individuals • F air and equitable conduct of business • Receiving consist ent, responsive and supportive service delivered wit h simplicity , clarity and ease • Meet ing their needs throughout changing economic cycles • Receiving customer -led propositions t hat meet their individual ne eds Engaging with our customers, clients and partners Th e grou p has c ustom er s, cli en ts and p ar tn er s in th e UK, I rela nd, the Ch an nel I sla nd s and G er ma ny . Ou r lo ng-term s uc ce ss de pen ds on th e stre ngth of o ur rel atio nsh ips w ith cu stome rs, cli ents a nd p ar tn er s, our s pe ci ali st ex per tise a nd ma int ain ing h ig h standards o f ser vice. As su ch, ce ntra l to all de ci sio n-ma k ing is d oi ng the r igh t thin g for customers , clients and par tners, b y helping them achie ve nancial solutions t o meet their needs. Our specialist , expert teams consist ently deliver high quality ser vic e to our cu stome rs, cl ie nts and p ar tn er s. We enga ge w ith our c ustom ers th roug hou t the ir e nd-to-e nd jou rn ey wi th us an d acti vely s ee k the ir fee dba ck. We proac tive ly revi ew the cu stome r fee dbac k we rec ei ve in ou r loc al b usi nes s un it cu stome r for ums and c onti nuo usl y loo k at how we c an im prove ou r exp er ie nce a nd ser vic e, ens uri ng the s er vic e we provi de m eets th eir n ee ds a nd is ali gne d wi th our c ustome r pr inc ipl es. We als o use th is fee db ack to evolve o ur pr opo siti on an d of fe rin g as we ad apt to the ch an ging needs of our customers , client s and partners. Ke y engagement during the year We have sup por ted our c ustom er s, cli en ts and p ar t ner s throu gho ut th e hei ghten ed u nce r t aint y we h ave expe ri en ce d dur ing th e yea r , a nd m aint ain ed c los e cont act a s they nav ig ated ris ing i nati on an d cos t of liv ing p res su res, as we ll a s the rol l-of f of Co vid-relat ed gov e rnment support. W e have discussed our cus tomer n ee ds wi th the m regu la rly to he lp e nsure we a re supporting them appropria tely . Wa ys we have created v alue • Contin ue to rene o ur pro du cts an d se r vi ce s bas ed on c ustom er fee dba ck to del ive r pos itive c ustom er o utcom es, u nde rp inn ed by hig h qu ali t y ser vic e an d a gre at en d-to-e nd ex pe rie nc e. • By d ee ply u nd er sta ndi ng cu stome rs’ ne eds a nd g oal s an d tai lor ing n ew so luti ons to me et tho se ne ed s, cre ated an awar d-winning and industry- rst solution, pr oviding a forecourt ins ights d ata too l to motor de ale rs. Rea d m or e a bo ut e n ga g em e nt w it h o u r cu s to me r s , clients and par tners Se e pag es 3 9 to 4 1 Book 1.indb 14 27/09/2022 23:45:32 15 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Suppliers Ou r bus ine s s is su ppo r ted by a b road ra ng e of sup pl ier s, en abl ing u s to provi de hi gh st an dard s of se r v ice to ou r cus tomer s, cl ients a nd p ar tn er s. We are foc use d on de velo pin g and main taining transparent and sustainable w orking relationships with our suppliers. Ke y priorities of our suppliers • Str ong and sustainable relationships with Close Brothers • Fair and equitable conduct o f business • Appropriat e and clear pa yment procedur e s • An understanding o f the Close Br others Gr oup purpose and st rategy • Robust risk management framework En ga g in g wi t h ou r s up p li e rs Eng age me nt wi th our s upp lie rs e na ble s the g roup to de velo p and m ain tai n lon g-term an d sus tai nab le re latio nsh ips a nd ens ure s our s upp lie rs c an b et ter un de rst and a nd al ign to ou r ri sk management requirement s and operate responsibly . Our key s upp lie r rel ation shi ps ar e owne d by rel ation sh ip ma nag er s and a re su ppo r ted by ou r ce ntra l third p ar t y m ana ge me nt fu ncti on who p rovi de s pec ia lis t exp er ti se a nd su ppo r t. Eng age me nt wi th suppliers includes regular meet ings, with st rategic meetings taking pla ce at le as t qua r ter ly w ith ou r top tie r sup pli er s, as wel l as a n ann ua l sur vey to seek fe edb ack o n Clo se Broth er s as a c lie nt. Ke y engagement during the year Th roug hou t the la st ye ar , we have co ntinu ed to ma inta in ou r frequent con tact with our suppliers and conduct regular r eviews of service. Ou r ann ua l sur vey of key supp lie rs wa s und er t ake n in Ju ly 2022, focu sin g on how C los e Brothe rs p er form s as a cl ient a nd h ow our s upp lie rs fe el a bou t do ing b usi ne ss wi th us. We conti nue to sh are a st rateg ic vi sio n wi th our s upp lie rs to he lp them understand our direction and pro vide clarit y , while ensuring that we rem ain c ons id erate of ou r sup plie rs. We are als o wor ki ng in pa r tn er shi p with o ur key su ppl ie rs wi thin faci liti es a nd e et ma nage me nt to direc tly c oll abo rate and contribute t o the sustainability agenda. Wa ys we have created v alue • Work ing w ith o ur fac ili tie s man ag eme nt pa r tn er to inves t fu nds and ex pe r tis e to acce le rate ou r car bo n red ucti on pl an s acros s our group proper t y port folio . • Conti nue d to rene o ur third p ar t y m ana gem ent f ram ewor k to ens ure that p roc es ses re ma in ef c ie nt, are bu sin es s ena bli ng but re ma in rob ust f rom a r isk m ana ge men t per sp ec tive a nd remain aligned t o lat e st regulat or y requirements . R ea d mo r e a bo ut o u r su p p li er r e la t i on s hi p s Se e pag e 4 1 Regulat ors and Go vernmen t We are co mmi t ted to sust ain ing h igh s tan da rds of bu sin es s con duc t ac ross o ur bu sin es s an d mai nta in an a ctive d ia log ue with go vernment and regulat or y bodies. Ke y priorities of our regulators and gov ernment • Good cust omer outcomes • Compliance wit h bot h applicable regulations , including prudential r equirements, and with regulat ors’ expectations • Re cog niti on of the i mpo r ta nc e of resi lie nc e and r is k management • Pr ovision o f high quality information and regulat or y reporting • Active c ons id erati on of ri sks re latin g to susta ina bil it y an d other climat e matt ers • T r ans pa rent g roup t a x str ategy En ga gi n g wi t h ou r re gu l at or s a nd g over n me nt Th e grou p foster s an o pen a nd tra nsp are nt rel ation shi p with a ll ou r regulat ors, including the Financial Conduct Authority (“F CA ”) and the Pru de ntia l Reg ulati on Auth or it y (“PR A ”), as well a s gover nm ent auth ori tie s and tr ade a sso ciati ons. I t is imp or t ant that we m ain tai n a cul ture that i s focu se d on hi gh sta nd ards i n all o ur bu sin es s activities, regulatory compliance and an open relationship wit h our regulat ors. Ac tive e ngagement with the relevan t regulators and a ss oci ation s hel ps to ens ure the b usi ne ss is awa re of an d ada pting to the evol vin g regu lator y f ram ework. We maint ain a p roac tive d ial ogu e wi th the PR A an d the FCA an d have a co nstr uct ive rel atio nsh ip wi th HMRC to he lp e nsu re we are aligned with the r e levan t regulat or y framew orks. We regularly intera ct wi th the tra de bo die s an d bus ine ss a sso ci ation s we are af li ated wi th to ensu re we are e nga ged w ith i ssu es im pac ting our industry . Ke y engagement during the year We have conti nue d to mai ntai n a clo se wor ki ng rel atio nsh ip wi th the r e gulat ors as we progress t hrough the application process for moving t o use the Internal Ratings Based approach. We submit ted our i niti al a ppl icati on i n De cem be r 2020 an d, sinc e the n, have moved th roug h a se rie s of revi ews an d inter views. We re cei ved con rm ation f rom the PR A th at our a pp lic ation s ucc es sf ull y tran siti one d to Phase 2 of th e proc es s in M arch 2022. Phas e 2 doc ume ntati on was s ubm it ted in J uly 2022 a nd we ar e well pos itio ned to su ppo r t the n ext s et of revi ews. Wa ys we have created v alue • Con trib uted c onst ruc tive fe edb ack to trad e ass oc iatio ns on a wid e ran ge of re gul ator y deve lo pme nts su ch as th e De bt Res pi te Sche me (B reath ing Sp ace), Consu me r Dut y , a nd Statu tor y De bt Re payme nt Pla ns (“S DRP ”). • Kept ab rea st of reg ula tor y deve lop me nts to bet ter un de rsta nd not on ly ch ang es i n regu latio n but a lso c han ge s in reg ulator s’ expectations and industr y concer ns. R ea d mo r e a bo ut o u r ap p r oac h t o ri s k gove r na n ce Se e pag es 7 4 to 92 Book 1.indb 15 27/09/2022 23:45:33 16 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Communities and Environment Clo se Broth er s is co mm it ted to contr ib utin g las ting va lue a nd mak in g a pos itive i mpa ct on th e soc iet y in w hic h we op erate and th e env iron me nt more b road ly . T his u nde rp ins th e growi ng ran ge of pro gra mm es a nd in itiati ves we s up por t th at be ne t our communities and the environmen t. Ke y priorities of our communities and the en vironment • A suitable strat egy for approaching sustainabilit y issues • Suppor t for community initia tives • Job creation and social mobility • A lon g-term fo cus o n addr es sin g the im pacts of c lim ate cha nge Engaging with our communities and the environment Eng agin g wi th loc al c omm uni tie s he lps th e boa rd an d our employees de velop our understanding of our clients, cust omers and p ar tn er s so that we c an su ppo r t the m an d hel p the m to achieve their ambit ions, whilst also building employee eng age me nt. We rml y bel ieve that e nvi ronm ent al co nsi de ration s sho uld fo rm a n integ ral p ar t of th e de cis ion s we make a s a bus ine ss a nd e mpl oyee s ac ross th e grou p are a ctive ly e ng age d on responsible behaviours and envir onmental issues. Ma ny of our e mpl oyee s pa r tic ipate in g roup -wid e com mi tte es est ab lis hed to dr ive fo r war d a ran ge of in iti ative s aro und d ive rsi t y and inclusion , helping the en vi ronment and charitable and com mun it y ac tiv itie s, wi th our e mp loyee vo lu nteer s the d ri vin g force b eh ind o ur su cc es sfu l co mmu nit y a nd ch ar ita bl e events. We have a ra nge of p ar tn er shi ps wi th le adi ng org an isati ons d ed ica ted to creati ng po siti ve im pact v ia d ive rsi t y , inc lus io n and s oci al mobility schemes, while our regular int eractions with industry bod ie s and th ird pa r t y co nsu lta nts he lp info rm o ur str ategy towards cli mate cha ng e and th e env iron men t. Ke y engagement during the year In rec ogn iti on of the Q ue en’ s Plati num Ju bil ee, we do nated a tree fo r ever y c oll ea gue to su ppo r t the Q ue en’ s G ree n Can opy sch em e. Thi s wil l he lp to enh an ce ou r env iron me nt an d cre ate a leg acy th at wil l ben et f utu re gen er ation s, whi ch is s ometh ing that is d ee p-ro oted in ou r pur pos e an d our re spo nsi bil it y . T he don ated tre es w ill b e pla nted in d ep ri ved ur ba n are as a nd in and a rou nd sc hoo ls, w here th ey wi ll imp rove the q ual it y of li fe in the se co mmu nit ies by g iv ing a cce s s to gree n spa ce s and a ll the benets these bring . Wa ys we have created v alue • Be ca me a si gnator y to the Net Zero B ank in g Al lia nce. • Esta bli she d a new re lati ons hip w ith T he Wi ldl ife T ru sts an d don ated £50,00 0 to supp or t th e cha ri ty’s work. R ea d mo r e a bo ut o u r vol u nt e er i ng a n d co mm u ni t y initiatives Se e pag es 3 8 to 39 Inve s tor s Clo se Broth er s ha s a proven a nd re sil ie nt bus in es s mod el a nd is foc use d on g ene rati ng lo ng-ter m, sust ain abl e val ue for i ts inve stors, w hil e als o ma inta in ing a st rong b ala nc e she et. Key pr io ri t ie s of o ur i nve st or s • Stron g retur ns an d na nci al re sili en ce thro ugh th e cycle • Capital generat ion and distributions • Sustainable and consistent business model • Appropriat e governance practices and regard t o envir onmental and social responsi bility Engaging with our in vestors Ou r inves tors a re the prov id er s of ca pit al to ou r bus ine ss s o it is im por t ant th at we eng age a ctive ly w ith the m an d lis ten and res pond to the ir fee dba ck. We have an e sta bli she d pro gra mm e of eng ag eme nt fo r sha re hol de rs, de bt ca pi tal p rovi de rs a nd othe r ma rket par ticipa nts thro ugh o ur inve stor rel atio ns team, w hic h inc lud es re gul ar di al ogu e with th e execu tive tea m an d cha ir man. We proa ctive ly c oll ate feed bac k from o ur inve stors and re lay thi s to seni or ma nag em ent, the b oard a nd to our em ploye es i n the ap prop ri ate foru ms su ch as T own H al ls. Ke y engagement during the year We maint ain ed ou r pro gra mme of c omm uni cati on wi th the inves tme nt co mmu nit y thro ug hou t the yea r , inc lud ing th roug h our re gu lar m ar ket upd ates an d an aly st pre se ntatio ns. We unde r took i nves tor roads hows c over ing th e UK , Nor th Am er ic a and Eu rop e and c om plete d a se rie s of me eti ngs with s el l-sid e an aly sts an d sa le s des ks, as we ll a s with xed inc ome h old er s. In add itio n, our c hai rm an he ld a c orp orate gover na nc e roads how w ith top sh are ho lde rs. Wa ys we have created v alue • Enhanced our disclosures on En v ironment , Social and Gove rna nc e (“ESG”) in l ine w ith th e reco mm end atio ns of theTCFD. • Com pre he nsi ve prog ram me of e nga ge me nt over th e yea r with exist ing and prospect ive shar eholders and analysts , covering over 70 insti tuti ons ac ros s the UK , Euro pe an d No r th Am er ic a. Rea d o ur TC FD d i sc lo s ur e s Se e pag es 42 to 57 Our S takeholder s continued Deliv e ring for our s takeholders Book 1.indb 16 27/09/2022 23:45:33 17 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Se c t io n 1 72 S t at e me nt a n d St a te m en t of E ng ag e me nt w i t h Employ ees and Ot her Stak eholders Sec tio n 1 72 ( 1 ) of th e Co mpa nie s Act 20 0 6 req uire s the di rec tors of a com pany to ac t in a way that th ey con sid er , in g ood f aith, wo uld b e mos t likel y to promote th e suc ce ss of the c om pany fo r the be ne t of its me mb er s as a w hol e, and in d oin g so h ave rega rd (amo ngs t other factor s) to variou s othe r con sid erati ons a nd st akeh old er in teres ts: • the li kely c ons equ en ce s of any de ci sio n in the l ong ter m; • the in terest s of the co mpa ny’ s e mpl oyee s; • the ne ed to foster th e com pany’s busin es s relati ons hip s with sup pli er s, cu stome rs a nd othe rs; • the imp act of th e com pany’s operati ons o n the c omm uni ty and th e en vironmen t; • the de sir abi lit y of th e com pany m ain tain ing a re pu tatio n for hi gh standards o f business conduct ; and • the ne ed to ac t fai rly a s bet we en m emb er s of the c omp any . Th e boa rd is re spo nsi ble fo r est abl ish ing a nd ove rse ei ng the com pany’s value s, strate gy an d pur po se, all of w hi ch ce ntre a roun d the intere sts of key st akeh old er s and oth er f actor s set ou t in s ect ion 1 72 (1 ). Th e dire ctors a re co nsc iou s that the ir de ci sio ns an d acti ons h ave an imp act o n sta keh old er s, in clu din g em pl oyee s, cus tome rs, s upp li er s, com mun iti es a nd inve stors, a nd th ey have had re ga rd to stake hol der con sid er ation s and oth er fa ctors i n se ctio n 1 72( 1 ) d ur ing th e yea r . Reg ula r en gag eme nt wi th sta keho lde rs, b oth dire ctly a nd in dire ctly via m an age me nt, has c onti nue d to be an i mpo r ta nt focu s for th e boa rd an d has e nsu red th at the di rector s are awa re of an d have ef fe ctive re ga rd to the mat ters s et ou t in se ctio n 1 72( 1 ). Throug hou t the ye ar , the bo ard re ce ived a nd d iscu ss ed st akeh old er in sig ht an d feedback and it ensured that stakeholder considerations were tak e n into acc ou nt in the b oa rd’ s de li ber atio ns an d de cis ion -ma ki ng. Whi lst th e boa rd ack now le dge s that, som etim es, i t may have to take decisions that af fect one or more stak eholder groups differently , it see ks to treat i mpac ted grou ps fa irl y an d with re ga rd to its dut y to act i n a way that it c ons ide rs wo uld b e mos t like ly to prom ote the suc ce ss of th e com pa ny for the b en et of it s mem be rs a s a who le, havi ng re gard to the b ala nc e of factor s set o ut in s ec tion 1 72 (1 ). Con sid erati ons re latin g to the factor s in se cti on 1 72( 1 ) are a n imp or t ant pa r t of gove rn an ce pro ce ss es a nd de ci sio n-ma k ing b oth at boa rd an d execu tive leve l, and m ore wi de ly thro ugh ou t the gro up. For exa mpl e, the Sc hed ul e of Mat ter s Res er ved to the Boa rd an d the term s of refere nc e for ea ch of the b oa rd’ s co mm it tees e mp has ise th e imp or ta nc e of de cis ion- mak in g with re ga rd to releva nt fac tors un der section 1 72 ( 1 ) and broader stak eholder considerations. Ne ce ssa ri ly in a l arg e and re gu lated g roup, some d ec isi ons a re ta ken by man age me nt or th e dire ctor s of sub sid ia r y co mpa nie s. T hes e de cis ion s are ta ken wi thin p ara mete rs set by th e boa rd an d the re is a rob ust f ram ework th at en sure s ong oin g over sig ht, moni torin g and c ha lle ng e by the bo ard a nd its c om mit tee s (i ncl udi ng ce r t ain de cis ions a nd ac tiv itie s that a re alway s rese r ve d to the boa rd or its co mm it tees). The bo ard h as reg ard to rel evant fa ctors s et ou t in sec tio n 1 72 (1 ) i n its ac tivi tie s in the se a rea s, inc lud ing c ons ide ratio ns rela ting to the poten tial i mpa ct of de le gated d eci sio ns on th e lon g- term s ucc es s of the gr oup a s a who le, the gro up’ s repu tati on for hig h sta nda rds of b usi ne ss c ond uct a nd th e con seq ue nc es of lo ca l decisions on t he group ’ s stakeholders. Deta il o n the boa rd’ s e ng age me nt with, a nd co nsi de ratio n of , the com pa ny’ s sta keh old er s ca n be fou nd on p age s 99 to 1 22 of the Corporat e Governance Report. Book 1.indb 17 27/09/2022 23:45:33 T H E MOST SU C C ES SF UL RE LA T I O NSH IP S 18 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Book 1.indb 18 27/09/2022 23:45:37 19 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report WO R K BE A U T I F U L L Y ON B O T H S IDES Case Study Ellers F arm Disti ller y w ant ed a nancier who shared t heir et hos and commitment t o susta inabilit y . The Challen ge Sta r tin g up i n Septe mb er 2020, Ell er s Far m Dis till er y has grow n stead ily a nd eth ic all y . Ba se d on an o ld N or th Y orkshire farmstead, it includes a barn-based distiller y and a n orch ard to su sta in vod ka ma ki ng. Op en ing i n the p an d em i c pl ace d ex tra p res sure o n t h e i r am bi t i ous pl ans to f ocus on p eo pl e, pl anet an d p ro t. Wi t h a wor ld - r enowned distiller and head o f sustainabilit y in p lace, it was vi ta l the y foun d a like -min de d fu nde r to su pp or t them in acq uir in g and i nsta llin g the e qui pme nt they n ee ded. The S olutio n Ell ers F arm spo k e to sever a l organ i sat i ons b ut wer e p articularl y im p ressed with Close Brothers . W e showed a n un d erstan di ng o f t h e i r et h os an d comm i tmen ts to t h e env i ronm ent, as we ll as go vernance an d f un di ng costs . Our industr y s p ecialist s develo p ed a nance sol ution t h at f un d e d t h e i r new di st ill ery p l ant , cons i st i ng o f st ill s, b ott li ng an d f ermenta t i on equ i pment, a b o il er an d a water treatm ent pl ant . T o d a y , t h e y are s ucc es s f u lly supp l y i ng supermar k ets, hi g h -en d restaur ants , an d di rect ly to t h e consumer . As w e’ r e an ethical business that’ s doing things a l it tle bit dif ferently , patience is k ey . Close Brothers w ere br illiant t o work with. W e put our par tners and supplier s under scrutiny t o check that they meet our v alues, and w e’ r e condent w e chose the right funder . Andy Braithwaite , Managing Direct or El lers F arm Distill er y Book 1.indb 19 27/09/2022 23:45:38 20 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Our Responsibilit y T o hel p addre ss the social, e conomic and envir onmental ch allenges facing our business, emp loyee s and cl ients, now and i nto the futu re. Our Cul ture Combines e xper tise , ser vice and relat ionships with tea mwor k, integr it y and p rud enc e. Ou r Purp ose T o help the people and businesses of Britain thrive over the long term. Our Strategy T o provide exceptional service to our customers and clients across lending, savings, trading and wealth management. The Foundat ions of O ur Bu sin ess Our cultur e, our s trat egy and our responsibility underpin the f oundat ions of our success , enabling us t o deliver on our purpose : t o help the people and businesses o f Britain t hriv e ov er the long t erm. We beli eve in pu t ting o ur cu stome rs a nd cli ents r st. Our c ultu ral at tri bute s bri ng out th e ver y bes t of our p eo ple, sk il ls an d stron g repu tatio n that we have b uil t with o ur sta keho lde rs ove r ma ny yea rs. A c omb inati on of exp er ti se, ser vic e and re lati ons hip s with team work, integrity and prudence underpins our a ppr oac h and g ive s us the too ls to he lp our c ustom er s thri ve over th e lon g term. Ou r lon g-term st rateg ic ap proa ch p lac es excepti ona l se r vi ce at th e he ar t of eve r y th ing we do. Eac h of our d ive rs e, spe cia lis t businesses all hav e a deep industry kn owle dg e, so they ca n und er sta nd the challenges and opportunities that our cus tomer s an d cli ents f ace. We sup por t the unique needs o f our customers and clients to enab le the m to thri ve, rather th an si mpl y sur vive, whatever th e ma rket co nditi ons. An d we reco gni se that to he lp the p eo ple and b us ine ss es of B rit ain th ri ve, we als o have a responsibility to help address the so cia l, eco no mic a nd env iro nme nta l challenges facing our business, em ploy ees and c lie nts, now a nd in to the futu re. Th ese g uid ing p rin cip le s are the fo und atio ns of our s uc ce ss a nd en ab le us to co ntin ue delivering for our stakeholders. Book 1.indb 20 27/09/2022 23:45:38 Gov ernance Repor t Financial S tatement s Strategic Report 21 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Our p ur pos e is at the h ea r t of ou r bus ine ss and g uid es eve r y d ec isi on we ma ke. We take a long-t erm approach t o managing our business. Th is me an s sup por ting ou r co lle ag ue s, cus tomer s an d cli ent s, and th e co mmu niti es and e nvi ronm ent in w hic h they o per ate, for the b en et of a ll ou r sta keho lde rs. I t means helping people and businesses unl ock th eir p otentia l an d pla n for the f utu re with con dence, building relationships that sta nd the tes t of time. It a lso m ean s that we conti nue to be th ere for th e lo ng term, whatever th e eco nom ic cli mate, maki ng de cis ion s that are r ig ht for today a nd for generations to come . Ou r custom er s are th e pe opl e and bus ine ss es of Br it ain a nd we rec og nis e that put tin g the ir ne eds a nd i nteres ts at the he ar t of our b usi ne ss i s cen tral to ou r suc ce ss. OU R PUR POS E I S T O H E L P T H E PEO PL E A N D BUS I N E S S ES OF BR I T AIN TH R I V E O V E R TH E L O N G TE R M Ou r Pur pose Book 1.indb 21 27/09/2022 23:45:38 22 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 OU R DI ST I NC T I V E CU L T U R E A N D LO N G - T E R M A PPR O A C H A R E EM BE DDED T H ROUG HOUT T H E ORG AN I SA T ION Our Cu lture Book 1.indb 22 27/09/2022 23:45:38 23 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Ser vi ce W e pride ourse lves on our ex c ellent level of ser vice and thin ki ng that is both entre pre neu ri al and disciplined. 92% 2021 : 93% see colleagues go the e xtra mi le to me et the n ee ds of c usto mer s and clients Te a m w o r k We promot e teamwork in a fair and open envir onment , where individua ls and their contribu tions are valued and re spected. 97 % 2021 : 96% of colleagues be lieve their im me d ia te t ea m wor ks we ll together to get t he jo b don e E xper tise W e are commit ted t o fostering a culture that attracts and retains talent, whilst also growing and building the exper tise of our people. 97 % 2021 : 97 % of colleagues believ e they ha ve the skills and knowledge to do the ir jo b well Integrit y W e insist on trustwor thy behaviour and always acting with int e grit y – “ doing the r ight thing” , internally and e x t e rnally . 96 % 2021 : 97 % of colleagues believ e our culture encourages them t o treat customers and clients fairly Relationships We take the time t o und erstand and build strong long- term relationships with our customers and clients. High customer sat isfaction an d st r on g leve ls of r e pea t business acro ss the group Pr u d e nc e W e always tak e a prudent, robust and transparent ap proach t o r isk management . 95 % 2021 : 94 % o f c o l l e a g u e s b e l i e v e w e a r e co mmi t ted to prudent risk management Our dist inctiv e cultur e and long- t erm approach ar e embedded thr oughout the or ganisat ion. It com bin es o ur val ue s of ser vic e, expe r tis e and re lati ons hip s with our way s of work in g: teamwor k, in tegr it y an d pr ude nc e. Th es e valu es e ns ure we co ntin ue to prov ide exc ell ent s er vic e for ou r cus tomer s an d cli ents ove r the l ong te rm, br ing ing o ut the b es t in our people and suppor ting our strong reputation . Al l sc ore s a re ta ken f ro m Cl os e Bro the r s’ Emp loy ee O pi ni on S ur ve y , wi th th e su r vey c lo si ng i n Ma rch 2 022. Book 1.indb 23 27/09/2022 23:45:39 24 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Prot ec t Ke e p i n g it saf e Maintaining and enhancing the key strengths of our business model Gro w Deliv ering disciplined gro w th Maximising opportunities in existing and new markets; loan book growth remains an output of the business model Sust ain Doing it responsibly Securing the long-term future of our business, customers and the world we operate in TO P R OTEC T , G R OW AN D S UST AI N OU R P RO V E N AND R ES IL I E N T BUS I N ES S MODE L SO TH A T IT CO NTI N U E S T O DE L I V E R I N T H E LO N G T E R M Our Strategy Book 1.indb 24 27/09/2022 23:45:39 Protect ing ou r busi ness: operational and cyber resilience We contin ue to inves t in the o pe ratio nal a nd cyb er re si lie nc e of our b usi ne ss, to protec t our c ustom er s wh ilst m ai ntai nin g an d enh an cin g our key stre ngth s as a bu sin es s. In line wit h UK regulat or y developments, we have id enti e d our i mpo r ta nt bus in es s ser vices, assessed their r e silience, and a re al ign in g our c ap ita l inve stme nt roa dmap wi th t hese services t o enable enh an ce men ts to their re sil ien ce ove r time. Th is is en ab ling u s to test and d em onstr ate how ou r mos t imp or t ant s er v ic es c an b e sustained thr ough severe but plausible disruptions , and t o target enhancements to address an y vulnerabilities identied . Fur the r , we conti nue to inve st in p eo ple, system s and p roce ss es th roug h a mul ti- year strat egic cyber resilience programme. Our fo cu s on cy be r resi lie nc e inc lud es evolving our in-house cyber securit y exp er t ise, au gm ented by i np ut f rom strat e gic supplier partners hips, whilst maintaining Security by Design as a core te net of tec hno log y an d ope rati ona l changes. Utilising an industry-standard control framework, we maintain an ongoing assessment of our risk and con trol pro le, targ etin g inves tmen ts to ef fectively prev ent compromise of information assets. Acknowledging t he nature of c yb er ri sks, we re co gni se the re is a ris k that preve ntio n may not b e abs olu te and we th ere fore si mul tan eo usl y ma inta in our i nvest men t in ca pa bil itie s to detec t, res pon d to , a nd re cove r from a ny cyb er events w hic h may oc cu r . Mo re i n fo rm a t io n on o u r ap p ro ac h to r is k c an b e fo u nd o n pa ge s 7 4 to92 Maintaining and enhancing the ke y st r e ng th s o f ou r bu s in e ss m od el Our key s treng ths di f fer enti ate our prove n and resilient business model and hav e cont ributed to our lo ng-term tr ack re cord, e nab lin g us to deli ver g row th, prot abi lit y a nd retur ns to sha re hol de rs ove r ma ny yea rs. Ou r hig h leve ls of pe rs on al se r v ice a nd specialism are key poin ts o f dif ferent iation. Our people ha ve deep knowledge o f the ind ustr y sec tors a nd as set c la sse s we cove r , leading t o lending decisions informed by exp er ts a nd f aster a cc es s to fun ds wh en o ur cust omers need t hem most . We run ou r bu sin es s pru de ntly , m ai ntai nin g a str ong funding, liquidity and capital position . Our loan book is predominantly sec ure d or str uc tura lly p rotected, w ith a focus on maintaining strong cr edit quality . We adopt a c ons isten t and d isc ipl ine d app roac h, as we ma int ain p ru den t under writing and pricing in our lending. Whi lst o ur foc us on th e str ict m ana ge me nt of cos ts rem ain s unc han ge d, it is e sse nti al that we co ntin ue to invest i n protec ting th e key attr ibu tes of ou r mod el a nd ma inta in regulat or y compliance and enhance our operational and cyber r esilience. Our inves tme nts an d co st bas e su ppo r t the generation o f our st rong margins , enabling our operat ional and nancial resilience, whi le al so su ppo r tin g our a bil it y to ma xi mis e opportunities as the y arise . Pr otect K e eping it saf e 25 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Book 1.indb 25 27/09/2022 23:45:39 26 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Long-term growth prospects Conservative funding prole Strong margin Cultural t Strong track record Diversied business Expe r t, relationship based, specialist Prudent underwrit ing and secured lending Maximising opportunities in exi s ti n g an d n ew ma rke t s Ou r focu s on de li ver ing d isc ipl ine d grow th is cr iti cal i n en abl ing u s to protect th e model, whilst still ma ximising oppor tunities and t ak ing th e bus ine ss fo r ward. It a llow s us to pri or itis e con sis tent an d pru de nt und er w ri ting c ri teri a and m aint ain s trong retur ns acro ss o ur bu sin es ses. We do not man age th e grou p to a grow th ta rget, with loa n boo k grow th re mai nin g an ou tpu t of the business model . Whi lst we re mai n ope ratio nal ly a nd strateg ica ll y well po siti one d to contin ue suppor ting our customers and delivering for ou r sh are hol de rs, we co ntin ual ly a sse s s exis ting a nd ne w mar kets for g row th opportunities that t with our model. We have a lon g his tor y of de li ver ing dis cip lin ed g row th an d to supp or t u s in bui ldin g on thi s track re co rd, we devel ope d our “ Mod el F it As se ss me nt Framewo rk ” . Th is fra mewo rk su ppo r ts ou r revi ew of opportunities, assessing t heir t wit h our mod el, cu ltur e and re sp ons ibl e way of doi ng business, alongside their suitability from a strat egic perspective . Gr ow Deliv ering discip lined grow th En s ur i ng t h e ri gh t t Th ese e ig ht cr iter ia ar e all f actor s that we co nsi de r whe n as se ssi ng grow th o ppo r tun itie s. Th ey ca pture th e key streng ths of ou r mo del and s o by tak in g the se into ac cou nt, it en sure s we are fo llow ing a disc ipl ine d ap proac h to grow th and p res er v ing th e at trib utes that generat e value f or our shareholders. Our Strategy continued Book 1.indb 26 27/09/2022 23:45:39 Growing our business: commercial oppor tunit ies in the green lending space Growing our bu sin ess: Close Brot he rs B rew er y Rentals Delivering disciplined growth Th e UK gove rn me nt’s Net Zero Str ateg y repo r t e stimate s up to £90 b ill ion of p ri vate inves tme nt in the g ree n in dus tria l revol utio n by 203 0 1 . Th e exis ting m arkets a nd as sets th at we have de ep ex pe r ti se in na nci ng ar e tran siti oni ng towards b ec ome g ree ne r , aid ed by g over nm ent p oli ci es a nd corporat e commitment s, as the UK aligns towards a ne t zero e con omy . We curr entl y na nc e a wid e ar ray of gre en ass ets, as we ll as tr ans itio nin g as sets wh ere new g ree n tech nol og y is sti ll de velo pin g: • Our Asset Finance business has been nancing wind farms , solar parks and hydro sc he me s si nce 201 4 an d als o nances transit ion assets such as gas pe ak ing p lan ts. We also s upp or t b atte r y electric v e hicle deplo y ments through the Wholesale Fleet business • In ou r Motor Fi nan ce b usi ne ss, we nance hybrid and electric v ehicles and s upp or t o ur de al er pa r tn ers w ith guidance and t hought leadership on the mar ket, feature s of the tec hno log y an d considerations specic to alternative fuel vehicle o w nership • In ou r Prope r t y bu sin es s, all of o ur ne w deve lop me nts have an EP C ratin g of A or B an d we have si gn ic ant ex pe r tis e in nancing sustainably focused development s Financing a batter y energy storage system We have rec entl y prov ide d a deve lo pme nt loan t o Pacic Green T echnologies Group for the c ons tru cti on ph ase of o ne of the UK’s large st bat ter y e ne rgy s torage system s (“BESS” ), a 99 .98 MW ba tter y energy s torage syst em at Richborough Energy Park in Kent. Given t he sizeable mark et opportunity in su ppo r ting th e tra nsi tion to a net ze ro ec ono my , we are c ontin ual ly lo ok ing fo r oppor tunities f or disciplined growth in t his arena, whether that be through increasing our a pp etite for l end ing to gre en a ss et cla ss es o r expa nd ing o ur of fe ri ng into ne w green proposit ions and t echnologie s. We conti nue to bu ild o ur ex pe r tis e in gre en a nd tra nsi tion a sse ts, cem en ting our re pu tatio n for sp ec ial ist k now led ge and nancing . £9 0 b n Es t i ma te d p ot en t i al i nve s t me n t in t h e UK gr e en i n du s t r ia l r evo lu t io n by 2 0 3 0 clarity on st ock positions, impr ove eet efciency and inf orm management decisions. Th e sel f-co lle cti on e le me nt of our EkegPlus se r vice also supports the reduction o f CO 2 emissions. We use ultr a-hig h pre ss ure (“U HP ”) water jet tin g for the i nter nal c le ani ng of cont ain er s, an inn ovative me thod that me ans we c an p roc es s uni ts qui ck ly a nd to a high s ta nda rd. Th ere a re no c he mi ca ls use d in the U HP pro ce ss, re duc ing o ur imp act on th e env iron me nt. Dur in g Covi d- 1 9, we were a bl e to help brewe rs w ith lo ckdow n waste by prov id ing a sol utio n to safel y em pty th e exp iri ng conte nts of kegs a nd ca sks i n an e co- fr ie ndl y ma nne r . Ove r 1 30 m ill ion p ints of be er , cid er a nd a le were e ith er so ld to farm er s for fe r tili se r or us ed a s a pH balancer for anaerobic digestion processes. 2. 3 m Ou r ee t of ke g s an d c as ks Delivering disciplined growth Th e Brewe r y Re nta ls bu sin es s was est ab lis he d in 20 07 and, sin ce the n, ha s grown f rom stre ng th to streng th. We work w ith b rewer s and d isti lle rs, of fe ri ng tai lore d sol utio ns for ke g and c as k renta ls, container maint enance ser vices and equipment nance solut ions. We oper ate from fou r site s arou nd the U K and, w ith a e et of ove r 2 .3 mil lio n, are the UK’ s b ig ge st own er of ke gs an d ca sks. We have grown th e bus ine s s orga ni cal ly , de live ri ng a rec ord p er fo rm anc e in the 2022 nancial year . We are co ntinu all y evol vin g our of feri ng and expanding into complementary products , utilising our specialist e xpe r tise and k now le dge to of fe r ex ibl e sol utio ns to meet th e ne eds of o ur cu stome rs. T hi s de mons trates th e Clo se Broth er s mod el perfectly – specialist k nowledge in action to supp or t o ur cu stome rs a nd a fo cus on expanding int o niche and adjace nt markets t o deliver disciplined gro w th. EkegPl us EkegPl us is a c onta ine r rent al po oli ng ser vice, o f fering an outsour ce d k e g and ca sk so luti on to all ow brewer s to pay onl y for the tim e they are u sin g the c onta ine rs. Each cont ainer is embedded with Radio F requency Identication (“RFID”) technology so it is uniquely identiable , enabling customers t o track containers dire ctl y and g ivi ng the m gre ater vi sib ili ty over u sag e an d cos ts. We develo pe d the pro duc t in re spo nse to requ es ts from c ustom er s for a dire ct to retai l outl et sho r t -term renta l sol utio n. It has ena bl ed us to op er ate in a mar ket seg me nt previously unavailable to us. EkegPlus has seen strong cust om er demand this ye ar , in cre asi ng to 90 c ustom er s sin ce lau nch, wi th more i n the pi pe line. Innovativ e and sustainable focus As a bu sin es s, we are c ons tantl y deve lop ing new tec hno lo gy as we b road en o ur of fe rin g and p rovi de g reate r ben e ts for ou r cus tome rs. Ou r award-wi nni ng c onta ine r RFI D trac ki ng technology allo ws customers t o monitor an a rray of d ata po ints th at ca n provi de 1 HM G ove rn me nt (20 21 ), “N et Ze ro S tra teg y: B uil d Ba ck G re en e r”, page 10. Con ta in s pu bli c se c tor in for m ati on l ic en ce d un de r th e Op en G ove rn me nt L ic en ce v 3.0 (https:/ /ww w. nationalarchives. gov. uk /doc/ open-government -licence/version/3/). 27 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Book 1.indb 27 27/09/2022 23:45:39 SE C URI N G T HE LO N G - T E R M F UTU R E O F OU R BU S IN E S S , CU ST OM E R S AND T H E WO R LD W E OP E R A T E I N Ou r lon g-term a ppro ach i s em be dde d throughout our organisation and guides all of our d ec isi ons, s o it is im po r ta nt that we evol ve our b usi ne ss to sus tai n it for th e lon g term. For ou r cus tomer s, thi s invol ves re co gni sin g and re sp ond ing to cha ng es in th eir behaviour , adapt ing our business accordingly and impro v ing our digital ca pabilities and the cust omer journey t o enhance their use r exp er ie nce. We conti nue to val ue the impor tance o f long-standing relationships with o ur cu stome rs, p rovi ding th em w ith excepti ona l se r v ice a nd the d ee p in dus tr y kn owle dg e an d exp er ti se of o ur pe op le. For ou r pe opl e, this me an s mai nta ini ng ou r focus on employee engagement to support the well be ing a nd ne e ds of ou r col le agu es. We wi ll continue to enable t he ongoing developmen t of our p eo ple, as we l oo k to retain t ale nt an d suppor t our succession planning , whilst also nurturing an inclusive culture where our people feel v alued and respect ed. We are al so foc use d on o ur im pac t. W e cre ate valu e in ou r lo ca l com mu niti es by understanding the needs o f SMEs and hel pin g the m ach ieve the ir am bi tion s, and by creating equal oppor tunities f or all , regardless of background . W e maintain our focus on reducing our envir onmental imp act a nd res pon din g to the ris ks and oppor tunities brought b y climate change. Sustain Doing it responsibly Our Strategy continued 28 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Book 1.indb 28 27/09/2022 23:45:39 29 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Sustaining our business: suppor ting t he oppor tun iti es brought by climate change O f f sh or e wi n d fa rm s u pp o r t ves s el s Of fshore wind is a signicant contribut or of rene wabl e en erg y in the U K, wi th the go vernment recently announcing its am biti on to reac h 50GW of i nsta lle d capacity by 2 030, supporting 90, 0 00 jobs 1 . Our Commercial Marine nance t eam is an activ e funder t o businesses performing mission-critical serv ices t o the UK o f fshore win d far m se ctor , w he re inn ovative crew tran sfer ve ss el s suc h as the H ST Har ri (pictured) operated by High Speed T ransfers Lim ited, a re en gag ed to de pl oy en gin ee ri ng and m ainte nan ce c rews safe ly to of fs hore win d far ms i n the No r th Se a, in of ten challenging weat her conditions. With the abi lit y to tra nsfe r up to 26 per son ne l and equ ipm ent at a ti me, the se mo de rn ve ss els, which wer e developed in cooperation with th e of fs ho re win d ind ustr y , p rovi de an ef cie nt a nd time ly s er v ic e to ensu re that of f sho re win d far ms c an re mai n onli ne and re li abl y prov ide a m aj or , low-c ar bon contr ibu tion to the U K gri d. 1 HM G ove rn me nt (20 22), “Br it is h en er gy s ec ur it y st rate g y”. Cont ai ns pu bl ic s ec tor i nfo rm at ion l ic en ce d u nd er th e Op e n Gov er nm e n t Li ce nc e v3 .0 (https:/ /ww w. nationalarchives. gov. uk /doc/ open-government -licence/version/3/). Book 1.indb 29 27/09/2022 23:45:40 30 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 S HAR ED PE R S PECT I V E S Book 1.indb 30 27/09/2022 23:45:43 31 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report MAK ING I T H A PPE N Case Study Gold Pr ope r t y Development s has be en building family homes in semi -rural locat ions acr oss the South Eas t o f England f or more t han 20 y ears. Fina nce S olutio n G old Pro per ty D evel opm ents s oug ht na nc e for its Fai r bro o k G rove deve lop men t – now an awa rd-winn ing i nnova t i ve commun i t y o f 14 P ass i ve H ouse h omes, t h e UK’ s rst p r i vate d eve l o p ment o f i ts ki n d . Wi t h a s h are d phil oso phy on susta i na bl e d eve l o p ment , we un d erst oo d t h e c h a ll en g es an d were a bl e to p rov id e t h e nan ce re q u i re d . I n turn, t hi s f ree d u p t h e c a p ita l for Go ld Pro p ert y Develo p ments to us e on othe r susta i na bl e d eve l opment pro j ects . Th e R esu lt S inc e work in g with u s, G old Pro pe r t y Deve lop me nts h as t h r i ve d as a b us i ness, d emonst rat i ng aw ar d w i nn i ng susta i na bili ty c re d ent i a l s, an d go i ng f rom stren gt h to s tr e n g t h . It has been impor tant to us and v er y helpful that Close Bro ther s ha s a similar phi losophy t o sustainable dev e lopment and suppor t e d us t o proceed with these sor ts of dev elopments. W e hav e gone from strength to strength since doing so , w e ha ve really thriv ed a s a business. Bradley Gold, Chairman Gold Proper ty Dev elopments Book 1.indb 31 27/09/2022 23:45:44 32 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Our long- term s trat egic approach f ocuses on wa ys t o pro t ect , gro w and sustain our model , enabling us t o cont inue delivering e xcel lent s tak eholder out comes. St rateg y and Ke y Per formanc e Indic ators How we a r e ac hi ev in g t hi s Th e p ro gr es s we a r e ma ki ng Fut ur e p ri or i t ie s Pr otect K e eping it saf e • Maintaining a strong capital, funding and liquidity position • Consistently applying our prudent bu s in es s m od el t h r ou gh o ur disciplined appro ach to under writing and pricin g • Balancing investment needs and cost discipline • Maintaining regulat or y compliance, whilst enhancing operat ional and cyber resilience • Strengt hened our funding base with a securitisation of our Motor Finance book and g row th of ou r de pos it ba se • Cont inued t o lend through the cycle , adhering t o our disciplined appr oach to unde rw riting and pr icing, whilst maintaining a st rong margin • Ma inta ine d ou r stri ct fo cus o n cos ts wh ilst inves ting i n strateg ic pro gra mm es that prot ect the business model • IRB application successfully transiti oned to P ha s e 2 • Fur the r e nha nce d ou r ope ratio na l and cyber resilience, whilst undertaking a continuous cycle of improv ements • Retaining our strong capital, funding and liquidity position • C onti nui ng foc us on p ri cin g and p ru de nt under writing whilst lending t hrough the cycle • Str ict m an age me nt of co sts w hils t inves ting i n strateg ic pro gra mm es that protec t key attr ibu tes of ou r mod el • On goi ng pre par ation s for a tra nsi tion to the IR B app roac h, altho ugh th e timet ab le rema ins u nd er the d ire ctio n of the PR A • Continuin g pr eparat ions for implementa tion of the FCA ’s Consu me r Dut y • Compliance wit h regulatory changes, whilst fur ther strengthening our operational and cyber r esilience • Mon itor an d miti gate ex ter nal th reats, including from heightened uncertainty in the e conomic and geopolit ical environment and competition from both established and emerging players Gr ow Deliv ering discip lined grow th • Maximising opportunities av ailable to us in th e current environment • Capitalising on cy clical oppor tunities in ea ch business • E x te nd i ng o ur p r od u ct o f f er in g a nd la un c hi ng n ew i ni ti a ti ve s • Assessing oppor tunit ies f or disciplined gro w th in ne w and exi s ti n g ma rke ts • Ove r £400 m illi on of lo an b ook g row th an d a stron g marg in, as we m ake the mo st of demand across our lending businesse s • Re cr uite d new tea ms to ex tend o ur offering in agriculture and specialist mat erials handling • Di git al inve stm ents h ave en ab led u s to broaden our proposition, wit h Mot or Finance ent e ring strat egic par tnerships with Au to T r ade r and i Vendi • Pilot ing a buy -to-le t offering in our P ropert y bridging nance business • Grow n our I SA ba lan ce s to c.£350 milli on foll owin g the ex pan sio n of ou r Reta il Savings pr oduct range • Inves ting i n new hi res i n CBAM i n lin e with our g row th str ategy • Conti nue d strong grow th of Wi nter oo d Business Service s, with assets under administration increa sing t o £7 .2 billion • Cont inue t o capitalise on cy clical and structural gr ow th opportunities in each o f our businesses • As ses s op por tuni tie s in new a nd ex isti ng mar kets, in li ne w ith the “ Mod el Fi t Assessment F ramework” • Broadening our sustainabilit y offering to ca pture de ma nd wi thin th e gre en le nd ing space • Fur the r grow th of CBAM th roug h hir ing and selectiv e acquisitions • Conti nue d grow th of Winter ood Bu sin es s Ser vic es, w ith a so lid p ip eli ne of cl ie nts exp ecte d to supp or t a ss ets und er adm ini strati on in exce s s of £1 0 b illi on i n the 2023 na nc ial ye ar • Ai min g to provi de £1 .0 bi llio n of fu nd ing for bat ter y ele ctr ic veh icl es i n the nex t veye ar s Sustain Doing it responsibly • P romoting an inclusiv e culture and su p po r t i ng n ew way s of wo rk i ng a nd social mobility • Re du c in g ou r im p ac t on t h e environment and responding to the threats and opportunities of climate change • Promo t ing nancial inclusion, helping borrowers t hat might be ov erlooked and enabling savers and in vestors to access nancial mark ets and advice to p la n fo r t he i r fu t ur e • Supporting our cust omer s, clients an d pa r tn er s i n t he t r a ns it i on t owa r ds more sustainable practices • Remain on track to achieve our target of 36% of fema le s eni or m ana ge rs an d 1 4% ethnic al ly di ver se m ana ge rs by 2025 • Established new Gender Balance, Social Mob ili t y , and Wor ki ng Pa rents a nd Ca rer s Net wor ks as p ar t of o ur D iver si t y and Inclusion initiat ives • Su pp or ti ng the we llb ei ng of ou r emp loye es in the hy br id wor ki ng e nviro nme nt wi th exi ble wo rk in g arr an gem ents a nd eve nts and initia tives from in ternal networks , vir tual workshops and online tness classes • Continued to support social mobility prog ram me s, with s ix s tude nts jo ini ng us through our par tnership with UpReach • Offering emplo yees access to our nancial education w ebsite pr ovided by Close Brot hers Asset Management • Enhancing our climate disclosures in line with th e rec omm en datio ns of the TCFD • Be ca me a si gnator y to the N et Zero Banking Alliance • Focu s on su pp or tin g our c ustom er s and p ar tn er s in the c urr ent u nce r ta in envir onment • Reta in a nd at tract t ale nt an d ma x imi se productivity by e ngaging, training and developing our people , nurturing an inclusive and diverse culture and investing in tool s and te chn olo gy • E xp and o ur ex pe r tis e in gre e n and transit ion assets and broaden our sus tai nab ili ty of feri ng as we s upp or t th e transition to a net zero carbon economy • Achi eve a net ze ro co mpa ny ca r e et by 2025 and be co me op er ation all y net ze ro throu gh ou r Sco pe 1 a nd 2 em is sio ns by 203 0 • C o nt in u e to ad a pt to t h e ev o lv i n g n e e d s of our c ustom er s and c li ents a nd ta ke into acc ount th e fee dbac k they prov ide Book 1.indb 32 27/09/2022 23:45:45 33 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Ke y performance indicators Creating long- term shareholder v alue 2022 2021 2020 14 . 6 15 . 8 14 .1 Co mm on e q ui t y t i er 1 c a pi t al r a t io Per c en t 2022 2021 2020 7. 8 7. 7 7. 5 Net interest margin Per c en t 2022 2021 2020 52 52 52 Banking expense / income ratio Per c en t 2022 2021 2020 12 7 12 8 131 T ot al f u nd i ng a s a pe r ce nt a ge of loan book 1 Per c en t 2022 2021 2020 1. 2 1. 1 2.3 Ba d de b t ra t io Per c en t 2021 2022 2020 14 . 5 10. 6 8.0 Gr o up r et u rn o n o pe n in g eq u it y Per c en t 2022 2021 2020 5 11 0 Loan book growth 2 Per c en t 2022 2021 2020 5 7 9 Net ino ws Per c ent o f op eni ng AUM 2022 2021 2020 111 . 5 14 0 . 4 74 . 5 A dj us t ed b as i c ea rn i ng s pe r s ha r e Pen ce 2022 2021 2020 86 91 86 Employ ee engagement Per c en t 2022 2021 2020 2,4 38 2,5 4 2 3,484 T ot al S c op e 1 a nd 2 e mi s si on s (mark et based) T onnes CO 2 e Savings online CSA T Property Finance NPS A sset Finance CSA T Mot or Finance (dea le r) N PS +86 +87 +88 +7 3 Customer s cores 3 2022 2022 2021 2020 66. 0 60. 0 40. 0 Di v id en d p er s h ar e Pen ce 1 T ot al f u ndi ng a s a % of l oa n bo ok i ncl ud e s op er ati ng l ea se a ss ets . 2021 an d 2020 m etr ic s h ave be e n re -pr es en ted to i nc lu de operating lease assets. Revised denition is to tal funding as a % of loan book including operating lease assets. 2 Lo an b oo k in cl ud es o pe ra tin g le as e as s ets. 2 021 an d 2020 l oa n bo oks h ave b e en re -p re se nte d to in cl ud e op er ati ng l ea se a ss ets . 3 CSA T represents customer satisfaction score . NPS represents net promot er score . Property Finance NPS scor e excludes Commercial A cceptances. July 202 1 customer scor e s: Savings online CSA T +82 , Property Finance NPS +87 , Asset Finance CSAT+81 , M otor F in an ce (d ea le r) N PS +7 0. Book 1.indb 33 27/09/2022 23:45:45 34 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Our Responsibilit y OU R R ES PON S I B I L I T Y I S T O H E L P ADDR ES S T H E SO CIAL , E CONOMIC AND E N V IRON M E N T AL CHAL L E NGES F A CING OU R BU S IN E S S , EMP L O YEES, CU ST OM ER S A N D CL IE N TS, NO W AN D I N T O T H E FUT U R E We see thi s res pon sibi lit y a s a core p ar t of our b usi ne ss a nd ce ntra l to our s ucc es s. It enc ou rage s us to loo k at how we op er ate our b usi ne ss mo re broa dly , as we foc us on ac hiev ing th e be st ou tcome s for ou r sta keho lde rs a nd ma k ing a p osi tive im pac t on the s oci et y an d the env iron me nt we ope rate in. We beli eve this w ill e na ble us to make a g reate r dif feren ce fo r our em ploye es, c ustom er s an d cli ents, b oth now an d into the fu ture. Ou r valu es e nc our age a nd su pp or t di ver si t y and inclusion a t all levels of our organisation, hel pin g the co mmu niti es we o pe rate in. We cons isten tly str ive to act re sp ons ibl y , ethic al ly a nd wi th integ rit y , a nd thi s commitment t o sustainable behaviours is embedded within our corporate culture and supported b y a wide range o f policies and procedur e s. Book 1.indb 34 27/09/2022 23:45:46 Gov ernance Repor t Financial Stat ements Strategic Report Our Sustainability Objectives We are kn own for o ur c ore stre ng ths of a tru sted cl ie nt approach, disciplined lending and adaptability . The se pos itio n us we ll to supp or t o ur cu stome rs as th ey nav igate a cha ng ing wor ld. We have de mon strated we t ake ou r res pon sib ili ties to ou r em ploye es a nd o ur co mmu nit y seriously , acting ethically and responsibly . Th is is re ec ted in ou r sus tai nab ili t y obj ect ives we h ave set as a business : • Sup por ting ou r cu stome rs, c lie nts an d par tner s in th e transition towar ds more sustainable practices • Promoti ng an i ncl usi ve cu lture i n ever y thing we d o • Re duc ing o ur im pac t on the e nviro nm ent a nd res po ndi ng to the threats a nd op por tuniti es of c limate c han ge • Pr omoting nancial inclusion, helping borrow e rs tha t might be o verlooked by larger nance pro viders and enablin g save rs a nd inve stor s to acce ss na nci al m ar kets and adv ice to pl an for th eir f utu re In the fo llow ing p age s, we prov ide u pd ates on o ur pro gre ss this ye ar ac ros s all a sp ect s of our ESG str ateg y . New fo r this yea r’ s an nu al rep or t, an d foll owin g the TCFD req uire me nts, we demonstrat e the signicant progress we ha ve made in developing our c lim ate strateg y , cove rin g not ju st ou r ope ratio na l imp acts, bu t understanding the implica tions acr oss our nanced act iv ities and evalu ating th e imp or t ant ro le we wi ll pl ay in su ppo r ting b usi ne sse s and i ndi vi dua ls to tran siti on to a low ca rb on ec on omy . Dur in g the yea r we have m aint ain ed a st rong fo cus o n prog res sin g with our wide -ranging sustainability agenda, dr iving forward with pr ogramme s and init iatives tha t address key priorities such as inclusion , social mobility , suppor ting cust omer needs and res pon ding to the i mpac ts of cli mate cha nge. Sustainabilit y Report W e are commit t e d t o suppor ting the tra nsition to a lo w-car bon economy and will continue t o work with all of our stak eholder s on the journey t o a net zero fut ure. Adrian Sainsbury , Chief Executiv e 35 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 A t Close Brot hers, beha v ing responsibly i s int egral t o our actions and decision -making and th is is r eect ed across our sustainabilit y objectiv es we set ourselves . Sustainabilit y Report Book 1.indb 35 27/09/2022 23:45:49 36 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Sustainabilit y Report continued Our Sustainability P illars Society Ensur ing we are a diver se and in clusive em ployer . S er vin g the nee ds of ou r custome rs Our T argets • 3 6% fem al e se ni or m an age rs by 20 25 • 14 % of o ur m an age r s to be fro m an e thn ic min or it y b ackg rou nd by 2025 • A im t o maintain or impr ove cust omer satisfaction scores across our businesse s Our P rogress • 3 3% fem al e se nio r ma na ge rs a t 31 July 2022 • 10% of our ma na ge rs we re fr om an e thn ic min or it y ba ckgro un d at 31 July 2022 • Customer satisfact ion scores • P rop er ty na nce N PS +87 • As set nance CSA T +88 • Savings online CSA T +86 Al i gn m en t to S D Gs 1 For ou r p eo pl e Se e pag es 3 6 -38 Social responsibilit y Se e pag es 3 8- 39 Helping our customers Se e pag es 3 9 -4 1 Go vernance Set ting high s tand ards of c orp orate governan ce to ethica lly and tr anspa rentl y achieve long-ter m succ es s for sta keholde rs Our T argets • M ai nta in h igh s ta nda rds of g over na nc e, wit h appropriat e board lev el oversight • A im to m ai nta in or i mp rove ou r ex ter nal ES G ratings Our P rogress • 5 0% of boa rd me mb er s we re fem al e at 31 July 2022 • C BA M be ca me a s ign ator y of the UK Stew ardship Code • R ec ei ve d stro ng ra tin gs of B - fro m CDP , A A A fro m MSC I an d CIS - 1 ESG Cr ed it Im pa ct Sc or e from Moody ’ s Corporate governance Se e pag es 9 9 - 1 1 2 Climate risk governance Se e pag es 5 0 -52 Our people V aluing Our Colleagues Cre ating a n inc lus ive c ultu re wh ere a ll col le agu es a re sup por ted to thrive i s fu nda me ntal to the c onti nue d su cc es s of our b usi ne ss. We valu e the ex pe r tis e of our p eo pl e in de li ver ing exc el len t se r vi ce and building long-last ing relationships wit h our cust omers, clients and par tners based on tru st a nd inte gri t y . We cele br ate dive rsi t y and a re co mmi tte d to creati ng an i ncl us ive cu lture w he re al l of our e mp loye es c an fe el pro ud to wor k for us, reg ard les s of the ir ge nd er , age, eth nic it y , disability , sexual orientation or back ground. We want our c oll ea gue s to feel a s thou gh Clo se Broth er s is a gr eat p lac e to work an d are pro ud that 9 4 % of co lle ag ues fe el i ncl ude d and 9 3% feel they c an b e them se lves at wo rk. We are sig nator ies to a wi de ra ng e of cha r ter s and c om mitm ents a cros s a broa d spe ctr um of inclusion themes and social ent erprises, inc ludi ng the R ace at Wor k Cha r ter , the Social Mobility Pledge , the W omen in Finance Cha r ter a nd the Valua ble 50 0. We par tn er with l ea din g dive rs it y org an isati ons, i ncl ud ing Stonewa ll an d the Bu sin es s Di sa bili t y Foru m, to help i nfor m our th ink in g and s ubs equ ent ac t io n s. We c o nt in u e to r un i nc l u si v e leadership training sessions f or our managers, senior managers and group e xecutives , highlighting how act ions and beha v iours can shape our inclusiv e culture. All h ir ing m ana ge rs are re qu ired to co mp lete a collection of t raining modules developed to provid e a co nsi stent a nd b est p rac tic e approach f or talent acquisition. T hey ensur e a focu s on in clu si on an d un con sci ous b ia s and e qu ip lin e ma nag ers w ith th e sk ills and k now le dge to ma ke ef fe ctive a nd fa ir recruitment decisions. We are als o com mit ted to in clu sive re cr uitm ent practices ; using gender decoders to a void the use of g en de r bia s wordi ng in a dve r ts an d job descriptions, and seeking balanced shor tlists and d ive rse i nter v iew p ane ls to al levi ate bia s in the p roc es s. We strive to ac hieve a 5 0:50 ge nde r sp lit fo r our e ntr y l evel a nd for ma l training pr ogramme s including our Aspire school leav er programme , our gra duat e schemes and our summer internships. Th is yea r , we have e sta bli she d new employee networks f or Accessibility , Social Mob ili t y , and Wor ki ng Pa rents a nd Ca rer s. We now have net wor ks foc use d on e ach of our d ive rs it y an d inc lus io n pil lar s. Ea ch are c hai red by a n execu tive s pon sor a nd take responsibilit y for driving our inclusion ini tiative s ac ross th e org ani sati on. Employ ee Engagement Lis tenin g to the vi ews of our c oll ea gue s rema ins key to reta inin g a hig hly e ng age d work force; ens ur ing o ur cu ltu re is on e whe re our c oll eag ue s fee l motivate d, proud to wor k for us a nd c an thr ive. Our lat e st Employ e e Opinion Survey closed in Ma rch 2022. Environment Reducing our impact on the environment and tackling climat e change For ou r TC FD r ep or t Se e pag es 42-57 Our T argets • Becoming operat ionally net zer o by 2030 thro ug h ou r sco pe 1 a nd 2 e mi ss io ns • A ch ieve a n et ze ro co mpa ny c ar eet by 2025 • T o a li gn a ll op er ati on al a nd at tr ib uta bl e emissions from our lending and inve stme nt p or t fo lio s wit h pathway s to net zero by 20 50 • A im t o provide o ver £ 1 .0 billion of le ndi ng fo r zer o emi ss io n bat ter y el ec tri c vehi cl es ove r the n ex t 5 yea rs Our P rogress • 4 4.8% redu cti on i n sco pe 1 a nd 2 em is si ons s in ce 201 9 (m ar ket b ase d ) • A f ur the r red uc tio n of 43% in aver ag e e et vehicle CO 2 emissions vs 202 1 nancial yea r • Completed initial assessme nt acr oss all categories of scope 3emissions including as se ss me nt of n an ce d em is si ons i n ou r loan book • Published our inaugural T CFD report • B e ca me a si gn ator y to th e Ne t Zero Banking Alliance • 3 5% of new ca rs na nc ed in t he l ast na nc ial ye ar we re ba tte r y el ec tri c Al i gn m en t to S D Gs 1 1 W e have ident ied above specic United Nations Sustainable Deve lop me nt G oa ls (“ SD Gs” ) wh ic h al ig n wi th a sp ec ts of o ur s us ta in ab ili t y str ate gy d et ai le d in ou r re po r t fo ll owi ng. Book 1.indb 36 27/09/2022 23:45:50 Gov ernance Repor t Financial Stat ements Strategic Report 37 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Ensuring we are a div er se and inclusiv e employ er . Female senior managers: 1 33 % as at 31 Ju ly 202 2 Future target: 36 % by 2025 94 % of o ur e m pl oy ee s fe e l in c lu d e d by t he i r colleagues. 93 % of c ol l ea gu e s fe e l th e y ca n b e th e ms e lv es atw or k . We retain ed hi gh leve ls of e nga ge men t at 86% , which is close t o pre-pandemic lev els. Our re sp ons e rate also re ma ine d strong at 86%, ena bli ng us to dr aw mea ni ngf ul ins ight f rom ou r res ults. O ur s core s rem ain ed broa dly a lig ne d to last ye ar , reta in ing m any high scores fr om our 202 1 sur vey , par ticularly around t eamwork, exper tise , acting wit h integ rit y a nd tre ating c ustome rs a nd c lie nts fai rl y . Ou r org ani sati ona l cul ture wa s sh own to be par ticul ar ly stro ng w hen c om pare d to other nancial serv ices rms with high scoring questions against t he Financial Serv ices Cul ture B oard b en chm ar ks. Fee dba ck showed a str ong sense of belonging with 94 % of c oll eag ue s fee lin g inc lud ed a nd that they a re treated w ith re spe ct. Racial E qualit y As si gnator ie s to the Race at Wor k Cha r ter , we dem ons trate our c omm itme nt to thei r seve n key acti ons to he lp im prove representation of e thnic minorities acr os s all l evel s of the org an isa tion. As p ar t of this c omm itme nt, we co ntinu e to moni tor ethnicity disclosure levels. O ur disclosure has i ncre as ed f rom 75 % at the e nd of the 202 1 na nc ial ye ar to 83% at 31 July 2022, whi ch a llows u s to more ac cur ately m ea sure our ethnic balance to in form our thinking and future actions. Ou r targ et to have at le ast 1 4 % of o ur managers t o identify from an e thnic minority bac kgroun d by 2025, forms pa r t of ou r Long- T erm Incent ive P lan objectiv es and demonstrat es our commitment t owards improving representation of all colleagues with an ethnic minority backgr ound. Th is yea r we ex ten de d our p ar tn er sh ip with th e 1 0,00 0 Bl ack I ntern s prog ram me to provid e 6 -week p ai d inter ns hips to 3 0 stud ents a cros s the gro up. Thi s prog ram me provides gr e at er opportunities for us to sup por t th e ca ree r prog res sio n of our ethn ica ll y dive rs e co lle agu es. T he b oa rd continues to support the r ecommendations of the Par ker R eview a nd th e com pos iti on of the bo ard is i n lin e with th e adv ic e to have at le ast o ne dire ctor of c olo ur . Th e boa rd will cont inue to t ake oppor tunities to further stren gth en the d ive rsi t y of bac kgroun ds an d exp er ie nce a mo ng its d ire ctors a s par t of future board-le vel r e cruitment sear ches. Ou r Ethni c Di ver sit y e mp loyee n et wor k, spo nso red by o ur ch ief c red it ri sk of ce r , has e sta bli sh ed its el f with c ore str ategi c aim s to create a s afe spa ce for c oll ea gue s from e thnic minority gr oups t o share pe rso na l exp er ie nce s a nd se ek c ou nse l. The net wor k ha s be en a key dr ive r in pr omoti ng a mul titu de of key ce le bratio ns w hils t als o rai sin g aware nes s thro ugh s pe aker eve nts avail abl e to all c oll eag ue s. Th e work th ey continue to drive complements and suppor ts our ov erall Diversity and Inclusion agenda . Gender Div ersit y At Clos e Broth er s, we are pa ss ion ate abo ut cre ating a n env iron me nt wh ere a ll ou r col le ague s fe el they b elo ng a nd ca n thr ive. As pa r t of ou r co mmi tme nt to bui ldi ng an inclusive cult ure, w e remain f ocused on redu cin g our g en de r pay ga p. The ge nd er pay ga p show s the di f fe ren ce in ave rag e pay bet we en wo me n and m en, w hic h is a n imp or ta nt di f fer entiati on to pay eq ual it y . We rema in c ond ent th at wome n an d me n are paid equally f or per forming equivalen t roles across our business. Reducing our gender pay ga p is on e way in wh ich we rev iew o ur prog res s on im prov ing g en de r bal anc e across our organisation. Ou r 2022 gen de r pay ga p rep or t s hows our m ea n gro up-w ide g en der p ay ga p was 38. 7% at 5 Ap ri l 202 1 . At Cl ose B rothe rs, th e gap i s ma inl y dr ive n by a hig he r prop or ti on of male incumbents in bot h senior and front ofce roles, and a higher number of f e males who wo rk p ar t-time. We are co mmi t ted to imp rovi ng ge nd er ba la nc e acro ss a ll leve ls of the org an isa tion a nd have a n umb er of initiativ e s in place to support this. Fur th er de tai ls of ou r ge nde r pay g ap c an be foun d on ou r web site. At Clos e Brothe rs, we re co gnis e that g end er ide ntit y is b road er tha n ma le an d fema le and we wa nt to af rm th at we welc om e colleagues o f all gender iden titi es. In rec ogn itio n of this, o ne of the s teps we have take n this ye ar i s to update ou r fam il y-frie ndl y pol ici es to en sure th ey use g end er n eu tral lan gu age a nd ar e inc lus ive for a ll. As si gnator ie s of the Wome n in Fi nan ce Cha r ter , we rem ain c ond ent that we a re on trac k to achi eve 36% of sen ior m an age r role s be ing h el d by a fema le by 2025. At the en d of the n anc ia l year 50% of o ur bo ard me mb er s were fe mal e, excee ding th e gove rnm ent’s targ et of 33%, and we re mai n broad ly in l ine with F TSE Women Le ad ers g en de r targ ets for exec utive s an d thei r dire ct re por ts. Our g en de r bal anc e net wor k, sp onso red by our W inte r o od c hie f execu tive of ce r , conti nue s to thri ve. Thi s yea r , th e net wor k has successfully: • host ed a number o f ev ents including speed networking, pr oviding colleagues with t he opportunity to speak wit h senior me mbe rs of th e rm • ru n events fo cus ing o n topic s of intere st suc h as pa rent al l eave a nd im poste r synd rome • launched a quar terly new slet ter to spotl ight th e ca ree r paths of wo me n with in the r m, and • continued to look for opportunities t o eng age w ith c oll eag ue s to progre ss ou r gender balance initia tives. 1 Senior managers are dened as those manage rs with line manageme nt r esponsibility for a line manager , in accor dance with the re pre se nt ati on i de nti e d in o ur g en de r pa y ga p re po r t. Th ey a re ge ne ra ll y he ad s of d ep ar t me nts, f u nc tio ns o r la rg er te am s. Book 1.indb 37 27/09/2022 23:45:51 38 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Sustainabilit y Report continued We also h ave a num be r of ex ter nal par tnerships in place to support and promo te dive rs it y a nd ge nd er ba la nce at a ll l evels of the org an isati on. We conti nue to par tner w ith the 30% Cl ub thro ugh w hi ch we prov ide cross- business ment oring, as part of Ge nder Equi t y , for ou r tal ente d fema le s. Al mos t hal f of me ntees w ho have p ar ti cip ated in the sch em e over th e yea rs have h ad a pro motio n, secondment or int ernal move . We are prou d to have co-s po nso red the latest U K Automoti ve 30% Clu b ’ s “I nsp iri ng Automoti ve Women Awa rds” and a re de lig hted that on e of our c oll ea gue s in o ur Motor F ina nce business was declared a winner . Our wo rk force re mai ns di ver se, with 4 4 % fem ale e mp loye es, a nd we have a b road age r ang e of em ploye e s, with 22% of ou r em ploye es b ei ng un de r 30 ye ar s old a nd 20%over 50. Dev eloping Our P eople We provid e a fu ll ra ng e of trai nin g and deve lop me nt for ou r pe opl e ir res pe ctive of whe re they a re in the ir c are er s. We work with o ur c oll eag ue s fro m ind ucti on an d technical training t o management , leadership and t al ent d evel opm en t prog ram me s. We prom ote a rang e of me ntorin g sc hem es a nd oppor tunities to broaden external networks as wel l as s pons or ing q ual ic atio ns to fur ther suppor t pro fessional development . All sta f f cont inue to have access to our le ar nin g por t al of fe ri ng a wi de va ri et y of prac tic al tool s an d e-l ea rni ng on a n umb er of topic s. Th e aver age n umb er of tr ain ing hou rs ac ros s the gro up was 13 per em ploye e dur ing th e yea r . We re qui re all e mp loyee s to complet e relev ant regulat or y training on an annual basis with further t raining o f fered when requ ire d. Thi s yea r , we m ain tai ned a 100% completion rate of mandat or y training b y the las t wor kin g day of th e na nci al ye ar . We continue t o suppor t our talen t thr ough mentoring programmes including the cross-compan y schemes Mission Include (supporting t hose who ident if y as being from an ethnic minority back ground) and Gender Equity (wit h a focus on suppor ting fema le s in pro gre ssi ng to sen ior ro le s) . T o support inclusivit y , we opened up application proc es se s for the se s che me s, an d this yea r , we we re award ed “m ost d yn ami c orga ni satio n of the ye ar ” for the M iss io n Include programme . We r un sev e ral tailored junior training prog ram me s acro ss the b us ine ss w hic h are aimed at gr owing high-pot ential individuals to progre ss i nto sen ior ro les. S imi la r to our ment oring schemes, these programmes ar e ope n to ever yo ne by m ea ns of an a pp lic ation proc es s to prom ote incl us ivi t y at all l evel s. Our Sales A cademy pr ogramme within our c omm erc ial b us ine ss h as res ulte d in nin e col le ague s gr adu ating th is yea r and commencing Area Sales Manager r ole s across t he business. T o support our high pot ential colleagues, we have la unc he d our e me rgi ng le ad er s programme wit h 20 individuals across the grou p ta kin g pa r t. We contin ue to sup po r t ou r entry level programmes through our school le aver pro gra mm e, Asp ire, whe re we have three ne w students joining us in Sept embe r 2022. In additi on, we have hi red a ne w grad uate sc he me co ho r t for th e 2023 na nci al yea r with 22g radu ates rea dy to ful l rol es acro ss the rm. T o s upp or t ou r inc lu sive c ultu re throu gh fu r the r em be ddi ng ou r co de of co nd uct, we conti nue to en sure a ll ou r new st ar te rs receive our “Close Brothers W ay” e-learning module, focusing on our cultural attributes and ex pe cte d be havi ou rs. We have al so wor ked wi th me mbe rs of o ur e mpl oyee inclusion networks to updat e the con tent for all c oll ea gue s to rece ive i n Jan uar y 2023. Suppor ting Our P eople Th is yea r , we have foc use d on s upp or ti ng colleagues as man y embarked on new ways of wor ki ng af ter th e pan de mic. As par t of this, we have pa r tne red w ith o ur UK be ne ts prov ide r BU P A to ru n 1 6 v ir tu al wor ksho ps for c ol le agu es o n a num be r of well be ing topi cs i ncl udi ng ma nag ing st res s and u nce r ta int y an d wor k -l ife ba la nce. A ll colleagues ar e o f fered company- funded pri vate hea lthc are w ith hi gh ta ke-up r ates acro ss the g roup. As pa r t of the U K of fe rin g, BUPA provid es a we alth of h ea lth a nd well be ing su ppo r t as we ll as d ed icate d mental health suppor t. Mai nta ini ng the p osi tive me nta l wel lbe ing of our c oll ea gue s is of g reat i mpo r ta nc e to us and we n ow have over 50 tr ain ed M ent al He alth F irs t Ai der s acro ss th e grou p as wel l as an employ ee assistance programme o f fering a ran ge of c ond enti al s upp or t. Ou r rec ent Employee Opinion Survey results sho wed 89% of col le agu es fe el Cl ose B rothe rs i s ge nui nel y co nce rn ed fo r the wel lbe in g of em ploye es, w hi ch is a bove th e ex tern al benchmark. It is imp or t ant to us that we rewa rd our s taf f fai rl y and o pe nly , a nd we th erefo re str ive to ens ure that c le ar an d tran spa rent o bje cti ves link d irec tly to remu ne ratio n acros s the g roup. We are con de nt that o ur e nha nce d be ne t pac kag e rema ins t for pu rp ose a nd s atis es the ex pec tatio ns of ou r co lle agu es. Th e grou p con tinu es to pay al l staf f at or above th e nati ona l liv in g wage. We offe r both a S ave As Y ou E arn s ch em e as we ll as a B uy A s Y o u Ear n sh are i nce nti ve pla n, wh ich a llow s em ploye es to ac qui re sha re s on a mo nthl y bas is ou t of pre -ta x earnings. Participation rat es in our long- term owne rs hip s ch eme s rem ai n stron g at 4 7% of eligible employees. For me mb er s of the gro up’ s pe nsi on pl an s, we contr ibu te bet wee n 6%- 1 0% towards colleagues’ pe nsions, which is above required lev e ls. Support ing Social Mobilit y We are prou d to be an i ncl usi ve orga ni sati on that suppor ts social mobilit y and creat es equal opportunities fo r all , regardless of backgr ound. Social mobility is one of our inclusion pillars, with our working group rec entl y trans itio ne d to beco me a new employee net work wit h ex ecutive sponsorship fro m our c om me rcia l ch ief exe cuti ve of ce r . We contin ue o ur pa r tne rs hip w ith up Re ach, a charity committed t o transf orming social mob ili t y . Th is ye ar’s summe r inte rn shi p prog ram me of fe red s ix-week pla ce men ts for si x un iver si t y stud ents f rom l ower socioeconomic back grounds. T he pro ven suc ce ss of th ese i nter nsh ips h as su ppo r ted us to broad en o ur ta le nt po ol for e ntr y level roles, with some int erns successfully obta inin g pe rma ne nt rol es w ithin th e r m. T o extend our commitment to social mobility , we of fer a n umb er of m entor in g opp or tu nit ies to our cu rre nt co lle agu es. We pa r tne r wi th “The Girl’ s Network” thr ough suppor ting me ntorin g to insp ire a nd e mpowe r gir ls f rom lower socioeconomic back grounds t o identify with f emale role models. In addition, t hrough our p ar tn er shi p wi th upR eac h, we sup por t 10 ind iv idu als to vol untee r an d trai n to bec om e ment ors each year . Gender Div ersit y 31 Ju ly 2 0 22 Male Female Number of board directors 1 66 Num be r of dire ctor s of sub sid iar ie s 2 48 7 Num be r of sen ior m an age rs, othe r tha n boa rd dire ctor s 3 19 2 10 7 Num be r of em ploye es, oth er th an bo ard d irec tors a nd senior employees 1 ,934 1 ,590 2, 1 80 1 , 7 1 0 1 Includes non-execut ive dir ectors, excluded from group headcount calcula tions. 2 Includes subsidiary directors who are excluded from group headcount calcula tions. 3 Senior managers dened as those managers with line management responsibility for a line manager , in accor dance with the re pre se nt ati on i de nti e d in o ur g en de r pa y ga p re po r t. Th ey a re ge ne ra ll y he ad s of d ep ar t me nts, f u nc tio ns o r la rg er te am s. T his gure e xcludes 42 male and eight female emplo yees wh o are reported under dir ectors or subsidiary direct ors. Book 1.indb 38 27/09/2022 23:45:51 39 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Our Emplo yees in the Community We are co mmi tte d to creati ng a po siti ve imp act in o ur c omm uni tie s and re co gni se tha t empl oy ee volun teers ar e often the dri vi ng forc e be hin d ma ny com mu nit y a nd charity activit ies. As pa r t of the re latio nsh ips we h ave with our c ha rit y p ar tn er s, we loo k to enc our age employ ee engagement through in volv ement in vol untee ri ng ini tiati ves. Fo r ever y hour of volu ntar y time, we do nate £8 dire ctl y to the cha ri t y und er o ur Ma tched G iv ing S ch em e, and we a lso e nc ou rage p eo pl e to take adva ntag e of one p aid vo luntee ri ng day e ach year through our Emplo yee V olunt eering P olicy . V olu ntee ri ng ha s be en a key pa r t of ou r newe r cha ri ty re lati ons hip s. T e am s from across Close Brothers ha ve donat ed their time to Sma r t Wor ks to take par t i n cor po rate wardro be day s, hel pin g marg ina lis ed wom en build their condence and nd employment. A grou p of co lle ag ue s als o prov ide d cl ose suppor t t o Stop Hat e UK t o improv e their mar keting a nd str ategi c ope ratio ns ac tivi tie s, ena bli ng the m to reach o ut to he lp more communities affected by hat e crime. We continue t o par tner closely with the children ’ s literacy charity Bookmark. This academic year , Close Brot he rs ’ volunt eers hav e deliver ed ov er 300 one-t o-one reading se ssi ons to ch ild ren. T his i s the eq ui vale nt of ve we eks of ba ck- to- bac k read ing su pp or t during school hours which has never be en ach ieved by a noth er Bo ok ma rk c orp orate par tner . In ad di tion, tea ms have g ive n thei r time to bui ld sc hoo l lib rar ie s an d hel p with the charity’ s work t o support Ukrainian child refu gees. We are sup po r tive of o ur co lle ag ue s giv in g thei r time a nd ex pe r tise to f ul l trus tee rol es for var io us ch ar itie s. In retu rn, e mpl oyee s gain board -lev el experience t o support their pe rso nal d evel opm ent a nd c aree r pro gre ssi on. Charitable A c tivities Our t wo m ain c or porate c har it y pa r tne rs are c hos en by o ur co ll eag ue s as pa r t of o ur emp loye e opi nio n sur vey and the se re ma in Ma ke-A-Wis h Foun dati on, wh o gra nt wi she s for children wi th l ife-t hreat ening i llnesses , and C an cer R es ea rch U K, w hic h we have now su ppo r ted fo r ten co nse cu tive ye ar s. T o d ate, we are pro ud to have ra ise d over £550,00 0 for Can ce r Re sea rch U K and we are r e peatedly nominated f or Corporat e Fundr ais ing T e am of the Y e ar by th e cha ri t y . Ove r the la st thre e yea rs, we h ave rais ed £1 76,000 fo r Ma ke-A-Wis h Foun dati on, ena bl ing th em to gra nt 7 1 wi sh es. Th is yea r , a grou p of co lle agu es s uc ce ssf ul ly took pa r t in M ake -A-Wish’ s r st eve r wis h challenge volunt eering day which r e sulted in a wi sh b ein g gra nted for a c ri tic all y ill l it tle boy . Close Bro thers’ support and f e edback has h el ped d evel op thi s cha ll eng e into a successful team building exercise which is now de li vere d glo bal ly by M ake-A-W ish. We have a ded ic ated co mm it tee for charitable and community act i vities chair ed by our g roup h ea d of hum an re sou rce s and s up por ted by emp loye es f rom a cros s the gr oup. This committ ee meets regularly to discuss and propose new initiatives with i npu t fro m our c ontro l fun ctio ns whe n req uir ed. We also h ave seve ral l oc al committees which plan and run initiativ e s t o rai se f und s for lo ca l ch ari tie s. We match 50% of fund s that ou r co lle agu es rai se for c har iti es u nde r the C los e Brothe rs Mat ched Giving Scheme. We also encourage our e mp loyee s to col lab orate on r ais ing mon ey for c aus es that a re mo st me an ing ful to them by m atchi ng fu nds r ais ed thro ugh l oc all y organised fundraising e vents and activities. Th is yea r , we h ave expa nd ed th e reac h of our c ha ri tab le gi vi ng to don ate a total of £ 1 50, 000 to support three additional cha ri tie s that al ign w ith ou r ESG goa ls. Our donations : • he lpe d Stop H ate UK es tab lis h a new helpline based in the London boro ugh of Me r ton • are h elp ing s upp or t T he W ild life T r usts with th eir v it al wor k in re stori ng an d prot ecting nature • are s upp or ti ng Sm ar t Wor ks to hel p more women ge t back int o employment T o f ur th er o ur rel ation shi p wi th Boo km ar k, we mad e a don ation of £40,00 0 this ye ar , w hic h accompanies the signicant cont ribution our e mp loyee s ma ke to the cha rit y th roug h volu nteer ing. In re sp onse to the c ris is in Ukraine, w e have dona ted £50 ,000 to date. Thi s inc lud es a do nati on to the Ref uge es at Hom e ch ari t y an d matchi ng 1 0 0% co lle ag ue don ation s to the Br itis h Red C ros s in su ppo r t of t he ir Ukraine Crisis Appeal . Our P ayroll Giving Scheme mat ches charitable contribut ions while allowing employee donations to be made directly from p re-ta x s al ar y . A pp roxim ately 1 2% of emp loye es a cros s the gro up we re sig ne d up to Payroll G iv ing at 31 Jul y 2022 , ach iev ing us a t wel f th co nse cu tive ye ar of th e Payro ll Gi vin g Qu ali t y Ma rk G old Awar d and e nsu ri ng that we have m et our t arge t of mai ntai nin g this standard. Helping our cust omer s thriv e There hav e been multiple fact ors contributing to the cur rent e nvi ronm ent of c ha ngi ng customer , partner and client ne eds. Considerations include the acceleration o f the us e of dig ita l cha nn els c om ing ou t of the pan de mic, as we ll as r is ing i natio n an d cos t of liv ing. At Cl ose B rothe rs, b ein g the re for ou r cus tome rs, cl ie nts an d pa r tne rs a nd l end ing throu gh the c ycle re mai n an im por tant pa r t of our business model . Furthermore, to cont inue suppor ting cus tome rs, cl ie nts, an d par tner s we be li eve in maintaining high standards of service, delivering specialist e xper tise and building long-lasting r e lationships. T hese priorities continue to guide t he end-t o-end experience we aim to co nsi stent ly de li ver to cus tome rs whi lst a lso e ns uri ng we c ontin ue to ada pt as ne ed ed to me et e me rgin g ne eds a ga inst a bac kdrop of a co nst antl y ch an gin g envir onment . Support ing our Vulnerable Cust omer s In co ntinui ng to rene a nd d eli ver the d es ired exp er ie nce fo r dif fere nt cu stome r gro ups, we have also made various vulnerable customer exp er ie nce j ou rne y imp rovem ents. M otor Finance conduct ed research int o vulnerable customers generat ing in sight which assist ed the cr e ation of an appr opriat e gov ernance mod el ac ros s Reta il to en sure i mprove me nt in identicat ion, ov e rsight and outcome monitoring . Conduct risk dashboar ds are be ing d evel ope d for e ach of th e bus in es ses to track a nd me asu re vu lne ra bili t y and th e various out comes customers receiv e. Finally , many o f our businesses use t heir cust omer for ums a nd exec uti ve com mi tte es to mo nitor , dis cus s and re ne th eir a ppro ach es toward s vulnerable cust omer s. W e proactiv ely identify vulnerability and pro vide necessar y suppor t, tai lor in g our s er v ic e an d cus tomer j ou rne y to vulnerable cust omer needs. In the R etai l bus ine s s, for exa mpl e, we wor k with o ne of ou r pa r tne rs to prov id e additional suppor t t o vulnerable customers in the management of collect ions, recov eries and arrears whilst ensur ing Close Brot he rs retai ns rob ust g over nan ce, co ntrol a nd management o versight including dealing wit h more challenging and complex vulnerable customer cases. We are foc use d on c ontin uin g to supp or t vulnerable cust omers. Most recently , we est ab lis hed a g rou p-wid e vu lne ra ble cus tome r work in g grou p to sha re be st prac tic e and i mprove th e co nsi stenc y of del ive r y ac ross th e grou p. Fur ther mo re, we are in th e pro ce ss of un de r ta ki ng a maturity assessmen t across k ey vulnerabi lity capabilities t o identify fur ther opportunities to evolve ou r ap proa ch to me et cus tome rs’ emerging needs as the operating envir onment changes . Leading Through Purpose Ou r pur pos e of he lpi ng the p eo ple a nd bus ine ss es of B ri tai n thri ve over th e lon g- term i s a fu nda me nta l com mit men t to our cus tomer s that we wi ll be th ere fo r them i n both the g ood ti mes a nd th e bad. Ou r pur pos e is underpinned b y our group- wide customer pri nci pl es, wh ic h gui de how we d eli ver th e end- to-end experience t o our cu st omers, clients and par tners thr oughout their journey with C los e Broth er s and a lso h el ps us m ea sure how ef fe cti vely we a re pe r for mi ng acro ss th e key pri nci ple s. ( Y ou c an re ad more a bo ut ou r de live r y ag ain st the se p rin cip le s on pa ge 36). Book 1.indb 39 27/09/2022 23:45:51 40 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Motor Dealer NPS 2022 2021 Motor Customer Net Ease Savings Online CSAT +86 +82 Property NPS +87 +87 Asset Finance CSAT +88 +81 +7 3 +7 0 +81 +81 Note: A ll s cor es a s at J une e ac h ye ar. Customer Satisfaction Scores Sustainabilit y Report continued Listening t o Our Customers and Improving E xperience We coll ec t a broad r an ge of cu stome r metr ic s that we us e to help i nfor m day-to-day ch an ge s as we ll as l ong er -term str ategi c de cis io ns to improve c ustom er ex pe ri en ce. We lis ten, ana ly se an d act o n cus tome r ins igh t and str ive to imp rove our a bi lit y to me et cu stome r ne eds. We are re ni ng ou r custom er o per ating fra mewo rk to prov id e bet ter ex pe ri en ce vis ib ili ty a s wel l as im prove d gove rn anc e of the e nd-to-e nd cu stome r jou rney w ith c lea r acc ou ntab ili t y an d owne rs hi p of dif fere nt jou rn ey stag es. We co ns isten tly ap pl y our jou rne y mod el of the 5E f ra mewor k (Entic e, Enter , Eng ag e, Ex ten d an d End ) to unde rst an d the key exp er ie nce s tag es w ith Cl ose B rothe rs across our various business and cust omer , cli ent a nd pa r tn er g roup s. It i s im p o r t a n t that we co nst antl y walk in th e sh oes of our c ustom er s an d make th e voic e of our customers visible t o colleagues to prioritise exp er ie nce i mp rovem ents a nd to en gag e with c ustom ers i n lin e with th eir p refere nc es. We have cre ated jo ur ney da sh boa rds i n the Ba nk ing d iv isio n wh ich re ec t jou rne y and e xperience performance. We measure hol isti c bra nd metr ic s as we ll as s pe ci c jou rn ey stag e metr ic s, inc lud ing s enti me nt, operational and insight data. We contin ue to ach ieve stro ng he ro metr ic pe r for ma nce a nd ou r sc ore s pe r for m well against a vailable external benchmark s. This evidences the st rength of our relationships and th e fai th ou r cus tomer s pl ace i n us as the ir prov ide r of ch oic e. Looking Ahead We conti nue to evol ve our c ustom er ca pab ili t y and c on duc ted a cu stome r experience maturity assessment across our bus ine ss es in th e spr ing to ca lib rate and benchmark against external best practice . From this, we h ave ide nti ed so me key oppor tunities to fur ther accelerate and em bed c ustom er c ent ric it y wh ic h bui lds o n existing programmes in the business . Our Customer Principles - Suc ces s S tor ies Our custome r princi ples s er ve as a stron g reectio n of the exper ienc e we strive to deliver . He re are some exam ples of how we have delivere d value to our customers, clie nts and par tners in the past ye ar: W e do the right thing for customers, clients and par tners The pa ndemi c accel erated an industr y paradigm sh if t with th e focus on shor t -t erm c ommi tment, self-ser vice a nd pay for use. Brewer y R entals resp onde d with a new p roduct (EKegPlus) whic h is a shor t -t e rm re ntal product u sing techno logy to track ass ets and provide a d aily hire c harging mode l. The team au tomat ed the re petiti ve backend proce ss es, free ing up internal reso urce to f ocus on customer exp erie nce. The prod uct is designed t o par tner with cust omers t o pro vide low- level commitment fr om the customer . T he re sults are th at there is cl ari ty a nd trans pare ncy as fe es are highli ghted earl y on for customers to make informed de cisio ns. Customers a re in control of the ir own cost to ser ve w ith the ab ilit y to reduce fee s by doing more th emse lves. We are exible, r es pons ive and execute w ith sp ee d It is critic al to remain a breas t with customer , c lient a nd par tne r ne eds. In Premium F inan ce, we utilised a regu lator y require ment c hang e to improve complianc e and enh ance our cu stomer journey by providing a new cha nnel for cu stomers to make arre ars payme nts. The team imple mented the ab ilit y for customers to make arre ars payme nts using a QR cod e in customer com munic ation for ea se and sp eed, tak ing them throu gh to a secure pl atfor m. The re sult was an o ptimised jou rney and a re duction in a rre ars c alls. The so lution a ids the e cosystem as the suppo r t is also avail able to our broker pa r tner s as they c an sh are the link direc tly with the ir customer to make a payment. The soluti on is scala ble and m ay be deployed in other busine ss line s. We make dec ision s informe d by our spe cia list expe r tis e T o re main c onstantl y aware of how w e can c ontinue to help our customers an d par tner s thrive in an ever -evolv ing land scape a nd to identif y areas of improveme nt, w e re ly on ou r V oic e of Customer program me to pro vide acti onab le insights ac ross the grou p . T he Invoice Finan ce busin ess h as bee n work ing hard to ensure we are c apturing feed back from customer s and acting u pon it, with valuab le improvement d elivere d as a res ult, including p lat form migr ation to a better tolling system for cust o mer s, communic ation to cust o mers to remind th em ab out cy bercr ime a nd what to look o ut for an d optimised call routing so cu stomers ca n get through for su ppor t easie r and quicker . W e build relationships base d on quality and trus t Solid an d lasting rel ationships a re of utmost impor tance to us at Close Brothers. In Prope r t y Finan ce the focus h as be en on retain ing great existing relatio nships whilst l ook ing to build new ones. The team h as bee n dri ving events in pe rson to bring togethe r skills to host and foster conver sation s for the nex t ge ne ration devel ope r . Attende es of the events are provide d with prac tical ad vic e from industr y exper ts, start to build a relatio nship wi th a mar ket leading prope r t y na nce sp ecia list and join a net work of long-stand ing clie nts and profess ionals w ho will sh are thei r chal len ges a nd exp eri enc e with th e nex t ge nerati on of develo per s. Book 1.indb 40 27/09/2022 23:45:51 41 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report We are in the p roc es s of add ing c ustom er spe ci c o bje cti ves to jou rn ey sta ge ow ner s’ KPIs wit h tailored objectives and explicit clarit y on what be haviours ne ed t o be demonstra ted to deli ver o n ou r cus tomer , c lie nt an d pa r tne r ambition . Engaging Our Suppliers We enga ge w ith ou r mos t imp or ta nt su ppl ie rs on a reg ula r bas is to ens ure that b oth par ties a re att ain ing o ptimu m valu e fro m the rel atio nsh ip. Our a nnu al su r vey of key sup pli er s who re pre se nt ou r mos t cri tic al an d strate gic s er v ic es wa s las t co ndu cted i n Jul y 2022 and re ma ins a nony mo us to ens ure we gather honest and ca ndid feedback. Sim ila r to previo us ye ars, th e 2022 su r vey focused upon how Close Brothers performs as a cl ie nt and h ow our s up pli er s fee l abo ut doi ng bu sin es s with u s. Ove ral l, feed bac k rema ins p osi tive th roug hou t and we a re se ein g fu r the r imp rovem ents a cros s key are as foll owin g acti on un der taken a s a res ult of th e 2021 sur ve y . We were ple as ed that th e maj or it y of our sup pli er s woul d con tinu e to reco mme nd u s as a cli ent, sc or ing 8 o ut of 1 0 fo r this m ea sure. Previous results indicat ed suppliers wanted gre ater tra nsp are ncy of o ur str ategy a nd priorities. Ha ving enhanced our engagement with s upp lie rs o n this top ic, we are p lea se d to see in th is yea r’ s su r vey that re sp onse s rece ive d indi cate imp roved tran spa rency o n growing collaboration t o reach shar ed goals. As su ch 77% of sup pli er s fee l pos iti ve ab out how we trea t them a s a valu ed p ar tn er a nd rat e this good or e xcellent, an improvement fro m 7 1 % in 2021 . We have als o se en a c onti nue d im provem en t in how o ur su ppl ie rs rate ou r ap proa ch to tran spa ren cy and f air ne ss, w ith 83% ratin g it as g oo d or exce lle nt c omp are d to 7 8% in 202 1 . S up pli er s con tinu e to rate us on ave rag e at 7 .6 out of 1 0 for e ase of d oin g bus ine ss w ith us. We also e nga ge ou r sup pli er s on the ir approach t o sustainability , cov ering suppliers ’ env iron me ntal a nd s oci al g over nan ce, to hel p bet ter in form o ur vi ews of the p rogre ss e ac h par ty is m ak in g towards im prove men ts. We use th e outp ut of thi s to inform o ur in tern al strate gy an d sp ec ic i niti ative s to fur t her con trib ute to the sus tai nab ili t y age nda . Som e examples are: Ga inin g gre ater tra nsp are ncy of o ur sc ope 3 emi ss ion s and i de ntif y t arge ted are as of focus. Collaborat ing with our facilities partner to closely analyse data acr oss our nat ional por tfolio, repor t accurately and monitor against specic sustainability KPIs. Work ing c los ely w ith Lex Au tolea se a nd ca r man ufa ctu rer s on a Ro ad to Zero tra nsm iss io n ini tiati ve by 2025 in relati on to our c omp any car eet . We recog nis e that ou r sup pli er s form a key par t of th e se r v ice we p rovi de an d are com mit ted to treati ng the m fai rl y . We are theref ore pleased to have maintained our Cor por ate Cer ti ca tion for Eth ica l Procu rem ent from th e Cha r tere d Inst itute of Proc ure men t and Supply ( “CIPS”) . Our policies We are com mit ted to ac ting re spo nsi bly throu gho ut a ll our a ctiv iti es, a nd have a number o f group-wide policie s and regu latio ns in pl ace to en sure we c ontinu e to oper ate in a soc ial ly re spo nsib le a nd compliant manner , including: Di gn i t y a t Work Po li cy Our D ig nit y at Wor k Polic y outl ine s the t yp e of be havi our th at the co mpa ny con sid er s to be un acc ept ab le an d exp lai ns wh at so luti ons the re are i f any e mpl oyee h as ex pe rie nc ed o r believes someone else has e xperienced any discrimination , harassment or bullying at w ork. We ensure equal opportunities for all, including having a commitment as part of our D ig nit y at Wor k Polic y to ensu re no employee is subje ct t o discrimination. This app li es to all wo rk c ontex ts, a s well a s all em ploye e life cyc le eve nts, for exa mpl e in recruitment , training, promotion and exible work in g requ es ts. As pa r t of ou r Di gni t y at Work Pol icy , o ur colleagues with disabilities are encouraged to share th ei r con diti on wi th us, to ens ure any r easonable adjustments can be made . We are als o me mb ers of th e Bu sin es s Dis ab ili ty Fo ru m to supp or t th e hir ing, ret ention, t raining, career development and promot ion of employ e es with disabilit ie s. Whistleblowing P olicy We provid e a si mpl e, trans pa rent a nd se cure e nvi ronm ent fo r our e mp loye es, sha re hol der s an d othe r sta keho lde rs to ra ise con ce rn s abo ut a ny potenti al w ron gdo ing within t he company . We enc oura ge o ur em ploye e s to repor t any ac tivi t y that may co nsti tute a vio latio n of la ws, regulations or internal policy , and repo r tin g ch ann el s are prov id ed to staf f for thi s pur pos e with in the f ra mewor k of a Whistleblowing Policy . Employ ee Health and Safety Po licy Our H ea lth a nd Safet y Pol icy de mo nstrates our c om mitm en t to ensu ri ng ou r em ploye e s and v isi tors a re safe a nd se ts the fr amewo rk for ou r safe ty c ult ure. We conti nue to prov id e a safe a nd he al thy wor kin g env iron me nt for our e mp loye es a nd vi si tors in a cco rda nce with T he M ana ge ment of H ea lth a nd Safet y at W ork Regulations 1 9 99 . Th e Hea lth a nd Safe ty C omm it tee co ntinu es to meet o n a qu ar ter ly b asi s an d we are p roud of t he ongoing progress in successfully raising the pro le of he al th and s afet y acro ss th e bus ine ss. T hi s yea r we reco rde d 83 in cid ents acro ss al l of our s ites. O f the se, ni ne were repo r ta ble a nd a ll ar isi ng fro m Covi d- 1 9 w ithi n the w ork place reportable requirements . We continue to use an online risk assessment t ool to manage site-specic risk s as appropriat e and our Displa y Screen Equipment risk assessment programme . Privacy Policy Our Pr iva cy Poli cy co di es o ur ap proa ch to prot ecting personal informat ion, in line with the Ge ne ral D ata Protec tion R egu lati on an d UK Dat a Protecti on Act 201 8. It se ts out o ur core p rin cip le s for wh at pe rso nal i nfor matio n we col le ct an d pro ce ss, an d the c ontro ls to which the data is subject t hrough it s lifecycle. We have a nomina ted Data Pr otection Of ce r who i s acc ount ab le for th e rm’ s app roac h to priva cy ma nage me nt, a Chie f Infor mati on Se cur it y O f c er ac cou nta ble for ou r ap proa ch to cyb er s ecu ri t y , and a broad er o pe ratin g mod el in w hic h the p riva cy and s ecu ri t y requ irem ents a re em be dde d in operations throughout the organisa tion. Fi na nc i al C ri m e Pol ic y Ou r pol ici es a nd st and ard s are in tende d to preve nt the g roup, emp loye es, c lie nts an d any other a ss oci ation s or rep res ent ative s from be ing u sed fo r the pu rp ose s of na nc ial c ri me, inc lud ing, b ut not l imi ted to, money la un der in g, terro ris t na nc ing, fa cili tati on of ta x eva si on and circum vention o f nancial sanct ions. We are co mmi t ted to car r y ing o ut bu si ne ss fai rly , hon es tly an d op enl y , op erati ng a zero- tolerance appr oach to bribery and co r r u pt io n. We a r e d e d ic a te d to en s u r in g full compliance wit h all applicable ant i- briber y and corrup tion laws and regulat ions, inc lud ing th e UK Br ib er y Ac t 201 0. Hu ma n R ig ht s a nd M o de r n Sl ave r y A ct Th e boa rd give s du e reg ard to hum an rights considerat ions, as dene d under t he Eur opean Conv ention on Human Rights and th e UK Hu ma n Rig hts Act 1 9 98. We are aware of ou r res pon sib ili ties a nd o blig atio ns und er th e Mod er n Slave r y Act, wi th the appropriat e policies and training in place to enable compliance acr oss the organisa tion . The Banking division has also committed t o the CIPS Eth ic al Co de of C ond uct, wh ich suppor ts our commitment to preventing modern slav er y from existing within our supply cha in. Fur th er d etai ls of ou r com pl ian ce wi th the Mo de rn S laver y Act ca n be fou nd on o ur group w e bsite . T ax Strategy We are co mmi tte d to comp ly ing w ith ou r ta x ob lig atio ns an d doi ng so i n a man ne r con siste nt with th e spi ri t as wel l as the l et ter of ta x law s. Th is inc lud es a tr ans pa rent and c oop er ative rel ation shi p with th e ta x au tho ri tie s. O ur ta x o bli gation s ar ise ma inl y in the UK w he re our o pe ratio ns an d custom er s are pr edominantly based. Our straightforward business model r educes the complexity of our t a x af fa irs a nd h elp s us ma inta in a lower r is k ta x p role. Fur t her d eta ils of o ur ap proa ch to ta x c an b e fou nd on o ur we bs ite. Book 1.indb 41 27/09/2022 23:45:51 42 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 42 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Introduction Welco me to our i nau gur al T as k Force on Climat e-related Financial D isclosures (“TCFD”) rep or t. We reco gnis e the imp or ta nc e of addre ss ing th e thre at of cli mate cha ng e and a re pl eas ed to pre se nt our progr ess in addr essing climat e-relat e d risks and oppor tunities. We take our re spo nsi bili t y towards the env iron me nt se rio usl y an d are c omm it ted to me eting th e goa ls of the Pa ri s Agree me nt to ach ieve ne t zero by 20 50. We are con sci ous that the e mis si ons im pac t of the as sets a nd sec tors th at we na nce c an c ontr ibu te to cli mate cha ng e, and as a nan cia l se r v ice s provi de r we rec ogn ise th e role we h ave to play in suppor ting the t ransition to a more sustainable futur e. This include s supporting our c ustom er s and p ar tn er s with th ei r own transition journeys. Our ef forts to reduce the imp act of ou r op erati ons o n the env iro nme nt con tinu e at pac e, and we str ive to ta ke actions t hat make a positive contribut ion to the wor ld a roun d us. Caref ul c ons ide ratio n of env iron men tal fac tors a nd poten tia l ris ks now p lays a n integ ral ro le in th e acti ons we ta ke, alon gsi de thoughtful ev aluation of where opportunities may ar is e for us to ma ke a mea ni ngf ul difference thr ough our business decisions. The ef fects of climat e change are already e viden t. Fi nancial institutions such as Close Brothers need to pla y their par t. In this, our r st T CFD repor t , w e hav e outlined our curr ent approach, considering both risks and oppor tunities, with our disclosures al igned to T CFD recommendations. Rob er t Sa ck , Group Chief Risk O f cer Sustainabilit y Report continued T ask For c e on Climat e-relat ed Financial Disclosures Progre ss to Date We believe in enhanced climat e disclosure in line wit h TCF D recommendations and sup por t the orga ni satio n’ s a ims of m ar ket transparency and stability . W e are committed to providing transparen t disclosures t hat help our stak eholders understand t he progr ess we are m ak ing in m an agin g our c lim ate- relat ed risks and opportunities, and support them i n the ir ef fo r ts to do the sa me. In this, o ur in itia l TCFD repo r t, we have hig hli ghted o ur pro gre ss, a s well a s are as of fu ture foc us, wi th reg ard to the integ ratio n of clim ate ris k into our gove rn anc e inf rastr uc ture, business strat egy and risk managemen t framework . T o date we have made good prog res s emb ed ding c lim ate risk i nto our ways of wor ki ng, en sur ing we c on sid er th e impact of climate change in the decisions we take. T o sup por t our ef for ts, we c ontin ue to build capabilities across t h e group . This has inc lud ed the ro ll-o ut of c limate r isk tra ini ng, updat es t o our go vernance approach, evolu tio n of our r isk m an age me nt fr amewo rk to improve o ur a nal y tic al c ap abi liti es, a nd under taking our rst climate risk long horizon scenario analysis ex ercise. No t withstanding the ef fo r ts al read y mad e, we rema in at the sta r t of a lo ng jou rn ey an d reco gn ise th ere is mo re to do to develo p our ow n tra nsi tion plans, targets and metrics. An i mpor tant en abl er fo r this w ill be o ur a bil it y to addre ss challenges around da ta and modelling . This repr ese nts a key foc us are a an d we conti nue to work ac ros s ind ustr y and a lon gsi de o ur customers , t o evolve both understanding and capabilities. In preparing our TCFD disclosur e s, w e have sought t o provide sufcie nt granularity , proportionate to the mat eriality of the climate ris ks id enti ed a cros s the g roup. An ex te nsi ve ana ly sis of r isk s pre sen ted by cli mate ch ang e has b ee n co mpl eted, id enti f yi ng im pact s acro ss ou r ri sk un ive rs e. Ana lys is in dic ates we are n ot mater ia lly ex po sed to lo ss o r dis ru ption from clima te-r elated considerations ov er the sho r t to med ium te rm. Ove r the l ong er ter m, increased risk has been ident ied, primarily dri ven by p otentia l tra nsi tion al im pac ts suc h as changes t o regulation, technological change and th e evol utio n of co nsu me r prefe ren ce s, and i n res pe ct of phy sic al r isk, we c ons id er seve re imp acts a re onl y li kely to pre se nt in the lo ng-term a ltho ugh we do re co gni se that acu te physic al eve nts are a lre ady h app en ing. Th ese r is ks are la rge ly mi tig ated throu gh ou r resilient business model which benets from a sho r t ave rag e teno r of 1 7 mo nths, a c ustom er base tha t is pr edominantly UK and Republic of Irel an d bas ed w ith str ategi c man age me nt acti ons b ei ng exec uted to su ppo r t ou r cus tomer s an d strate gic pa r tn er s on the ir own tran siti on pathways. Our d isc los ure s are c ons istent w ith the J une 20 1 7 rep or t e ntitl ed Re co mme ndati ons of the T ask Fo rce on C lim ate-rel ated Fin anc ial Disclosures and w e have also considered the ad diti ona l gui da nce p ubl ish ed i n the 201 7 and 2021 TCFD Ann exes wh ere p rac tica l to do so. Th e str uctu re of the re por t that foll ows prov ide s a sum ma r y of ou r ali gn men t with th e TCFD reco mme nda tions a nd th e key focus are as wi thin o ur pl an to mature o ur cl imate risk frame work. F ur ther detai l is pro vided on pages 44-5 7 . Book 1.indb 42 27/09/2022 23:45:59 43 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report TCFD R ec om me n da t io n s Our P rogress F uture F ocus Go vernance De scr ib e the bo ard’s oversi ght of cl imate - relat ed risks and opportunities. Describe management’ s role in assessing and managing climate- related risks an d oppor tunities. • Boa rd mo nitor ing of c limate -rel ated ri sks a nd opportunities enabled thr ough clear roles and re sp ons ibi litie s for th e boa rd an d boa rd committees. • Supported b y increased r e gular management updat e s co vering clima te st rat egy , risk management capabilities and investment ne eds ( i.e. t o b uil d sk ill s, data a nd too lin g) . • ESG and c lim ate-sp eci c tra ini ng de live red to boa rd with c lim ate-sp eci c tra ini ng roll ed ou t to all gro up e mp loye es. • Gro up ch ief r isk of ce r acc oun tab le un de r the Senior Managers and Certication Re gime for identifying and managing the nancial risks associat ed with climat e change. • E xecutive and senior management teams/ committee structur e s support via collaboration , escalation and control oversight . • Cli mate Ris k Stee rin g Com mit tee re sp ons ible for over se ei ng evol utio n of cli mate ri sk framework, suppor ted by various subsidiar y working groups covering credit risk , scenario analysis and disclosur e s. • Boa rd to over see c ont inu ed evol uti on of cli mate strateg y and a mb itio n, incl udi ng underlying tr ansition plan and supporting metr ics a nd ta rgets. • Conti nue to bu ild k now led ge at bo ard and s en ior m an age me nt le vel to sup por t deve lop me nt of cli mate strate gy an d re la te d r is k a p pe ti te. • Fur the r em be d the cl imate ri sk fr amewo rk and supporting operating models and processes t o suppor t management of both risks and opportunities. • Deve lop p la ns to addr es s key cha lle ng es on da ta, mo de ls an d tooli ng. • Con tinu e to build c lim ate awaren es s an d com pete ncy ac ros s our s taf f a nd key stakeholders. • Continued e nhancement of disclosures hig hli ghtin g the br ead th an d depth of th e climat e gov e rnance framework including spe ci c de tail s on the f req ue ncy a nd topics monitored b y committees. Str at egy De scr ibe th e clim ate-rel ated ri sks a nd opportunities the or ganisation has identied over th e sho r t, med ium a nd l ong-ter m. De scr ibe th e imp act of c limate r isks a nd opportunities on the organisation ’ s business strat egy and planning. Describe the resilience o f the organisat ion’ s strat e gy taking into c onsideration different cli mate-re lated sc en ar ios, in clu din g a 2 ºC o r lower sce nario. • Initial climat e-relat e d risks and oppor tunities ide nti ed wi th ma nag eme nt ac tion s agre ed for str ategi c focu s are as. • Cli mate ris ks an d opp or tu niti es c ons ide red within nancial and strategic planning proc es se s, us ing th e rm’ s st an dard o ne to thr ee-y ear time horizon . • Lo ng-term h ori zon sc ena ri o ana lys is c apa bil itie s deve lop ed u tilis ing th e Net wo rk for G re eni ng the Financial Syst e m (“NGF S”)-aligned scenarios. • Sig nator y of Pa r tn er shi p for Ca rb on Accounting Financials (“PCAF”) using methodologies t o conduct rst est imates of nanced carbon emissions. • Ide nti catio n of cli mate rela ted le ndin g grow th oppor tunities have be en dev eloped including an in iti al ve ye ar a mb itio n for f und ing b atte r y electric vehicles. • Fur the r deve lo p cli mate strateg y an d ambitions, including design of t ransition pla n, dec ar bo nis ation a ctio ns an d other risk and opportunity measurements. • Cont inue t o enhance scenari o dat a and modelling capabilities to e nhance strat e gic and nancial plannin g. • Co ntinu e to addre ss key c hal le nge s relat e d t o the av ailabilit y of granular customer data, including t he use of customer outreach. • Respond t o evolving r e gulat or y requirements and dev elopments in t he broader industry , including the emergence of best pract ic e. Risk management De scr ibe th e org ani sati on’ s p roc es ses fo r ide ntif ying a nd as se ss ing c limate -rel ated ri sks. De scr ibe th e org ani sati on’ s p roc es ses fo r managing climat e-related risk s. Describe how processes for ide ntifying, assessing and managing climat e-related risks are in tegrated i nto the orga ni satio n’ s ove ral l risk management . • Deve lop me nt of cl imate r isk f ram ewor k, an d emb ed me nt with in the g roup’ s Ente rpr ise R isk Man age me nt Fram ework (“ ERM F”). • Cli mate ris k cla ssi e d as a cro ss- cut tin g risk, impacting multiple principal risks. A lso ide nti ed a s an em erg ing r is k • Id enti cati on an d an aly sis a cros s the gro up of the var io us ri sks p res ented by c lim ate cha nge, identify ing impacts across various existing pri nc ipa l and key r isk s • Qu ali tative a nd, wh ere pr acti ca l, quan titati ve as ses sm en t of potenti al im pac ts of phys ic al and transit ional risks complet ed, including via inaugural long- term horizon scenario analysis • Initial credit risk sensitivity met hodology implemented t o support identication and mon itori ng of potent ial c lim ate risk w ithi n our loan book. • Enh anc ed th ird pa r t y ris k du e dili ge nce cli mate and ESG q ue stion na ire de pl oyed. • Potentia l imp acts o n cu stome rs, p eo ple and infrast ructure consider ed through crisis management and business continuity planning ex ercises. • Conti nue to integ rate clim ate risk considerations wit hin business processes to fur ther mat ure risk manageme nt and decision-making. • Commence i mplementa tion of more sop histi cated c lim ate credi t ris k as ses sm ent methodology , including dev elopment of ass oci ated rep or tin g and M I. • Pr ogress mult i- year programme o f work to both imp rove data q ua lit y a nd an al ysi s ca pab ili tie s and f ur t her evo lve r isk appetit e setting. • Con tinu e to work w ith cu stome rs, key par tner s an d sup pli er s to bet ter un de rst and pot e ntial impacts t o their businesses. • Conti nue to be tra nsp are nt wi thin ou r disclosures on bo th our progr ess and the cha ll eng es we f ace. • Continue to mat ure climat e stress t esting and s ce nar io a nal ysi s, inc lud ing w ithi n exis ting I CA AP a nd op er ation al r isk processes. Climate-related Disclosures Over view Book 1.indb 43 27/09/2022 23:46:00 44 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Sustainabilit y Report continued T ask For c e on Climat e-relat ed Financial Disclosures TCFD R ec om me n da t io n s Our P rogress F uture F ocus Met rics and target s Disclose the metrics used b y the organisa tion to assess climat e-relat ed risk and opp or tu ni ties i n lin e wi th its str ategy a nd r isk management process. Dis clo se Sc op e 1 and 2 a nd, if a ppro pr iate, Sco pe 3 g ree nho use g as e mis si ons a nd the rela ted ris ks. De scr ibe th e targ ets us ed by the o rga nis ation to mana ge cli mate rel ated ris ks an d oppor tunities and performance against targets. • Conti nue d prog res s to enha nc e our capabilities in relation to measuring our carbon footpr int fo r our ow n op erati ons i ncl udi ng me asu rem ent ac ros s all S cop e 3 op erati ona l emission cat egories. • Ini tia l ass es sm ent of S co pe 3 n anc ed em iss ion s (acros s ou r loa n boo k) u sin g PCAF methodologies. • Broa de nin g of our c limate str ateg y and targ ets to cover b oth net ze ro sc ope 1 , 2 ope ratio nal t arg ets, as wel l as sp ec ic t arget s relating to our nanced e missions. • An ove ra rch ing c omm itm ent to ne t zero throu gh ou r rec ent j oini ng of the N et Ze ro Banking Alliance. • Set tin g of inter im 203 0 ta rgets ac ros s the mos t car bo n intens ive s ector s wi thin o ur por tfolios. • Conti nue to en ha nce d ata qu ali t y acro ss ou r po r t foli os to imp rove qua li ty of na nc ed em is sio ns rep or ti ng, ri sk assessment and business strat egy . • Set addit ional targets acr os s our lending and i nvest men t acti viti es (add ing to ou r new ba ttery electric vehicles ambition ) and suppor ting our transition pat hwa y plans. Risk Management • Climate risk integration acro ss risk management framework – Risk identicat ion, considering both physical and t ransitional imp ac ts acr os s Clo se B rothe rs’ risk univ erse – Risk assessment , evalua tion and measurement , utilising stress t esting/scenario analysis as appropriat e – Mi tig atio n an d co ntro l vi a individual risk frame works e. g. policies/ standards – Monitoring and reporting across risk go vernance framew ork (incl. board); includes alignment wi th s tr ate g y an d a pp et ite (s ee Go vernance) • En ha nc ed I CA A P ri sk a sse s sm ent • Considerat ion as part of stra tegic acquisitions and new products/ ser vices Scenario Analysis • U se of s hor t and l on g-ter m an al ysi s to info rm s trate gi c planning and risk assessment/measur ement – Sho r t-term a sse s sme nts to l ever age ex is tin g ICA A P – Sepa ra te exerc ise to c on sid er l on g-ter m im pac ts und e r a ran ge of tr an si tio nal p ath s • E volu tio n of qu an tita tive m od el lin g ca pac it y in l in e wi th data/model suit e maturity Gov ernance • Clear roles and responsibilities acro ss 3L OD, including committee terms o f reference and SMF assignment • Inte gr ati on wi th in r i sk a p pe ti te st ate m en ts w it h co nsi de rat io n to both lo ng a nd s ho r t tim e ho ri zon s • Pe r fo rm an ce a nd in ce nti ve ma na ge me nt in teg rati on • Appropr iate traini ng/awarene ss for rel evant individuals • Boar d-level oversight and understanding with co nsi de rati on a s pa r t of over all b us ine s s stra teg y Disclosures • Enhanced group climate risk disclosures • Regulatory compliant product and entity -level disclosures • Evo lut ion of ot he r ex ter nal d is clo su res i n lin e wi th bro ade r gr oup s ust ai na bil it y str ateg y Data Resource Syst ems & Mo dels Pe op l e & Pr em i se s R is k Third Party Risk Tr a d e d M a r k e t R i s k Fun d in g & L iq u id i t y R is k Conduct Risk Regulatory Risk Business/Strategic Risk Credit Risk Gr o up C li m at e Ri s k St r a te gy • Al ig nme nt wi th th e bro ade r gr oup s us ta ina bi li ty a ge nd a Our Climate Risk Frame work Em b ed d in g Cl im a te R is k: R i sks a n d Opportunit ies We have soug ht to addr es s clim ate ris k and oppor tunity management b y int egrating clim ate-rel ated co nsid erati ons in to our core w ays of working, ensuring appr opriate con sid er ation of p otentia l imp acts. I n doi ng so, the gro up ha s deve lop ed a n asc ent Clim ate Risk Fra mewor k that a lig ns wi th our long-standing appr oach t o enterprise risk management ( as detailed abo ve) . Book 1.indb 44 27/09/2022 23:46:00 45 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Go vernance Strategy Disclosure s Close Brothers board Au di t Co m mi t t ee Sustainability Committee Scenarios Working G roup Disclosures Working G roup Scope 3 Working G roup Climate Risk Steering Committee Credit Risk Working G roup Risk Management ES G an d Cl im a te Co m mi t te e G over na n ce Fr am ewo rk Nomination & Gov ernance Committee 3 Gr o up E xe cu t i ve Committee Local Executive Committe es Lo ca l Ri s k an d Compliance Committe es 1 Gr o up R is k & Compliance Committee Credit Risk Management Committee 2 Board Risk Committee Programme 1 Op er ate s on d el eg ate d GR CC a uth or it y, howev er c re di t ri sk c lim ate r ep or ti ng f ee ds i nto C RM C in r st i ns ta nc e. 2 Ope rate s o n de le ga ted G RCC a ut ho ri t y , h owe ve r fee db ac k lo op i nto p rog ra mm e go ver na nc e v ia C red it R is k Wor k in g Gro up. 3 Oversight and monit oring only , decisioning via group board . Key: Bo a rd Ex ec ut ive P ro gr a mm e Di r ec t In di re c t Integrating Climate Considerations into Our Go vernance and Decision-Making Sin ce 2020, the c orp orate gove rn an ce framework has been subject to continuous review a nd re nem ent to en sure ef fecti ve ov ersight of risk frame work implementa tion and m an age the i nterco nne ct w ith the rm’ s climate strategy . Oversight o f climate-r elated risks and oppor tunities has been supported by the e sta blis hm ent of c le ar rol es a nd responsibilities, extending across board and execu tive co mmi t tees, a nd the th ree l ine s of defe nce m ore ge ne ral ly . I ntegra l to this ha s be en the p rovis io n of regu la r fra mewor k statu s updat es t o appropria te commit tees and f ora, the ren em ent of T er ms of R efere nce s an d the integr ation of cl imate-re lated c ons ide ratio ns with in both th e grou p ’ s po lic y fra mewor k an d new pr oduct approval process. Enriched reporting and management infor mati on (“M I”) a re als o now be in g provi de d to relevant committees, providing important insi ghts th at are in tu rn en ab ling c lim ate considerations to be embedded within both strategic planning and the setting of grou p-l evel r isk a pp etites. A l ink h as a lso be en e sta bli she d be twe en th e de live r y of the r m’ s c lim ate strateg y and exe cut ive remuneration through the inclusion of climate/ ESG obje cti ves w ithi n both the exe cuti ve committee ’ s scorecard and L ong- T erm Incent ive Plan . Fur the r det ail s on the ro le s and re sp ons ibi litie s of both the b oard a nd ma na gem ent w ith rega rd to clim ate risk m ana ge men t are ou tlin ed from p age 4 6. Book 1.indb 45 27/09/2022 23:46:00 46 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Sustainabilit y Report continued T ask For c e on Climat e-relat ed Financial Disclosures Board Oversight Board Th e boa rd is res po nsi ble fo r the lo ng-term suc ce ss of th e grou p an d the de live r y of sus tai nab le va lue to its s ha reh old er s and wid er s takeh ol der s. It di sch arg es so me of it s responsibilities dir ectly and others through its subsidiar y committees. In ensuring the long-t er m sustainability of the gro up, the boa rd is als o res pon sib le for the ove ra ll de live r y of th e rm’ s cl imate and ESG s trateg y . It revi ews an d app roves the stra tegy a nd rec ei ves re gul ar up dates on its exe cut ion f rom re leva nt me mbe rs of the exec uti ve team. T he bo ard i s als o res pon sib le for a pprov in g the gro up’ s ris k app etite state men ts, incl udi ng ri sk a ppeti tes associat ed with climat e risk. Boa r d Ris k Co mmi t tee Op erati ng on au tho rit y d ele gate d by the boa rd, the Bo ard Ri sk C omm it tee (the “BR C”) ove rse e s the ma nag em ent of ris k acro ss the g roup, inc ludi ng the r is ks pre sen ted by cli mate cha ng e. The BRC pr ovides oversigh t of the measures take n to manag e cli mate ris k and re ce ive s regular updat es on the development and sub seq ue nt em bed din g of the r m’ s c lim ate ris k fra mewor k. T his in clu des th e ong oin g review of e me rgi ng po r t folio M I, mon itori ng the evol utio n of as soc iated r isk a ppe tites an d the co nsi de ration of c lim ate-rel ated ri sks a nd opportunities assessed thr ough the complet ion of long- term scenario analysis e xercises. Audit Commit tee Op erati ng on au tho rit y d ele gate d by the board , the audit committee o versee s the management of nancial and regulat or y repo r tin g acro ss the g roup, as wel l as the r m’ s i nter nal nan cia l co ntrols. T he committee is r e sponsible for e nsuring the clarity and complet eness of en vironmental and sustainability disclosures included wit hin the gro up’ s a nn ual re por t and ac cou nts. Nomination and Go vernance Committee The Nominati on and Go vernance Committee monit ors environmental , social and go vernance ( “ESG”) and sustainability deve lopm ents re leva nt to the grou p (including dev e lopments r elating t o climat e change) . The r ol e of ma na ge men t Th e chi ef exec uti ve has u ltim ate responsibility for climat e-related issues af fec ting th e grou p and i ts cus tomer s an d overall accountability to the board and shareholders for ensuring sustainable and responsible pract ice s, including thos e ass oci ated with th e env iron ment. Acco unta bil it y for the g roup’ s cl imate an d ESG strateg y sim ila rl y rest s with th e chi ef execu tive, alb ei t with va ri ous re sp ons ibil itie s de leg ated to me mb er s of the exec utive te am as ap prop ri ate to ensure s trategi c de live r y and e mb ed me nt with in ways of wo rk in g. With in the B ank in g div isi on, an d in lin e wi th exp ect ation s und er th e Sen ior M an age rs Reg im e, the grou p chi ef ri sk of ce r (“GCRO” ) is sp eci c all y res pon sib le for c limate r isk management. This includes: • embedding clima te change risks within business planning and risk appetit e statements ; • conduct ing scenario an alysis ov er dif fer ent time h ori zons; • ensuring sufcient board-lev e l vis ibi lit y a nd a cl ea r all oc ation of ro le s/ responsibilities ; and • considering risk mat e riality as part of the annual Internal C apital Adequac y Assessment P rocess ( “ICAAP”) . Th e GCRO i s sup po r ted by the b oa rd and the ex ecutive who collectively o versee del ive r y of the rm’ s cl imate ri sk ob jec tive s and a re al so re spo nsi ble fo r cha lle ng ing a nd app rovi ng the rm’ s broa de r clim ate and ESG s tr ate gy. Group Risk and Compliance Committee At an execu tive -le vel, cli mate ris k man ag eme nt is p ri ma ril y over se en by th e Group Risk and Compliance Committee (“GRCC ”), which i s res pons ibl e for rev iewi ng and c ha lle ngi ng the r isk f ra mewor k em ploye d to man age th e na nci al r isk s from climat e change. T o suppor t this, regular fra mewo rk up dates a re pre se nted to the com mit tee w ith rel evant c limate r isk MI a lso embedded within its long-established risk repo r tin g mec ha nism s. T o support practical da y- to-day oversight , res pons ibi lit y is d ele gate d to a Climate Ri sk Stee ri ng Co mmi tte e whi ch is c ha ired by th e GCRO a nd ta sked w ith ove rse ei ng cl imate risk frame work design and delivery . Executive Committee (and local Executive Commit tees) Th e E xecu tive C omm it tee c ons ide rs a nd implements init iatives t o ensure a sustainable bus ine ss m ode l that ta kes in to acco unt al l risks, including ESG. Climate Risk S teering Committee The Climat e Risk St eering Committee coordinat es programme gov er nance and ov ersees the design and implementa tion of t he rm’ s regulat or y compliant climat e risk frame work, ens uring al ignment with grou p strateg y . It al so en sure s that reg ula r upd ates a re prov ide d to the GRC C an d BRC, en abl ing th em to stay i nfor me d on fra mewo rk de li ver y a nd o pin e on/rev iew key strat e gic deliverables. The steering committ ee is supported b y focused subsidiary working groups co vering cre dit r is k, sce na ri o ana ly sis, Sc op e 3 and disclosures, and also w or ks closely wit h the group ’ s Sustainability Committee, which is responsible f or day -t o-day management o f the r m’ s c lim ate and ESG strate gie s. Credit Risk Management Committee The Credit Risk Management Committ ee (“CRMC”) is specically responsible for monitoring the group ’ s credit risk prole. Acco rdin gly , it is re spo nsi ble fo r over se ein g the ma nag em ent of cl imate- relate d cred it risk considerations . Ove r the la st yea r it ha s rec ei ved reg ula r upd ates on th e deve lo pme nt an d subsequent implementati on of the Banking division ’ s inaugural credit risk asse ssment fra mewor k, as we ll as th e ini tial M I repo r tin g stemming from this, designed t o illustra te the potentia l cli mate ris k se nsit ivi t y of dif fe re nt se ctors a nd a sse t cla ss es. Th e com mit tee h as a lso rev iewe d and app roved th e integr ation of c lim ate considerations within cr edit risk policies and standards, most notably t o reect new r equirements in troduced to suppor t the ma nag em ent of a sso ciate d cred it r isk impacts. Business Risk and Compliance Committees Business risk and compliance committees are re spo nsi bl e for over se ei ng ri sk prol e, alig nme nt to ris k app etite an d the ef fe ctive ne ss of th e ris k ma nage me nt an d com pli an ce fr am ework at a l oc al le vel. With re ga rds to clim ate risk , thes e committees are responsible for overseeing key ris ks an d opp or tu ni tie s on an o ng oin g basis. This includes monitoring of the evolving regulatory and industry landscape as rel evant to ea ch bu sin es s, the revi ew of reg ula r ris k MI, a nd over si ght of lo ca l acti ons to align with group- wide change initiat ives. Sustainability Commit tee The Sustainability Committee ov e rsees the development of t he group ’ s sustainability strate gy in clu din g the ad van cem en t of cli mate and ESG a mbi tion s, and a sso ciate d operational and nancing act ivities, tar gets and met rics, supporting the chief ex ecutive and E xe cuti ve Co mmi t tee to reco mme nd to the bo ard for a pp roval. T ra ining and compet ency Both the b oar d and exe cuti ve team a re committed t o building and embedding a requ isi te ski ll set ac ros s clim ate and ESG compet encies. The r e gular updat es provided to the boa rd and m an age me nt co mmi tte es over th e cou rse of th e la st yea r have p layed a key role in th is reg ard, he lpi ng to edu cate key populations on the risks and opportunities that cl imate ch ang e pre sen ts, as wel l as the rm’ s pro gre ss in a ddre ss ing the se. These updat es have be en supplement ed by a num be r of ex tern al ly fa cil itate d trai nin g ses si ons, ta ilo red to foc us on th e com pl exiti es ass oc iated wi th the topi c – for exa mpl e, the evolving regulatory landscape, spe cic board and management responsi bilities and general trends in industr y practice. Book 1.indb 46 27/09/2022 23:46:00 47 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report T o support awareness more broadly acro ss the o rga nis ation, a ne w man dator y trai nin g mod ule wa s is sue d to all UK-base d staf f a cros s the gro up du ri ng the ye ar to sup por t the deve lop me nt of a co re leve l of understanding of climat e risk considerations. T a ilo red up date s and p res enta tions we re als o del ive red to releva nt bus ine ss a nd function- specic forums while fur ther job -sp eci c tra ini ng is p lan ne d over th e cou rs e of the nex t nan ci al ye ar to aug me nt understanding and a wareness among thos e likel y to be mos t imp acted. T his w ill be de li vered i n lin e with p lan ne d fu ture bus ine ss o pe rating m od el ch an ge s (see Ri sk Ma nage me nt). Going fo r ward, ad diti ona l ca pab ili t y and ex pe r ti se wi ll b e ena bl ed throu gh fu r th er tra ini ng of ou r peo pl e, including the unde r taking of accredited clim ate qua lic atio ns wh ere re levant, as we ll as the augmentation o f new capabilities via re cr ui tmen t and /or the use of ex ter na l specialist expertise. Str at egy We ar e co mm i t te d to m e et i ng t h e go al s of t h e Pa ri s Ag re e me nt t o ac hi eve n et ze ro b y 2 05 0 Support ing our customers, clients, and pa r t n er s i n t he t r a ns it i on t owa rd s m or e sustainable practices Overview Acros s the org an isati on we rec ogn ise th e imp or ta nc e of addre ss ing th e thre at of cli mate cha nge, a nd the u rgen cy ne ed ed in t ackling the en vironment al, economic and s oci al im pacts th at it br ing s, noting th at the se ex tend a cros s al l se ctio ns of so ci et y , af fec ting a ll key sta kehol de r group s. Ou r ong oin g work to id enti f y the r is ks and oppor tunities clima te change poses t o our business model remains a ke y area of strat e gic focus for the board and senior man age me nt. We take our re sp ons ibil it y towards the e nvi ronm ent s er iou sly a nd, as a grou p, are com mit ted to me eting th e go als of the Par is Ag ree me nt to achi eve net ze ro by 2050. As a n an cia l se r vi ce s prov ide r we rec og nise the sp ec ic ro le we c an pl ay in su ppo r tin g the climat e agenda, aligning our le nding and i nvestm ent p or t fol ios w ith the tra ns itio n pathways of o ur cl ie nts. We prov ide ex pe r t nancing solutions for UK SMEs and medium- sized businesses. As these businesses evolve a nd, ove r time, de li ver the ir ow n transition plans to a dopt clean t echnologies, greener asset s, and new business models, we are re ady to su ppo r t the m by prov idi ng appropriat e nancing solutions ; in doing so , facilitating change and supporting the wide r transition of the economy . It is a lso im po r ta nt we me et ou r own emissions reduct ion target s across our ope ratio ns, thro ugh th e de ploy me nt of en erg y ef c ie ncy , gre en tr ans por t and re newa ble en erg y sup pli es. T his w ill i ncl ude c oo rdin ation with o ur su ppl ie rs to ens ure the i mpa cts of al l of our b usi ne ss p roc es se s are mi nim ise d. Adapt ing in response t o market , technological, regulat or y and geopolitical de velopments tha t af fec t the sh ap e and tim ing of th e tran siti on to a low-c ar bon e co nom y is al so cr iti cal. We wi ll keep o ur po lic ies, t arge ts and p rogre ss u nde r conti nua l revi ew , re ecti ng the ra pi dly c han gin g ex tern al e nviro nm ent a nd the n ee d to supp or t our c ustom er s and s oc ieta l am biti ons. W e are current ly working on formu lat ing our d eta ile d net ze ro stra tegy , th e de car bo nis ation p athways ne ce ss ar y to sup por t i t and th e as soc iated ta rgets w hic h we wil l aim to dis cl ose w ithi n 1 8 mo nths. T o date, our a ppro ach h as foc use d on th ose are as ac ros s our b usi ne sse s wh ere we be lieve C los e Brothe rs c an h ave the gre ates t impa ct, brea ki ng the se dow n into thre e core pillar objectiv es ( se e chart on page 4 9) . In as ses si ng cli mate-re lated r isks a nd opportunities, ther e are two primary cha nn els f rom w hic h im pact s occ ur , na mel y transit ional and physical risks. T ra nsitional risks Ar isi ng f rom the p roc es s of adju stme nt towards a low- ca rbo n ec ono my . A ra ng e of factors inuence this adjustment , including clim ate-re lated d evelo pme nts in p oli cy and regula tion , the emer gence of di sruptive technology or business models , or shif ting sentiment and societal preferences. Th ese c ou ld sim ila rl y imp air th e valu e of na nc ed as sets o r imp act th e creditworthines s of our customers should they fai l to adapt ef fec tivel y . Physi cal r is ks Ar isi ng f rom a nu mb er of fa ctors i ncl udi ng spe ci c we ather eve nts (suc h as he at waves, oods, wildr e s and st orms) and long- term s hif ts in clim ate (such a s cha nge s in pre cip itatio n, ex treme we athe r var ia bili t y , sea leve l ris es a nd ri sin g me an tem per ature s) . Th ese c oul d res ult i n physi ca l dam age to the grou p’ s ow n prop er ti es, i mpa ir the valu e of na nc ed a ssets o r imp act th e creditworthiness of our cust omers. We also c ons ide r poten tial i mpa ct ac ross dif fere nt time h ori zons. T he se ta ke into acc ount th e lo ng-term n ature of so me cli mate cha ng e impa cts, w hil e als o ens uri ng ali gnm ent w ith th e grou p’ s bro ade r bu sin es s strate gy an d n anc ial p la nni ng cyc les. T he rm’ s a ppro ach to tim e hor izons i s likel y to devel op f ur th er ove r the c omi ng ye ar s, both to alig n wi th the ad vanc em ent of o ur targ ets an d me asu res a s well a s the bro ade r evolut ion of our clima te risk frame work. As ou tlin ed in th e sec tio ns that fol low , n o mater ia l impa ct is a ntic ipate d over the s ho r t to m e di u m te r m. Ke y Climate-Related Risks As ou tlin ed o n page 5 0, the grou p has und er taken a n ex tens ive a nal ysi s of the var io us ris ks pre se nted by cl imate ch an ge, ide ntif ying imp acts a cros s var iou s exis ting p ri nci pal a nd key ris ks. Ou r ana lys is to date ind ica tes that we are not i mme di ately (over the s ho r t to med ium term) exp ose d to potentia l mate ria l los se s or disruption . Over the longer term howe ver , increased risk has been identied , primarily driven b y tran siti ona l imp acts s uch a s cha ng es to regulation , technological change and the evolut ion of cons umer pre ferences . With rega rd to physi cal f actors, we re co gni se that acu te physic al eve nts are a lre ady h app en ing, although mor e severe impact s are only lik ely to prese nt in th e lon g-term. Th e core c limate -rela ted ris ks fac ing the grou p ca n be s umm ar ise d as fo llows: • Ef for ts and a mbi tio ns of gove rn me nts an d businesses to accelerate t he transition to a low-ca rb on ec ono my may re sul t in rapid adop tion o f policy and regulatory int er vention , presenting t ransition risk for our se lve s and o ur cu stome rs (e.g. more aggressive energy e fciency requirement s for buildings , acceleration o f planned bans on new petrol/ diesel cars ). • Inc rea se d glo bal wa rm ing m ay lea d to ex trem e vari ab ili ty i n weath er pat ter ns, increasing incidence and severit y of phys ica l ri sks, w hic h in tur n co uld l ea d to our cu stome rs b ei ng dis ru pted an d experiencing nancial loss . • Th e sa me ex tre me var ia bil it y co uld a lso imp act ou r own o per ation s, eith er a s a res ult of d ama ge to of c es o r data ce ntres, or th roug h dis rupti on to key sup pl ier s (wh o may a lso b e im pac ted by transitional factors) . • Ris k as soc iated wi th the g roup’ s own tran siti on to a low-c arb on e con omy – for exam pl e, a potenti al in cre as e in co sts ass oci ated wi th mee ting key ta rgets o r a strate gic f ail ure to de live r in li ne w ith ou r transition plan. Th e grou p has a lre ady t aken s teps to miti gate eac h of the se co re ri sks thro ugh the implemen tation of targeted measures within e x isting risk -specic frameworks. These include enhancement s to busine ss con tinu it y pla ns a nd ch an ges to ou r third par ty m ana ge men t proc es s wi th fu r the r ren eme nt pl an ned ove r the ye ar s to com e. Ou r pri ma r y foc us ar ea is o n poten tial cre dit r isk i mpac ts gi ven th e nature of th e ser vic es we p rovid e pa r ticu la rly w ith in the Banking division. Impor tantly , the group has min ima l app etite for c oa l and oth er fo ssi l fu el ex tra ctio n with e nh anc ed d ue di lig en ce required on individual case assessments. W e Book 1.indb 47 27/09/2022 23:46:00 48 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Sustainabilit y Report continued T ask For c e on Climat e-relat ed Financial Disclosures and i nc enti vi se ou r cus tome rs an d co lle ag ue s to reduc e thei r env iron men tal i mpac t. Look in g ahe ad, adva nc em ent ac ros s the sector in data capabilities, particularly to suppo r t c arb on ac cou ntin g and th e kn owle dg e of ind iv idu al s and S ME businesses with r e gard t o climat e and ESG crede ntials, will facilitat e great e r management insight s and inform ongoing disclosure t ransparency . Scenario analysis pi lot e xercise Dur in g the la st yea r , we have co ntinu ed to deploy scenario analy sis t o enhanc e our abi lit y to ide ntif y c lim ate-rel ated ris ks an d opportunities, and assess the r esilience of our business model . Sin ce 201 9, all di vi si ons h ave be en a sked to cons ide r potenti al cl imate sc en ar ios a s par t of sho r t to med ium -term (1 -3 ye ar s) sce na ri o ana lys is r un as p ar t of th e ann ua l ICA A P fra mewor k. Wh ile n o spe ci c cli mate sce na ri os have yet b ee n ado pted for th e group- wide scenarios deploy ed for Pillar 2b purposes (a gain using t he rm ’ s standard 1–3 yea r tim e hor izon), climate imp acts a nd pos sib le cl imate -le d sce na rio s con tinu e to be dis cus se d and d eba ted as pa r t of the s ce na rio de sig n proc es s. Ul timatel y howeve r , d ue to the sho r t-dated ten or of ou r le ndin g bo ok, cl imate ris k is not d ee me d to be a sig ni ca nt ri sk in th e short to medium term. Thi s as ses sm ent was re -af r me d in the la st year t hrough t he completion o f an inaugural long-t erm scenario analysis ex e rcise designed to explo re poten tial c lim ate ris k imp acts ove r an ex tend ed (3 0-ye ar) tim e hor izon. T hi s was the rs t time th e r m had un de r ta ken an exe rcis e beyond our typical strat egic planning cycle and a proportionat e approach was subsequently take n to plan nin g and i mp lem ent atio n. Thi s pri or itis ed s cop e cove rag e of our m otor and asset nance businesses–capturing c. £5 billion/60 % of our loan book. Recognising the complexities and challenges pos ed by s uch a n exerc ise, the rm e nga ge d the su ppo r t of a thi rd par t y to ai d sce na rio deve lop me nt. Ultim atel y , we el ecte d to use three N et wor k for Gre en ing th e Fin anc ial System ( “NGFS”)-aligned scenarios, each reecting con trasting transition paths : i) Ea rl y acti on: T r ans iti on to a low- ca rbo n ec ono my st ar ts e a rl y , in cre as e in gl oba l temperat ures stays belo w 2°C ( global climate goal); ii) Late ac tion: G lob al cl ima te goa l is met, howeve r the tra nsi tion i s de layed a nd is m ore seve re to comp en sate for th e late st ar t; an d iii ) No ad diti ona l acti on: No add itio nal p oli cy actions be yond t hose already announced , Gl oba l cli mate g oal n ot met. Eac h sce na ri o was a sse ss ed o n two dif ferent bases : i) No ma na ge men t acti ons – te stin g stati c na nc ia l yea r 201 9 b al an ce sh e et (p re- pan de mic) at d if fe ren t poi nts in th e sce na ri o to determine resulting nancial impact; and ii) With m ana ge me nt acti ons – a llow in g for cha ng es i n bus in es s stra tegy a t eac h ve -yea r inte r va l i.e. cha nge s in l oa n bo ok c om pos iti on, addi tion al r isk mi tiga tion m eas ure s and pursuit of new commercial opportunities. Given data and modelling limitations , a broadly qualita tive approach was adopt ed. Ass um ptions we re pr ima ri ly ex pe r t-judge me nt driven, with business modelling underpinned by quant itative industry data inputs and proj ecti ons, a nd e me rgin g trend s for key sectors including transpor t/ energy pro vided by a third p ar t y . A na lys is was c omp lete d at ve -year i nter va ls ou t to 2050 wi th mod el lin g ru n at a por tfol io le vel. Hi gh leve l bu sin es s ass um ptions we re ap pli ed to key na nci al parameters (i. e. impairment and loan book movem ents), with outp uts in tende d to be directional only given known limitations . As pa r t of thi s work, wo rks ho ps were h eld w ith business senior management , sect or experts and r is k sp ec ial ists to ex plo re an d as ses s climat e-relat ed vulnerabilities and opportunities, and i de ntif y p ropo r tion ate and tim eo us mitigat ion stra tegies. T he ex ercise pro ved ex trem el y valu abl e, prom pting g en uin e and thought -prov oking consideration of real-world impacts while generating signic ant interest fro m both r st an d se co nd lin e sta keh old er s, inc lud ing at a n execu tive a nd b oard l evel. With in the p or t fol ios a cros s our m otor and ass et n anc e bu sin es ses we c an a lre ady see that technology advancements and customer demand are accelerat ing the tran siti on to bat ter y e le ctri c veh icl es a nd we an ticipat e this tr end will continue to accelerat e. Additionally , the renew a bles sec tor togethe r wi th the ne ce ss ar y Our Business Planning Time Horizons Sho r t ter m (0- 1 yea r) Tim e ho rizo n for an nua l bu dge ting a nd c api tal assessment . Medium t erm ( 1 -3 years ) Tim e ho rizo n for bu sin es s strate gy a nd n anc ia l planning. Also aligns with t ypical ICA AP scenario analysis hori zon. Long ter m (more th an 3 ye ars) Time horizon beyond typical nancial planning cy cle. Impa cts pr im ar ily a sse ss ed th roug h the us e of lon g- term s cen ar io an aly sis n oting mo st mater ia l clim ate risks will crystallise in this horizon . do pro v ide funding t o some higher emission sec tors a nd as sets a s det ail ed on p age 49 and w ill c ontin ue to mon itor co nce ntrati ons acro ss a ll se ctors a nd a sse t cla ss es. Sector analysis fro m our loan boo k Whi le th e rm i s exp ose d to potentia l cre dit imp acts, we c ons ide r any c lim ate impac t, in the sh or t to me diu m term, to be s ubst anti all y miti gated. Phys ica l ri sk is re duc ed by o ur ge ogr aph ic lo cati on, wi th 99% of ou r loa n por tfol io ba sed i n eith er th e UK or th e Rep ub lic of Ire la nd, wh ere th e ris k prol e is lowe r . R eg ardl es s, acro ss ou r pro per ty por tfo lio (1 0 0% UK ) , we s till u nde r ta ke ana ly sis to co nsid er th e potenti al ood r isk ass oci ated with eve r y tra ns actio n, with onl y 2% of our exi stin g por tfo lio cu rre ntl y in locations ca tegorised as very high or high climat e sensitivity , with appropria te mitigant s put i n pla ce for e ac h to ensu re any pote ntia l risk is reduced. Sim ila rl y , tran siti ona l ri sk is g reatl y red uce d by our s hor t loa n boo k teno r (average re si dua l teno r of 1 7 mo nths w ith on ly 2% gre ater than 5 ye ar s) whi ch e nab le s us to qui ck ly ada pt our l end ing s trateg y to resp ond to any changes in asset or sectoral risk proles . Rigorous underwriting and lending policies are a lso d ep loyed, w ith a ny dec rea se i n ass et val uatio ns mi tigate d by con ser vative structuring o f the funding provided . As ou tlin ed on p age 47 , pro gres s ha s als o bee n mad e to integrate cl imate ris k with in the broader credit risk management framework , supporting top-do wn oversight and in turn enhancing our risk manage ment capabilities . Ke y climate-related opportunities As a signicant provider of asset lending acro ss the U K an d the Re pu bli c of Irel an d we be lieve th ere a re als o sig ni ca nt com me rcia l oppor tunities t o suppor t our cust omers and client s as they transition t o cleaner technologies. The ke y oppor tunities ident ied t o date relat e to our le nding port folios, par ticularly with in the e ne rgy s ector a nd ou r who le sa le na nce b usi ne ss. We are a lrea dy su ppo r tin g the en erg y se ctor throu gh re newab le s and rese r ve p ower , whi le wi thin o ur tra nsp or t business we are seeing signicant gr ow th with k ey partners in providing le nding products for electric vehicles. We hav e set our i nau gur al gre en g row th ta rget th is yea r , with th e am biti on to prov ide ove r £1 bill ion of le ndi ng for ze ro em iss io n bat ter y e le ctr ic veh icl es, ove r the n ex t ve ye ar s. Other opportunities are st ill being explored with d ee p di ve ana lys is re cen tly la unc he d through our annual st rategic planning cycle. Wh ilst we a re yet to en gag e our c ustom er s in a st r uctured approach t o improv e their cli mate and ESG c rede ntia ls, pl an nin g on the app roac h is we ll ad vanc ed to en gag e, par tner Book 1.indb 48 27/09/2022 23:46:01 49 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report suppor ting in frastructure has been recognised as key oppor tunity areas within our a na lysi s and we a ntic ipate that n ew technologies emerging across our sectors will cont inue t o offer fur ther opportunities. Our initial sce nario analysis proved it s rea l valu e throug h the id enti c ation a nd con sid er ation of p otentia l ma nag eme nt acti ons ove r a ran ge of tra ns itio n pathways that co uld s er ve to mi tigate a ny mater ial impact and in addition suppor ted the em be ddi ng of cl imate ri sk im pact consideration wit hin longer -term st rategic pla nn ing. Wh il e ris ks over a l ong er ti me hor izon we re ide nti ed, ou r bus ine ss m od el continued to demonstra te its strength and robu stne ss, p rovi din g the tool s and c ap aci t y to large ly m itig ate thes e over the s hor t to med ium te rm. We wil l conti nue to evol ve our strat eg y and capabilities t o ensure we ca n con tinu e to supp or t a nd f und o ur customers as they t ransition t o the use of new tec hno lo gy a nd lowe r ca rbo n as sets. In the n ex t yea r , we in tend to fu r the r adva nc e our use o f long-t e rm scenario analysis, expa nd ing c over age to in clu de ou r pro pe r t y business while also completing initial count e rpart y- specic assessment across se ctors l ikel y to be mos t imp acted. I n doi ng so, we will s ee k to leve rage e nh an ce d data capabilities, both internally and externally , with a v iew to tak in g a more q ua ntitati ve approach . The av ailabilit y of comparable por tfol io- releva nt dat a rema ins a c hal le nge, par ticul ar ly ac ros s retai l an d SME m ar kets, me ani ng the evo lut ion of o ur ap proa ch is likely t o be gradual . Climate strategy We recog nis e the ne ed to co ntin ual ly as se ss and monit or the thr eats and oppor tunities ass oci ated wi th clim ate cha nge. As o ur data capabilit ies improv e, pro v iding more power ful i nsi ghts, str ateg y acro ss e ach of our th ree c ore pi lla rs wi ll evol ve. 1 . Achieving net zero operations We contin ue to focu s on th e ini tiative s in o ur dire ct co ntrol to de cre ase o ur op erati ona l footpr int. We have prev iou sl y set ou rs elve s cha lle ng ing n et zero a lig ne d targ ets for o ur direct operat ional emissions and continue t o make good progress t owards our ambitions to achi eve a net ze ro pos iti on for o ur c ar e et by 2025 and for a ll of ou r Sc ope 1 a nd 2 emissions across our operations b y 2030. We have r e cently expanded our carbon accounti ng t o cover all cat egories of our Scope 3 emissions , providing us with init ial vis ibi lit y ac ross b oth our di rec t and i ndire ct operat ional emissions. This will enable us to develop our emission r eduction plans for all o ur op er ation al im pac ts, work in g wi th our s upp lie rs a nd p ar tn er s in ar ea s suc h as fac ili tie s ma nag eme nt a nd IT se r v ic es. Th is yea r , we h ave co ntinu ed to broad en our e ng age me nt wi th our s upp ly c hai n on env iron me ntal m at ters, w hil e wor ki ng wi th those who share our ambitions to efciently use re sou rce s an d com bat the ad ver se ef fe cts of cl imate ch ang e. We have ex tende d the e mis sio ns dat a we co lle ct f rom ou r sup pli er s an d co ntinu e to expl ore way s in whi ch we c an in cor po rate car bo n imp act criteria into our choice of suppliers. Reducing the impact our operations hav e on the e nviro nme nt co ntinu es th roug h a num be r of init iatives and impr ovement programmes, to contin ue lowe ri ng ou r emi ss ion s, reducing our energy use and enhancing our en erg y ef c ien cy . T his ye ar we c ontin ue d mom entu m with ad diti ona l ene rgy s avin gs, en erg y ef c ien ci es a nd water us e redu cti ons. We have set ou r faci liti es ma nag em ent con tractor th e tas k of evalu ating th e cur ren t estate of buildings and their building se r vi ce s, to devel op a f ur th er i nventor y of energy e f ciency measures. Fur thermore , having alr e ady adop ted renew able electricity sup pli es fo r our of ce s, we have rec entl y add ed gre en g as s upp lie s to reduc e fu r the r the im pac ts of the en erg y we do u se. Post pa nde mi c, we contin ue to be net f rom redu ce d com muti ng in th e yea r with st af f conti nui ng us e of ex ibl e and hy br id wor ki ng pract ices, with associat ed envir onmental benets. We encourage our employees to make positive change b y leasing low emission ca rs an d par ticip ating i n the cycl e to work sch em e. T o su ppo r t the ir own sw itch to an ele ctr ic c ar , we of fe r our e mp loye es a s ala r y sac ri ce s che me a s a route to make th e shi f t. We have contin ue d to reduc e the im pac ts of our c om pany c ar eet by o nl y now of fe rin g bat ter y op er ated ful ly e lec tric c ar s onto the e et, with the a im to me et ou r zero e mis sio n ca r e et by 2025. Waste recyc ling i s en cou rag ed in a ll ou r of c es a nd 1 0 0% of the wa ste co ntrac tors we use a cros s ou r of c es s end ze ro was te to land ll. O ur pro gre ss in S cop e 1 , 2 and 3 emi ss ion s is de tail ed i n pag e 54. 2. Reducing our nanced emissions Th is yea r , we h ave sig ni ca ntly ad van ce d our c ar bon a cco unti ng an d repo r tin g. Thi s inc lud es ou r res ults f rom o ur Sc ope 3 as ses sm ent w hi ch cove rs e mi ssi ons a cros s all 1 5 cate gor ie s of Sc ope 3, in cl udi ng ou r ini tia l ass es sm ent of na nce d em is sio ns acro ss ou r loa n bo ok. We have ado pted the Pa r tne rs hip s for Carbon Accounting Financials (“PCAF”) methodologies t o calculate our nanced emissions. As signatories t o PCAF , we wil l eng ag e with o ur pe er s an d sh are be st practice frameworks to advance accounting for n anc ed e mi ssi ons a nd i mprove th e reso lu tion of o ur an al ysis. Gui de d by our c om mitm ent to al ign to the Par is Agre em ent ’ s n et zero a mbi tio n by mid- ce ntur y , we w ill d en e our t arge ts for sustainable nance opportunities acr oss both our existi ng established nance markets as we ll as n ew ma rket an d tech nol og ie s sec tors th at bes t t wi th our e sta bli she d lending criteria and technical capabilities. In the c omi ng yea r we wi ll en ha nce o ur customer data across our nancing activities, whi ch w ill prov id e us wi th the in sig hts ne ede d to be in a p osi tion to set c red ibl e lon ger- ter m targ ets that w ill: • vali date ou r sup por t for the Pa ris Agree men t; • de mon strate the rol e we wil l play i n suppor ting our customers transit ion, and • complement our established ne t zer o operational targets . Ack nowl ed ging o ur prev iou s su ppo r t of the goa ls of the Pa ri s Agree me nt to achi eve net zero by 20 50, and as we f ur ther d evel op o ur understanding of the impact s of our nanced emi ss ion s, we wil l prog res s for wa rd in evalu ating w id er go als fo r ou r bus ine ss a nd its impact s. Demonst rating this progress we have rec entl y be com e a sig nator y of the Net Z e ro Banking Alliance, committing to setting robust , ambitious and scie nce-based targets. 3. Financing the transition We have be en a n acti ve prov ide r of gre en and s ust ain ab le n an ce ac ross a num be r of se ctors fo r seve ral ye a rs. We recognise suppor ting UK businesses in their t ransition through the adopt ion of green technologies o f fers a signicant gr ow th oppor tunity for the Banking division building Ach iev ing n et zero operations Ach iev ing n et zero operations and reducing supply chain emissions , wor ki ng wi th ou r par tner s and suppliers t o minimise operational impacts Reducing our nanced emissions Sup po r ting t he go als of t he Par is Agre e men t throu gh re-al ignm ent of our nancing and b y assisting our c us tome rs i n me etin g thei r trans itio nal ta rgets Fina nc ing t h e trans ition Ena bl ing th e de pl oym ent of cleaner technologies and business model a daption throu gh ou r gre en g row th lending strat e gy , leveraging our ex pe r ti se a nd en su rin g alignment with agreed risk a ppetit e Th e Th r ee P il la r s of o ur C l im at e St r a te gy Book 1.indb 49 27/09/2022 23:46:01 50 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Sustainabilit y Report continued T ask For c e on Climat e-relat ed Financial Disclosures on thi s rece nt trac k rec ord, our s trateg y in this a rea i s und er pi nne d by our s ig ni ca nt exp er ti se in th e as set a nd se ctor s we fun d, rigorous underwriting, monit oring and contr ol proc es se s to asse ss c red it an d cli mate- rela ted ri sk an d our c om mitm ent to bu ild capabilities in emerging t echnologie s. W e wil l conti nue to ada pt le ndi ng po lici es a nd grow ex istin g gre en p or t fol ios to t evo lv ing economic and industry landscapes. T o f ur th er o ur c omm itm ent, we ai m to broade n ou r sup por t for ren ewab le tech nol ogi es s uc h as so lar a nd w ind p ower , expa nd o ur fu nd ing of c le ane r tra nsp or t solutions such as zero emission electric vehicles, and expand our green nancing int o new technologies and markets including charging infrastructure , batter y st orage and energy efciency (acr oss buildings and industrial processes ). W e will cont inue t o provide customers with t he suppor t, nance and ex pe r tis e they n ee d to grow and our is h and re al ise th eir ow n tran siti ons. As we deve lo p our d ec ar bon isati on tra nsi tio n pla n over th e nex t 1 2- 1 8 mon ths we wi ll closely monit or projected sect or transition pathways a nd ai m for the e mi ssi ons of o ur le ndin g acti vi t y to at leas t ali gn wi th se ctor - wid e redu ctio ns in th e med ium to lo nge r term . One example of a green gr owth opportunit y is in ze ro emi ss ion ve hi cle s. Be in g a sig ni ca nt fu nde r of both g ood s veh icl es a nd pa ss eng er veh icl es, tra ns por t i s a sp ec ial ist s ector fo r us. We supp or t o ur cl ie nts to bri ng ne w , cl ea ne r vehi cl es to the ir e ets. T ranspor t is t he highest -emit ting sect or in the UK e co nomy a nd so th e ele ctr ic atio n of surface transport ( suppor ted by modern grid in frastructure and signican t deployment o f renewable elect ricity) repr ese nts a key tran siti on for o ur bu sin es s and consumer cust omer s. We are a le adi ng prov id er of n an ce for th e adopt ion of zero emission electric v e hicles, deploying nance for ne w innov ative v ehicles into se ctors s uc h as lo gis tic s and d el ive r y , supporting electrication of car eet s, and enabling innov ative nancing packages for con sum er ad optio n of el ectr ic c ar s. Bat ter y e le ctri c ca rs re pre sents ove r a thi rd (35.3% ) of al l new c ar s we fu nde d in o ur commercial business in the last y e ar , more than double the proportion across new car sa les i n the UK (1 5.3% ). We beli eve the bat ter y powere d vehi cl e sector of fers a signicant growth opportunit y . Ou r ass es sm ent of th is ma rket poten tial i s bas ed on tr ans po r t po licy d ri ver s and a n app etite f rom ou r cus tome rs, in clu din g our corporat e cust omers, looking t o meet their own c arb on re duc tion t arge ts. We have set ou rs el ves a n amb itio n of prov idi ng over £1 .0bill io n of len di ng for ze ro emission batt er y electric vehicles over the nex t ve ye ar s fr om 2023 to 202 7 . Risk management Integrating Climate Risk into Risk Management As ou tlin ed i n our R isk R ep or t (se e page s 7 4 to 92 ) , the gr oup e mp loys a n Enter pri se R isk Management F ramework t o effectively manage the r isks i t fac es o n a day-to-day ba sis. I n addi tion to de tail ing th e core r is k man age me nt components and structures used across the r m, the fr amewo rk d en es a co nsi stent and measurable appr oach to identifying, assessing, cont rolling and mitigating , reviewing and m oni torin g, and re po r ting r is k – the ri sk proc es s life cycl e. It als o outl ine s ea ch of the rm’ s p rin cip al ri sks, s et ting th e foun datio n for the in div idu al r isk f ram ewor ks put i n pla ce to man age a nd m itig ate eac h. Con sis tent with o ur a ppro ach to ris k man age me nt, the grou p co nsid er s cli mate risk t o be a cross -cut ting risk, noting the potenti al for i mpac ts ar isi ng f rom cl imate cha ng e to affe ct s evera l of our ex is ting pri nci pal r isks. We re cog nis e that the se may be both p hysic al a nd tran siti ona l in natu re. Noting the longer horizon over which some climate impacts will ultimat el y crystallise, and th e prop en sit y fo r eme rgi ng po lic y and regulat or y developments on the t opic, the grou p als o conti nue s to track cl imate ri sk as one of i ts co re em erg ing r isk s (see pa ge 91 ). Sub stan tive pro gre ss ha s alre ad y bee n mad e in embedding climat e risk considerations within our existing risk framew or ks, with fur ther re ne me nt and e nh anc em ents pla nn ed ove r the mo nths an d yea rs to com e. Th e com ple tene ss of th is jo urn ey is c riti ca l. Ove r time, ou r expe ct ation is th at cli mate ris k will be consider ed within ev er y component of our risk framework, ensuring full coverage through our risk lifecycle . Integ ration w ith in key par ts of our gro up policy framew ork, ri sk appet ite sta tements and g roup s tres s testin g fr amewo rk has b ee n an i mpo r ta nt rs t step on th is jou rn ey , an d over tim e, the ex tent to wh ich clim ate ris k con sid erati on be co mes f ur t her embedded within business-as-usual risk as ses sm ent a nd d ec isi oni ng wi ll be a n imp or t ant b en chm ar k of our s uc ce ss. How we id en tif y , a ss es s an d ma na ge climate-related risks Rec og nis ing th e potentia l for c lim ate chan ge to pres ent b oth disr upti ve phys ica l an d transitional impacts, the group coordinat ed an ini tia l ris k ide nti cati on exerc ise i n 201 9 w ith a view to id enti f yi ng the m ost m ateri al ri sks to the gro up. Thi s covere d al l bus ine ss a rea s as well a s rel evant g roup c entr al fu nc tions a nd, usi ng a pre -agre ed q ue stion na ire for mat, was suc ce ssf ul in i de ntif y ing p otentia l cli mate- relat ed impacts acr oss several e x isting pr inc ipa l or key ri sks, m ost n ota bly: • Cre dit r isk (cou nterpa r t y an d collateral impact s) • Op erati ona l ri sk (p rem ise s and p eo ple, and th ird pa r t y im pacts) • T r ade d ma rket r isk • Regulat or y risk • Con du ct risk • Business and st rategic risk • Funding and liquidity risk Th e grou p ha s sub seq ue ntly s ou ght to review a nd c ons ide r al l ide nti ed r isk a rea s, with consider ation given to each aspect of the ri sk li fecyc le, na mel y ( 1 ) Ide ntif y; (2 ) ass es s; (3) contro l and m itig ate; ( 4) review and monit or; and ( 5) report. For e ach, bu sin es se s an d grou p ce ntra l functions ha ve dev eloped, or are developing , processes and reporting t o suppor t the ef fe ctive m ana gem ent of p otentia l cli mate imp acts g oin g for wa rd, as wel l as the em bed din g of cl ea r acc ount ab ili ties a nd responsibilities. T o d ate, our focu s ha s pri ma ril y ce ntred on cre di t and o pe ratio nal r isk i mpa cts con siste nt with o ur vi ew that the se a rea s ca rr y th e hig he st le vel of pote ntia l ris k. Whi lst we a cce pt that we a re exp ose d to de gree s of both tr ans itio nal a nd p hysic al r isk , cur re nt ris k exp os ure is n ot con sid ere d to be mat e rial. However , we ac ce pt that d evelo pm ents ove r the longer term (particularly those with a transitional impact) could impact the business without t he implementation of appropriat e management act ions and t he evolution of our business operating model. T o d ate our a nal ysi s of ea ch ri sk a rea h as remained broa dly qualitative with indust r y best practice still not established and data ne eds a nd c apa bil itie s (b oth inter na lly and ex te rn all y) stil l evolv in g. Ove r time, deve lop men ts both wi thin th e grou p and across the indust r y will facilitate a more quantita tive asse ssment o f pot ential impacts. Some quantitativ e analysis, such the comple tion o f our inaugural long- term horizon scenario analysis ex ercise outlined on page 48 , has been per formed , greatly suppor ting our abilit y t o understand and assess po tent ial risk expo sure . Credit risk Ou r pri ma r y foc us ha s und ou btedly b ee n on cre dit r isk g ive n its ma teri ali t y to the Ban ki ng div is ion a nd the w ide r gro up, but mo re so its sensitivity to possible climat e impacts, no ting that both phy sical and transiti onal drivers have the pote ntial to af fec t both co unter par ty and collat eral risk. Book 1.indb 50 27/09/2022 23:46:01 51 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report T o enable a standar dised assessme nt o f current loan book exposures t o physical and tr ansitional risks, we hav e developed and i mpl em ented a rst-ge ner ation c lim ate sensitivity methodology . This utilises a standardised impact classication approach with ex po sure s ca tegor is ed f rom “Low ” to “Ver y H igh” ba se d on the p otentia l se nsi tiv it y at both a co unter pa r t y (dri ven by se ctor) and asset level. The methodology relies on exis ting d ata s ourc es a nd a ppl ie s a set of qua lit ative, exp er t j udg em ent a ss umpti ons to assign exposur e s int o different classicat ions. Prese ntl y the meth odo log y is de pl oyed ac ross c.£7 billio n of the Ba nk in g div isi on’ s lo an bo ok (77% ) an d ha s proved u sef ul in i de ntif ying those e x posures deemed as ha v ing the most pot ential sensitivity t o climate change, namely: • Car bo n ass et fu ndi ng w ithi n our M otor / Asset Finance businesses • Non-r enewable energy and carbon asset funding • Re cei vab les f un din g in potenti all y imp acted s ec tors wi thi n our Invo ic e Finance business • Residential/ commercial pr oper ty funding (par ticularly in high ood risk loc ations ) in our Pr oper t y business Importantly , the current methodology does not ac cou nt for ti me ho rizo ns over w hi ch climate impacts are expect e d t o cr ystallise, meaning that the segmentations it produces are not n ec es sa ril y rep res ent ative of o ur cur ren t por tfol io r isk. A s outl ine d on p age42, we be lieve th e sho r t aver age te nor of th e por tfol io si gni ca ntl y mitig ates th e ris k associated with our existing book. Nonetheless, outputs fr om the methodology have provided important insights into po tent ial future risk with resulting se nsitivity dashboard extracts incorpora ted int o regular reporting to key risk c om mit tee s si nce O ctob er 2021 . These include divisional risk and compliance com mit tee s (“RC Cs”), CRMC, GRCC a nd the board risk commit tee . Add re ss ing d at a an d fu tur e enhancements Data q ual it y re mai ns a key cha ll eng e an d we are c omm it ted to deve lop in g enr ic he d clim ate cred it ri sk dat a that wi ll sup por t more acc urate me asu rem ent a nd mo nitor ing that ca n in tur n sup por t not just e f fec tive r isk mitigation but also strat egic alignment. T o s upp or t u s in thi s en deavo ur , we have now co mm enc ed th e deve lop me nt of a sec ond- ge ner ation cl imate as ses sme nt methodology that will incorporat e a more sophisticat ed approach utilising both qua lit ative an d qua ntit ative in pu ts. Thi s wil l: • facilitat e customer and asset assessment scorecards f or each exposure as relevant ; • leve rag e a wid er ra ng e of data at tr ibu tes (both c ustom er a nd as set); and • incorporat e customer out reach at onboarding t o better understand count erpar ty-specic clima te and ESG s en si ti vi ti es . Our tr ans itio n to this en han ced m etho dol ogy for ms an i ntegr al pa r t of ou r pl an for enh an cing c lim ate risk m an age me nt ca pab iliti es. It w ill a lso re qu ire us to add res s var iou s exis ting d ata g aps w hi ch wi ll be faci lit ated by the g athe rin g of more c ustom er data a s wel l as the l ever agin g of ind ustr y wid e data s ourc es w he re rel evant a nd avai la ble. Whi lst we e nvi sag e it wi ll ta ke time to imp lem ent, the e nha nc ed meth odo log y will ultima tely move functionality be yond simple reporting enhancements, initiating parallel changes to opera ting models , credit sa ncti onin g pro ces se s, co re systems a nd, in tim e, our cr edi t mod el lin g app roac h. The en han ce d repo r tin g an d MI it w ill p rovid e wil l also facilitat e more decision use ful insights that wi ll in tur n su ppo r t the evo luti on of the rm ’ s longer -t erm stra tegy f or manag ing ri sks and opportunities and t he development o f more t ailored cr edit risk appet ites based on sectoral transition risk asse ssments . Operational risk Pre mi se s an d pe opl e Rec og nisi ng the p otential fo r cli mate cha nge to impact both our buildings and service provision capabilities, par ticularl y in t h e ev e nt of a sus tai ned i nc rea se in tem pe rature s ove r the lo nge r ter m, the grou p ha s con duc ted a revie w of its exi stin g bus ine ss c onti nui t y pla ns a s well a s its bro ade r ap proa ch to crisis management to ensure it is adequat ely prepared . Where necessary , appropriat e upd ates have b ee n mad e to ens ure su f c ie nt con sid erati on of pote ntia l impa ct al thou gh the lo cati on of the g roup’ s pro pe r tie s and ser vic e ce ntres ( pr ima ri ly UK a nd Ire la nd- bas ed) re du ce s our ex pos ure to the mo st immediat e physical r isks. Potential c lim ate impa cts on o ur pe op le, cus tomer s and i nfr astr uctu re are a lso n ow considered in crisis management simulat ions con duc ted ac ross th e grou p. The se sp an from d isr uptio n to data ce ntre s as a res ult of ex trem e weathe r even ts, to oper ation al imp acts re sul ting f rom the f ail ure of key thir d parties, right t hrough t o signicant changes in cu st omer pref erences. Relevant operational risk standar ds have als o be en up dated to rec ogn ise th e ris ks pre sen ted by cli mate ch ang e wh ile wo rk continues t o incorporate climate risk considerations wit hin our assessment of operational resilience for critical ser vices and change managemen t risk assessmen ts. Over time, we al so pl an to gath er f ur th er phy sic al ris k dat a on ou r pre mis es, i ncl udi ng key data c entre s, wi th a vi ew to suppo r tin g our ass es sme nt of f uture r isk. M ore im me diatel y , con sid erati on of a b esp oke cli mate-b ase d Pillar 2a operat ional risk scenario is under way as pa r t of ou r nex t ICA AP cyc le. Th ird p ar t y ri sk Th e grou p als o rec ogn ise s the pote ntial fo r key third pa r ti es a nd su ppl ier s to be im pacte d by cli mate cha nge (du e eith er to phys ica l or transitional factors ) , causing disrupti on t o day -to-da y business operations . Enhanced supplier due diligence quest ionnaires have now be en in trodu ced to gath er c limate a nd ESG data fo r all of o ur T ie r 1 and T ie r 2 sup pli er s wh ile o ur ten der in g proc es s ha s been upda ted t o consider environmen tal and c lim ate cons ide ratio ns alo ngs ide sustainability innovation . Where pract ical, measurable performance indicators are also now included within agreements with performance against these mon itored o n an o ngo ing b asi s. Whi lst we have not yet s et cli mate-s pe ci c third -par ty r isk app etites, we c onti nue to wor k col lab orati vel y with o ur su ppl ier s to supp or t th em w ith the ir cli mate and ESG ag en das. O ver th e nex t yea r we pla n to fur t her e nh anc e the g roup’ s third- par t y management framew ork to keep pace with the evolving regulatory landscape, ada pting o ur ri sk a sse ss me nt pro ce sse s an d contr ols as appr opriate. Other risks Work to integrate c onsi de ration of c lim ate ris k acro ss oth er id enti e d ris k are as i s als o prog res sin g at pace. C limate ch ang e, and th e grou p’ s re spo nse to it, now fo rms a n integ ral par t of our bu si nes s str ategy. This in clu de s continued asse ssment o f the resilience of our mod el, to ens ure we are s uf ci entl y pre pare d to mana ge the r is ks pos ed by i t. As outl ine d on pa ge 45 (G over nan ce s ecti on), strong over sig ht of str ategi c de live r y i s ma inta ine d through our committee framew ork, wit h con sid erati on of c limate r isks n ow emb ed de d within our strategic planning and new pr oduct appro val pr ocesses. Funding and liquidity impacts ha ve also been reviewe d an d are now s ubj ect to on goi ng re- assessment with regular updates provided t o releva nt T rea sur y comm it tees. Pr im ar y fo cus are as in clu de im pli cati ons for d ebt c ap ita l marke ts, potent ial behavioural changes in our i nvestor b ase, a nd po ssi ble d ire ct an d indirect reputat ional impacts, including those relat e d t o evolving disclosur e requirement s. We a l so c on ti n u e to a s s e s s t ra d e d m a r ket ris k imp lic ations fo r Winte r oo d, altho ugh th e business ’ role as a marke t maker means we do not take long- term posit ions, mit igating pot e ntial risk exposure. The rapidly ev olving regulat or y landscape als o pre sen ts ris k and we re co gni se ou r responsibility to comply with new and emerging requirements . Horizon sc anning capabilities ha ve been enhanced in r esponse, with ne w dev e lopments initially ident ied via the gro up’ s Re gul ator y O ver sig ht Gro up an d subsequently assigned to r elevant functi ons and business ar eas as appr opriate. Book 1.indb 51 27/09/2022 23:46:01 52 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Sustainabilit y Report continued T ask For c e on Climat e-relat ed Financial Disclosures Work is a ls o und er w ay to cons ide r co ndu ct ris k imp lic ation s. In pa r ticu la r , we re cog nis e the ne ed fo r tran spa ren cy ac ross a ll l evels of disclosure. This includes compliance with an y new pr oduct -specic disclosure requirement s as they c ome i nto ef fec t. Linked to thi s, we als o note the in cre ase d potenti al for l itig atio n ris k sho uld we fa il in th is reg ard. Our asset management business has integrat ed responsible inv estment practices in our i nvestm ent p roc es s to aid us i n crea ting lon g-term va lue fo r cli ent s and b en ec iar ie s, in turn leading to sustainable benets for t he economy , the environment and societ y . This app roac h is u nde rp inn ed by o ur fo cus o n stewards hi p , wh ere we have s et ou rse lve s hig h sta nda rds of i ntegr it y a nd exce lle nc e to de live r co nsi stent va lue fo r our p eo pl e and cli ents. We also c ontinu e to grow our pro duc t of fer in g for cl ien ts who w is h to fur th er a lig n thei r inve stme nts to their va lue s; we of fer ethical scr e ening, Sustainable Funds and our Socially Responsible Invest ment Service and a re ac tive ly lo ok ing at way s in wh ich we ca n ali gn ou r por tfo lio s with p osi tive environmental , social and go vernance factors . T o d o this, we are c ontin ua lly e duc ating o ur pe opl e and c lie nts o n ind ustr y bes t prac tice, and a re sig nator ies of th e Prin cip le s for Responsible Invest ment (“P RI”) . Look in g ah ead to 2023 and b eyon d, we have mobilised a Sustainability Programme with d ed ica ted ini tiati ves to em bed th e principles of responsible inv estment and stewards hip a cros s al l face ts of our b usi ne ss inc lud ing b eco min g a sig nator y of th e UK Stewards hip C od e. We believe th at to man ag e our A ss et Ma nagement clien ts ’ capital responsibly , we must be acutely aware of, and re spo nd to, the mater ial risks and oppor tunities present e d b y cli mate cha nge. We als o be lieve th e ass et man ag eme nt in du str y c an p lay a hu ge rol e in fac ili tatin g the tra nsi tion to a lowe r car bo n ec ono my , whi le b ein g min df ul of the i mpac ts to soci et y . T o dri ve this fo r war ds, ou r ass et management business will be making a com mitme nt to actively c ontrib ute towards the UK g over nme nt’s net zero cl imate go al s, throu gh the N et Zero A ss et Ma nag er s initiativ e, in addit ion t o maintaining a prudent app roac h to E SG ris k ma nage me nt. Risk appet ite Dur in g the la st ye ar , wor k has c onti nue d to integr ate cons ide ratio n of clim ate ris k withi n the gro up’ s r is k app etite statem ents. T hi s has i ncl ude d the o ngo ing re ne me nt of exis ting q ual itati ve statem ents a s well a s the deve lop me nt of qua ntit ative r isk m ea su res for rel evan t pri nci pal a nd key ri sks. Whi le qu anti tati ve mea sur es ar e, in the ma in, currently included for monit oring purposes, we are c ontin uing to deve lo p more t ail ored, formal risk appetites , par ticularly f or credit ris k. We expe ct th es e to be bas ed on sectoral transition risk asse ssments , aligned to our am biti on to me et the g oal of th e Par is Agre eme nt to reac h net ze ro by 2050. Metr ic s wil l be f ur th er e nha nc ed as d ata a nd ca pab ili tie s evolve, a nd over ti me we ex pe ct these t o also leverage sce nario analysis and o ur e nha nc ed cre di t ris k rep or tin g metho do log y to ena ble th e set tin g of ris k app etite ac ross d if fe rent ti me ho rizo ns. Dur in g the la st yea r , we have mad e pro gres s in deve lo pin g fur ther o ur cl imate str ategy and our understanding of our broader emissions including our full operational em iss io ns (i ncl udi ng Sc op e 3) an d ea rl y as ses sm en t of our nan ce d em iss io ns in our l oan b ook . Our fo otpr intin g acti viti es i n the ye ar have b road en ed ou r bou nd ar y to inc lud e our f ul l Sco pe 1 , 2 an d 3 ope ratio na l emi ss ion s acro ss the g roup a s wel l as an ini tial eva lu ation of o ur Sc op e 3 na nc ed emissions (initially f o cused on our le nding book) . We recog nis e the im por tanc e of add res sin g the thre at of cli mate cha nge a nd a lso app rec iate the v ita l rol e we can p lay in sup por ting our c ustom er s on the tra ns itio n to a low-ca rbo n ec ono my . Havi ng prev iou sl y set a mbi tiou s sho r t-t e rm n et zero t arge ts for our S cop e 1 an d 2 ope rati ona l em iss io ns, we are n ow set tin g our se lve s a wid er a nd lon ge r -term a mb itio n to alig n all of o ur ope ratio nal a nd at tri but abl e GHG e mis sio ns from our lending and inv e stment portfolios to ali gn w ith pathway s to net zero by 20 50. T o th is en d, we have rece ntly j oin ed 1 1 6 othe r ban ks glo bal ly , a s a sig nator y to the N et Zero Ban ki ng A lli anc e. Th is sets u s on a c lea r traject or y to further develop our understanding of our f ul l valu e cha in e mis si ons ( inc lud ing our na nce d em is sio ns) and to set s ho r t- te rm and long- term targets aligning our operational and nanced gr eenhouse gas emissions with pathways to net ze ro by mi d-c entu r y . Our c lim ate strateg y is for med a rou nd three p ill ars: • Achi evi ng net ze ro op erati ons ac ros s our buildings and eet (covering our Scope 1 and 2 e mi ss ion s) , as we ll a s our w id er operational impact s in our supply chain em is sio ns (S co pe 3) • Me asu ri ng an d redu cin g our na nce d emissions across our lending and investment por t folios t o suppor t our cus tomer s to mee t thei r own g oal s and ali gni ng o ur pathway to ne t zero by mi d- century • Dev eloping our green nancing activities, growi ng ex isti ng gre e n mar kets (suc h as ou r cur re nt wor k sup po r tin g our customers ’ transit ion to battery electric veh icl es), as well as o pe nin g new g ree n ass et ca tegor ie s wh ere th ey ali gn to our lending expertise and appet ite. Reducing our operational emissions Having pr eviously made good pr ogress across our building and eet emissions (including setting o f ambitious net z ero targ ets for o ur Sc op e 1 an d 2 emi ss ion s by 2030 a s wel l as a n et zero eet by 2025), we have exp an de d fu r the r ou r as ses sm en t of operational impact s this year . As ca n be s ee n in the t abl es o n pag es 54 and 56, we h ave now ca rr ie d out o ur r st evalu atio n of our f ull o per ation al fo otpri nt, cove rin g Sco pe 1 a nd 2 as we ll a s all relev ant Scope 3 categories. We gathe r our e nviro nm enta l dat a and com pil e our g ree nh ous e gas e mi ssi ons w ith the su ppo r t of an i nde pe nde nt thi rd-pa r t y analytics and reporting consultancy . Fur the r to meeti ng a ll of the ma nd ator y reporting requirements under the Streamlined Ene rgy and Carbon Repor ting (“SECR ”) st and ard s, we are n ow provi din g enhanced disclosure acr os s our wider operational impact s. Our m etho dol ogy fo r ca lcu latin g and disclosing our GHG e missions and energy use i s in acc orda nc e with th e requ irem ents of the Worl d Re sou rce s Insti tute GH G Pro tocol Corpora te Standard, GHG Prot ocol Cor por ate V a lue C hai n Acco untin g and th e SECR st and ard s. We repor t on all m ateri al Sco pe 1 a nd 2 em iss ion s as soc iated wi th our o pe ratio ns. Sc ope 1 i ncl ude s fu el emissions from buildings and company vehicles and Scope 2 includes our emissions from e le ctr ici ty. W e h ave also re po r ted ou r indirect Scope 3 operational emissions acro ss al l rel evant c atego rie s. In the 2022 nan cia l yea r , o ur total l oc ation - bas ed G HG em is sio ns were 2,6 79 t onn es of carbon dio x ide equiv alent (t CO 2 e), eq u at in g to 0.7 0 tC O 2 e pe r em ploye e, up 2% overa ll but d own by 1 % pe r em ploye e fro m 2021 . Th oug h we saw si gni c ant re duc tion s in em is sio ns f rom ou r bui ldi ngs i n 2022, we saw a s imi lar s ize d inc rea se in ee t emissions as our relationship managers got bac k on th e road fol lowi ng the q uie ter Covid- 1 9period. Ou r of c es a nd B rewe r y R ent a ls Operations As c an be s ee n in the c ha r t on p age 55, a growi ng pro po r tion of th e en erg y we us e acro ss ou r of c es a s wel l as us e in ou r Brewe r y Re nta ls si tes (p rim ar ily to cl ea n the kegs) is c omi ng fro m ren ewabl e sou rce s. We have ex tens ive de pl oym ent of re newa bl e ele ctr ic it y acro ss ou r si tes an d pri mar il y use wo od p ell ets to rais e he at for ou r bar rel c le an ing p roce ss es. T hi s yea r , th ese exis ting s ourc es of re newa bl e en erg y have be en c omp le men ted wi th our u se of gre e n gas ( supplied to us with Renew a ble Gas Book 1.indb 52 27/09/2022 23:46:02 53 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Guarant ee of Origin (“RGGO”) cer ticat e s) . Th is gi ves u s com ple te trace ab ili ty a nd assurance tha t our gas comes fr om authent ic biogas sour ces. Our gas supplier is a reg istere d su ppl ier w ith the G re en G as Certicat ion S cheme ( “GGCS ”). Ou r ong oin g app roac h acro ss ou r operations o f energy ef ciency and sourcing of ren ewabl e en erg y co ntinu es to dr ive down o ur S cop e 1 an d 2 emi ss ion s. We have now ac hi eved a re duc tion of 4 4.8 % in our S co pe 1 a nd 2 em is sio ns si nc e 201 9 und er a m ar ket -ba sed a pp roac h, whi ch demonstrat es good progress to wards be com in g ope rati ona ll y net ze ro by 203 0. Du rin g the pa st yea r , our e ne rgy e f ci en cy prog ra mme a cros s ou r of c e est ate has imp le me nted a nu mbe r of e ner gy-sav ing initiativ e s, including : • Boi ler d em and s trategy: rev iew ing the boi le r usa ge at o ne of ou r site s has s aved an estima ted 1 0% gas consump tion sin ce it wa s imp le me nted. Bas ed o n this suc ce ss, we a re now lo ok ing to rol l ou t this i niti ative ac ros s other of ce s ites. • Decommissioning staircase hea ting : a pla nn ed ch an ge to how we he at the sta irca se s and oth er c omm una l spa ce at our H ead O f ce h as save d an e stim ated 5 % gas consumpt ion at this site since implementation. • Co ntinu atio n of our L ED lig hting u pgr ade s: lig hting a cros s a fu r the r thre e of ce s ites has been upgraded to efcient LED lig hting s avin g 5.2 MW h of ele ctr ici t y this yea r . Electrif ying our car eet Our d ri ve towards hav ing a f ul ly el ec tric ca r e et an d a net ze ro e et by 2025 has con tinu ed th is yea r . We a re prou d of our le adin g stra tegy , a llow in g us to dem on strate to our cu stome rs how p rog res s in de ca rbo nis ing eet s ca n be ac hieve d – an are a we ca n sup por t th em to n anc e. Sin ce Ja nua r y 2022 we h ave onl y of fere d fully electric, battery elec tric v ehicles (“BEVs ”) optio ns on ou r ca r sch em e (other tha n in ex ceptional circumstances ). Ou r ee t of 639 c ar s is now a lmo st wh oll y bat ter y e le ctr ic or hy br id (as c an be s ee n in the di agr am on p age 55) a nd we an tici pate the ma jor it y of the ve hi cle s to be BE Vs by the end of th e 2022 ca le nda r yea r . Our e f for t s to transi tio n our eet (and to prog res s towards o ur net ze ro ta rget by 202 5) has driven our eet a verage emissions down f ur ther th is yea r (and a lo ng way a he ad of the UK ave rag e for n ew veh icl es). The average CO 2 em iss ion s have now f all en to 32.9 gC O 2 /k m (202 1 : 57 .3 g CO 2 /km ). Met rics and target s Ou r C li ma te S t r at eg y Ach iev in g net ze ro operations Achieving net z e ro operations and reducing supply chain emissions. Working with our par tner s and suppliers to minimise our operational impact. As a s ig na tor y to t he N et Ze ro B a nk in g Al li an ce We commit to trans ition all o per ationa l and at trib uta ble GHG e mis sions f rom our l ending and investme nt por t foli os to align with pathways to net zero by mid-c entur y , or s oone r , including CO 2 emis sions re aching ne t zero at the latest by 2050, con sistent with a m a ximum tempe rature r ise of 1 .5ºC ab ove pre-in dustri al levels by 2 100. Reducing our nancial emissions Supp or ting th e goals of th e Paris Agreement t o achi ev e net zero by 2050, aligning our na ncing over time to supp or t the ne ce ss ar y reduc tions and tim elines, enab ling our cu stomer s to meet their targets. He lp in g to n an ce t h e trans ition Enabling th e depl oyment of clean technology and business mode ls through o ur gre en growth lending strategy . Growing existin g gree n as set mar kets and unlo cking n ew sec tors tha t align with o ur le nding expe r tise a nd app etite. Financed emissions Operational emissions Become operationally net zero throug h our Sc ope 1 an d 2 emis sio ns by 2030. T o reac h net zero e miss ions by 2050 across our operational and attr ibutable GHG emissions from our lending and investme nt por tfolio s. Provide over £1 billion of lendin g for zero em issi on batter y elec tric vehicles ov er the nex t ve year s (2023- 2027 ). In d evel op m en t: Interim (203 0) nanc ed em issi ons ta rgets su ppor ting our path to net zero . F ur ther green asset lending targets acros s specic technologies or mark ets Achieve a net zero com pany car eet by 2025. Our Climate Am bitions Book 1.indb 53 27/09/2022 23:46:02 54 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Sustainabilit y Report continued T ask For c e on Climat e-relat ed Financial Disclosures Greenhouse gas emissions 1, 2 Emissions s ource Location based Market based 2022 tCO 2 e 2021 3 tCO 2 e 2022 tCO 2 e 2021 3 tCO 2 e Scope 1 Buildings - fuel 379 712 355 712 Owned v ehicles - fuel 1, 015 345 1, 015 345 T ot al S c op e 1 1, 3 9 4 1, 0 5 7 1, 3 7 0 1, 0 5 7 - Of w hic h UK T ot al S co pe 1 1, 3 5 8 1, 0 5 7 1, 3 3 4 1, 0 5 7 Scope 2 Buildings - electricity 1, 12 3 1, 511 906 1, 4 2 8 Owned vehicles - electricity 16 2 57 16 2 57 T ot al S c op e 2 1, 2 8 5 1, 5 6 8 1, 0 6 8 1, 4 8 5 - Of w hic h UK T ot al S co pe 2 1, 2 4 2 1, 4 4 6 94 1 1, 3 0 6 T ot al S c op e 1 an d 2 (O p er a t io na l) 2 ,679 2,6 25 2,4 38 2, 5 4 2 - Of w hic h UK T ot al S co pe 1 a nd 2 2, 600 2,5 0 3 2,27 5 2,3 6 3 Sco pe 3 (Op er ation al) Categ or y 1 - Pu rch ase d goo ds a nd se r vi ce s 44,2 19 141 Cat egor y 2 - Capital goods 19, 2 9 1 Catego r y 3 - Fue l and e ne rgy-re lated e mis si ons 712 12 9 Catego r y 4 - Up strea m tra nspo r tati on an d dis trib utio n 86 Categ or y 5 - Waste g ene rated i n ope rati ons 206 44 Categ or y 6 - B usi ne ss trave l 1 ,11 0 13 0 Categ or y 7 - E mpl oyee c om muti ng 4,21 2 Catego r y 9 - D ownstre am tr ans por t and di stri buti on 408 T ot al S c op e 3 (O pe r at i on a l) 70, 24 4 444 T ot al S c op e 1, 2 and 3 ( Op e ra t io n al ) 72,923 3,0 6 9 2022 GWh 2021 GWh Energy U se To t a l e n e r g y u s e 18 . 47 16 .70 - Of w hic h UK T ot al e n er g y us e 18 . 0 6 16 . 4 4 Emission Intensity tCO 2 e per employee tCO 2 e per employee 2022 2021 2022 2021 Op erati ona l Sc ope 1 a nd 2 e mis sio ns in tensi t y 0. 70 0. 7 1 0.6 4 0.6 9 Op erati on al Sc op e 1 , 2 a nd 3 e mis si ons i ntens it y 1 9. 1 4 - Ca lcu la te d us in g: Aver ag e nu mbe r of e mp loye es i n yea r 3 ,810 3, 709 3,8 1 0 3, 709 1 W e have r eported on all emission sources required under the Companies (Directors’ Repor t) and L imited Liabilit y Partnerships ( Energy and Carbon Report) Regulations 20 18. Our reporting year runs from A ugust 20 21 to July 2022 . The emissions repor ting boundary is dened as all entities and fa cilities eith er owned or under our operational con trol. 2 Em is si ons h ave b ee n c al cu late d u si ng th e Gr ee nh ou se G as P roto co l Co rp or ate S ta nd ard an d cove r s al l gre e nh ou se g as es (c onv er te d to TCO 2 e) . We have used emissions factors published by t he UK gov er nm en t’s Dep ar t me nt fo r Bu si ne ss , En erg y & In du st ri al S tra teg y, and th e Inte rn at io na l Ene rg y Ag en cy. 3 Du ri ng ye a r en d ca rb on a cc ou nti ng w e id ent i ed a s ma ll a dj ust me nt to t he 2021 na nc ia l sc op e 2 em is si on s. T he 2021 s co pe 2 fo otp ri nt h as b ee n re st ate d - in cr ea si ng s li ght ly by 9 to nn es und e r lo ca tio n ba se d an d 12 tonne s un de r ma r ket b ase d ac c ou nti ng. Ou r O pe r at i on al I m pa ct s Book 1.indb 54 27/09/2022 23:46:02 55 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Recognising our progress We contin ue to par ti cip ate in the CDP , whi ch allows us to disclose our gree nhouse gas em iss ion s an d our a ppro ac h to mana gin g climat e-relat ed impact on a v oluntar y basis. We were ple as ed to be awa rde d a B- in th e lates t CDP s co res in D e cem be r 2021 , in recognition o f the positiv e ongoing progress we are m ak ing. T his ye ar , we we re als o prou d to be inc lud ed a gai n, for its s ec ond yea r , i n the Fi nan ci al T ime s’ list of Euro pe an Clim ate Lead er s, rec ogn isi ng ou r pos itio n as one of th e top 30 0 Euro pea n co mpa nie s at redu ci ng Sc ope 1 a nd 2 e mis si ons. Und er s ta nd ing o ur nan ce d em is si ons We recog nis e the ne ed fo r hol isti c acti on on cl imate ch ang e. We are addre ss ing th e imp act of ou r own o pe ration s throu gh ou r exis ting t arge ts of net ze ro Sc ope 1 a nd 2 ope rati ona l em is sio ns by 203 0 an d a net zero eet by 20 25. Th is yea r we have b eg un ou r jou rn ey to evalu ate the wi de r impa cts of ou r bus ine s s, by inc lud ing o ur nan ce d em iss io ns in o ur carbon a ccounting . T o a sse ss th es e emi ss ion s we have use d the PCAF approaches, applying the guidance inc lud ed in th eir G lob al GH G Acc ounti ng and R ep or ti ng Sta nd ard for th e Fin an cia l Ind ustr y , draw ing o n thre e of thei r deve lop ed methodologies, business loans, project nancing and mo tor vehicle loans. On review, 8 7% of our l oan b ook i s in sc ope of GHG a ss es sme nt un de r the cu rre nt PCAF sta nda rd. Of th is, 59% has b ee n as se sse d under the busine ss loans methodology , acc oun ting fo r an ap po r tio ned a mo unt of emissions from these businesses, in line with the val ue we n an ce. A fu r the r 5% of our total loa n bo ok ha s be en a sse ss ed u nde r the proj ec t na nce m etho dol og y . He re, we have account ed for the appor tioned emissions of the pro je ct du e to our co ntri buti on. A n al 23% of our loa n bo ok ha s be en a sse s sed usi ng the m otor vehi cl e loa ns meth odo lo gy , acc ounti ng for th e an nua l in-u se em is sio ns of the ve hic les th at we na nc e. Du e to limi ted avail ab ili t y of data, we h ave, leveraged robust da tasets fr om the UK gover nm ent, the OEC D and oth er s, in lin e with P CAF recommendation s, wit hin our as ses sm ent. T his i s our st ar ti ng po int a nd is ba sed o n cu rre nt be st ava ila ble d ata. We have a strate gy to move for ward on progressing t he availability , granularity and a ccu racy of th e dat a util ise d to fur th er imp rove the qu ali t y of this re por ting. However , a s rec omm en ded by P CAF , we are c hoo sin g to not all ow low d ata avai la bili t y to deter us f rom b eg inn ing o ur jo ur ney to as ses s ou r na nce d em is sio ns. We repo r t now as i t sets o ur inte ntion a s a bu sin es s to ali gn ou r loa n po r t foli o with th e Par is Cl imate Agree me nt an d move towards n ot just Ou r O wn C ar F le et Hybrid Batter y Electric Diesel Pet rol 639 cars improv ed accuracy in our r epor ted emissions but a lso to dr ive g reater d ec ar bon is ation acro ss the a ctiv itie s we n anc e. In the ta bl e on pag e 56, we have set o ut the in itia l em iss ion s cal cul ation s for this prop or ti on of ou r loa n bo ok ag ain st e ach categ or y , as we ll as th e imp acts of o ur ope ratin g le ase b usi ne ss w hic h we have inc lud ed u nde r Sc op e 3 categ or y 13– downstr e am leased asset s. We have also inc lud ed e stim ates of e mis si ons im pac ts of any as sets we d is pos e of und er c atego r y 1 1 (Use of s old p rodu cts– for th ei r rema ini ng life), and cate gor y 1 2(En dof life tre atme nt of sold product s) . Pr op or ti on o f Re ne wa bl e E ne rg y u se d Ac r os s ou r O f ce s an d B re wer y Re nt a l S it es 2020 2021 2022 Our ofces Keg cleaning and handling 2020 2021 2022 0% 40% 20% 60% 80% 100% Renewables T otal energy used Book 1.indb 55 27/09/2022 23:46:02 56 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Sustainabilit y Report continued T ask For c e on Climat e-relat ed Financial Disclosures Green Growth We recognise the signicant growth oppor tunities for gr een asset lending acr oss seve ral of o ur ex istin g as set c las se s, as we ll as new one s. As a specialist, adaptable lender , with deep understanding o f our cus tomer s’ nee ds, we c an su ppo r t the m in their t ransition t o new cleaner t echnologies to meet th eir ow n sus tai nab ili t y targ ets. As a n exis ting l end er a cros s a ra nge of ve hi cle mar kets (b oth pas se ng er a nd co mme rci al ) , we are a lrea dy se ei ng grow th in bat ter y el ectr ic ve hic le s, as o ur e et cu stome rs s ee k to reduce their emissions . In our wholesale na nc e bus ine s s, we are se ei ng a ma jo r move to full y bat ter y ele ctr ic ca rs, a n exam pl e be ing our s upp or t fo r the la unc h of a new p er son al Our F inanced Impacts 2 2022 Greenhouse gas emissions Emissions so urce tCO 2 e Sco pe 3 (F ina nc ed) Categ or y 1 1 - Use of s old p rod ucts 1 9 6, 526 Catego r y 1 2 - En d of life tre atme nt of so ld pro duc ts 1 0 0 Catego r y 1 3 - D ownstre am l ea sed a sse ts 535,9 89 Categ or y 1 5 - Inve stme nts 1 (loan book only ) 70 7 ,4 2 1 Of which : - Motor ve hic le l oa ns 39 4,49 3 - Business loans 2 1 8,985 - Proje ct n an ce 93, 94 3 Scope 3 (nanced) 1 ,4 40,0 3 6 tCO 2 e pe r £ M loan book Emission intensity 2022 Fin anc ed e mis si ons i ntens it y (Catego r y 1 5 - Inve stm ents o nly 2 )8 8 . 8 - Ca lcu la te d us in g: loa n bo ok r e lat ed to a ct ivi ti es c ur re nt ly i nc lu de d in th e fo otpr i nt £8 .0 b ill io n 1 Partnerships f or Carbon Accounting Financials (“PCAF”) methodology select ed as the most appropriat e approach t o calculating nanced emissions. 2 O ur i ni tia l as se s sm en t of n an ce d em is si on s co ver s ou r ba nk in g loan book only and excludes our asset management act ivities. New UK car s nance d by our commercial business The whole UK new car market 15 . 3 % 35.3 % Pr op or ti on o f N ew Ca r s th a t we re Ba t te r y El ec t r ic i n t he Pa s t Y ea r ca r hire of fe ri ng by O ctopus E le ctri c Vehicl es (see c ase s tud y ri ght). Demonstrating our leadership in pro viding sup por t for the d ep loym en t of zero e mis si on veh icl es, in th e pas t yea r , 3 5.3 % of new cars nanced b y our commercial business have be en b atte r y el ec tric. T his i s more than double the proportion that were seen acro ss the w hol e UK m arket i n the sa me period. Building on t his ear ly success in supporting the el ec tri cati on of su r fac e tran spo r t, as an in iti al gre e n grow th a mbi tion, we h ave set ou rs el ves th e amb itio n to provi de fu ndin g for at l eas t £1 .0 bil lio n of bat ter y ele ctr ic ve hic le s in the n ex t ve ye ars (2023 -2027). Book 1.indb 56 27/09/2022 23:46:02 57 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Our Sust ainabilit y Alliances Net Z er o Ba nk ing A ll ia nce Clo se Broth er s has re ce ntly si gne d up to the Ne t Zero Ba nk ing A ll ian ce (“N ZBA ”), aglo bal c oa lit ion of b ank s conve ne d by the UN. As a si gnator y to the NZBA, we c om mit to transition our lending and inv e stment por folio s to alig n wi th net- ze ro pathways by 2050. Par tnership for Carbon Accounting Financials Thi s yea r , we j oin ed Pa r tn er shi p for Carbon Accounting Financials (“PCAF”) to supp or t ou r pro gres s in m eas ur ing o ur nanced emissions. PCAF is a c ol lab orati on of ove r 290 nancial institut ions worldwide wit h the aim of harmonising the assessment and disclosure of greenhouse gas (GHG ) emissions associat ed with their loa ns a nd inve stm ent s. CDP CDP i s a glo bal n ot -for-prot org ani sati on that ru ns the wo rl d’ s env iron me ntal disclosure sy stem f or investors , com pan ie s, citi es, st ates and re gi ons to man age th ei r envi ronm en tal im pac ts. For the s eventh ye ar i n a row , in 2022, we disclosed through CDP . In reporting our environmental data through CDP , we are able t o benchmark our greenhouse gas emissions reporting and our appr oach to managing our clima te-rela ted impact s. In De ce mb er 2021 , we were p le ase d to be awar ded a B - in th e CDP s cor ing, in rec og niti on of the p osi tive o ngo ing prog res s we are ma k ing in a ddre ss ing th e threat of c lim ate chan ge. Our wholesale nance busine ss has been work in g with O ctop us Ele ctr ic Vehic le s for the la st 3 ye ars. We were th e r st fu nde r to supp or t th eir ow n bo ok of fe rin g wh ich all owed the m to take to mar ket thei r fu lly electric salary sacrice product . Since launch, the pr oduct has gr own exponentially and O ctop us Ele ctr ic Vehic le s are n ow one of t he fastest gro wing leasing companies in the UK . Bui ldi ng on th is su cc es s, we have continued to w ork with Octopus Elect ric V ehicle s t o suppor t them bringing ne w inn ovative pro duc ts to the mar ket. In Jul y 2022 we were p lea se d to be nam ed a s sol e fu nde r for the l aun ch p has e of thei r exciti ng new consumer of fering: “ the ultima te E V pac kag e” . T his of fe rs c ons um ers a complet e EV solution , combining a new ele ctr ic c ar wi th Oc topus exib le E V dom es tic e ner gy ta ri f fs a nd a s ma r t hom e cha rge r , i nsta lle d for f ree. T his c omb inati on all ows the c ustome r to take ad vant age of che ap er a nd g ree ne r ‘tim e of us e’ ener gy tar if f s to cha rge the ir c ar . New P e rsona l Cont ract Hi re package lau nch ed to consumers with Octopus Electric V ehicles Book 1.indb 57 27/09/2022 23:46:05 Sustainabilit y Report continued T ask For c e on Climat e Relat ed Financial Disclosures DE DIC A T E D S E RV ICE 58 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Book 1.indb 58 27/09/2022 23:46:11 59 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 F OR DEEP ER RE LA T I O NSH IP S Case Study Sta vele y Mill Y ard , a four -acr e “ green ” business park in t he Lake Di st rict National P ark comprising o ver 40 r etail and indust rial units . F rom engineers , w oodtu rners , caf es, a br ew er y and th e biggest bicy cle shop in the UK, Sta vele y Mill Y ard is a unique and vibran t working communit y . Fina nce S olution R enew a bl e ene rgy h as a l ways b een i n t h e m ill’ s DNA . With l ots of roof s p ace avai lab le, the de ci sio n was ma d e to i nsta ll a l ar g e, s ta te -o f -t h e-art p h otovo l ta i c ( “PV ”) sys tem. We were able to fu nd this i nsta llatio n t hrou g h a C orona virus Business Int erruption Loan Scheme loan agreement . Th e R esu l t T he 1 ,53 3 roof-mounted s ola r pan els, a nd nin e T e sla Po wer wall Batteries , installed b y G ent , su pp l y around 5 93 MWh o f power a nn ua ll y to t h e b us i ness par k’ s t en ants, he lp in g make it more sustainable while also sav i ng s i gn i cant co st . Th e d a il y sur p l us energy i s e xpo r ted to the g rid a nd al so us ed in th e loc al v illa g e. It goes a long w ay t o reducing the carbon foot print of all the businesses on sit e and adds to the 1 4, 0 0 0 deciduous har dw ood trees w e planted in the vil lage. Close Brothers were v er y prof essional and exible when accommodating our requir ements. David Brock ban k, Ow ner Staveley Mill Y ar d Book 1.indb 59 27/09/2022 23:46:12 60 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Non-Financial Information Statement In line wit h the non- nancial repor ting r equirement s contained in sect ions 4 1 4C A and 4 1 4 CB of t he Companies A ct 2 0 0 6 , the table belo w contains re ferences t o non- nancial inf ormat ion int ended t o help our stak eholders understand t he impa ct o f our policies an d ac ti vi ti e s. Reporting Requirement Pol icies and Standards Information Necessary to Under stand our Impact and Outcomes En vironment al Mat t ers • Bank Cr edit Policy Under writing Standards • Envi ronm ent al Policy • Our Responsibility , page 34 • Sustainability Repor t, pages 4 2 to 57 • Our stakeholders, page 1 6 Emplo yees • He alth a nd Sa fet y Polic y • Whistleblowing Policy • Ke y Customer P r inciples • Equal Oppor tunit y and Dignity at W ork Pol ic y • Business Model , page 1 0 • The Founda tions of our Busine ss, page 20 • Ou r Cul ture, pag es 22 a nd 23 • Our Responsibility , page 34 • Our stakeholders, page 1 4 • Sus tai na bili t y Re por t, pages 3 5 to 39 and 41 • Corporat e Governance Repor t, page 99 Social Matt ers • Ke y Customer P r inciples • Bank Cr edit Policy Under writing Standards • Our Responsibility , page 34 • Sustainability Repor t, pages 35 to 57 • Our stakeholders, page 1 6 Respect for Human Right s • Human Righ ts and Modern Sla ver y Act • Pri vacy an d Data Prote ctio n Polic y • Cy be r Se cur it y Pol icy • Sustainability Repor t, page 4 1 An t i-Co rru pt ion and Ant i-Br ibery • Anti -Money L aundering Policy • Anti- Br ibe r y an d Cor ru ption Pol icy • Cy be r Se cur it y Pol icy • Sustainability Repor t, page 4 1 Descript ion of t he Business Model • Business Model , pages 1 0 t o 1 3 • The Founda tions of our Busine ss, page 20 • Ou r Purp ose, pag e 21 • Ou r Cul ture, pag es 22 a nd 23 • Ou r Stra tegy , p ag es 24 t o 32 De s c r ipti o n of Pr i nc i pa l Risks and Imp act of Business Act ivit y • Prin cip al R isks, p age s 78 t o 89 • Emerging Risk s and Uncer tainties, pages 90 to 92 • Ris k Co mmi t tee Re por t, pages 1 1 7 to 1 1 9 Non-Financial K ey P er formance Indicat ors • Strat egy and Ke y Per formance Indicat ors, pag es 32 a nd 33 • Sustainability Repor t, pages 36 and 53 Book 1.indb 60 27/09/2022 23:46:12 61 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Financial Ov er view Summar y Group Income Statement 1 2022 £ million 2021 £ million Change % Operating income 936. 1 952 .6 (2) Adjust ed operating expenses (59 8.0) (592 . 1 ) 1 Impairment losses on nancial as sets (10 3 . 3 ) (89.8) 1 5 Adjusted operat ing prot 23 4. 8 270.7 (1 3 ) Banking 227 .2 212.5 7 Commercial 91 . 0 52.8 72 Retail 61.0 71.9 (15 ) Prope r t y 75 . 2 87 .8 (1 4) Asset Managemen t 21. 7 23.7 (8) Wint er ood 14 .1 60.9 (77 ) Group (28 . 2) (26.4) 7 Amor tisation and impairment of intangible assets on acquisition (2 .0) (1 4. 2) ( 8 6 ) Goodwill impairment – (12. 1) n /a E xcepti ona l item: HM RC V A T ref un d – 20.8 n /a Op e ra t i ng p ro t b e for e t a x 2 3 2 . 8 265.2 ( 1 2) Ta x (67 .6) (63. 1 ) 7 Prot af ter ta x 165 . 2 202. 1 ( 18) Prot at tributable to shareholders 165. 2 202. 1 ( 1 8) Adjusted basic earnings per share 2 111 . 5 p 14 0 . 4 p ( 2 1) Bas ic e ar nin gs pe r sh are 2 11 0 . 4 p 13 4 . 8 p ( 18 ) Ordinary dividend per share 66.0p 60. 0p 1 0 Return on ope ning equity 10. 6% 14 . 5 % Retu rn on ave rag e ta ngi ble e qu it y 12 . 2 % 16.5 % 1 Adj us ted m ea su re s ar e pre se nte d on a b as is c on si ste nt wi th p r ior periods and e xclude amortisation o f intangible assets on acquisition, to present the performance o f the group ’s acquired businesses consistent with its other businesses ; and any exce pti on al a nd o the r ad ju st ing i te ms w hic h do n ot re e ct u nd er l yi ng tr ad ing p e r for ma nc e. Fu r the r d eta il o n th e rec on ci li ati on bet w ee n op er ati ng a nd a dj uste d m ea su re s ca n be fo un d in n ote 3. 2 Ref er to n ote 8 fo r th e ca lc ul ati on of b as ic a nd a dj us ted e ar ni ng s pe r sh ar e. Ba s is o f Pr es en t at i on Re sul ts are p rese nted b oth on a statu tor y an d an ad juste d bas is to aid comparability between periods. A djusted measures ar e present ed on a basis consistent with prior periods and ex clude amo r tis atio n of inta ngi ble a sse ts on acquisition , t o present the pe r formance of t he group ’ s acquired businesses consistent with its o ther businesses; and any exce ption al a nd othe r ad jus ting i tems which do no t reect underlying trading per form anc e. Plea se refe r to page 62 for fu r the r det ail s on ite ms exclu de d from th e adju sted p er fo rm anc e metr ic s. Th e loa n boo k gu re has b ee n re-p res ented to incorporate closing loans and advances to custome rs a nd op er ating l ea se as sets, previously sho wn separately . Adjusted Operating Prot and Returns Adju sted op erati ng pro t redu ced 13 % to £ 234 .8 million ( 202 1 : £2 7 0. 7 million) , primarily reecting a reduction in income in Win ter o od a nd an i nc rea se in i mpa irm en t cha rge s. Af ter a dju stin g item s, statu tor y ope ratin g prot b efore t a x de cre as ed by 1 2% to £232.8 millio n (202 1 : £ 265.2 mil lio n) . T he grou p de live red a retu rn on o pe nin g equ it y of 1 0.6% ( 2021 : 1 4.5 %) , ree ctin g the re duc tion in Wi nter ood’s prot and c onti nue d grow th in the e qui t y bas e, and retur n on ave rag e tan gib le e qui t y of 1 2.2% (202 1 : 16.5 %) . Adju sted op erati ng pro t in the B ank in g div is ion i nc rea sed by 7% to £227 .2 mil lio n (202 1 : £21 2.5 milli on), reectin g stron g inc om e grow th, pa r tia ll y of fs et by hi ghe r cos ts and i mpa ir me nt cha rge s. In th e Asset Managemen t division , adjust ed ope ratin g prot d ec lin ed 8% to £21 .7 milli on (202 1 : £23.7 milli on) as grow th in inc ome was mo re tha n of fse t by inc rea sed s taf f cos ts. Winter ood s aw redu ce d tradi ng oppor tunities in higher margin sectors and pe rio ds of vo latil it y in fa lli ng m ar kets. Foll owin g the e xceptionally st rong trading performance and e levated m ar ket acti vit y ex pe rie nc ed in the pr io r yea r , o per ating p rot wa s down 77% to £ 1 4. 1 m illi on (2021 : £6 0.9milli on). Group ne t exp ens es, w hic h inc lud e the c entr al f unc tion s suc h as n an ce, le ga l and c om pli anc e, ris k and human r e sources, increased 7% on the pri or ye ar to £28.2 m illi on (2021 : £ 26.4milli on), mai nly re ec ting th ird pa r t y spe nd in re lati on to the ass es sm ent of p otentia l grow th oppor tunities. Operating Income Operating income reduced 2% to £936. 1million (2 021 : £952 .6 million ) , with grow th i n Ban ki ng an d As set M an age me nt of fs et by a red ucti on in tr adi ng in com e in Win ter o od. Inc om e in the B ank in g div isi on inc rea se d by 1 0%, ree ctin g goo d loa n bo ok grow th a nd a stro ng net i ntere st ma rgin of 7 .8% ( 2021 : 7 . 7% ). Alth oug h inco me in th e As set Ma na ge men t div is ion wa s up 6%, with c onti nue d net i nows a nd po si tive mar ket pe r for ma nce i n the r st ha lf of the yea r , i nco me was m ore su bdu ed i n the se con d hal f of the ye ar d ue to fall ing m ar kets and th ei r impa ct on w id er cl ie nt se ntime nt. Inc ome i n Win ter o od re duc ed by 48%, dr iven by a m ar ket- wid e sl owdown i n trad ing activity fr om elevat ed lev e ls durin g th e pan de mic a nd a ch an ge in th e mix of tr adin g volu me s, exac er bate d by fal lin g ma rkets. Adjusted Operating Expenses Adju sted op er ating ex pe nse s were b roadl y sta ble at £59 8.0 mill ion (2021 : £592. 1mi lli on) , reecting a signicant reduction in variable cos ts in W inter oo d, of fse t by hig he r inve stme nt sp en d an d sa lar y inc rea se s in Ba nk ing a nd hi ghe r staf f costs i n As set Ma nag eme nt. In the B ank in g div is ion, co sts were up 10% , as we co ntinu ed to inve st in ou r key strategic pr ogramme s and incurred higher business-as-usual (“BAU”) spe nd follo wing salar y increases t o reect inat ion and performance-driv en compen sation . Expenses inc reas ed 9% in the A ss et Man age me nt div is ion, ma inl y dr ive n by hig he r staf f c osts i n the cu rre nt in ation ar y envi ronm ent a nd new hire s, as we c ontin ue to inves t to grow the bus ine ss. W inte r o od’ s o pe rating ex pe ns es de cre ase d 33%, reec ting l ower va ria bl e com pe nsa tion a nd se ttl em ent c osts. O ver all, the gro up’ s exp ens e/ inc ome r atio in cre ase d on the p rio r yea r pe rio d to 64 % (202 1 : 62% ), whilst th e grou p’ s c omp en satio n ratio de crea se d to 3 7% (202 1 : 3 8% ). Statutor y ope ratin g exp en ses i ncr eas ed to £60 0.0 million ( 202 1 : £59 7 .6 million ). Impairment Charges and IFRS 9 Provisioning Imp air me nt ch arg es i ncre as ed to £1 03.3mi lli on (202 1 : £89.8 mill ion), corre sp ond ing to a bad de bt ratio of 1 .2% (202 1 : 1 . 1 % ). This in clu ded the impact of updated assumptions for the Novi ta s loa n bo ok, in form ed by ex pe ri en ce of cre dit p er fo rm anc e, whi ch re sul ted in £60.7 million ( 202 1 : £7 3.2 million ) of impairment charges rela ted to this busine ss. E xclud ing N ovi tas, th e bad de bt rati o was 0.5 % (202 1 : 0.2% ), reecti ng the re le ase of Cov id- 19 provisi on s, par tiall y of f set by th e ong oin g revi ew of prov isi ons a nd c overag e acro ss ou r loa n po r t foli os, in clu din g ce r tai n individual exposur es in the Commercial business, as well as higher IF RS 9 pr ovisions to take into acc ount th e outl oo k for the extern al en vironment . Book 1.indb 61 27/09/2022 23:46:13 62 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Financial Ov er view cont inue d Di v id e nd p e r s ha r e 66 . 0 p 2021 : 6 0.0 p Return on average tangible equity 12 . 2 % 2021 : 16.5% Adjusted operating prot £2 34 . 8 m 2021 : £ 270.7 m Th ere wa s a marg ina l de cre ase i n prov isi on cove rag e to 3. 1 % (31 Jul y 2021 : 3. 2% ). Excluding pro v isions relat ed to the No vitas loa n boo k, the c overag e rati o redu ce d to 1 .9% (31 July 2021 : 2.3 %) , pr im ar ily re e ctin g provision releases, mainly driv en by r e duced Cov id- 19 forbor ne b ala nc es. T hi s cover age level appropriately reects the elevat ed unc er t ain ty i n the ex ter na l env iron men t in the range of modelle d out comes. Econ omi c fore ca sts have evo lved ove r the cou rs e of the 2022 n anc ia l yea r . At 31 July 202 1 , th e sc ena ri o weig hting s ree cted the con tinued economic challenges and unc er t aint y a sso ciate d with th e pan dem ic, with 4 0% allo cated to the b ase lin e sc ena ri o, 20% to the upsi de s ce nar io a nd 40% ac ros s the thre e dow nsi de sc en ari os. T he leve l of economic uncertainty associat ed with the pan de mic re duc ed u p to 3 1 Ja nu ar y 2022 and 10 % weig ht was m oved fro m the thre e downside scenarios to the upside scenario . In the s eco nd h alf of 2022, 7 .5% weig ht has moved f rom th e bas eli ne sc en ari o to the three do wnside scenarios, resulting in nal weig hts that a re co nsid ere d co nsis tent wi th the e con omi c unc er taint y at 31 July 2022 a s follows : 30% strong upside, 32 .5 % baseline , 20% mil d down si de, 1 0.5% mode rate downside and 7% se vere downside . Whi lst we a re not yet s ee ing a s ign ic ant impa ct f rom ri sin g inati on an d intere st rates a nd the ir ef fe ct o n custom er s on our c red it p er fo rm anc e, we are a le r t to the highly unce rtain macroeconomic env ironm en t and c ontin ue to moni tor clo se ly the pe r for ma nce of th e bo ok. We rema in con de nt in th e qua lit y of o ur lo an bo ok, which is pr edominantly secured, pr udently und er w ri tte n and d ive rse. A pprox imatel y 99% of our l oa n boo k exp osu re is to the UK , Republic of Ireland and Channel Islands , with th e rem ain ing ex pos ure to Wester n Eur opean count rie s. E xce pt i on a l an d O t he r Ad ju s t in g It em s Amor tisation and impair ment of intangible assets on acquisition was down signican tly to £2. 0 m ill ion (2021 : £1 4.2 mi lli on) . T he pri or ye ar c ha rge in clu de d a £1 0. 1 mi lli on impairment of intangible assets r e cognised on acquisition in relation t o Novitas, following the decision to cease permanently the app roval of l en din g to new cus tome rs ac ros s all of th e prod uct s of fere d by this b usi ne ss. Foll owin g this d eci sio n, we als o reco gn ise d an ad justi ng ite m in rel ation to the f ull w rite down of g ood wi ll al loc ated to Novi tas i n the pr ior ye ar of £1 2. 1 mil lio n. Th ere we re no exce ption al ite ms rec ord ed in the 2022 n anc ia l yea r (202 1 : £20.8 mil lio n) . In 2021 , we rec ogn ise d an exc eptio na l gai n of £20.8 mil lio n, reec ting a VA T ref und from HMR C in r elation t o hire pur chase agre em ents i n the Motor Fi nan ce a nd As set Finance businesses. T ax Expense Th e ta x ex pe nse wa s £67 .6 mil lio n (202 1 : £63. 1 mi llio n) , w hi ch c or res pon ds to an ef fe ctive t a x rate of 29.0% ( 2021 : 23.8% ). Th e inc rea se in th e ef fec tive ta x rate pri mar il y ree cted a wr ite- down i n the grou p’ s d efer red ta x asse ts as a res ult of the le gis lated re duc tion i n the rate of ban ki ng su rcha rge f rom 8% to 3 % w hic h was du e to app ly fr om Ap ri l 2023, and the non -rec urre nc e of the pr io r yea r wri te-u p in the g roup’ s defe rre d ta x a ss ets as a resu lt of le gi slati on that ye ar in cre asi ng the mai nstre am co rp orate ta x r ate from 1 9% to 25 % (als o due to ap pl y fro m Ap ril 2023). Th e grou p’ s u nde rl yin g ef fe cti ve ta x rate for the ye ar e nd ed 31 July 2022, exclud ing the im pact of th e defe rre d ta x a ss et wr ite- down, wou ld b e 25 .7 %, re ec ting th e UK cor po rate ta x rate of 1 9% an d he adli ne ban ki ng su rcha rge of 8% (wh ich a pp lie d to a proportion of t he group ’ s prots, resulting in c.6% b an k i ng su rc h a rg e). On 23 Se ptemb er 2022, the Ch anc el lor of the E xch equ er a nno un ced a s pa r t of his Grow th Pl an that th e cor po ration t a x rate increase from 1 9% t o 2 5% from April 2 023 wil l be ca nc ell ed, an d that the ba nk ing surc harg e rate wil l rema in at 8%. The rele vant le gi slati on is ex pe cted to be e nac ted in the ye ar e ndi ng 31 July 2023 an d is a non -adju stin g pos t bal an ce sh eet eve nt. Had this change been enac ted before 31 July 2022, the group’ s defe rre d ta x a ss et bal an ce at 3 1 J ul y 2022 woul d have de cre as ed by appr oximately £ 1 .5 million, with a corresponding tax charge recognised in the inc ome s tateme nt, net of a s mal le r cred it to other comprehensive income . Earnings per Share Pro t attributable t o shareholders reduced 1 8% on the pr io r yea r to £ 165.2 milli on (202 1 : £202. 1 mill ion), reectin g a redu ctio n in adj usted o pe ratin g prot a nd the i mpac t from reva lu ation s of defe rre d ta x as sets o n the ef fe cti ve ta x ra te in the 2022 an d 202 1 na nci al ye ar s. As a re sul t, adjus ted ba sic ea rni ngs p er sh are (“ EPS”) was 1 1 1 .5 p (202 1 : 1 4 0. 4p) and ba sic EPS wa s 1 10 .4p (202 1 : 13 4. 8 p ). Book 1.indb 62 27/09/2022 23:46:13 63 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Group Capital 1 31 Ju ly 2 0 22 1 £ million 31 J u l y 2 021 £ million Common equity tier 1 capital 1, 3 9 6 . 7 1, 4 3 9 . 3 T otal capital 1, 5 9 6 . 7 1, 6 6 2 . 7 Ris k weig hted ass ets 9, 5 91 . 3 9, 10 5.3 Common equity tier 1 capital ratio ( transitional) 14 . 6 % 15 . 8 % Tier 1 capital ra tio (transitional) 14 . 6 % 15 . 8 % T otal capital ratio (transitional) 16 . 6% 1 8.3% Leverage ratio 2 12 . 0% 11. 8 % 1 In li ne w it h CR R, ef f ec ti ve on 1 J an ua r y 202 2, the C E T1 , ti er 1 a nd tot al c ap it al r ati os n o lo ng er i nc lu de th e be n et r el ate d to software assets which were pr eviously exempt from the deduction requir ement for intangible assets fr om CET1 . 2 Th e le ve rag e ra tio i s ca l cul ate d as t ie r 1 ca pi ta l as a p er ce nt ag e of tota l ba la nc e s he et a ss ets exc lu di ng c en tr al ba n k cl aim s, adjusting f or cer tain capital deductions, incl uding in tangible assets , and off-balance she et e xposures, in line with the UK lev erage fr am ewo rk u nd er C RR . At 31 Jul y 2021, the lev er ag e rat io wa s ca lc ul ate d un de r th e EU CR R an d in cl ud ed c en tra l ba nk c la im s. Dividend Th e boa rd is pr opo sin g a na l di vid en d of 44.0p pe r sha re, res ulti ng in a f ull-ye ar div id end p er s ha re of 66.0p (2021 : 6 0.0p) , up 1 0% o n the pr ior ye ar . T his re ec ts the gro up’ s sol id pe r for ma nc e in the ye ar and s trong c ap ita l pos itio n, as wel l as ou r continued condence in the business model. We remai n co mmi tte d to our di vid en d pol icy , which aims t o provide sustainable dividend grow th ye ar -o n-year , w hil e ma inta ini ng a pr ude nt le vel of di vi de nd c over . Sub jec t to appr oval at the A nn ual G en er al Meeting , the nal dividend will be paid on 22 Novem be r 2022 to sha reho ld er s on the regi ster at 1 4 Oc tober 2022. Summar y Group Balance Sheet Th e grou p ma inta ine d a stro ng ba lan ce she et a nd a pr ud ent a ppro ach to ma nag ing nancial resour ces. The fundamen tal stru ctu re of the ba lan ce s he et rem ains unc ha nge d, with m ost of th e ass ets an d liabilities relat ing to our Bank ing activit ies. Loan s and a dva nce s ma ke up the ma jor it y of as sets. O the r item s on the b ala nc e she et include tr easur y assets held for liquidity purposes, and se t tlement balances in Wint er ood. In tangible s, pr ope rt y , plant and equipment , and pr e payment s are included as ot her assets. Liabilities are predominantly mad e up of cu stome r de pos its an d both sec ure d and u nse cu red bo rrow ing s to fund the lo an bo ok. T otal assets increased 5 % to £ 1 2. 7 billion (3 1 Jul y 2021 : £1 2. 0 b ill io n) , ma in ly re ec ting grow th in th e loa n bo ok, a n inc rea se in n on- trading deb t securities and higher market - mak in g as sets. T otal l ia bili tie s were u p 5 % to £ 1 1 .0 bi lli on (31 July 2021 : £1 0.5 bill io n) , dri ven p ri mar il y by hig he r cus tome r de pos its and an incr e ase in secured bor rowings . Both market -making assets and liabilities , relate d to trading ac tiv it y at Winte r oo d, were u p yea r -o n-year d ue to an i ncre as e in valu e trad ed at the e nd of th e per io d whe n settlement balances ar e calculat ed. T ota l eq ui ty i ncr ea sed 6% to £1 . 7 b ill ion (3 1 Jul y 2021 : £1 .6 bill ion), prim ar ily re e ctin g the pro t in the ye ar , pa r ti all y of fs et by div id end p ayme nts of £9 5.5 milli on (202 1 : £86. 6 million) . The group ’ s ret urn on assets marginally decr eased to 1 .3 % (2 02 1 : 1 . 7% ). Move me nt s i n Ca pi t al a n d Ot h er Regulatory Metrics Th e CE T1 capit al rati o red uce d fro m 1 5.8% to 1 4.6 %, mai nly d ri ven by a c han ge i n the regu lator y tre atme nt of sof t ware a ss ets (c. 45 bps), the impac t of the tra nsi tion al IFR S 9 add- back (c.30 bps) an d an i ncre as e in ri sk weight ed assets (“R WAs ”) ( c.80bps) , par tly of fs et by reta ine d ea rn ing s (c. 75bps). CE T1 capi tal d ec rea se d 3% t o £1 ,39 6. 7m ill ion (31 Jul y 2021 : £ 1 ,439 .3million ), r eecting the regulatory cha ng e in the tre atme nt of sof t ware a ss ets, which increased t he intangible asse ts de duc ted fro m CE T1 capi tal by £50.2m illi on, a de cre ase in th e tran siti ona l IFRS 9 a dd- bac k to capi tal of £3 4.8 milli on an d the regulat or y deduction o f dividends paid and fore see n of £9 8.4 milli on. Th is was p ar ti all y of fs et by the c api tal g en er ation th roug h prot of £ 1 65.2 million. T ot al ca pi ta l dec re ase d 4 % to £1 ,59 6. 7m ill ion (3 1 J ul y 202 1 : £1 ,662. 7m illi on), also ree cti ng the reg ula tor y cha ng e in the tre atme nt of sof t ware a ss ets and a s ma ll rep ayme nt of ou r subordinat ed debt. RWAs incre as ed 5% to £9 .6 bi lli on (31 July 202 1 : £ 9. 1 bi llio n) , m ai nly d ri ven by a n inc rea se in the l oan b ook a nd r isk we ighted ass ets rel ated to der ivati ves h eld fo r he dgi ng pur pos es, pa r tl y of fs et by the re gul ator y cha ng e in treatm ent of s of t ware as sets. As a re sul t, CET1 , tie r 1 an d total ca pit al ratio s were 1 4.6% (3 1 Jul y 2021 : 15 .8%) , 1 4.6% (3 1 Ju ly 2021 : 1 5.8% ) a nd 1 6.6% (3 1 J ul y 202 1 : 1 8.3% ), respe cti vel y . Summar y Group Balance Sheet 31 Ju ly 2 0 22 £ million 31 J u l y 2 021 1 £ million Loan s and a dvan ce s to custome rs a nd o per ating l ea se as sets 2 9,09 8 .9 8,667 .4 Tr e a s u r y a s s e t s 3 1, 8 5 5 . 1 1 , 788.2 Marke t -making assets 4 88 7 .2 80 1 .6 Oth er a ssets 837 . 1 777 .3 T otal assets 12,678 .3 12, 0 3 4 . 5 Deposits b y customers 6, 770.4 6,634.8 Borrowings 2, 8 7 0. 1 2, 6 0 0. 9 Marke t -making liabilities 4 796 . 1 69 0. 6 Other liabilities 584.2 538. 9 T otal liabilities 1 1,02 0.8 1 0, 465.2 Equit y 1,657 . 5 1, 5 6 9 . 3 T otal liabilities and equit y 1 2 ,678 . 3 12 , 0 3 4 . 5 1 Lo an s an d ad van ce s to cu sto me rs h as b e en re -p re se nte d for 31 J ul y 2021 to in clu de £ 22 2.9 mil lio n of o pe ra tin g le as e as se ts, with a corresponding reduction t o other assets. 2 In cl ud es o pe ra tin g le as e as s ets of £ 0.5 mi ll io n (31 Jul y 2021: £ 1.3 mi lli on) t hat r el ate to A ss et F ina nc e a nd £ 239.5 m il li on (31 July 2021 : £ 221.6 mill io n) to Invo ic e a nd Sp e ci al it y Fi na nc e. 3 T reasur y assets comprise cash and balances at central bank s and debt securities held to support the Banking division. 4 Market -making assets and liabilities comprise set tlement bala nces , long and short tra ding positions and loans to or from money br okers. At 3 1 J uly 2022, the ap pli ca ble m ini mum CE T1 , ti er 1 a nd total c ap ita l ratio requirements , excluding any applicable Prudential Regulation A uthorit y (“P R A ”) buf fer , were 7 .6%, 9.3 % a nd 1 1 .5%, resp ecti vel y . Accordingly , we continue t o have hea droom signicantly above the applicable minimum regulat or y requirements of 700bps in the CE T1 capit al rati o, 530b ps in th e tier 1 c ap ita l ratio a nd 5 1 0 bp s in the total c ap ita l ratio. The group applies IF RS 9 regulatory transitional arrangements which allo ws banks to add bac k to their c ap ita l bas e a prop or ti on of the IFR S 9 imp air me nt ch arge s du ri ng the tra nsi tion al pe ri od. Ou r ca pit al rati os are pre sente d on a tra nsiti ona l bas is af ter th e app lic atio n of thes e ar ran ge me nts. On a f ull y load ed ba sis, w itho ut th eir a ppl icati on, the CE T1 , ti er 1 a nd total c ap ita l rati os wou ld be 1 3.8%, 1 3.8% and 1 5.9%, resp ec tive ly . Th e leve rage r atio, whi ch is a tr ans par ent me asu re of ca pit al stre ngth n ot af fec ted by ris k wei ghtin gs, rem ain s stron g at 1 2.0% (3 1 J ul y 202 1 : 1 1 .8% ). The r atio at 31 July Book 1.indb 63 27/09/2022 23:46:13 64 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Savings pr oposition. Balances in our Fixed Rat e Cash Individual Savings Accounts (“ISA s”) have g rown to c.£350 mill ion (31 July 202 1 : £1 6 0 mill ion) si nce th ei r lau nch i n De ce mb er 2020. We re ma in fo cus ed o n continuing to ex tend t he deposit product ran ge, wh ich w ill s up por t us in grow in g and diversifying our retail deposit base and fur ther opt imise our cost of f unding and maturity pro le. Secured funding increased 2 0% t o £1 .6bill io n (3 1 J ul y 202 1 : £1 .3 b ill ion) as we complet ed our f our th public Motor Finance sec ur itis atio n in Ap ri l 2022 and i ncre as ed our c ur rent d rawi ngs u nde r the T er m Fundi ng Sc he me fo r Sma ll an d Me diu m- size d Enter pr ise s (“T FSME” ) to £60 0mill io n (3 1 Jul y 2021 : £490 mi lli on). Unsecured funding, which includes senior uns ecu red a nd sub ordi nated bo nds a nd undrawn committed revolving facilities , rem ain ed st ab le at £1 .5 bi lli on (31 July 2021 : £ 1 .5 billion ) . We have mai ntai ne d a pru de nt matu ri ty prol e. The ave rag e matu ri ty of f un din g all oc ated to the loa n boo k rem ain ed a he ad of the lo an bo ok at 21 month s (3 1 J ul y 202 1 : 24 month s) , wi th the ave rage l oa n boo k matur it y at 1 7 mo nths (31 July 2021 : 1 7 mo nths) , i n lin e with o ur “b or row lon g, len d sho r t ” pr inc ipl e. Our strong credit ratings r e main unchanged, with M oo dy’ s I nvestor s Se r v ice s (“M ood y’ s”) reafrming their rating for Close Bro thers Gro up as “ A 2 /P1 ” a nd Cl ose B rothe rs L imi ted as “ A a3/P1 ” wi th a “ne gati ve” outlo ok for both in Ju ly 2022, and Fi tch Rati ngs (“ Fitch”) reafrming their rating for both Close Bro thers Group and Close Brothers Limit ed as “ A-/F2” , with a “s tab le” ou tloo k in May 2022. This reects the group ’ s protability , capital position , diversied business model and consistent risk appetit e. Group Liquidity Th e grou p con tinu es to ado pt a con se r vative stance on liquidity , ensuring it is comfortably ahe ad of b oth inter nal r is k app etite an d regulat or y requirements. We contin ued to ma inta in hi ghe r liq uid it y rela tive to the pre -C ovid - 1 9 po siti on to provide additional exibility given the uncer tain UK economic outlook, whilst enabling us t o ma ximise any oppor tunities avail abl e. Ove r the yea r , trea sur y asse ts inc rea se d 4 % to £1 .9 bil lio n (31 July 2021 : £1 .8 bil lio n) and were p red omi na ntly he ld o n deposit with the Bank of England . We regul ar ly as se ss an d stres s test th e group ’ s liquidity requirements and continue to comfor tably meet the liquidit y coverage ratio (“L CR”) regulat or y requirements , with a 1 2 -mo nth aver age to 31 July 2022 LCR of 92 4 % (2021 : 1 ,0 03% ). In addi tion to inter nal me asu res, we m oni tor fu ndi ng ri sk ba se d on the C RR r ule s for the n et st abl e fu ndin g ratio (“ NSFR” ) whi ch be ca me ef fe cti ve on 1 Jan uar y 2022 . Th e NSFR at 31 July 2022 was 1 1 8.3% (3 1 J anu ar y 2022 : 1 1 7 .3% ). Financial Ov er view con tinued Group F unding 1 31 Ju ly 2 0 22 £ million 31 J u l y 2 021 £ million Customer deposits 6, 770.4 6,634.8 Secured funding 1, 5 9 8 .7 1 ,333. 7 Unsecured funding 2 1, 5 4 4 . 3 1, 5 3 9 . 5 Equity 1, 6 5 7 . 5 1, 5 6 9 . 3 T otal av ailable funding 1 1,570.9 11 , 0 7 7. 3 T ota l fu ndi ng a s % of loa n boo k 3 12 7% 12 8 % Averag e matur it y of f und ing a llo cate d to loan b ook 4 21 mo nt h s 24 m o n t h s 1 Numbers relate t o core funding and ex clude work ing capital facilities at the busine ss lev e l. 2 Un se cu red f u ndi ng e xcl ud es £ 22. 1 mi ll io n (31 Jul y 2021 : £ 22.7 mil li on) of n on -fa cil it y ov erd ra f ts i ncl ud e d in bo r row ing s an d includes £295. 0 million (3 1 July 2 02 1 : £295. 0 million) o f undrawn facilities. 3 T ot al f u ndi ng a s a % of l oa n bo ok ha s b ee n re -pr es en ted to i nc lu de £ 240.0 mi lli on ( 31 Jul y 2021 : £ 222.9 m ill io n) of op e rat ing le as e as se ts in t he l oa n bo ok gu re. T he re vi se d de n iti on i s tota l f un din g as a % o f lo an b oo k in cl udi ng o pe ra tin g le a se a ss et s. 4 A verage maturity of total funding excluding equity and funding held for liquidit y purposes. 2022 ree cts a c han ge in c al culati on u nde r the UK l ever age f ra mewor k to exclud e centr al bank reser ves. We continue t o make good progress on our p repa ratio ns for a tr ans itio n to the IRB app roac h. Foll owin g the su bmi ss ion of o ur ini tial a pp lic ation to the PR A i n De ce mbe r 2020, we have rece ive d con rm ation th at our app lic ation h as su cc es sfu lly tr ans itio ned to Phas e 2. The nex t ph ase of fo rma l revi ew wil l com me nce in Oc tobe r 2022 and we a re wel l positioned t o respond pr omptly , although the tim etab le re mai ns und er th e dire ctio n of the PR A . Ou r Motor Fin an ce, Prop er t y Fin anc e an d Ene rgy p or t fol ios, w he re the use of m ode ls is m ost m ature, have be en submitted with our initial applicat ion, with other busine sses t o follow in futur e years . Capital Management Framew ork Th e pru de nt ma nag em ent of th e grou p’ s na nci al re sou rce s is a co re par t of our bus ine ss m od el. Ou r pr ima r y o bje cti veis to deploy capital t o suppor t disciplined loa n bo ok grow th i n Ba nk ing a nd to make the most o f strategic oppor tunities. These inc lud e strate gic i niti ative s an d sm all acquisitions in existing or adjacent markets that t w ith ou r bus ine ss m ode l. Th e boa rd rem ain s com mit ted to the gr oup’ s dividend policy , which aims t o provide sustainable dividend growth year -on-y e ar , whi le m aint ain ing a p ru de nt leve l of di vi den d cover . Fur ther c ap ita l dis tri buti ons to shareholders will be considered depending on futur e oppor tunities. We are con sid er ing th e fu r the r optim isa tion of our c ap ita l str uctu re, inc lud ing th e iss ua nce of d ebt c ap ita l ma rket se cu riti es i f appropriat e, target ing a CET1 capital ratio ran ge of 1 2% to 1 3% over th e me diu m term. Th is wou ld al low the g roup to ma inta in a buf fer t o minimum regulat or y requirements whi le al soreta ini ng the exib ili ty fo r grow th. In the s hor t term, we wou ld exp ec t to ope rate ab ove the 1 2% to 1 3% CE T 1 ca pit al ratio ta rget r ang e, in ligh t of the he ighte ned macroeconomic uncer tainty and po tential growth opportunities a vailable t o us. Group F unding Th e pri ma r y pu rp ose of o ur T rea su r y an d Savings business is to manage funding and liquidity to suppor t the Banking businesses an d m a na ge in ter e st r ate ri s k. O u r c on se r vat ive app roac h to fund ing i s bas ed o n the pr inc ipl e of “bo rrow lo ng, le nd s hor t ” , wi th a spre ad of matur iti es over th e me dium a nd lo ng er ter m, com for t ab ly ah ea d of a sho r ter ave rag e loa n boo k matu rit y . It i s als o di vers e, draw ing o n a wid e ra nge of w ho les al e an d de pos it ma rkets including sev e ral public debt secur ities at both grou p an d ope ratin g com pa ny level, a s well a s a num be r of sec ur itis atio ns. We incre as ed total f un din g in the ye ar by 4% to £ 1 1 .6 bi lli on (31 July 2021 : £1 1 . 1 bil lio n) whi ch a cco unte d for 1 27 % (3 1 Jul y 2021 : 1 28% ) of th e loa n boo k at the ba la nce s he et date. Th e avera ge co st of f und ing re duc ed to 1 .3% (202 1 : 1 .4 %) , a n incr eas e fro m 1 . 1 % in the r st ha lf of th e 2022 na nci al ye ar d ue to the in cre ase d co st of cu stome r de pos its. Cus tomer d ep osi ts in cre ase d 2% to £6.8 bil lio n (3 1 Jul y 2021 : £6.6 bi lli on) wi th non- retai l de pos its red uc ing by 7% to £3. 7 b ill ion (3 1 J ul y 202 1 : £3.9 bi lli on) and re tai l de pos its inc rea si ng by 1 6% to £3. 1 b ill io n (3 1 J ul y 202 1 : £2 .7 billion) . The prev iou s inve stme nt in o ur cu stome r deposit platform con tinues to generat e be ne ts and h as e na ble d us to en ha nce o ur Group Liquidity 31 Ju ly 2 0 22 £ million 31 J u l y 2 021 £ million Cas h and b ala nce s at ce ntral b ank s 1, 2 5 4 .7 1, 3 3 1. 0 Sovere ig n and c en tral b ank d ebt 1 415 . 4 19 2. 5 Cer ticat es of deposit 18 5 . 0 26 4. 7 T reasur y assets 1 ,8 5 5. 1 1,7 8 8 . 2 1 Inc lu de d in s ove re ig n an d ce ntr al b an k de bt is £ 216.9 mill io n en cu mb er ed U K Go ver nm en t de bt (31 Ju ly 20 21 : £9 0.2 m il li on). Book 1.indb 64 27/09/2022 23:46:13 65 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Banking Ke y Financials 1 2022 £ million 2021 £ million Change % Operating income 693. 1 63 1 . 7 1 0 Adjust ed operating expenses 2 (362 .6) (329. 1 ) 1 0 Impairment losses on nancial as sets (10 3 . 3 ) (9 0. 1 ) 1 5 Adjusted operat ing prot 227 . 2 21 2. 5 7 Net inte rest m argi n 7. 8 % 7. 7 % Ex pense/income ratio 52% 52% Bad deb t rati o 1. 2% 1.1 % Retur n on n et loa n bo ok 2. 6 % 2.6% Return on ope ning equity 12 . 5% 13 . 7% Cl os in g lo a n boo k a nd o pe r at i n g le as e as s et s 3 9,09 8 .9 8,667 .4 5 1 Adj us ted m ea su re s ar e pre se nte d on a b as is c on si ste nt wi th p r ior periods and e xclude amortisation o f intangible assets on acquisition, to present the performance o f the group ’s acquired businesses consistent with its o ther businesses; and any excep tional and ot her adjusting items which do not reect underl yi ng tr ad ing p e r for ma nc e. Fu r the r de ta il o n the r ec on ci li ati on bet w ee n op er ati ng a nd a dj uste d m ea su re s ca n be fo un d in n ote 3. 2 Re late d o ngo in g co st s res ul ti ng f rom i nve st me nt p roj ec ts a re re ca teg or is ed f ro m inve s tme nt c os ts to BAU c os ts af te r on e ye ar. For c om pa ri so n pu rp os es , £5.2m il li on h as b ee n re ca teg or is ed f ro m inv es tme nt c os ts to BAU c os ts i n the 2 021 n an ci al ye ar to ad jus t fo r inv es tme nt p roj e cts’ o ng oi ng c os ts th at co mm e nc ed p ri or to th e 202 2 n an ci al ye a r . 3 Co mm er cia l, A ss et Fi na nc e an d In voi ce a nd S pe ci al it y F in an ce l oa n bo oks h ave b ee n re -p re se nte d for 31 Ju ly 2 021 to inc lu de £2 22.9mil li on o f op er ati ng l ea se a ss ets (£1.3mil li on i n As se t Fin a nc e an d £221.6mill io n in I nvo ic e an d Sp ec ia li ty F in an ce). Go od Lo an B oo k Gr ow t h a nd S t r on g Margins Banking adjust ed operat ing pro t increased 7 % t o £227 .2million ( 202 1 : £2 1 2. 5million) , reecting good loan book growth and a stron g net intere st ma rgin. S tatutor y ope ratin g prot i ncr eas ed to £227 . 1m ill ion (2 021 : £20 7 .2million) . Th e loa n boo k grew 5.0% over the ye ar to £9. 1billion ( 31 July 202 1 : £8. 7billion ) driven b y healthy new business volumes in our Commer cial businesses and high demand in Mo tor Finance , par tly o f fset by a con tracti on in th e Prem ium F ina nce a nd Prope r t y loa n bo oks. Mo me ntum pi cked up over the c ou rse of th e yea r , a s the 1 .9% loa n boo k grow th i n the r st ha lf of the ye ar wa s sup ple me nted by 3.0% grow th in th e se con d hal f of the ye ar . Th e retur n on ne t loa n boo k rema in ed sta bl e on the p rio r yea r at 2. 6% (2 0 21 : 2. 6%). Th e net inte rest m argi n of 7 .8% incre ase d marginally on the 202 1 nancial year (2 021 : 7 . 7% ), pri ma ril y dr ive n by lowe r cos t of fu nds. We conti nue to ad opt a di sci pli ned a pp roac h to pric ing a nd ou r sp eci ali st, relati ons hip - dri ven m ode l po siti ons u s wel l to maint ain a stron g net intere st ma rgin, a ltho ugh th e traj ector y will d ep en d upo n our a bil it y to pas s on further rat e increases ont o our cust omers. As a res ult, op erati ng in com e inc rea sed 1 0% to £693. 1mill ion (2021 : £6 31 . 7mi lli on) , reecting the good loan book growth and a strong net interest margin. Adju sted op er ating ex pe nse s inc rea se d 1 0% to £362 .6mi lli on (202 1 : £329. 1m illi on) as we prog res se d our key inve stm ent p rogr amm es and c onti nu ed to exerci se r igo rous c ont rol of our c osts, w hil st re cog nis ing th e cur ren t ina tionary envir onment. BAU costs inc rea se d by 7% t o £ 27 8.8m ill ion (2021 : £260. 3million) , primar ily driven b y higher staf f c osts re ec ting s ala r y in cre ase s in the c urre nt in atio nar y envi ronm ent and i nc rea sed p er form anc e- dr ive n compensation . Inves tme nt cos ts rose 22% to £83.8mil lio n (202 1 : £68.8mi lli on) , re ec ting s pe nd on o ur multi- year strat e gic inv e stment pr ojects and relat ed depreciation char ge s. Our inv estment project s align wit h our strat e gic priorities of pr ot e cting, growing and s ust ain ing th e bus ine s s and c onti nue to de live r ta ngi ble b en ets. O ur I RB sp en d has driven enhancements in our risk managemen t fra mewo rk, w hils t inves tme nt in ou r cus tome r deposit platform has e nabled the expansion of t he Savings product of fering, supporting a lower c os t of fun ds. In A ss et Fin an ce, inves tme nt in ou r syste ms ha s add ed ne w functionality and impr oved cust omer insights. Our Retail busine sses are beneting fr om digital inv e stment , with Mot or Finance utilising API li nks to con ne ct to strate gic p ar t ner s and of fer ou r na nce at va ri ous p oin ts of the cus tomer j our ney a nd Pre miu m Fin anc e have launched insight tools to support brokers . Whi lst we re ma in min df ul of in atio nar y pre ssu res, we c ontin ue to exerci se co st dis cip lin e. We expe ct co sts re lated to existing in vestment programmes to stabilise ov er the nex t nancial years, although depreciation charges relat ed t o these programmes will continue t o increase. Th e com pe nsati on rati o was at on the p rio r yea r at 29% (202 1 : 29%) and the ex pen se/ inc ome r atio al so rem ain ed st abl e at 52 % (2021 : 52% ). Impairment charges increased t o £1 0 3.3mill ion (2021 : £ 90. 1mil lion), cor re spo ndi ng to a bad d ebt rati o of 1 .2% (202 1 : 1 . 1 %) . E xcl udi ng Nov ita s, the bad de bt ratio wa s 0.5 % (202 1 : 0.2% ), reec ting the rel ea se of C ovid- 1 9 p rovis ion s, par tiall y of fs et by the o ngo ing rev iew of p rovis ion s and cov erage across our loan por tfolios, including certain individual exposures in the Commercial business , as well as higher IFRS 9 provi sio ns to take in to acco unt th e outl ook for the ex te rna l env iro nme nt. Ove ral l, there wa s a marg ina l de crea se in prov isi on c overa ge to 3. 1 % (31 July 2021 : 3.2% ). Exc lud ing p rovis io ns rel ated to the Novi tas l oan b oo k, the cove rag e ratio re du ce d sli ghtly to 1 .9% (3 1 J uly 2021 : 2.3 % ), pri ma ril y ree ctin g prov isi on re le ase s, ma inl y dr iven by reduced Co vid- 1 9 forborne balances . Whi lst we a re not yet s ee ing a si gn ic ant impa ct fro m ri sing i nati on an d intere st rates a nd the ir ef fe ct o n cus tomer s on our c red it pe r fo rma nc e, we are al er t to the highly unce rtain macroeconomic env iron me nt an d cont inu e to clos ely m on itor the pe r for ma nce of th e bo ok. We rema in con de nt in th e qua lit y of o ur lo an bo ok, which is pr edominantly secured, pr udently und er wri tte n, dive rs e, and su pp or ted by th e de ep ex pe r tis e of our p eo pl e. Book 1.indb 65 27/09/2022 23:46:14 66 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Banking continued Net in terest margin 7. 8 % 2021 : 7 .7% Banking adjusted operating prot £ 22 7 .2m 2021 : £ 21 2.5m W e continued to see good demand across our lending businesses and strong margi ns. Th e Re pub lic of I rel and m ake s up app roxim ately 7% of our tota l loa n boo k (3 1 J ul y 202 1 : 8% ), with a n of fe rin g fro m both our C om mer cia l an d Reta il bu sin es se s. The Republic of Ireland Motor Finance bus ine ss a cco unte d for 1 8% of the Motor Fin an ce lo an b ook (31 Jul y 2021 : 21 % ) an d 4 % of the B an ki ng lo an bo ok (31 July 2021 : 5 % ). As previously announced, from 30 June 2022, we cease d wr iti ng new b us ine ss und er ou r prev iou s par t ner shi p in the Rep ubl ic of Ire la nd. We remai n co mmi tted to the Iri sh ma rket a nd ar e con sid er ing o ur long-t er m opt ions. Well Positioned t o Deliv er Disciplined Gro wth Loan book growth continues to be an outp ut of ou r bu sin es s mod el, as we fo cus on de li ver ing d isc ipl ine d grow th whil st continuing to pr ioritise our margins and credit qua lit y . As ou tlin ed at the I nvestor Eve nt in Jun e 2021 , we c ontin ue to acti vel y wor k to ide ntif y incre me nta l an d new op por tuni ties i n both ou r exis ting a nd ad jac en t mar kets. Acros s our b usi ne sse s, we rec ogn ise a signicant opportunit y in br oade ning our na nci ng of gr ee n and tr ans itio n as sets, a s the UK a lig ns towards a n et zero e co no my . Ou r cur rent l en din g alre ad y spa ns a di ver se ar ray of gre en a ss ets inc lud ing w ind a nd solar generation , batter y electric v ehicles and gri d inf rastr uc ture, incl udi ng bat ter y e le ctr ic storage systems. We have see n stro ng grow th in bat ter y electric v ehicles in our Commer cial business. Our Wholesale Fleet division provides na nc e for co mpa ny ca r e ets a nd over one th ird of its l oa n boo k is now f ull y bat ter y electric. As an initial gr e en nance ambit ion, we have set o ur sel ves th e ai m to provid e fu ndin g for £1 .0 bi llio n of bat ter y ele ctr ic vehicles in the ne x t ve y ears. Ove r the co min g yea rs, we w ill c ontinu e to buil d fur ther o ur ex pe r tis e in gr ee n and tran siti on as sets, c eme ntin g our re pu tatio n for specialist knowledge, nancing and Retur n on o pe ning e qu it y in the B an kin g div isi on re duc ed to 1 2.5 % (202 1 : 1 3. 7% ). Th e loa n bo ok in cre as ed 5.0% year -o n-year to £9. 1billion ( 31 July 202 1 : £8. 7billion ) , ree ctin g stron g grow th i n our C omm erc ial and Mot or Finance businesses, par tly offset by a con tract ion i n the Prem ium F ina nc e and Pr oper t y businesses. Momen tum pic ked up ove r the c our se of the ye ar , a s the 1 .9% loa n bo ok grow th in the r st ha lf of the yea r was su ppl em ente d by 3.0% grow th in the se co nd ha lf of the ye ar . Th e Com me rci al lo an bo ok i ncre as ed 9% to £4 .6 billion ( 3 1 July 202 1 : £ 4.2 billion) , dr iven by 7% grow th i n As set F ina nc e, reecting strong new business volumes in the T ran spo r t, Broke r , C ontra ct Hi re and Ene rgy b usi ne ss es in p ar t icu lar , a s we saw good demand fr om customers. Invoice and Speciality Finance grew 1 4 %, re ecting stron g sa le s volu me s and i nc rea sed util isati on. T he co re Invoi ce Fi na nce l oan boo k inc rea se d 29% as we grew SM E cust omer numbers. The Retail loan book increased 3 % to £3. 1billion ( 3 1 July 202 1 : £3 .0 billion ), wit h 7% grow th in Motor F ina nc e as we saw strong new business levels , reect ing conti nue d de man d in the u sed c ar m ar ket and th e be ne ts fro m inves tme nt in the Mot or Finance transf ormation programme. Th is was p ar tl y of fs et by a 4 % d ec lin e in the Premi um Fi na nce b ook a s a res ult of l ower demand for the funding o f insurance policies fro m con sum er s, foll owin g prev iou s Cov id- 19 restr ictio ns. Th e Prope r t y lo an bo ok co ntrac ted 2%, de spi te the grow th s ee n in the s eco nd ha lf of the ye ar . Th is ree cted h igh re paym ent leve ls, wh ich m ore th an of f set d rawdow ns, give n we co ntinu ed to see h ei ghtene d uni t sa le s by deve lop er s as a re sul t of the buoya nt UK p rop er t y m ar ket. Our n ew business volumes r emained strong and our pipeline stands at over £1 billion. Loan Book Analysis 31 Ju ly 2 0 22 £ million 31 J u l y 2 021 1 £ million Change % Commercial 4, 561.4 4, 191 .0 9 Asset Finance 3,032.5 2, 8 45 . 9 7 Invoice and Specialit y Finance 1, 5 2 8 . 9 1, 3 4 5 .1 14 Retail 3 ,0 6 4 .0 2,97 4. 3 3 Mot or Finance 2, 05 1 .2 1, 9 2 4 . 4 7 Premi um Fi nan ce 1, 012 . 8 1, 0 4 9 . 9 ( 4 ) Propert y 1,4 73 .5 1, 5 0 2 .1 ( 2 ) Cl os in g lo a n boo k a nd o pe r at i n g le as e as s et s 2 9,09 8 .9 8,667 .4 5 1 Co mm er cia l, A ss et Fi na nc e an d In voi ce a nd S pe ci al it y F in an ce l oa n bo oks h ave b ee n re -p re se nte d for 31 Ju ly 2 021 to in clu de £2 22.9mil li on o f op er ati ng l ea se a ss ets (£1.3mil li on i n As se t Fin a nc e an d £221.6mill io n in I nvo ic e an d Sp ec ia li ty F in an ce). 2 Op er ati ng l ea se a ss et s of £0.5m il li on (31 Ju ly 20 21 : £1 .3mi ll io n) re late to A ss et F in an ce a nd £ 239. 5mil li on (31 Ju ly 2 021 : £2 21 .6mi ll io n) to Invo ic e a nd S pe ci al it y Fi na nc e. Book 1.indb 66 27/09/2022 23:46:14 67 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Operating income increased 1 9% t o £343. 4million ( 202 1 : £288. 9million) , reecting stron g loa n boo k grow th i n both As set Fin anc e an d Invoi ce Fi nan ce. T he ne t intere st margin incr eased marginally t o 7 .8% (202 1 : 7 . 7% ), mai nl y dri ven by a l ower c ost of f un ds. Adju sted op er ating ex pe nse s of £1 8 0.0mill ion (202 1 : £1 58.2m ill ion) were 1 4 % h igh er th an the pr ior ye ar , re ec ting h igh er st af f co sts to reect business growth and the ina tionar y env iron men t, as well a s cost s in rel ation to the gro up’ s w ith drawa l from th e le gal s er v ic es nancing marke t. In addition, in vestment spe nd i n the As set Fi na nce tra nsfo rm ation programme con tinued. The expense/income ratio d ec reas ed to 52% ( 2021 : 55% ) as the growth in operating income more than offset the co st inc rea se. Impairment charges decreased 7 % to £7 2. 4m ill ion (2021 : £77 .9mil lio n) , cor res po ndi ng to a redu ced b ad de bt rati o of 1 .7 % (202 1 : 2. 1 %) , ree ctin g the re duc tion in the C ovid - 1 9 fo rbo rn e boo k an d a lower cha rge i n the yea r rel ating to Nov ita s, par tly offset by an incr ease in pro v isions against cer tain individual e xposures. A signicant por tion of the i mpa irm ent c ha rge s repo r ted in Commercial related t o credit pr ovisions aga inst th e Nov ita s loa n boo k (2022 : £60. 7m ill io n, 202 1 : £73.2mill ion), whic h ree ct the l atest a ssu mptio ns on th e cas e fai lure a nd re cover y rates in th is bus in es s. Th e provi sio n cove rag e redu ce d marg ina ll y to 4 .0% (3 1 Ju ly 2021 : 4.2% ) ree cti ng reduced Co vid- 1 9 forbear a nce, par tly o f fset by prov isi ons a gai nst th e Nov ita s loa n bo ok to take int o account updat ed assumptions on case failur e rates. Excluding Novitas , the provision co verage ratio reduced to 1 .6 % (3 1 Jul y 2021 : 2. 1 %) . Banking: C ommercial 1 2022 £ million 2021 2 £ million Change % Operating income 343.4 28 8.9 19 Adjust ed operating expenses (18 0 . 0 ) (158 . 2) 1 4 Impairment losses on nancial as sets (72.4 ) (77 .9) (7) Adjusted operat ing prot 91 .0 52.8 72 Net inte rest m argi n 7. 8 % 7. 7 % Ex pense/income ratio 52% 55 % Bad deb t rati o 1.7% 2. 1 % Cl os in g lo a n boo k a nd o pe r at i n g le as e as s et s 3 4,561 .4 4, 19 1.0 9 1 Adj us ted m ea su re s ar e pre se nte d on a b as is c on si ste nt wi th p r ior periods and e xclude amortisation o f intangible assets on acquisition, to present the performance o f the group ’s acquired businesses consistent with its o ther businesses; and any excep tional and ot her adjusting items which do not reect underl yi ng tr ad ing p e r for ma nc e. Fu r the r de ta il o n the r ec on ci li ati on bet w ee n op er ati ng a nd a dj uste d m ea su re s ca n be fo un d in n ote 3. 2 Co mm er cia l, A ss et Fi na nc e an d In voi ce a nd S pe ci al it y F in an ce l oa n bo oks h ave b ee n re -p re se nte d for 31 Ju ly 2 021 to inc lu de £2 22.9mil li on o f op er ati ng l ea se a ss ets (£1.3mil li on i n As se t Fin a nc e an d £221.6mill io n in I nvo ic e an d Sp ec ia li ty F in an ce). 3 Op er ati ng l ea se a ss et s of £0.5m il li on (31 Ju ly 20 21 : £1 .3mi ll io n) re late to A ss et F in an ce a nd £ 239. 5mil li on (31 Ju ly 2 021 : £2 21 .6mi ll io n) to Invo ic e a nd S pe ci al it y Fi na nc e. maximising commercial opportunities ar isin g in the s pac e, for exam pl e throu gh the na nci ng of bat ter y ele ctri c storag e system s and c ha rging i nfr astr uctu re acro ss the U K. The Asset Finance busine ss is well posit ioned to capi tal ise o n conti nue d de ma nd for a sse t na nc ing. Du ri ng the ye ar , we h ave expa nde d our sect or cov e rage, hir ing agricultural equ ip men t and m ater ia ls ha ndl ing te ams w ho have both c omp leted th ei r rs t de als, a nd have in cre ase d our fo cu s on the nan cin g of green and transition asse ts. In Invoi ce F ina nc e, we expe ct the g row th traject or y t o follow t he economic conditions . We continue t o pursue opportunities in t he ABL space , including identify ing syndication oppor tunities , partnering with o ther le nde rs. O ur B rewer y R ent als b us ine ss h as del ive red a re cord ye ar a nd ou r dire ct-t o - outlet container ren tal product , Ek egPlus, continues to see st rong demand. Ou r inves tme nt in the M otor Fin an ce transforma tion pr ogramme has enabled us to fur ther b road en ou r of fe rin g in thi s mar ket an d ta ke advan tag e of he ighte ne d de man d for us ed c ar s. Th e prog ra mme h as improv ed ef ciency and the introduct ion of e-s ign f unc tio nal it y ha s del ive red sustainability benets. W e hav e dev eloped a unique pr oposition to provide dealers with re al-tim e dat a and m ar ket insi ghts, in pa r tne rs hip w ith Auto T ra der , w hic h has suppor ted a n increase in dealer numbers and re du cin g vehi cl e sal es ti me s. We have als o deve lop ed a s et of APIs th at ena bl e us t o connect seamlessly into strat egic par tner s incl udi ng Auto T ra der a nd i Vendi and pro vide our nance offering at various points o f the cust ome r journey . Alongside this, we continue t o explore oppor tunities for grow th over the lo ng er ter m throu gh the sh if t to Al tern ative ly Fue lle d Vehicl es (“ AF Vs”) , as they b ec ome m ore preva le nt in the se co nd ha nd ca r ma rket. AF Vs cur ren tly make u p a low pro por tion of ou r Motor Fin anc e loa n bo ok, in li ne w ith pe netr ation in the wi de r se con d han d ca r ma rket. We have expa nd ed o ur cre di t pol icy to ca pture s uc h vehi cl es a nd are c ur rentl y pil oting n ew AF V - sui ted of fe rin gs in s el ec ted mar kets. For Prem iu m Fina nc e, we have lau nch ed new in sig ht tool s, Fores ig ht and Fo cu s 360, to en han ce ou r of fe rin g an d sup por t brok ers ’ decisioning. We ant icipat e demand for the funding o f insurance pol ici es c oul d inc rea se gi ven th e unc er tain macroeconomic conditi ons. In Prop er t y , we c ontinu e to make go od progress e x panding our r e gional presence , whi ch n ow con trib utes ove r 50% of ou r loa n book, as well as building out our br idging na nc e of fer in g. In par tner sh ip wi th T r avis Per kin s, we have e sta bli she d a new f aci lit y , allowing SME housebuilde rs t o access discounted building supplies and mat e rials dire ctly v ia a c redi t fac ilit y , w itho ut the nee d to dem onstr ate any tradi ng or c redi t histor y ,w here a re lati ons hip wi th the cl ient already exists and funding has previously be en ag ree d. We are also p iloti ng a sp ec ial ist buy-to-le t ex tens ion to ou r exis ting Pro pe r t y bridging nance client s, which is a natural evolu tio n of our ex pe r tis e in Prop er ty Fi na nce and we ll a lig ne d with o ur bu sin es s mo del and r is k app etite. Ou r pip el ine of u ndr awn com mitm en ts rema ins s trong at a bove £ 1billion, although t he heightened economic unc er tain t y is exp ec ted to con tinu e to impa ct ac tiv ity in t he pro perty m ark et . Ove rall, we re mai n cond ent i n the grow th outl ook fo r the lo an b ook ove r both the s ho r t and m ed ium te rm. Commercial The Commercial busine sses pro v ide specialist, predominantly secured lending pri nci pal ly to the SM E ma rket an d inc lud e Asset Finance and Invoice and Speciality Finance. We nance a diverse range of se ctors, w ith A sse t Fin anc e of fe rin g commercial asset nancing, hire pur chase and l ea sin g sol utio ns ac ros s a broad r ang e of asse ts including commercial vehicles, machine t ools, contract ors’ plan t, printing equipment , company car eets, ene rgy proj ec t na nce, a nd ai rcraf t and m ari ne ves se ls. Th e Invo ice a nd S pe cia lit y F ina nc e business pro v ides debt factoring, in voice discounting and asset-based le nding, as well as cov ering our specialist businesses such as Brewe r y Re nta ls, Vehic le Hi re and N ovi tas. Adju sted op erati ng pro t in Co mme rci al ros e 72 % to £91 .0mil lio n (202 1 : £52 .8mi lli on) as the business achieved positive operat ing leve rag e and s aw a de cre as e in im pai rm ent cha rge s. Statu tor y op er ating pro t was £90.9 million (2 02 1 : £35. 9million) . Book 1.indb 67 27/09/2022 23:46:14 68 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Banking continued Banking: Retail 1 2022 £ million 2021 £ million Change % Operating income 237 .0 219.8 8 Adjust ed operating expenses (151.6 ) (138 .0 ) 1 0 Impairment losses on nancial as sets (2 4.4) (9.9) 1 4 6 Adjusted operat ing prot 61 .0 71. 9 (15 ) Net inte rest m argi n 7. 8 % 7 .6% Ex pense/income ratio 64 % 63 % Bad deb t rati o 0.8% 0. 3% Closing loan book 3,0 6 4 .0 2, 97 4 .3 3 1 Adj us ted m ea su re s ar e pre se nte d on a b as is c on si ste nt wi th p r ior periods and e xclude amortisation o f intangible assets on acquisition, to present the performance o f the group ’s acquired businesses consistent with its other businesses ; and any exce pti on al a nd o the r ad ju st ing i te ms w hic h do n ot re e ct u nd er l yi ng tr ad ing p e r for ma nc e. Fu r the r d eta il o n th e rec on ci li ati on bet w ee n op er ati ng a nd a dj uste d m ea su re s ca n be fo un d in n ote 3. par tly of f set by ex pe cte d cre dit los se s inc rea sin g to reect l oa n boo k grow th. The Retail loan book increased 3 % to £3. 1billion (3 1 July 202 1 : £3. 0billion ) . The Motor Fi nan ce bo ok g rew 7% t o £ 2. 1bil lio n (3 1 Jul y 2021 : £1 .9bil lio n) , a s hig h new business lev e ls re ected continued de man d, and s trong p ri ces conti nu ed in the us ed c ar ma rket. Th e Premi um Fi nan ce bo ok d ecl ine d 4 % to £1 .0 billion (3 1 July 202 1 : £ 1 .0 b illion) pri ma ril y as a re sul t of lowe r dem an d for the funding o f insurance policies from con su mer s. T his wa s pa r tia lly of fse t by strong new business volumes as customers loo k to ease c as h ow pre ss ures i n the commercial mark et. We remai n co nde nt in th e cre dit q ual it y of the Ret ail l oa n boo k. Th e Motor Fi nan ce lo an book is pr edominantly secured on second- hand vehicles which are less exposed t o depreciat ion or signican t declines in value than n ew ca rs. O ur c ore Motor Fi na nce product r emains hire-purchase contracts, with le ss exp osu re to resi dua l valu e ris k as soc iated with Pe rs ona l Co ntrac t Pla ns (“PC P” ) , whi ch acc oun ted for c. 1 1 % of the Motor F ina nc e loa n boo k at 3 1 Jul y 2022. The Prem ium Fin anc e lo an bo ok b ene ts f rom var io us for ms of st r uctural pr ot ection including pr e mium refu nda bil it y an d, in mos t ca ses, b roker recourse fo r the personal lines product . Prop er t y Propert y comprises P ropert y Finance and Commercial Accept ances. The Propert y Finance business is focused on specialist res ide ntia l deve lop me nt na nc e to established pro fessional developers in the UK. Commercial Accep tances provides bridging loans and loans for r efurbishment pro jects. Op erati ng pro t de crea se d 1 4% t o £7 5.2mi llio n (202 1 : £87 .8m illi on) pri ma ril y ree ctin g a redu cti on in in co me, as wel l as an incr ease in impairment char ge s on the pr io r yea r . Op erati ng in com e was dow n 8% t o £ 1 1 2 . 7million (2 021 : £1 23. 0million ) reecting the red uct ion in th e loa n bo ok. T he net intere st ma rgin was s tab le at 7 .6% (2 02 1 : 7 .6% ), main ly dr ive n by lowe r co st of fu nd s, par tly of f set by the n eg ative i mpa ct of ri sin g rates in th e las t few month s of the na nc ial yea r on the i nteres t rate oo rs, w hic h were set at 1 %. W ith the U K bas e rate now a bove 1 %, we exp ec t no fu r the r im pact i n res pe ct of the se o ors a s a res ult of f utu re rate ris es. Banking: Property 2022 £ million 2021 £ million Change % Operating income 11 2 . 7 12 3 . 0 ( 8 ) Operat ing expen ses (31 .0) (32.9) (6) Impairment losses on nancial as sets (6.5) (2.3) 1 8 3 Operating prot 75.2 87 .8 ( 14) Net inte rest m argi n 7. 6 % 7 .6% Ex pense/income ratio 28 % 27% Bad deb t rati o 0.4 % 0. 1 % Closing loan book 1,4 7 3. 5 1, 5 0 2 .1 ( 2 ) Th e Com me rci al lo an bo ok i ncre as ed 9% to £ 4. 6billion ( 3 1 July 202 1 : £ 4.2 billion) . The As set Fi na nce b ook g rew 7% to £3. 0b ill ion (3 1 J ul y 202 1 : £ 2.8billi on), ree cti ng stro ng new business v olumes. The Inv oice and Speciality Finance loan book increased 1 4 % to £ 1 .5b ill ion (31 Jul y 2021 : £1 .3b ill io n) , dr ive n by hig h sa le s vol ume s, su pp or te d by the Re cove r y Loa n Sc hem e, and i mprove d utilisation , albeit this con tinues t o remain sli ghtl y be low pr e- Cov id- 1 9 le vels. Retail The Retail businesses pro vide intermediated na nc e, pri nci pal ly to ind iv idu als a nd s ma ll businesses, t hrough mo tor dealers and insurance brok e rs. Op erati ng pro t for Ret ail re duc ed 1 5% to £61 .0mill ion (2021 : £7 1 .9mi lli on), drive n by hig he r imp air me nt ch arg es a nd in cre as ed ope ratin g exp ens es, w hic h more th an of f set income gro w th. Operating income increased 8 % to £23 7 .0 million (20 2 1 : £2 1 9.8 million ), r ee cting loan book growth and an increase in the net int erest margin t o 7 .8% (202 1 : 7 .6% ), mainly dri ven by h igh er fe e inc om e in Prem ium Fin anc e an d a lowe r cos t of fu nds. Op erati ng exp en se s rose 1 0% to £ 1 5 1 .6million ( 202 1 : £1 38.0 million) , driven by hig her s taf f c osts a nd the c ost of re spo ndi ng to ongoing regulatory change. In addition, ongoing inv e stment in the Retail businesses, alongside relat ed depreciation , continued . Th e exp ens e/ inc ome r atio in cre as ed marg ina lly to 64 % (2021 : 6 3% ). Imp air me nt ch arg es i ncre as ed to £24 .4 million ( 202 1 : £9. 9 million) , with a bad debt ratio of 0.8% (202 1 : 0.3% ) w hic h ree cted a more n or mal ise d leve l of ca nce ll ation s in the co nsu me r por t fo lio in Pre mi um Fin an ce foll owin g the stro ng cre di t per form anc e in the pri or ye ar a nd a ri se in a rre ar s in the M otor Fin anc e bus ine s s as a res ult of th e imp act on cu stome rs f rom the c es sati on of the U K govern ment’s Covid- 1 9 job retentio n sche me and th e inc rea se in i natio n. Th e provi si on cove rag e ratio re ma ine d sta bl e at 2.2 % (31 Jul y 202 1 : 2.2% ), main ly dr ive n by the r e lease o f model-driv en adjustment s, Book 1.indb 68 27/09/2022 23:46:14 CO N F I D E NT IN T H E L ONG - TE R M G R OW TH PR OS PECTS OF OU R BUS I N E S S ES 69 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Strategic Report Op erati ng exp en ses we re 6% lower at £3 1 .0mi llio n (202 1 : £32.9millio n) as we mai nta ine d our r ig orou s focu s on c ost discipline. The expense/income ratio rema in ed bro adl y stab le on th e pr ior ye ar at 28 % (2021 : 27% ). Imp air me nt ch arg es i ncr eas ed to £6.5mi lli on (202 1 : £2.3mill ion) fol lowi ng the o ngo ing review of p rovi sio ns an d the pr io r yea r be net ing f rom the re le ase of C ovid - 1 9 rela ted prov isi ons, re sul tin g in a bad d ebt ratio of 0.4 % (202 1 : 0. 1 %) . T he p rovis ion cover age r atio de cre as ed ma rgin all y to 2 .4 % (3 1 Jul y 2021 : 2. 6%) . In spit e of str ong new business volumes, the Prop er t y l oan b ook re duc ed £ 29mil lio n to £1 .5billion (3 1 July 2 021 : £1 .5billion ), as hi gh re paym ent l evels m ore tha n of f set drawd owns, w ith the b uoya nt UK p rope r t y marke t resulting in heightened unit sales by developers . Our pipeline of undrawn com mitm ents re ma ins s trong at £1 .0bi llio n (3 1 J ul y 202 1 : £0.9bil lio n) and we c ontin ue to se e success from regional expansion, with the re gio nal l oan b ook m ak ing u p over 50% of the Prop er t y F ina nce p or t fol io. The Property loan book is conser vat ively und er w ri t ten, with t y pic al L T V s be low sta nda rd ma rket le vels. We wor k wi th experienced , professional developers, with a focus on mid-price d family housing , and hav e min ima l expo sure to the p rim e ce ntral Lo ndo n mar ket. Our l ong tr ack re co rd, expe r tis e and qua lit y of s er v ice e ns ure the b usi nes s rem ain s res ilie nt to com peti tion a nd c ontin ue s to generat e high le vels of r e peat business . Financia l S tatement s Book 1.indb 69 27/09/2022 23:46:14 70 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Asset Management Ke y Financials 1 2022 £ million 2021 £ million Change % Invest ment management 11 0 . 4 10 2. 9 7 Advice and other se r vices 2 36. 1 36.4 ( 1 ) Other income 3 1. 5 0. 1 n /a Operating income 1 4 8 .0 13 9 . 4 6 Adjust ed operating expenses (12 6 . 3 ) (1 15 .9 ) 9 Impairment gains on nancial assets – 0.2 n /a Adjusted operat ing prot 21. 7 23.7 (8) Revenue mar gin (bps) 87 91 Operating margin 15% 17 % Return on ope ning equity 28.6 % 31 .7% 1 Adj us ted m ea su re s ar e pre se nte d on a b as is c on si ste nt wi th p r ior periods and e xclude amortisation o f intangible assets on acquisition, to present the performance o f the group ’s acquired businesses consistent with its other businesses ; and any exce pti on al a nd o the r ad ju st ing i te ms w hic h do n ot re e ct u nd er l yi ng tr ad ing p e r for ma nc e. Fu r the r d eta il o n th e rec on ci li ati on bet w ee n op er ati ng a nd a dj uste d m ea su re s ca n be fo un d in n ote 3. 2 Inc o me f rom a dv ic e an d se lf- di re cte d se r vi ce s, exc lu di ng i nve stm en t ma na ge me nt i nc om e. 3 Ot he r in co me i nc lu de s £1 .4 m il li on g ai n on d is po sa l of an a dv is ed c li e nt bo ok . Co nt i nu i ng to B u il d o n a Lo ng T r a ck Record of Growth Close Bro thers Asset Management pr ovides pe rso na l na nc ial a dv ice a nd i nvestm en t man age me nt se r vi ce s to private c lie nts in the UK , inc lud ing f ull b es po ke mana ge me nt, managed port folios and funds, distribut ed both di rectl y vi a our a dv ise rs a nd inve stme nt man age rs, a nd thro ugh th ird pa r t y na nc ial advisers . Adju sted op erati ng pro t in CBA M de cre ase d 8% t o £ 21 . 7 m ill ion (2021 : £23.7 millio n) , d ri ven by n eg ative m ar ket movem ents w hic h ad vers el y imp acted revenu e in the s ec ond h al f of the yea r an d hig her s taf f c osts. T he op erati ng ma rgin redu ce d to 1 5% ( 202 1 : 1 7% ). Statu tor y ope ratin g prot b efore t a x was £1 9.8 milli on (202 1 : £22. 4mill ion). T ota l op erati ng in com e grew 6% to £ 1 48.0 million ( 202 1 : £ 1 39. 4 million ), r ee cting posit ive net in ows a nd ma rket move me nts in th e rs t hal f of the ye ar , de sp ite fal lin g mar kets an d thei r imp act o n wid er cl ie nt se ntime nt in th e sec on d hal f of the ye ar . Th e revenu e ma rgin redu ce d to 8 7bp s (202 1 : 91 bps) ree ctin g lower i nvest men t man age me nt ma rgin s as ows have i ncl ud ed a hi ghe r pro po r tion of lower margin pr oducts. Adju sted op er ating ex pe nse s inc rea se d 9% to £ 1 26.3 mi lli on (202 1 : £1 1 5.9 mil lio n) , dr ive n by higher staff costs, pr imarily reecting the cu rre nt in ation ar y enviro nm ent a nd new hi res, a s we co ntinu e to inves t to grow the business. As a result , expense/income ratio g rew to 85 % (2021 : 83%) with th e com pe nsati on rati o rema ini ng in li ne wi th the pri or ye ar at 56% (202 1 : 56% ). We have bee n inve sti ng in tec hn olo gy i n the business and r ecently completed a major re-platforming project t o rationalise legacy syst e ms and incr e ase efciency , while adding a digital portal to improv e functionality and cus tomer e xperience. Our t echnology proj ec ts have be en fo cus ed o n inc rea sin g efciency and operational r e silience, improving clie nt e x perience by using best- of -breed applications, digital technology and selective in-house development. Continued P osit ive Net Inows, Despite Vo l a t i l e M a r k e t C o n d i t i o ns Equi t y ma rkets have ex pe ri en ce d a mi xed pe r for man ce du ri ng the nan cia l yea r . I n the se con d hal f of the ye ar , a gl oba l equ it y ma rket sell-off led t o largely unfa vourable conditions, with some major indices suf fering near - unp rec ed ented d ec lin es. A lth oug h con ce rn s over c ontinu ed i nati on an d ge opo liti cal unc er t aint y co ntinu e to weigh o n mar kets and a dve rs ely i mpa ct inve stor s enti me nt, we saw ne t inow s of £844 m illi on fo r the yea r , de live ri ng a net i now rate of 5% (2 021 : 7% ). T otal managed assets decreased 2 % t o £1 5.3 bil lio n (202 1 : £1 5.6 bill ion), as neg ative mar ket move me nts of £1 . 1 bil lio n more th an of fs et net i nows. T ota l cl ien t as sets, w hic h inc lud es a dv ise d and m an age d as sets, redu ce d by 3% overal l to £ 16. 6 bil lio n (202 1 : £ 1 7 .0 billion) . Fund Performance Our funds and se gregat ed bespoke portfolios are d esi gn ed to provi de at trac tive r isk- adju sted retu rns fo r ou r cli ents, c ons isten t with th ei r lon g-term go als a nd i nvestm en t obj ect ives. Fu nd pe r for ma nc e over the 1 2 month s sin ce 31 July 2021 has be en m ixed, ree ctin g vola tile m arkets a cros s as set cla ss es si nc e the sta r t of 2022. As a res ult, all o ur f und s have de li vere d neg ative a bso lu te retur ns over th is pe ri od. In rel ative ter ms, eig ht of ou r 1 5 fu nds h ave outp er forme d the ir rele vant pe er g roup ave rag es. O ur b es poke strat egy composites ha ve out pe rformed their res pec tive p ee r grou ps in a fa lli ng ma rket env iron me nt, except for th e Equi t y Ris k strate gy , w hic h was the m ost i mpac ted by the 2022 mar ketfa lls. Our Appro ach t o ESG and Sustainabilit y ESG integr ation i n our i nvestm ent re sea rch and s tewards hip re mai ns a key are a of foc us and we c ont inu e to expa nd ou r Re spo ns ibl e Inves tme nt tea m. Our sustainable funds ( Close Sustainable Balanced Portfolio Fund and Close Sustainable Bon d Por t fol io Fun d), laun che d in 2020 to complement the existing SRI discret ionar y ser vic e, are ga ini ng trac tio n and we c onti nue to develop our sustainable proposition as more of our c lie nts lo ok to how they c an m ake a dif feren ce w ith the ir inve stm ents. Mov ement in Client Assets 31 Ju ly 2022 £ million 31 J u l y 2021 £ million Opening managed asset s 15, 5 8 8 1 2,594 Inows 2,3 30 2, 28 4 Outows (1, 4 8 6) (1,3 67 ) Net ino ws 844 91 7 Mar ket movements (1, 13 0 ) 2,07 7 T otal managed assets 1 5, 30 2 15 , 5 8 8 Advised only asset s 1, 2 7 2 1, 4 3 5 T otal client assets 1 16 , 5 7 4 17 , 0 2 3 Ne t ow s as % o f o pe n in g ma n ag ed a s se t s 5% 7% 1 T ot al c li en t as se ts in cl ud e £5.9 b il lio n of a ss ets ( 31 Jul y 2021 : £ 6.0 bi ll io n) tha t are b oth a dv is ed a nd m an ag ed . Book 1.indb 70 27/09/2022 23:46:15 CO NTI N U I N G T O BU I L D ON AL ONG T R A CK RE C O RD O F GR O W T H Gov ernance Repor t Strategic Report 71 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 We have mobilised a Sustainabilit y Progr amm e wi th ded ic ated ini tiati ves to emb ed th e Prin cip le s for Re spo nsi ble Inves tme nt (“PRI ”) an d steward shi p acro ss all f acets of o ur bu si nes s, an d as pa r t of thi s, have rec entl y be com e a sig nator y to the UKStewa rdsh ip Co de. CBAM will be making a commitment to active ly c ontr ibu te to ward s the UK governmen t’ s net zero climate goals , through the Ne t Zero As set M an age rs i niti ative. In line with our regulatory repor ting obliga tions and d es ire to be tra nsp are nt in f ul llin g our com mi tme nts, we are a lso wo rk in g towards aligning our disclosur es with t he TCFD recommendations by 20 2 4. Well Po si t io n ed fo r Fut u re G r ow t h We remai n con de nt that ou r ver tica lly int egrated , multi-channel business model pos itio ns us we ll fo r ong oin g dem an d for our s er v ic es a nd the s tru ctur al grow th oppor tunity present ed by the wealth management industry . Ou r focu s rem ain s on prov id ing exce ll ent se r vi ce to our c li ents w hil st inve sti ng in new hi res to sup por t the lon g-term g row th potentia l of ou r bus ine ss. W hil e CBA M is sensitive to nancial market condit ions, we rema in c omm it ted to dri vi ng grow th both org ani ca lly a nd thro ugh th e conti nue d sel ec tive h ir ing of ad vi se rs a nd inve stm ent man age rs, a nd thro ugh i n-ll ac qui siti ons. As pre viously announced, Eddy Reynolds took over th e le ade rs hip of th e As set Management division from Martin An drew in M arc h 2022. Eddy has ove r 30 yea rs’ expe ri en ce in th e fu nd an d wea lth management indust ries and has brought with him outstanding experie nce and kno wledge to lead ou r tal ented tea m at CBA M. Financia l S tatement s Book 1.indb 71 27/09/2022 23:46:15 72 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Ke y Financials 2022 £ million 2021 £ million Change % Operating income 95.2 18 2. 0 ( 4 8 ) Operat ing expen ses (8 1 . 1 ) (1 21.2 ) ( 3 3 ) Impairment gains on nancial assets – 0. 1 n /a Operating prot 1 4. 1 60. 9 ( 77) Average b arga ins p er d ay (‘000) 81 10 1 Operating margin 15% 33% Return on ope ning equity 1 10 . 5% 63.5 % 1 Re e cti ng i nc re as e in c ap it al ba se i n n an ci al y ea r 2021 . Cyclicality in the T rading Business Imp acte d Per for man ce; Well Place d for When In vestor Appetite R eturns Winte r oo d is a le adi ng UK m ar ket make r , delivering high quality e xecution service s to stockbrok ers, w ealth managers and i nsti tuti on al inve stor s, as wel l as providing corporate advisor y ser vices to inves tme nt tru sts an d outs ourc ed d eal ing and cust od y service s via Wint er ood Business Ser vices (“WBS”) . Global geopolitical event s, in particular the on goi ng c oni ct in U kr ain e, ene rgy and commodity price rises , supply chain iss ue s, new Cov id va ria nts an d the re sul ting restrictions, have all negat ively impacted mar ket co ndi tion s in the 2022 c al end ar yea r . T igh tenin g mon eta r y po licy to co mbat ination and concerns over slo w ing ec ono mic g row th have a lso re sul ted in a r isk- of f se ntim ent fo r ma rkets, f ur t her s ub dui ng inves tor ri sk ap peti te. Cyc lic ali ty s ee n in the tr adin g bus ine ss negativ e ly impact ed Winterood’ s per formance , with a signican t reduction in trading oppor tunities, exacerbated b y periods of vola tilit y i n fal lin g mar kets. Fol lowi ng the ex ce ptionally strong trading pe rformance and eleva ted mark et activity experienced during the pr io r yea r , o per ating p rot wa s down 77% to £ 1 4. 1 m illi on (202 1 : £6 0.9 milli on). Operating income decreased 48% to £95 .2 million ( 202 1 : £ 1 82. 0 million) , primar ily driven by a mar ket- wid e sl owdown i n tradi ng ac tiv it y and a c ha nge i n the m ix of trad ing vo lu mes, exacerbated b y falling markets . We also s aw a de cli ne in fe es g en erate d from cor po rate activ it y , a ltho ugh WB S co ntinu ed to ge ne rate inc rea se d leve ls of in com e, up 1 2% to £ 10 .2 mi lli on on th e pri orye ar . T r adin g volu me s have re duc ed, w ith aver age dai ly ba rgai ns at 81 k (202 1 : 1 01 k), but they rema in e levated on p re- Cov id leve ls (20 19 : 56k). However , the re ha s als o be en a c han ge in the c omp os itio n of tradi ng vol um es, wi th volumes in the higher -margin mark ets o f AIM and S ma ll Ca p both dow n on the p rio r yea r , as reta il inve stor ap peti te has fa lle n, and ret ail- driven t rading oppor tunities have reduced. As a resu lt, tradi ng in com e ha s dec lin ed to £80. 7 mil lion fo r the ye ar (202 1 : £1 64. 1 m ill ion). Securities Winterood Business Ser vices WBS pro vides outsourced dealing, set tlement and cust od y services to asset managers, wealth mana gers and retail platforms. WBS h as be e n ope ratin g for mo re tha n 1 0 ye ar s and p rovi de s ser vic es to over 1 50,00 0 reta il cli en ts and ove r 50 ins titu tion s on its p lat for m. It ha s a stic k y an nui t y style income stream based on asset s under administra tion fees and dealing com mis si ons, a key di f fe renti ator to our co re tradi ng bu sin es s. WBS h as grow n sig ni ca ntly in th e las t few yea rs an d had a ss ets und er ad min istr ation of £7 .2 b illi on at 3 1 J uly 2022. We continu e to see s ign ic ant grow th potentia l in this b usi ne ss, with a s oli d pip el ine of c lie nts. O ur awa rd-win nin g prop ri eta r y tec hno log y deve lo pe d in ho use i s hig hly s ca la ble a nd al lows u s to des ign b es poke so lu tions fo r ou r cus tomer s that s upp or t th e grow th in a ss ets and tr adi ng vol ume s. WBS Clients WBS Income £m 2022 202 1 2020 10. 2 9. 1 6.5 2022 202 1 2020 7. 2 6.2 4. 1 WBS AuA £bn 3 Diversication of client base 3 Fee - dr ive n r even ue m od el , greater predictability from fe es a n d tr a di ng vo l um es 3 St i ck y an nu i t y s t y le income stream 3 Strong gro w th potential Book 1.indb 72 27/09/2022 23:46:16 Gov ernance Repor t Strategic Report 73 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 WEL L P L A CED F OR WH EN INVES T OR A P P ETITE RE T URNS Global equity mark ets hav e experienced substantial volat ility in the past six months and i ndi ce s have su f fere d, with U S stocks rec ordin g the ir wor st r st ha lf in mo re tha n 50 yea rs, the F TSE 250 losin g 1 4% and the AIM i ndex d own 2 4 % thi s yea r . We have navi gated th e vola tile in traday tr adi ng wel l, be ne ting f rom the ex pe r ti se of ou r trade rs and o ur stro ng fo cus o n ris k ma nag em ent, whi ch ha s res ulte d in ei ght lo ss d ays for the yea r (202 1 : on e los s day), of whic h seve n occ ur red in th e se con d ha lf of theye ar . Operat ing expenses decreased 33 % t o £8 1 . 1 million ( 202 1 : £ 1 2 1 .2 million) driv en by the var ia ble n ature of W inter ood’s cost bas e, as the red uce d reven ue p er fo rma nc e and tr adin g volu me s le d to lower st af f compensation and settlement costs . The exp ens e/ inc ome r atio i ncre as ed to 85% (202 1 : 67 %) as the red ucti on in in com e was not f ul ly of f set by th e cor re spo ndi ng de cre ase i n var iab le c osts. T he com pe nsati on rati o fell to 4 7% (202 1 : 4 8% ). WBS, which provides outsourced dealing and c ustod y se r vi ce s, has d el ive red an othe r strong per formance, generat ing £ 1 0.2 million of inc ome (2021 : £9. 1 mi lli on) and g rowin g its as sets u nd er ad min istra tion to £7 .2 bil lio n (3 1 Jul y 2021 : £6. 2 bi llio n) . Net i nows ove r the pe ri od were £1 .3 bil lion (2021 : £1 .2 billion) . We see signicant gro w th pot ential in thi s bus ine ss, w ith a so lid p ipe lin e of cli ents ex pe cte d to incre as e as sets u nde r adm inis trati on in exce ss of £1 0 b illi on in th e 2023 n an cia l ye ar . As a da il y tradi ng bu sin es s, Win ter o od is se nsi tive to ch ang es i n the ma rket env iron men t but re ma ins we ll pos iti one d to continue trading pr otably , taking advantage when in vest or appetit e retu rns. Wint er ood con tinu es to dive rs if y i ts reven ue stre am s and explor e gro w th opportunities, balancing the cycl ic ali ty s ee n in the tr adin g bus ine ss. Ou r rece ntl y app oi nted new c hi ef execu tive, Bra dley D yer , w ill b e well p lac ed to le ad Win ter o od in th e nex t st age of i ts grow th and d evel opm en t. We would like to tha nk Phili p Y ar row for hi s sig ni ca nt con trib utio n to the grou p and to W inter oo d foll owin g his de cis ion to retire a s chi ef execu tive. Financia l S tatement s Book 1.indb 73 27/09/2022 23:46:16 74 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 & A w a r e n e s s S y s t e m R i s k A p p e t i t e R i s k C u l t u r e I n t e r n a l C o n t r o l R e v i e w a n d C o n t r o l a n d M o n i t o r M i t i g a t e R e p o r t I d e n t i f y A s s e s s Pri nci pa l Risks S t r e s s T e s t i n g R i s k G o v e r n a n c e Risk Repor t Enterprise Risk Management Th e grou p em pl oys an En terp ri se Ri sk M an age me nt Framewo rk to prov id e the bo ard a nd se nio r ma nag em ent with o versight of the organisat ion’ s nancial position as well a s the ri sks th at mig ht adve rs ely af fect it. Th e fra mewor k det ail s the co re ri sk ma nag em ent com pon ents a nd s truc ture s use d ac ross th e r m, and denes a consist ent and measurable appr oach to identifying, assessing, cont rolling and mitigat ing, reviewing and m oni torin g, and re po r ting r is k – the ri sk pro ce ss life cycl e. Thi s sets ou t the ac tivi tie s, tools, tec hni qu es an d orga nis atio nal a rr ang em ents that e ns ure al l pri nci pal r isks faci ng the g roup a re id enti ed a nd u nde rstoo d; and that appropriat e responses are in place to pr otect t he group and p reven t detr ime nt to its cu stome rs a nd co lle ag ue s. Th is en ab les th e gro up to mee t its go als a nd e nha nc es its ability to respond to ne w opportunities. Th e fra mewor k is p urp ose ly d es ign ed to all ow the captur e of business opportunities whilst main taining an app ropr iate bal an ce of ri sk an d reward w ithi n the gro up’ s agreed risk appetite . Enterprise Risk Management F ramework Pr ot ecting our establ ished business model is a k ey st rat egic objectiv e . Ef fectiv e management o f the ri sks we f ace is cent ral t o ev er y thing w e do . Ou r A p pr oa ch t o Ri sk Th e grou p fac es a nu mb er of r isks i n the normal course o f business pro viding lending, de pos it ta kin g, wea lth ma nag em ent se r v ice s and s ecu ri tie s tradi ng. T o ma nag e the se ef fectively , a consist e nt approach is adopted bas ed o n a set of ove rarc hi ng pr inc ip le s, namely: • adh er ing to ou r es tab lis he d and p roven business model , as out lined on pages 10 t o 13; • imp lem enti ng an i ntegrated r isk man age me nt ap proa ch ba sed o n the con ce pt of “ thre e lin es of d efen ce” ; a nd • set tin g and o pe rating w ith in cl ear ly d en ed ris k ap petite s, mon itored w ith d ene d metr ics a nd li mits. Th is Ri sk R epo r t pr ovid es a s um mar y of our a pp roac h to ris k man ag eme nt, cove ri ng eac h of the key as pe cts of the rm’ s Ent erprise Risk Management F ramework. Infor mati on on th e grou p’ s p rin cip al r isks, including an o ver view of t he frameworks in pl ace to ma nag e the m, is als o inc lud ed, togeth er wi th an ove r v iew of cu rre nt emerging risks and uncertainties. Role of th e Boar d Th e boa rd reta ins ove rall re sp ons ibi lit y for over see in g the ma inten anc e of a syste m of inter nal c ontro l whi ch e nsu res that a n ef fe ctive r isk m an age me nt fra mewo rk an d over sig ht proc es s op erate s acros s the grou p. The r isk m ana ge me nt fra mewo rk a nd associat ed gov ernance arran gements are designed t o ensure a clear organisational stru ctu re with d isti nct, tra nsp are nt an d consistent lines o f responsibility and effective proc es se s to ide ntif y , man age, m oni tor and repo r t the r isk s to whic h the gro up is, or m ay become, exposed. Risk management across the gr oup is over se en by the B oa rd Ris k Co mmi t tee. The Committee is responsible for reviewing risk appet ite , monit oring the group ’ s risk prol e agai nst th is an d review ing th e day-t o- day ef fe ctive ne ss of th e ris k man age me nt fra mewor k. In ad diti on, the C omm it tee is res pon sib le for ove rs ee ing th e mai ntena nc e and dev elopme nt o f an appropriat e and suppor tive risk culture and for providing risk input int o the alignment of remunerat ion with p er forma nc e aga ins t ris k app etite. Th e Com mi tte e’ s key a rea s of focu s over th e las t na nc ial ye ar a re set o ut o n pag es1 1 7 to 1 1 9. Th e grou p clo se ly mo ni tors its r is k prol e to ensu re that it c ontin ue s to alig n with i ts strat egic objectives as document ed on pag es2 4 to 33. The b oard c ons id ers th at the gro up’ s c ur rent r isk p role re ma ins consistent with its stra tegic objectiv e s. Risk Appetite Ris k ap petite fo rms a key c omp one nt of the gro up’ s ris k ma nag eme nt fr am ework and re fer s to the sourc es a nd l evels of ris k that the g roup i s wil ling to as sum e in orde r to ach ieve its s trateg ic ob jec tive s and business plan . It is managed through an established framework that facilitat es ong oin g com mun icati on be twe en th e boa rd and m an age me nt with re sp ec t to the grou p’ s evo lv ing r isk p role. T his e na bl es key decisions concerning the alloca tion o f group reso urc es to be m ade on a n info rm ed ba sis. Ris k ap peti te is set o n a top-d own b asi s by the bo ard wi th co nsid er ation to bus ine ss requ es ts and exe cuti ve rec omm en datio n. Appetit e measures, bot h qualitative and qua ntit ative, are a pp lie d to infor m de cis ion- mak in g, and m oni torin g and re po r tin g proc es se s. Ea rl y-warni ng tri gg er s are al so employed to driv e required correct ive action befo re overa ll tole ra nce l evel s are re ach ed. Th e grou p con duc ts a for mal rev iew of i ts ris k app etite s ann ual ly , a s par t of the strateg y- set tin g proc es s. Th is al ign s ris k -ta ki ng wi th the ac hieve me nt of str ategi c obj ec tive s. Adherence is monitored t hrough the gr oup ’ s ris k co mmi tte es o n an on goi ng ba sis w ith in te ri m u p d ate s to in d iv i d ua l r i s k a pp e ti te s considered as appropriate through the year . Book 1.indb 74 27/09/2022 23:46:17 75 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Stress T esting Stre ss testi ng rep res ents a nothe r core component o f the risk managemen t fra mewo rk a nd is e mp loyed, a lon gsi de scenario analysis , t o suppor t assessment and understanding o f the risks t o which the gro up mi ght b e expo sed i n the f uture. As su ch, it p rovi des va lu abl e ins ig ht to the boa rd and s en ior ma nag em ent, play ing a n impor tant r ole in the f ormulation and pursuit of the r m’ s s trateg ic ob jec tive s. Stre ss testi ng ac tivi t y with in the g roup i s designed t o meet three principal objectives: 1 . Inform capital and liquidit y planning– including liquidity and funding risk assessment, con tingency planning and recov e r y and r e solution planning ; 2 . Support ongoing risk and por t folio man age me nt – inc lud ing r isk a ppe tite calibration , strategic decisioning and planning, risk /r eward op timisation and business resilience planning ; and 3. Provide a c he ck on th e ou tputs /accura cy of ris k mod el s – inc ludi ng the i de ntic atio n of non- lin ear e f fec ts wh en ag gre gating r is ks. T o s upp or t the se o bje cti ves, stre ss tes ting i s de sig ne d to cover the g roup’ s mo st ma teri al ris ks, wi th acti vi ty c on duc ted at var iou s leve ls, ranging from extensive group-wide scenario analysis t o simple port folio sensitivity analysis . Stre ss testi ng al so re pres ents a c ri tica l com pon en t of both the r m’ s Inter na l Cap ita l Adeq uac y Ass es sme nt (“ICA A ” ) and Internal Liquidity Adequacy As sessment (“IL A A ”) pro ces se s, with s ce nar io an al ysis add itio nal ly e mpl oyed a s par t of the grou p’ s RecoveryPlan . Risk Go vernance Th e grou p’ s r is k man age me nt ap pro ach is un de rp inn ed by a stro ng g over na nce framework that it considers appr opriate t o both the s ize an d strate gic i ntenti ons of i ts businesses. Th e fra mewo rk is fo und ed o n a “ thre e lin es of defe nc e” mod el, as s et ou t be low: Th e key pri ncip le s und er ly ing th is approach ar e that : • business management owns all the risks ass um ed thro ugh out th e grou p an d is responsible f or their management on a day-to-day ba sis to en sure th at ris k an d retur n are ba lan ced; • the board and business managemen t togeth er pro mote a cu lture i n wh ich r is ks are id enti e d, ass es sed a nd re por ted in an open, t ransparent and objectiv e manner; • the ove rr idi ng pr ior it y is to prote ct the group ’ s long- term viability and produce sustainable medium t o long- term r evenue streams; • ris k fu ncti ons a re ind ep en de nt of the businesses and pro vide oversight of and adv ic e on the m ana ge men t of ris k acro ss the gro up; • risk managemen t activities acr oss the group ar e propor tionat e to the scale and c om plex it y of the g roup’ s in div id ual businesses; • ri sk mi tigati on an d co ntrol ac tiv itie s are co mme ns ur ate wit h the d eg ree of ris k; a nd • risk managemen t and contr ol supports decision-making. Ali gn ed to thes e core p ri nci ple s, the gov ernance framework operates t hrough var iou s del eg ation s of auth or it y fro m the bo ard downwa rds. T he se cove r both in di vid ua l auth or itie s as we ll as a utho ri tie s exercis ed v ia the gr oup ’ s risk committee structur e. Fi rs t l in e of d e fe nc e Se co n d li n e of d ef en ce Th ir d l in e of d e fe nc e The Businesses Risk and Compliance Internal A udit Group Risk and Compliance Committee (Reports to the Risk Committee ) The Risk Commit tee (Re por ts to the b oard ) The Audit Commit tee (Re por ts to the b oard ) The chief ex ecutive delegat es to divisional and operat ing business heads da y- to-day responsibility for risk manage ment , regulat or y compliance, internal contr ol and conduct in running their divisions or businesses. Business management has day -t o- day o wnership, responsibility and accountabilit y for: • ide ntif yin g and a ss es sin g ris ks; • managing and controlling risks ; • measuring risk (k ey risk indicat ors/ early warning indicat ors) ; • miti gatin g risks; • rep or tin g ris ks; and • committee st r ucture and repor ting. Ke y Fe atures • Promote s a stron g ris k cul ture a nd fo cus on su stai na ble r isk-adjuste d retur ns. • Imp lem ents th e ris k fra mewo rk. • Promote s a cul ture of ad he rin g to limi ts and managing risk exposures. • Promote s a cul ture of c ustome r foc us a nd appropriat e behaviours. • On goi ng mo nitor ing of p os itio ns an d man ag eme nt a nd co ntrol of r isk s. • P or tfolio optimisa tion. • Sel f-asse ss men t. Th e Ris k Com mit tee d el eg ates to the gro up chief risk of cer day -t o-day r e sponsibility for ov ersight and challe nge on risk -relat ed issues. Risk functions (including compliance ) provide suppor t , assurance and independent challenge on : • the de si gn an d ope rati on of the r isk framew ork; • risk assessment ; • ris k ap peti te and str ategy; • performance manageme nt ; • ris k re por ti ng; • adequacy o f mitigation plans ; • grou p ri sk pro le; and • committee go vernance and challenge. Ke y Fe atures • Ove rar chi ng “R isk O ve rsi ght U nit ” ta kes an inte grated v iew of r isk (qua lit ative a nd quantitat ive) . • Sup por ts throug h deve lop ing a nd ad vi sin g on risk st rategies. • Facilita tes constructive check and challenge – “ critical friend” /“trusted adviser ” . • Oversight of business conduct . The Audit C omm it tee man dates th e hea d of grou p inter na l au dit w ith d ay-t o -d ay res pons ibi lit y fo r inde pe nd ent a ssu ran ce. Int ernal audit pro v ides independent assurance on : • rs t and s ec ond l ine s of de fenc e; • appropria teness/ ef fectiveness of internal controls ; and • effectiv eness of p olicy implementat ion. Ke y Fe atures • Draw s on de ep k now le dg e of the gro up and its businesses. • Pr ovides independent assurance on the acti viti es of th e rm, in clu din g the r isk management framew ork. • Assesses the appropriateness and effectiv eness o f int e rnal con trols . • Inc orp orates rev iew of c ultu re and c ond uct. Th r ee L in es o f De fe n ce Book 1.indb 75 27/09/2022 23:46:17 76 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 T o gethe r , the se co mmi tte es fac ili tate an ef fe ctive ow of key ris k infor mati on, aswe llas functioning t o support appropriate risk man age me nt at ea ch st age of th e ris k pro ce ss life cycl e. They a lso p rovi de a n esc al ation channel for any risks or concer ns, supporting the ma inten anc e of an e f fec tive ri sk cu ltu re. Ove r the pa st 1 2 mo nths the g roup h as further enhanced its risk governance fra mewor k an d sp eci c all y the org an isati on’ s risk and compliance commit tees, both at a group and divisional level. This has included the co ntin ued re ne me nt of co mmi tte e T e rm s of Refe renc es a nd the evo luti on of re por ting pac ks and M I sui tes. Al l com mi ttee s co ntinu e to work ef ci entl y and e f fec tive ly . Internal Control System Ali gn ed to the ri sk gove rn anc e fra mewo rk, over sig ht ac ross th e grou p is su ppo r ted by the ma inte nan ce of a ra ng e of inter na l contro ls. T hes e cove r ris k and na nci al man age me nt an d rep or tin g an d contro l proc es se s and a re de si gne d to ensu re the acc urac y and re lia bi lit y of the rm’ s n anc ia l infor matio n an d repo r ting. The main feat ures of these con trols include consisten tly applied accounting policies, cle ar ly d en ed li ne s of res pon sib ilit y a nd proc es se s for the rev iew a nd ove rsi ght of disclosures within the Annual Repor t. These contro ls are ove rs ee n by the Aud it C omm it tee. Th e a cc o un tin g p ol i ci e s fo rm pa r t of a b ro ad er policy framew ork, o verseen by the board , that su ppo r ts the fo und ation of a s trong r isk management struct ure. Group policies are suppor ted by group standar ds, divisional/ business-lev el policies and procedur es which, togethe r , outl ine th e way in wh ic h poli cy is imp le men ted and d eta il the p roc es s con trols in pl ace to en sure c om pli anc e. Polic ie s an d sta nda rds rel ating to the g roup’ s pr inc ipa l ris ks are f ull y cove red wi thin th e fra mewo rk, and i ncl ude s pe ci c doc ume nts rel ating to nancial crime compliance (e. g. anti- money lau nde ri ng / a nti-b ri ber y and c or rupti on) an d whistleblowing . • Group Risk and Compliance Commit tee • Model Go vernance Committee • Capital A dequacy Committee • Asset and Liability Committee • Credit Risk Management Committee • Group Credit Committee • Impairment Adequacy Committee • Operations and T e chnology Risk Committee • Di vis io nal R is k and C om pli anc e Committees Gr ou p Boa r d Board Risk Commit tee Risk -Specic Commit tees Divisional Committees Executive Committees Risk Committee Structure Risk Committee Ov er view Gr ou p R is k a nd C om p li an c e Commit tee Provid es ove rs igh t of the gro up’ s r is k prol e, alig nm ent to ri sk ap peti te and ef fe cti ven es s of the risk management and compliance framework. Model Go vernance Committee Provid es ove rs ight of th e gro up’ s ex po sure to mod el r isk th roug h the rev iew , a pp roval an d monitoring of all high ma teriality models. Capital Adequacy Co mmit tee Monitors group and bank capital adequacy , inco rporating capital planning, st ress t e sting , gov ernance, processes and cont rols. Asset and Liabilit y Committee Provid es ove rs igh t of ris k ma nag em ent a nd in tern al co ntrol fo r the ba nk a nd it s sub sid iar ie s across liquidity , funding and marke t risk. Credit Risk Management Commit tee Mon itor s the gro up’ s cre dit r is k prol e, exami nin g cur re nt pe r for ma nce a nd key po r t foli o trends , ensuring compliance with risk appet ite . Group Credit Committee Reviews material credit tr ansactions and exposures from a cr edit, reputat ional, funding structur e and business risk perspective . Impairment Adequa cy C ommittee G over ns the ba nk’s impai rme nt pro ce ss, rev iewi ng the na nci al po siti on rel ating to im pair me nt and e ns uri ng ad equ ate cover age i s he ld acro ss th e por tfo lio. Operations and T echnology Risk Committee Monitors and oversees group- wide operational r esilience, including technology , security , supplier and operat ional risk appetit e, e xamining industr y , regulat or y and t echnical risks. Divisional Risk and Compliance Commit tees Provid e over si ght of r isk p role, al ign me nt to ris k app etite a nd ef fe cti ven es s of the ri sk management and compliance framew ork at a divisional or business level . Risk Repor t cont inue d Book 1.indb 76 27/09/2022 23:46:17 77 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report This structure establishes a link between grou p strate gy an d day-to-day op er ation s in a ma nne r co nsi stent wi th agre ed r is k appetite , while simultaneously facilitating boa rd an d execu tive -l evel ove rs igh t and ass ura nc e as to the ap pli catio n of sa id stra tegy via con formance wit h underlying pol icy and s tan dard re qui reme nts. Review of Ef fect iveness of Risk Management and Internal Control Syst ems Th roug hou t the ye ar , the b oard, a ssi sted by the Risk Commit tee and the Audit Committee , mon itors th e grou p’ s r is k man age me nt an d inter nal c ontrol sy stems a nd revi ews the ir effectiveness. This covers all material con trols , inc lud ing nan cia l, ope ratio na l and c omp lia nc e contro ls. T he bo ard al so revi ews the ef fec tive nes s of both co mmi t tees o n an an nua l basis. Based on its assessment throughout the ye ar , and i ts revi ew of the co mmi t tees’ ef fe ctive ne ss, the b oa rd con sid er s that, overa ll, the gro up ha s in pl ace a deq uate system s an d con trols w ith reg ard to its p role a nd stra tegy . Risk Culture and Aw areness Mai ntena nce of a n ef fe cti ve ris k man age me nt cul ture is i ntegr al to the gro up m eeti ng its regulat or y conduct requirements and assisting the ac com pli sh men t of key strateg ic go als. Th e ris k cu ltur e: • suppor ts the gr oup and its dir e ctors in me etin g thei r le gal a nd re gul ator y obl igati ons, pa r tic ula rly w ith re spe ct to the ide nti catio n an d man age me nt of ri sks a nd the ne ed fo r a robu st co ntrol e nviro nm ent; • und er pin s the gro up’ s pur po se, strate gy , cultural a ttributes and divisional values; • prov ide s en ha nc ed awa ren es s of ris k in business operations by highlighting stren gths a nd we ak ne sse s an d thei r mater ial it y to the bus ine ss a nd, in tur n, facilitating informed decision-making ; • opt imises business per formance b y facilitating challenge o f inef fective controls and i mprov ing th e al loc atio n of reso urce s; • ens ure s all oca tion of c api ta l for op erati ona l risk is pr opor tionate for the risk s identied ; • imp roves th e grou p’ s c ontro l env iron men t; and • as sist s in the p lan nin g and p ri ori tis ation of ke y projects and initiatives . Whi le r isk m ana ge men t is le d by the c entre, it is e mb edd ed l oca ll y with in ou r bus ine ss es. Managers activ ely promo te a culture in which ris ks are i de nti ed, as se sse d, man age d and re po r ted in a n ope n, tran spa rent a nd objective manne r , and where appropriate staf f c ond uct i s viewe d as c riti ca l. Al l mem be rs of st af f a re res pon sib le for risk identicat ion and reporting within their are a of res pon sib ili ty a nd a re en cou rag ed to esc ala te risk s and c on ce rns w he re necessar y , either t hrough line or business ma nag em ent o r by foll owin g the p rovis io ns of t he Group Whistleblowing Policy . Grou p Ris k Man age me nt ope rates independently of the business, pro v iding over sig ht an d adv ic e on the o pe ratio n of the ri sk fr amewo rk, a nd as sur anc e that agreed pr ocesses operat e effectively and th at a ri sk an d con duc t cul ture i s embedded within the business. Th e relati ons hip b et wee n ris k and rewa rd is al so a key pr ior it y wi th all s taf f eva lua ted against bot h agreed objectives ( the what) and d es ire d beh avi our s (the how). Thi s encourages long-t erm, ste wardship be havi our s togeth er wi th a stron g and appropriat e risk and conduct culture. For fu r th er in form ation o n ou r app roac h to remu ne ratio n for the g roup’ s dire ctor s see pag es1 23 to 1 43. Group Standards Divisional / Business- Level Policies Proc edur es Group Policies ERMF Group Business Gr ou p Po li cy Fr am ewo rk Open escalation channels Escalation of ris ks and concerns encouraged; individual accountabilit y Independent second line Providi ng overs ight, advice and assurance Locally embedded Risks managed in an open, transpar ent and objective manner Risk / Rew ard Regular evalua tions encourage long- te r m, s te wa r ds h i p behaviours Risk Culture Risk Culture Book 1.indb 77 27/09/2022 23:46:17 78 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Princ ipa l Risks Th e foll owin g pag es se t out th e pr inc ipa l ris ks that m ay impa ct the g roup’ s ab ili ty to deli ver i ts strate gy , the f ra mewor ks in pla ce to mitig ate them, a nd rel evant key deve lop me nts, both ove r the la st ye ar a nd anti cipa ted for the n ex t na nc ial ye ar . Whi le we co nst antly m oni tor our p or t fol io for em erg ing r is ks, the gro up’ s acti vi ties, business model and strat egy remain unc ha nge d. As a res ult, the p rin cip al ri sks that the g roup f ace s an d our a ppro ach to miti gating th em re mai n broad ly co nsis tent with prior y ea rs. This consist ency has und er pin ne d the gro up’ s tr ack re co rd of tradi ng su cc es sfu lly a nd s upp or ti ng ou r cli ent s over m any ye ar s. Th is sh ould n ot be re gard ed a s a com ple te and c omp reh ens ive state men t of all p otential ris ks fac ed by th e grou p but re e cts tho se whi ch th e grou p cur rentl y be lieve s may h ave a signicant impact on its futur e performance. Business risk Bus ine s s ris k is de ne d as th e ris k of rea lisi ng lowe r tha n antic ipated p rots o r exp er ien cin g a los s rath er tha n a pro t. Exposure Th e grou p ope rates i n an env iron me nt wh ere it is ex po sed to a n ar ray of in dep en de nt factors . Its pr otabilit y is impact ed by t he broad er U K ec ono mic c limate, cha ng es in tech nol og y , reg ulati on an d cus tomer behaviour , cost mo vements and compet ition fro m tradi tion al a nd ne w playe rs, va r yi ng in both natu re an d ex tent ac ross i ts di vis ion s. Cha nge s in the se f actors m ay af fec t the ban k’ s a bil it y to wri te loan s at its d esi red ris k and re turn c ri teri a, resu lt in l ower ne w business volumes in Asset Management, imp act l evels of tr adin g acti vi t y at Wint er ood or result in additional inv e stment requ ire men ts and h igh er c osts of o per ation. Risk appet ite Th e grou p se eks to add re ss bu sin es s ri sk throu gh the exe cuti on of a s usta ina bl e business model based on: • focu sin g on s pe cia lis t mar kets wh ere we ca n bui ld le adi ng ma rket p osi tion s bas ed on se r v ice, ex per tise a nd rel atio nsh ips; • focu sin g on qu ali t y and retu rns r athe r than ove ra ll lo an bo ok grow th or marke t share ; • inve sting i n the bu si nes s for th e lon g term; • mai nta ini ng a stro ng ba lan ce s he et; • consist ently supporting our cust omers and client s through t he cycle ; and • acting sustainably and responsibly , con sid er ing th e ne ed s of all st akeh old er groups and increasing demand for sustainable product s and ser vices. Measurement Business risk is measured through a number of k ey per formance met ric s (including t hose set ou t on p age 33) a nd r isk i ndi cator s at a business, divisional and group level which provi de tra ns pare ncy o n pro gres s an d ex e cution against strat e gy . These indicat ors are t yp ic all y rep or ted mo nthl y vi a releva nt ris k an d na nc e com mi tte es, w ith over si ght als o exerci sed v ia th e boa rd, mos t nota bly throu gh the ir revi ew of key na nci al metr ic s and underlying performance trends . Alongside these measur es, t he status of ke y grou p ini tiati ves a nd pro je cts is a lso tra cked and discussed, noting the impor tance o f thei r suc ce ss ful d eli ver y to the group’ s strat e gic traject or y . Mitigation T o s upp or t the m an age me nt of its c ore st ra teg y, an d h el p m i ti ga te p ote nt ia l b u s in e s s Princ ipal Ris k Chan ge/Outlook Business Risk Th e ris k of rea lis ing l ower tha n anti cip ated pro ts or ex pe rie nc ing a los s rathe r tha n a prot. Capital Risk The risk tha t the group has insufcient regulat or y capital (including equ it y an d othe r los s ab sor bin g de bt instr um ents) to ope rate effectively , including meeting minimum regulat or y requirements , operating within boar d approved risk appetit e and suppor ting it s strat e gic goals. Conduct Risk Th e ris k that the g roup’ s be hav iou rs, or th ose of i ts col le agu es, whether in tent ional or unintent ional, result in poor outcomes f or cus tomer s or the m ar kets in wh ich i t op erates. I t is rooted i n the impor tance o f delivering good customer out comes at every stage of the customer journey . Credit Risk Th e ris k of a red ucti on in e ar ni ngs a nd / or va lue d ue to the fa ilu re of a cou nterp ar t y o r ass oci ated pa r t y , with w ho m the gro up ha s con tracte d or is ex pos ed a s par t of its op erati ons, to me et its o bli gati ons i n a time ly manner . Funding and Liquidity Risk Fundi ng r isk i s the ri sk of lo ss c aus ed by th e ina bil it y to rais e fu nds atan ac ce ptab le p ric e or to acc es s ma rkets i n a time ly ma nn er . Liq uid it y ri sk is d en ed as th e ri sk that l iab ili tie s ca nnot b e met w hen they fa ll du e or ca n on ly be m et at an u ne con om ic pr ice. Market Risk Th e ris k that a ch an ge in th e valu e of an u nde rl yi ng ma rket var ia ble w ill give r is e to an adve rs e movem ent i n the va lue of th e grou p’ s a sse ts. T o s upp or t th e man age me nt of ma rket r isk, th e grou p dis ting uis he s bet we en trad ed m ar ket ris k and n on-trad ed m ar ket ris k, as se t out i n the se cti ons that fo llow. Tr a d e d Market Risk Non- T raded Market Risk Operational Risk Th e ris k of los s or ad ve rse i mpa ct res ult ing f rom in ade qu ate or fai ledi nter nal p roc es se s, pe opl e and sy stem s or fro m ex ter nal eve nts. Th is inc lud es th e ri sk of lo ss re sul ting f rom f rau d/ na nci al cr im e, cybe r att acks a nd in form ation s ecu ri ty b rea che s. Reputational Risk Th e ris k of detr ime nt to sta keho lde r pe rce ption of th e rm, le ad ing to imp air me nt of the bu si nes s an d its f uture g oa ls, du e to any acti on or ina ctio n of the co mpa ny , its e mpl oyee s or a sso ciate d third pa r ti es. Key : No change Risk decreased Risk increased Pr in ci p al R is ks a n d Di r ec t io n of O u t lo ok Risk Repor t cont inue d Note : While dened be net pension obligation risk , intra group ri sk and tax risk are also classied internally as principal ris ks, none are d e em ed s uf ci en tl y mate r ia l to imp ac t th e gro up’s abi li t y to de li ver i ts s tra teg y. The g rou p’s den ed b en e t pe ns io n sc he me wa s cl os ed to n ew e ntr ant s in 199 6 an d to fu tu re ac cr u al in 2 01 2. Fo r fu r th er i nfo rm ati on s e e Note 25 o n pag e s 18 7 a nd 188. Book 1.indb 78 27/09/2022 23:46:17 79 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report ris k, the g roup m aint ain s a com pre he nsi ve fra mewo rk cove ri ng both th e des ig n and app roval of s trateg y , an d the on goi ng monitoring of its implementat ion. Th e grou p’ s c ore str ategi c pil lar s are regu lar ly rev iewe d and u pdated to en sure we conti nue to foc us on s trategi c pr ior itie s that su ppo r t ou r bus ine ss m ode l an d ada pt to chan ge s an d exp ect ation s in the ex te rna l operating environment . Th e grou p’ s lo ng tra ck re cord of s ucc es sf ul growth and pr otabilit y is supported b y a con sis tent a nd di sci pli ned a pp roac h to pricing and cr edit qualit y , both in competitive mar kets an d throu gh p er iod s of hei ghten ed ris k. Th is al lows th e grou p to contin ue to supp or t cu stome rs at a ll st age s in the nancial cy cle. We also build and maintain long- term rela tions hip s with o ur cl ie nts and int ermediarie s based on : • sp ee d and exib ili t y of se r vi ce s; • our local presence and personal approach ; • the ex pe rie nc e an d exp er ti se of ou r people; and • our of feri ng of ta ilo red a nd cli ent-dr ive n product solut ions. Thi s dif ferenti ated an d con siste nt app roac h resu lts in s trong c ustome r rel ation shi ps an d high lev els of repeat business. Th e grou p is f ur th er p rotected by th e diversity of our businesses and pr oduct por tfolio, wh ich pro vide s resilience against com peti tive p res sure o r ma rket wea k nes s in any on e of the se ctor s we ope rate in. Monitoring On an ongoing basis, st rategy is f ormulated and managed a t an individual business le vel through local Executive Committees with top-do wn oversight maintained through the Group Ex ecutive Commit tee . Outputs also fee d into the gro up’ s a nn ual b udg eting a nd planning process which t ypically operat e s on a thre e-yea r time h or izon. Th e grou p’ s bud get a nd pl an is s ubj ect to revi ew an d challenge, initially a t a business level , and subsequent ly b y the group ’ s Execut ive Com mit te e ahe ad of n al su bm iss ion to the boa rd who rev iew , cha lle ng e and a gree th e grou p’ s b udg et for th e foll owin gyea r . Th e ong oin g strate gic p la nni ng pro ce ss i s supplemented by an annual board st rategy day , wh ich t akes a th emati c app roac h to the review a nd c hal le nge of g roup a nd bu sin es s- leve l strate gic p rio ri tie s. In add itio n, a de ep di ve on str ategy fo r ea ch bu sin es s is p res ented to the bo ard fo r disc us sio n on a bi en nia l ba sis. New gr owth initiat ives and pot ential acquisitions are as sessed against both the gro up’ s strateg ic o bje ctive s an d Mod el Fit A sse ss me nt Framewo rk, to en sure con sis tency w ith the g roup’ s str ategi c pri ori tie s and th e key attr ibu tes of its b usi ne ss mo de l. Capital and liquidity adequacy planning con duc ted as p ar t of b oth the an nua l ICA A and I L A A proc es se s is al so us ed to as se ss the re sili en ce of the g roup’ s cu rre nt strate gy and b usi ne ss m ode l in the eve nt of di f fe rent stress scenarios. Although not intrinsically lin ked, outp uts an d an aly sis f rom both ex e rcises are use d t o guide strat egic planning. T he an n ua l r i s k a pp e ti te st ate m e nt rev i ew als o ens ures th at ris k ap petite, and sup por ting key ri sk in dic ators, is f ull y al ign ed with th e na nci al a nd strate gic pl an. Agre ed appetit e is communicat ed throughout the grou p throu gh the rev iew an d ap proval of div isi ona l ri sk ap peti te stateme nts an d business-level key risk indicat ors. The group also conducts monitoring focused on the ex te rn al e nviro nme nt (fo r exam ple, ke y mark et indices, growth of sustainable products and ser vices) . Within credit risk, all of th e ban ki ng bu sin es se s mon itor agre ed ex te rna l ea rl y war nin g ind ic ators (for example , movement in housing indices) wit h a view to su ppo r tin g the ea rl y ide nti cati on of ne gative tre nd s, and e nha nc ing th e grou p’ s ability to respond appropriately , minimising pot e ntial impact on per formance. In addit ion t o business-level monitoring, em ergi ng r isks a re al so mo nitore d and de bated o n an on goi ng ba sis at a ll l evels of the gro up a nd acro ss a ll fu nc tions. T he se include dev e lopments in areas concerning technology , regulat ion and sustainability , whi ch have th e potentia l to pres ent b oth opportunities and thr eats. Within the risk function specically , reporting capabilities continue to be enhanced t o fur ther support the gro up’ s a bi lit y to ide ntif y , a nd mo re importantly , respond effectively , t o changes in the ex te rna l env iro nme nt an d in cu stome r be havi our s with a v iew to miti gatin g any pot ential impact on business performance. Change/Outlook Notwithstanding the continued uncertain macroeconomic envir o nment our business mod el a s outl ine d on pa ge s 1 0 to 1 3 rema ins p roven a nd re sil ien t. W e con tinu e to focus o n su ppo r tin g our c ustom er s, maintaining underwriting standards and investing in our business. As the p res sure s res ulti ng fro m Covi d- 1 9 have rec ed ed the se h ave bee n rep lac ed with o ther macroeconomic and geopolit ical tensions. Accordingly , the group r e mains pre pare d for a r ang e of di f fere nt e con om ic and b usi ne ss s cen ar ios to e nsu re it ha s the r e sources and operational capability to conti nue to pe r for m ef fec tive ly thro ugh th is period of uncer tainty . For f ur th er d etai ls on e me rgi ng r isks and u nc er t ain tie s see p age s 9 0 to 92 . In addit ion, further commentary on the mark et en vironmen t and its imp act o n eac h of ou r div is ion s is ou tlin ed on p age s 65 t o 73 . Capital risk Cap ita l ris k is the r isk th at the gro up ha s insufcie nt regula tory capital (including equity and oth er l oss-a bso rb ing d ebt in str ume nts) to ope rat e ef fectively , including meeting minimum regulat or y requirements , operating within boar d-approv ed risk appetit e and suppor ting it s strategic goals . Exposure Th e grou p’ s ex po sure to ca pi tal r is k pri nci pal ly a ris es f rom its re qu irem ent to meet minimum r e gulat or y requirement s set out i n the Ca pita l Re qui reme nts D irec tive and from related a dditional r e quirements and guidelines specied by t he Prudential Reg ulati on Auth or it y (“PR A ”), and is u sua ll y spe ci e d in ter ms of mi nim um ca pi tal r atios whi ch as se ss th e level of re gu lator y c api tal and r isk we ig hted ass ets. Book 1.indb 79 27/09/2022 23:46:18 80 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Risk appet ite Th e grou p loo ks to mai nta in a stro ng ba se leve l and c om pos iti on of ca pi tal, su f cie nt to: • support the dev elopme nt and grow th o f business; • conti nue to me et Pill ar 1 req uire me nts, Individual Capital Guidance , additional Capital Requirement s Directiv e buf fers and leverage ratio require ments; a nd • be a ble to wi thsta nd a se vere bu t pl aus ibl e stress scenario with satisfact or y capital and l ever age r atios. A pru de nt ca pi tal p osi tion i s a core p ar t of the gro up’ s bus ine ss m ode l, all owin g it to grow an d inve st in th e bus ine ss, s upp or t paying dividends to shareholders and meet regulat or y requirements. Cap ita l trig ge rs a nd li mits a re ma inta ine d within the ri sk appet ite frame work and are app roved by th e boa rd at le ast a nn ual ly . Measurement Cap ita l ri sk is m ea sur ed us ing C E T 1 , T ie r 1 and tota l ca pit al rati os, an d leve rag e ratio s, det ermined in line wit h regulato r y capital ade qua cy req uire me nts. Th es e ratios, a nd ass oc iated metr ic s, are ac tive ly mo nitore d, and reported quarterly to the regulat or . They are also disclose d annually in the group ’ s Pilla r 3 dis clo sure s as we ll as i n the An nua l Re por t – see p age s1 8 4 to 1 8 6. Mitigation Th e grou p reta ins a ra ng e of ca pit al ri sk miti ga nts, the mo st nota bl e be ing i ts stron g ca pit al ge ne rati ng ca pac it y , as ev id en ce d by its track rec ord o f sustained protability . It als o mai nta ins ac ce ss to ca pi tal m ar kets an d in rec ent ye ar s has s ucc es sf ull y rene wed and i nc rea sed i ts Ti er 2 c ap ita l ins tru me nts. Monitoring Both actual and f orecast capital adequacy is rep or ted th roug h the gro up’ s gover na nce fra mewo rk wi th over sig ht fro m the Ca pi tal Adequacy Committee (“CA C”). Annually , as par t of the ICA A P , the gro up a lso un de r ta kes its o wn assessment of it s capital requirement s aga ins t its pr inc ipa l ri sks (Pi lla r2a) togeth er with a n as se ss me nt of how ca pi tal a deq uac y cou ld be i mpa cted in a r ang e of stre ss sce na ri os (Pi lla r 2b) . Un de r both as se ss me nts, the gro up en sure s that i t mai ntai ns su f ci ent leve ls of ca pi tal a de qua cy . Th e grou p’ s n an ce tea m is res pon sib le for measuring and monitoring t he capital pos itio n and re po r ting to the b oard o n a regu la r bas is, wi th any ch an ges to the c ap ita l stru ctu re of the gro up re ser ved for the C BG Boa rd. On a m onth ly ba sis, th e grou p’ s l atest and for e cast capital posit ions are reported to the CAC , w hose m em be rsh ip co nsi sts of na nc e, bus ine ss a nd r isk exe cu tive s and senior management . The committee als o mon itors ac tual, fore ca st an d stre sse d ca pit al metr ic s und er a n Inter na l Ratin gs In add itio n, a num ber of q ua ntita tive an d qua lit ative key ris k ind ic ators are d eter mine d at an in div idu al b usi nes s leve l, with re por ting to and over si ght v ia the re leva nt di vis io nal R isk and Compliance Committ e e. Per formance aga inst th e key ris k indi cators i s repo r ted to the Gr oup Risk and Compliance Committee and th e Boa rd Ri sk Co mm it tee as n ee de d. Mitigation Th e foll owin g co ntrols a nd p roce du res a re in place t o help mitigat e conduct risk: • Th e grou p ta kes step s to proac tivel y identify conduct risks and e ncourages individuals across the or ganisation to feel res pon sib le for m ana gin g the co ndu ct of their business and/ or function. • The group pr ovides suppor t t o colleagues to ena ble th em to imp rove the c ond uct of their business or function, including training and s pe cia lis t train ing w he re requ ire d. • The group ’ s remunerat ion strat egy is de sig ne d to ince ntiv is e goo d be havi our s and due considera tion is given to indiv idual conduct as part of any remuneration . • P olicies and standards set out employee expectations around key areas including dealing with clients, dealing with marke ts, complaint handling , vulnerable customers , and c oni cts of inte rest. Ma ndator y staf f trai nin g on the se topi cs i s provi de d on a regular basis. • All product s are subject t o a robust risk -based product development and revie w proc es s. Monitoring Risk identica tion and manage ment action are u nde r t aken by m an age me nt a nd emp loye es a s the r st li ne of defe nc e. Ris k and compliance pr ovide support, re view and cha lle ng e, to ensure c ond uct r is k repo r tin g is robu st an d rem ain s t for p urp ose. C omp lia nc e monitoring under take regular reviews o f key are as, su ch a s com pl aint h an dli ng an d vulnerable customer processes to conrm cus tome rs a re exp er ie nc ing g ood o utco me s. Group int ernal audit provide inde pendent ass ura nc e on the c ontro l ef fe ctive ne ss of key are as us ing a r is k -b ase d ap proa ch. All Risk and Compliance Committees are requ ired to revi ew con duc t ris k rep or tin g and outp uts a nd co nsi der a ny req uire d acti on. Where appropria te, issue s ma y be escala ted to both the Gro up R isk a nd Co mpl ia nce Committee and the Boar d Risk Committ e e. Ove r the pa st 1 8 mo nths, c ond uct r is k repo r tin g ha s bee n e nha nce d in s ome of o ur businesses to provide increased transpar ency and v is ibi lit y to mo nitor c ond uc t ris k. Repor ting on , and monit oring of , conduct ris k is ex pe cted to fu r the r evol ve with th e introduct ion of new regulatory requirements for t he Financial Conduct Auth ority’ s (“FC A ”) Con sum er D ut y for re tai l custom er s for ou r in- sco pe bu sin es se s of Motor Fi nan ce, Prem ium Finance, As set Finance and Savings. Bas ed a ppro ach i n ord er to pre par e for anticipat ed future t ransition t o this approach. Change/Outlook Continuing economic uncer tainty may imp act c api tal i n the s hor t to me diu m term d ue to lower th an ex pe cted p rots. RWA densi t y is exp ec ted gr adu all y to increase as Corono virus Business Int erruption Loans (“CBIL S”) are ren anc ed. Ca pit al is ex pe cted to be adve rs el y impa cted a s IFRS9 tr ans itio na l effects reduce . The group ’ s capital requ ire ments a re fore ca st to incre as e by 1 .4 pe rce nta ge po ints a s UK an d Irish co unt ercyclical capital buffers are intr oduced. These fact ors are e mbedded in the group’ s capital planning process and d ista nc e to risk a ppe tite rema ins substantial. Conduct risk Con duc t ris k is the r isk th at the gro up’ s be havi our s, or tho se of it s col lea gu es, wh ethe r int entional or uninten tional, result in poor outco me s for cu stome rs o r the ma rkets i n whi ch it o pe rates. It is ro oted in th e imp or ta nc e of deliv ering good customer outcomes at every stag e of the c ustome r jo urn ey . Exposure Th e grou p is ex pos ed to co ndu ct r isk i n its pr ovis ion of p rod ucts a nd s er vic es to customers and through other busine ss acti viti es th at ena bl e del ive r y . T he gro up fac es a si gni c ant vo lum e of regu lator y cha ng e, whi ch is expe cte d to conti nu e over the ne ar ter m, aim ed at e nh anc ing c ons ume r protec tion a nd m aint ain ing m ar ket integ ri t y given the current economic conditions. Failure to deliver good customer out comes may le ad to repu tatio na l har m, le gal o r regulat or y sanctions or cust omer redress. Risk appet ite Th e grou p rec ogn ise s the im por tanc e of delivering good cust omer outcomes and see ks to avoid c ustom er d etrim ent re su ltin g from inappr opriate judgement s or beha viours in the exe cuti on of ou r bus in es s acti viti es. T o sup por t this, it s trive s to mai nta in a cul ture whi ch pl ac es the c ustom er at th e hea r t of the bu sin es s mod el a nd rem ain s de dic ated to addressing customer dissat isfaction or detr ime nt in a ti mel y an d fair m an ne r . Th e grou p is co mmi t ted to main tai ning th e integ rit y of th e mar kets in w hic h it op erate s, avoid ing a ny ab usi ve or a nti-c omp etiti ve behaviour . Measurement Con duc t ri sk is m ea sure d throu gh a nu mb er of bus ine ss a ctiv iti es w hic h form p ar t of th e Con duc t Ris k Framewo rk. T he se ac tiv itie s spa n seve n are as w he re ha rm c oul d occ ur , be it in tent ional or unintent ional. Risk Repor t cont inue d Book 1.indb 80 27/09/2022 23:46:18 81 Cl os e B ro t he r s G ro u p pl c An nua l Re po r t 202 2 Gov er nance R eport Financial Statements Strategic Report Change/Outlook Con duc t ri sk ha s inc rea se d in the l ast 1 2mont hs. The economic envir onment is increasing pressure on consumers as result o f the hig he r cos t of liv ing. T his m ay wid en th e number of individuals and businesses req uir ing c red it in a n env iron me nt of ris ing intere st ra tes. As a re sul t, supp or t fo r customers in na ncial difcult y , including vul ne rab le cu stome rs, i s expe cted to inc rea se. Th is co me s at a tim e whe n the FCA ha s outl ine d new re qu irem en ts under Consumer Duty , which int roduces Pri nci ple 1 2 a nd re qui res r ms to act to deli ver g ood o utcom es fo r reta il cus tomer s. It set s a hig her s tan da rd than the exi stin g Pri nci ple 6 (a r m mus t pay due re ga rd to the inter ests of i ts cus tome rs and tr eat th em fa ir ly) an d Pri nci ple 7 (a r m mus t pay du e reg ard to the info rm atio n ne eds of i ts cli ents a nd c omm uni cate infor mati on to the m in a way wh ich i s cle ar , fa ir an d not mi sle ad ing) for ret ail businesses. Implementa tion activities for Con sum er D ut y a re und er way a nd w ill be in cor po rated in to the Con duc t Ri sk Frame work. In t he meantime, the group is foc use d on ta ilo ri ng its a ppr oac h to supporting customers to dr ive good cust ome r out comes. Cr edi t ri sk Cre dit r isk i s de ned a s the r isk of a red ucti on in e ar nin gs a nd / o r valu e due to the fai lure of a c ounte rpa r t y or a ss oci ated pa r t y , with w ho m the gro up ha s co ntrac ted or is expo se d as pa r t of its o per atio ns, to meet i ts obligation s in a timely manne r . Exposure Cre dit r isk a cros s the g roup a ri ses predominantly through the lending activities of the ba nk. A s a len de r to busi nes se s an d ind iv idu als, th e ban k is exp ose d to cred it los se s if cu stome rs a re una bl e to repay lo ans and o utst an ding i ntere st an d fee s. At 3 1 Jul y 2022 the gro up ha d loa ns an d adva nc es to customers amounting t o £9 . 1 billion. Th e grou p als o has ex po sure to counterparties with which it places deposits or trad es, a nd a lso ha s in p lac e a sma ll num be r of der ivat ive co ntrac ts to hed ge intere st ra te and fore ig n exchan ge ex pos ure s. Fur the r det ail s on lo ans a nd ad van ce s to cus tomer s an d de bt sec ur itie s he ld ar e in notes 1 1 an d 1 2 o n pag es 1 72 t o 1 76 of the nancial sta tement s. Further commentary on the cr edi t qua li ty of o ur lo an bo ok is o utl ine d on pa ges 195 to 2 0 2 . Risk appetite Th e grou p se eks to mai nta in the d isc ipl ine of its le nd ing c rite ria b oth to pres er ve its bus ine ss m ode l an d ma inta in an a cce pta ble return that appropriat ely balances risk and reward. T his i s und er pin ne d by a strong cus tomer fo cu s and c red it cu lture t hat extends across people , structures , policies and p ri nci ple s. Th is in tu rn p rovid es a n environment for long- term sustainable growth and lo w , predictable loan losses. T o support this approach , the group mai nta ins a c redi t ri sk ap peti te fra mewor k in orde r to den e an d ali gn cre di t ris k strate gy with i ts over all a ppe tite for ri sk a nd bu sin es s strate gie s as d ene d by the b oard. Th e grou p Cre dit R isk A pp etite St ateme nt (“CR AS”) o utl ine s the s pe ci c level of cre dit r isk t hat the g roup i s wil lin g to assume, utilising dened quantitat ive lim its an d tri gge rs, a nd cove rs b oth cre dit concentration and port folio per formance measures. Al l are ba sed o n the fo llow ing key pr inc ip les: 1 . T o l en d with in as set c la sse s we are fam ili ar wi th, and i n ma rkets we k now an d understa nd. 2. T o o pe rate as a pr edo min antl y se cure d, or structurally prot e cted, l ender against ide nti ab le an d acc es si ble a sse ts, and maintain conser vativ e loan t o values (“L T Vs ”) across our port folios. 3. T o m ai ntai n a dive rs ie d lo an po r t foli o (by business, asse t class and ge ography ) , as wel l as a s hor t ave rag e teno r and l ow average loan size . 4. T o r ely o n lo cal u nd er w ri ting ex pe r tis e, with d el eg ated au thor it y c asc ade d fro m the ch ief r is k of ce r , wit h ong oin g ce ntral ov ersight. 5. T o m ai ntai n rig oro us an d time ly c oll ec tion s and a rrears management processes . 6. T o o pe rate stron g co ntrol a nd gove rn anc e within our lending businesses overseen by a ce ntral g rou p cred it r isk te am. Ultimat e responsibility for t h e appro val and gover na nce of th e Gro up CR AS l ie s wit h the boar d, on r e commendation f rom t he Group Risk and Compliance Committee (“GRCC ”) , with support from the Credit Risk Management Committee ( “CRMC”) . Performance is monit ored against agreed app etite s on a mo nthl y bas is. Th e CR AS is e mb edd ed i nto busi ne ss un it cre dit r isk m an age me nt thro ugh a h ie rarc hy of loc al tr ig ger s an d lim its, wh ich a re ap proved by the CR MC (or the c hie f cre dit r isk of ce r de pen din g on ma teri ali t y) and i ncl ude form al c ap s and tr ig ger s ag ain st wh ich per formance is similarly monitor ed monthly via local Risk and C ompliance Committees (“RC Cs”). Materi al bre ac he s are e sca lated v ia established gov e rnance channels. Conduct Risk Frame work Conduct Risk F rame w ork Gov erna nce Prod uct Customer / Client Culture & Behaviour Business Process External Risk Infrastructu re PPI PPI JOB: 18_Risk Repor t _7 4 -92 PRO OF RE AD BY: OPERATOR: r o b PRO OF: Se tU p SE T- U P : r o b EDIT DA TE: 2 9 Sep tem be r 2022 1:45 PM FIRST READ/REVISIONS 18_Risk Report_74-92.indd 81 18_Risk Report_74-92.indd 81 29/09/2022 13:45:47 29/09/2022 13:45:47 82 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Whi lst d ive rse, o ur bu sin es se s adh ere to a set o f common lending principles r e sulting in stable port folio credit quality and consist e ntly low lo ss rates th roug h the cyc le. The bank’ s common lending principles are as follo ws: 1 . Predominantly se cured lender: 97 . 7% of loan bo ok s ecu red o r structurally pro tected. 2 . Short average tenor: por t folio r esidual matur it y of 1 7 m onths. 3. Low ave rage l oa n size: ap proxim ately 42% of loa n boo k ha s a valu e of le ss tha n £50 k. 4 . Diversied por tfolio : by sect or , asset class and UK geogr aphy . Low single-name con ce ntratio n ris k with th e top 1 0 fa cili tie s repre se ntin g les s tha n 5 % of b ook. 5. L ocal underwriting e x pertise with central over sig ht: focu s on as sets “ we kn ow an d understand” , with cont inued investmen ts in pe op le an d system s. We see k to mini mis e our ex po sure to cre di t losses by applying these strict lending crit e ria whe n testi ng the c red it qu ali ty a nd c ovena nt of t h e borro wer and main taining consist ent and c ons er vative loa n to value r atios w ith l ow avera ge l oan s ize a nd sh or t-term ten ors. A ll lending criteria and assessment procedures are t horoughly documented in robust credit pol ici es a nd st and ard s, at both a ba nk an d business lev el. Exp erti se We also employ credit risk staf f across our var iou s bus ine ss es w ho a re sp eci al ists in thei r are a an d ca n sup por t book g row th in a man ne r that is c ons istent w ith both r isk strat e gy and appet ite. This local distribution all ows us to form s trong re latio nsh ips w ith our c ustom er s an d inter me dia ri es b ase d on a de ep un de rst and ing of th eir n ee ds a nd the mar kets in wh ich th ey ope rate. Con siste nt under writing disciplines and lending against ass ets that we k now a nd un de rst and benets customers through the cycle and all ows us to mai nta in ou r track re co rd of strong margins and protability . Gove rn an ce f r am ewor k an d over s ig ht Ou r len din g is un de rp inn ed by a s trong con trol an d gover na nc e fra mewor k both within our le nding businesses and t hrough over sig ht vi a a ce ntra l gro up cre di t ri sk tea m. Credit underwriting is under taken eit her centrally or through regional of ce networks , de pen din g on the n ature of the b usi ne ss a nd the si ze and c omp lex it y of the tra ns acti on. Underw riting authority is delega ted from the Bo ard R isk C omm it tee, with l en din g businesses approving lower -risk exposures locally subject t o compliance with credit pol icy a nd ri sk a ppeti te. Loc al ri sk di rec tors as sure q ua lit y of under writing decisions for all facilities within the business ’ s delegat e d sancti oning auth or it y leve l vi a a qua lit y a ssu ra nce programme which sample s new business und er w ri t ten, with a p ar ti cul ar fo cus o n lending hotspo ts; f or example, long-tenor agreements , new asset classe s, or high L T Vs . Ou tputs a re rep or ted at l ea st quarterly with consolida ted summaries pre sen ted at CRM C. These u nderwriting appro aches ar e rein force d by time ly c oll ec tions a nd a rre ar s man age me nt, work in g in co nju nc tion w ith the cu stome r to ensu re the be st po ss ible outco me for b oth cus tome r and th e grou p. Th e loc al m od el is s up por ted by cen tral over sig ht an d co ntrol. A n ind ep end en t ce ntra l cre dit r is k fun ctio n prov id es o ngo ing monitoring of mat erial credit risks through regular re views of appe tite and policy . CR AS metr ic s are c lose ly a lig ned w ith th e bank’ s overall st rategy to facilita te monitoring of the co mp osi tion a nd q ual it y of new len din g to ensu re it rem ain s with in de ne d appetit e. Measurement Consistent , accurat e and consolidat e d Credit Risk Management Information (“CRMI”) repr ese nts a key tool for e f fec tive c redi t ris k management and measurement. CRMI facilitat es the identicat ion, measurement , mon itor ing a nd co ntrol of a ll m ateri al c redi t risks within the lending por tfolios, se tting cle ar c red it ri sk ap peti te withi n whi ch a ll lending is originat ed and ensures that as set po r t foli os a re grown re sp ons ibl y an d prot abl y . A ce ntral re po sitor y f aci lita tes: • the us e of co mmo n data d en itio ns for CRMI across all business units ; • con sis tent an d co ntroll ed ex tr acti on an d hou sin g of cre dit d ata f rom the b ank ’ s core business syst ems; • dynamic credit ri sk management to improv e strategic policy decision-making; • over sig ht an d con trol of the p role of th e le ndi ng bo ok to man ag e to credi t ri sk appetit e; • identicat ion, monit oring and cont rol of mater ia l cre dit r is ks aga ins t a cl ea r and communica ted credit risk appetit e statement . Mitigation Credit assessme nt /lending criteria Our g en er al ap proa ch to cre dit m itig ation i s based on t he provision o f af fordable lending on a se cure d or str uc tura l protec ted ba sis, a ga inst ass ets that we k now a nd un de rst and. T he se ass ets are t y pic al ly e asi ly rea lis ab le wi th stron g secondar y marke ts and predictable v alue s, and s pre ad acro ss a b road ra ng e of cla ss es within established sect ors. Impairment Adequ acy Committee Pol ic y & Gov ernance Exceptions & Large De als Third-line Ov er sight Credit Risk A ppetite Statements / Early W arning Indicators Credit Risk Management Committee Group Risk and C ompliance Committee Group Credit Committee Models Gov ernance Committee Board Risk Commit tee Risk -Speci c Committees Gr ou p I nt er na l Au d it Divisional Risk Commit tees Credit Risk Governance Framework Risk Repor t cont inue d Book 1.indb 82 27/09/2022 23:46:18 83 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Counterpar ty risk mitigation E xpo sure s to coun terpa r tie s wi th who m we trade o r pl ace d ep osi ts are m itig ated by continuous monitoring of the cr edit quality of our count erpar ties wit hin appro ved set limi ts an d Winte r o od’ s trad ing re lati ng to ex change traded cash securities being set tle d on a d el ive r y ver su s paym en t bas is. Count erpar ty exposure and settlement fai lure m oni torin g contro ls are a lso i n pla ce. Monitoring High -level re qui reme nts are o utlin ed in sta nd ards d ocu me nts cove ri ng the identication , monitoring and management of prob le m le ndi ng, with d eta ile d cre di t pol icy a nd gu ida nce fo rm ali sed w ithi n loc al credit policies , including guidelines on the ide nti catio n and tre atme nt of v uln era ble customers. Th is inc lud es th e doc ume ntati on of inte rna l policy and pr oce ss for monitoring , recording and a pp rovin g pro ble m cre di ts at all l evel s of e xposure, business-specic denit ions of cr iter ia for i de ntif y ing p rob lem c as es a nd requ ire men ts for ou tlin ing th e cou rse s of action a vailable to protect our position , taking acc oun t of the ter ms / c ovena nts of fa cil itie s, security enfor cement opti ons, legal remedies and th ird-p ar t y i nter ve ntio n (for exa mpl e, brok ers) . Th is pro ce ss is ow ne d by the r isk d irec tors, ens ur ing that p rom pt actio n is ta ken to review th e na nc ial c ond itio ns of cu stome rs when warning signs indicate deterioration in nancial healt h, credit quality , covenan t compliance or asset str e ngth/ coverage. Where p ossible , credit li mits are amended whe re the re is ev ide nc e of del inq ue ncy or det eriorating nancial condition/capacity tor e p ay . Our c red it r isk f ram ewor k ali gns w ith the broa der “ th ree l ine s of defe nc e” app roac h, with a go vernance struct ure owi ng from local rst line business t e ams, up to se con d lin e ris k dire ctor s (and key over si ght committees such as Credit Committees, div is ion al RC Cs, CR MC, Mod el G over na nce Committee (“MGC”) and the BRC) overlaid with a th ird li ne gro up inte rna l aud it f unc tion. Fir s t lin e cr ed it r isk m an ag eme nt Lending businesses hav e primar y res pons ibi lit y for e ns uri ng that a ro bust r is k and c ontro l env iron me nt is e sta bli she d as par t of day-t o -d ay ope rati ons, a nd go od quality credit applicat ions are brough t for wa rd for co nsi de ratio n. They a re als o res pons ibl e for e nsur ing th at the ir acti vi ties are c omp lia nt wi th the r ule s an d gui dan ce set ou t in l oc al cre di t pol ici es a nd p roce s ses. Eac h bus in es s uni t has i ts own fo rm ali sed cre dit r is k app etite a nd po licy doc ume nts, app roved by d iv isi on al RC Cs. Th is r isk cul ture i s faci lit ated by lo ca l pro t and l os s ownership , ensuring a long- term approach is ta ken, wi th an un de rst and ing of h ow loa ns will be repaid . Credit risk o versight and control Th e sec ond l ine of d efen ce ha s thre e tie rs: bus ine ss-a lig ned r isk d irec tors an d the ir team s, the ce ntra l gro up cre di t ris k team, and ove rs igh t com mi tte es. T he r isk d irec tors in the b ank, w ho re por t to the c hie f cred it ris k of c er , ar e resp ons ibl e for s ett ing and communicat ing credit risk strategy , identifying excep tions and ensuring local compliance. Similarly , the risk head s in Close Bro thers Asset Management and Win ter o od Se cur iti es, a nd the a sse t and lia bili t y man age me nt ri sk le ad, ens ure that thei r res pe ctive o per ation s are pe r for me d in lin e with th e grou p na nc ial i nsti tutio n an d non-banking nancial inst itution credit risk sta nda rds an d als o repo r t up thro ugh th ei r div is ion al RC Cs. Th e gro up cre di t ris k tea m prov ide s a fu r th er l ayer of ove rs ight a nd approv al, supported b y credit commit tees, CRM C, MGC, GRCC and th e BRC. T o geth er , the se co nd li ne of de fenc e prov ide s a cl ea r tactical and st rategic understanding of credit risk , proposing e nhancements t o the cre dit r isk f ram ewor k for on goi ng ef fe cti ve man age me nt an d co ntrol. Th e third li ne of de fenc e is th e grou p inter nal aud it fu ncti on. T hey us e both a ri sk-based app roac h an d a roll ing p rogr am me of review s to ensure th at the r st an d sec ond lin es of d efen ce are wo rk in g ef fec tive ly . Change/Outlook Cre dit l oss es h ave inc rea sed i n the ye ar to 3 1 Ju ly 2022, reec ting th e imp acts of ong oin g mar ket unc er t aint y , w hic h we continue to monitor closely . While direct Covi d- 1 9 imp acts h ave rece de d, the over all cre dit r isk o utlo ok re ec ts a hei ghten ed leve l of unc er taint y i n the ma croe co no mic env iron men t in the s hor t - to me diu m-term due to a co mbi natio n of evol vin g fac tors. Th ese i nc lud e the on goi ng co ni ct in Ukraine, supply chain disruption , the rising cos t of liv ing, a nd in atio n. In addi tio n, the cessation o f various go vernment support sch em es c oul d have an i mpac t on b oth con sum er s and b us ine ss es a nd the imp act of thi s on ou r cus tome rs wi ll be closely monit ored. These fact ors could resu lt in h igh er cre di t los ses i n the fu ture. Bad d ebt l evels a re bro adl y co nsi stent yea r -o n-yea r , w ith the se n ew cha ll eng es of fs et ting e ar lie r im provem ents i n the mac roe con omi c outl oo k as we em erg ed from th e pan de mic. R isk a ppeti te has rema in ed co nsi stent wi th ou r pru de nt, through -t he-cycle underwriting standards . For bea ra nc e leve ls have f ur th er d ec rea se d from th ose o bse r ved at th e pe ak of the pan de mic; however , they re ma in ab ove historical , pre-pandemic levels. Assumptions relating t o the No vitas business pro v isions ha ve been updated. Oth er c oun terp ar t y ex pos ure s are b roadl y unc ha nge d, with th e maj ori t y of our liquidity requirements and sur plus funding placed with the Bank of England. Further commentary on t he credit quality of our l oan b oo k is ou tlin ed o n page s 1 95 to 202. Furt her d eta ils o n loa ns a nd adva nc es to cu stome rs a nd d ebt s ecu ri tie s he ld are i n Notes 1 1 a nd 1 2 on p age s 1 72 to 1 76 of the na nc ial s tateme nts. O ur app roac h to credi t ris k ma nag eme nt an d mon itori ng is o utli ned i n more d eta il in note 28 on pag es 1 9 5 to 202 . Book 1.indb 83 27/09/2022 23:46:19 84 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Funding a nd liquidity risk Funding risk is dened as the risk of loss cau se d by the in abi lit y to rai se f und s at an acc ept abl e pr ice o r to acc es s ma rkets in a timely manner . Liquidity risk is dened as the risk that lia bil itie s ca nn ot be me t whe n they fa ll d ue or ca n onl y be m et at an u nec on omi c pri ce. Exposure Funding and liquidity are managed on a sep ara te lega l en tit y bas is wi th ea ch di vis io n res pon sib le for e nsu ri ng it m aint ain s suf cie nt liquidity for its own purposes. The group ’ s div isi ons o pe rate ind epe nd entl y of eac h othe r with n o fac iliti es o r other f un din g ar ran gem ents in pl ace b et wee n them, a nd the re is no l iqu idi ty reli anc e bet we en th e dif feren t div isi ons. Close Bro thers Group plc has relatively few mater ial c as h requ irem ents a nd a ll requ ire me nts are k now n in ad vanc e; for exam pl e, exte rn al di vi de nds. I t me ets its cash requir ements t hrough deposit s placed with th e Ba nki ng di vi sio n and th e grou p’ s committed borro wing facilities. The Banking division ’ s funding pro le benet s from a broad array of liabilit ie s, comparable with th ose of m uch l arg er ba nks. It s dive rs ie d approach t o funding includes using secured funding, unsecured funding, re tail deposits and non-re tail deposits. Funding risk exposure primarily arises if it is unable t o obta in the n ec es sa r y fu ndi ng to sup por t its ass et po siti ons fo r the matu ri t y expe cted to be required . Unsustainable or undiv ersied fu ndi ng ba se s, suc h as a n over -rel ia nce o n sho r t- term d ep osi ts, ca n inc rea se the l evel of ris k an d can l ea d to a deviati on f rom the fun din g pla n. In tur n this c an in cre ase th e cos ts of rai sin g new f und s, red uci ng ou r ab ilit y to orig inate new a ss ets an d potenti all y le adin g to negative marke t or cust omer percep tion. Th e Ban ki ng di vi sio n’ s I nter nal L iq uid it y Adequac y Assessment Process ( “ILA AP”) cove rs pote ntia l event d ri ver s of a ran ge of st res s t e sting scenarios, including idiosyncratic examples, to ensure liquidity management remains a source of strength with a robust and prudent approach to as sessing and maintaining liquidity requirements in place . Funding and liquidity risk in Wint er ood Se cur itie s is d rive n fro m fou r pri mar y sources: long trading book risk positions; over nig ht an d intra day no rm al a nd fa ile d settlement ; margin r equirements ; and multid ay client o rder s. Winter oo d mainta ins ris k ap petite su f c ie nt to ensu re co ntinu ed compliance with Individual Liquidit y Gui da nce (“ ILG”) set by the re gu lator . For Cl ose B rothe rs A sse t Man ag eme nt, ca sh requ ire me nts, suc h as pay roll a nd di vi de nds to the grou p, are know n in ad van ce. Fund ing and l iqu idi ty r is ks are c ons ide red th roug h the division ’ s cash ow forecasting, ensuring t hat suf cie nt li qui dit y i s mai nta ine d to cover th e nex t thre e month s of out ow s. Fur the r det ail o n the g roup’ s fu ndi ng an d liq uid it y ex pos ure is p rovi de d on pa ge 64 of the Fi nan ci al O ver v iew a nd pa ge 204 of th e nancial statements . Risk appet ite Th e grou p ado pts a con ser vative ap proac h to f unding and liquidity risk and seeks t o maintain a distinctiv e funding and liquidity position charact erised by pr e ser ving a simple and tr ans pa rent b ala nc e she et, sus tai nin g a diverse range of funding sources and holding a pr ude nt leve l of hi gh qu al it y liq ui dit y . A s suc h, the wei ghted ave rag e matu ri ty of i ts fu ndin g is lo nge r tha n the we ighte d avera ge matur it y of i ts len din g por tfo lio. Th ese o bje cti ves for m the ba si s for the Group F unding and Liquidity Risk Appetit e Stat e ment , appro ved annually b y the board , which outlines the specic le vels of funding and l iqu idi ty r is k that the g roup i s will ing to as sum e. Give n the m ateri ali t y of the Ba nk in g div is ion, thi s is pr ima ri ly foc use d on th e leve ls of ris k as sum ed wi thin th e ban k. Measurement A var iet y of me tric s are u se d to mea sure the Banking division ’ s funding and liquidity position t o ensure compliance with both external regula tory requirement s and in ternal ris k ap petite. T hes e cove r both the s hor t and long-t erm view of liquidity and funding and have lim its a nd e arl y-warn ing i ndi cator s in pla ce that a re ap proved v ia th e As set an d Liability Committee (“ AL CO”) . These metrics inc lud e term f un din g as a p erce nta ge of lo an boo k, wei ghte d avera ge ten or of lo an b ook ver sus we ig hted ave rag e teno r of fu ndi ng, avail ab le ca sh ba la nc e with th e Ba nk of Engl an d and l iqu id to total as set r atio. Th e pri ma r y me as ure me nt tool for f un din g is the Bank ing division ’ s funding plan which see ks to ens ure that th e ban k mai ntai ns a bal an ced a nd p rud en t app roac h to its fun din g ris k that is i n lin e with r isk a pp etite. Th e fu ndi ng pl an is s upp le me nted by me tric s that highlight an y funding concent ration risks, funding ratios and levels of e ncumbrance. Liq uid it y is m ana ged i n acc orda nc e with th e IL A AP w hic h is ap prove d by the bo ard. In addition t o regulat or y metrics, t he banking div is ion a lso u se s a sui te of inter nal ly developed liquidity st ress scenarios t o monitor its pot e ntial liquidity exposure daily and d eter min e its h igh q ua lit y li qu id as set requ irem ents. T hi s ensu res th at the ba nk rema ins w ithi n ris k app etite an d ide nti es pot e ntial areas of vulnerability . The outcomes of the se sc ena ri os ar e form all y rep or ted to the ALCO, GRCC an d the bo ard. Mitigation Ou r fun din g app roac h is ba se d on the pri nc ipl es of “b or row lon g, len d sh or t ” and ensuring a diverse range of sources and c ha nne ls of f und ing. In th e Ba nk ing div isi on, reta il and c or por ate custome r funding is supported b y wholesale funding programmes including unsecured medium- term n otes an d sec ur itis ation p rogr am mes. Th e ban k has a lso d rawn a ga inst th e Ban k of Eng lan d’ s T FSME sc he me, that was intro duc ed to su ppo r t le ndi ng in th e prevai lin g low intere st rate env iron me nt. This approach pr ovides resilience and exibility . T ot al avai la ble f un din g is kept we ll in exc es s of the lo an bo ok f und ing re qui rem ent to ens ure f und ing i s avail ab le wh en n ee de d. A stron g liq uidi t y pos itio n is ma inta in ed to ens ure that we re mai n comfo r ta bly w ithi n both internal risk appe tites and r e gulat or y requir ements. Liquidity risk i s assessed on a dai ly ba si s to ensu re ade qua te liqu idi t y is he ld an d rem ain s read ily ac ce ss ibl e in stressed conditions . Fundi ng an d liq uid it y ri sks ar e reviewe d at eac h me etin g of the ALCO. Monitoring Liq uid it y is m eas ure d and m oni tored o n a dai ly ba sis w ith mo nthl y rep or ts fo rmi ng standing it e ms for discussion at bo th the ALCO and G RCC, wi th the Bo ard Ri sk Committee maintaining overall oversight. A ny liquidity and funding issues are e scalated as requ ire d to the ALCO , a nd the n onwa rds to the GR CC an d the Bo ard Ri sk C omm it tee. Th e ban k ope rates a thre e lin es of d efen ce model, with T reasur y responsible f or the measurement and management of the bank’ s funding and liquidity posit ion and Ass et an d Li abi lit y Ma na gem ent (“ A LM ”) ri sk providing inde pendent revie w and challenge . AL CO provides ov er sight o f funding and liquidity and supports the rele vant senior managers in discharg ing their senior management funct ion responsibilities . Change/Outlook Econ omi c unc er t aint y h as co ntinu ed ove r the la st 1 2 mo nths, in cre asi ng ma rket competit iveness. Despit e the challenges this h as pre se nted, the Ba nk ing d iv isi on’ s abi lit y to fu nd the l oan b oo k has b ee n largely una f fect ed and it continues t o re tain acc es s to a wid e ran ge of f und ing s ou rce s and product s. Similarly , elevat ed levels of liquidity have continued to be maintained despite market v olatility and uncertainty . Th e Ban ki ng di vi sio n suc ce ss ful ly is su ed a new £200 million securitisat ion transaction in A pri l 2022 and h as c ontin ued to enhance its current r etail pr oduct range . For exa mpl e, this ye ar s aw the la unc h of a new ve rs ion of o ur Pe rs ona l Fi xed Ra te Bond product which has greatly increased ope ratio na l ef c ie nci es a nd al lowed u s to sca le u p our l evel of xed f und ing. IS As con tinu e to feature h eav ily i n our ra ng e and represent a key product for growth. Risk Repor t cont inue d Book 1.indb 84 27/09/2022 23:46:19 85 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Market risk Marke t risk is dened as the risk that a cha ng e in the va lue of a n un der ly ing mar ket var ia bl e wil l give r is e to an adve rs e movem ent i n the val ue of the g roup’ s as sets. Market volatility impacting equity and xed income exposures , and/ or changes in inte rest a nd exch ang e rates, h as the potenti al to imp act the g rou p ’ s p er fo rm anc e. T o s upp or t th e man age me nt of ma rket r isk , the gro up di stin guis he s bet we en trad ed mar ket ri sk an d non -trade d mar ket ri sk, as set ou t in the s ec tion s that fol low . Tr a d e d m a r k e t r i s k Expo sur e T r ade d mar ket ris k in th e grou p onl y ar ise s in Winterood Securities, whose core business is to provi de li qui dit y a nd in terac t wi th the market on a principal basis , holding posit ions in n anc ial i nstr ume nts as a re sul t of its cl ient facilitation act i vity . Win ter o od op erate s as a ma rket ma ker in equities , ex change-traded products, inves tme nt tru sts an d sove reig n and corporat e bonds, operating across three primar y mark ets: the United K ingdom, Nor th Am er ic a and Eu rop e. For he dgi ng pu rp ose s, a num be r of der ivati ves a re al so trad ed, alth oug h thes e are l imite d to listed fu ture s in UK e qui t y and xed in co me ma rkets. Se e page 20 3 for d eta ils of th e grou p’ s tra din g book exposur e to mark et price risk. Risk appetit e Winterood’ s strategic object ives and business plan ar e centr ed on its ability t o con tinu e trans act ing in th e ma rkets in w hic h it op erate s, in the ma nn er it h as hi stori ca lly . Th e grou p sets it s ris k app etite ac cord ing ly , acknowledging t hat an acceptable level of trade d ma rket r isk mu st be i ncu rre d for the business t o operate ef fectively . Win ter o od se e ks to always e nsu re su f c ien t leve ls of ca pi tal a nd li qu idi t y are ma int ain ed to cover it s trade d ma rket r isk ex pos ure. Measurement T r ade d ma rket r isk i s me asu red a gai nst a set of d ene d ri sk li mits s et at over all g lo bal, de sk an d ind iv idu al stoc k leve ls, on b oth an int raday and end-of -day basis. These limits ar e monit ored via a combina tion o f in ter n a ll y d eve l op e d, a n d ex te r n al, in du s tr y le adin g system s on a n intrad ay an d over nig ht bas is ag ain st a lim it f ram ewor k ali gn ed to the co mpa ny ris k ap peti te. The fr amewo rk incorporat es: • Ma rket ri sk a ppeti te bei ng ma nag ed v ia tradi ng bo ok ex pos ure s limi ts. Th es e are set us ing g ros s cas h po siti ons a nd the ster ling va lu e of a bas is po int (“SV01 ” ) for products with int erest rate exposure . • Adop tion of a real-time limit monit oring syst em, along wit h end-of -day summary reports to track equity , x ed income and for e ign e xchange (“F X”) book cash exposure risk aga inst agreed limit s. • Min ima l exp osu re to der ivati ves (l imi ted to hed gin g of intere st ra te expos ure s and F X positions r esulting from trades in for e ign currencies) . Mitigation The management of traded market risk is fully embedded under Winterood’ s training and g over nan ce f ram ework. Key at tri bute s include : • An established tr aining programme for junior dealers, r e quiring their supervision by a se nio r de al er u ntil d ee me d co mp etent to trade on th ei r own. • Th e prov isi on of tra ini ng to all n ew joi ne rs an d new ly c er ti e d staf f by f ront of c e contro ls. T his in clu de s mar ket ri sk considerations as well as detail regarding order ent r y contr ols. • Th e mai ntena nc e of ris k ma ndate s for al l trade rs, d eta ilin g the r m’ s ma rket-mak ing stra tegy , contr ols frame works and policies and procedur e s. • Ove rs igh t of all r is k iss ue s, inc lud ing trade d mar ket ris k, vi a the Wi nter o od Ris k and Compliance Commit tee . Management infor mati on an d key ris k ind ica tors are repo r ted to the co mmi tte e on a mo nthly bas is wi th esc al ation to the G rou p Ris k and Compliance Committ e e and Boar d Ris k Co mmi t tee in c ase of n ee d. • Th e mai nten anc e of a Gro up M ar ket Ris k Polic y an d spe ci c T rad ed M ar ket Ris k Standard , outlining minimum governance requ ire ments a nd e sca lati on. • Ord er e ntr y c ontrol s in pl ace a cros s the trad ing oor , li miti ng, amo ng st othe r tradi ng var ia ble s, the a mou nt of capital tha t can be committed pe r or der (the se are d oc ume nted i n a fron t of c e procedure ). • Dai ly total va lue tr ade d ca ps to limi t the amount t he business can tra de thr ough a single brok er . • Minimal e xposure to derivatives (limit ed to cons er vati ve he dgi ng of F X po siti ons resu ltin g from tr ade s in fore ign c urre nc ies). Monitoring Bui ldi ng on th e use of re al-tim e limi t mon itor ing (se e above), the mon itor ing of trade d ma rket r isk is e mb edd ed a cros s all three l ine s of defe nc e. T op -dow n vis ibi lit y is exerc ise d vi a the Wi nter ood R is k and Compliance Committee which retains regular over sig ht of co re trade d ma rket r isk M I and key ris k indi cator s, as wel l as stre ss te sting outp uts a nd po lic ie s and s tan da rds. Th e Win ter o od r isk te am wo rks in con jun ctio n wi th the fr ont of ce co ntrol s team to en sure th e man age me nt of trade d ma rket r isk is c or rec tly al ign ed to doc ume nted c ontro ls. T o s upp or t th is, MI das hb oard s are u tili sed a lo ngs ide d ail y repo r tin g to help m an age ma rket r isk o n a daily and in trada y basis. Change/Outlook Whi le the i mpa cts of Cov id- 1 9 have l arge ly fal le n away , i n rec ent m onth s Chi na’ s ec ono my ha s be en im pac ted by f ur th er loc kdown s whi ch ha s had a n onwa rd imp act to glo ba l mar kets an d sup pl y cha ins. T hi s has b ee n co upl ed w ith a ris ing i ntere st rate e nviro nme nt, dr ive n by ina tion, an d a bac kdrop of gl oba l pol itic al unc er tain ty , d ri vi ng hi ghe r vol atili t y into what i s now a be ar m ar ket. Th e Inves tmen t Fir ms Pru de ntia l Reg ime (“IFPR ”) ha s bee n intro duc ed i n the past 1 2 m onths, c han gin g the way the company calcula tes capital. From a mar ket ri sk pe rs pe cti ve this h as had ve r y lit tle i mpac t in the c al cul ation s we per form for t h e regulat or or those we conduct inter na lly . O ve r the nex t 1 2 m onths i t was ex pec ted that th e introd uc tion of the Fund am enta l Rev iew of the T ra din g Boo k (“FRT B”) may c han ge the rm’ s calculation of regulat or y capital; however , the im ple me ntatio n of this re gul ation h as been dela yed. Non-traded market r isk Expo sur e Th e grou p’ s no n-trade d ma rket r isk ex pos ure con sis ts of intere st rate ri sk in th e ban ki ng boo k (“IR RBB” ) an d forei gn exch ang e ri sk. Int erest rat e risk is predominantly incurred in the Ba nk ing d iv isi on as a re sul t of the ba nk’s lending and funding act ivities. Forei gn exch ang e ri sk is in cur re d acros s the grou p an d ari se s fro m: • managing t he funding requirements of the bank’ s lending subsidiaries through de pos it gath er ing a nd w hol es al e fun din g and m ana gin g the as soc iated F X r isks; • conducting foreign ex change payment ser vic es o n be hal f of the gro up; and • non -ster lin g inve stm ents. Fur the r de tail o n the g roup’ s exp osu re to non -traded m ar ket ris k is ou tlin ed in n ote28 on pa ge s 202 and 20 3 of the nan ci al statements. Risk appetit e Th e grou p has a s imp le a nd tra nsp are nt bal anc e sh eet a nd a low a pp etite for in teres t rate ris k whi ch is l imite d to that requ ired to ope rate ef c ie ntly . Th e grou p ’ s p olic y is to match re pri cin g ch arac ter istic s of as sets a nd liabilities nat urally where possible or b y using intere st rate swaps to se cure th e ma rgin on its lo an s and a dva nce s to cus tomer s. Book 1.indb 85 27/09/2022 23:46:19 86 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Th e grou p als o has a l ow app etite for fo rei gn excha nge r is k, avoid ing l arg e ope n po siti ons and applying individual currency limits to mitigat e risk. Th e grou p doe s not u se n anc ial i nstr um ents for speculat ion although it r etains a limited ris k ap peti te to take advan tage of p rot opportunities that may arise in the normal course of business. Measurement Th e grou p rec ogn ise s thre e mai n sou rce s of IRR BB wh ich c ou ld ad vers el y imp act f uture inc ome o r the va lue of th e bal anc e sh eet: • rep ric ing r is k – the ri sk pr ese nted by ass ets an d lia bili tie s that rep ric e at dif feren t time s an d rates; • em bed de d optio nal it y ri sk – the r isk pr e se n ted by c o ntr a ct ter m s e m be d d ed into ce r tai n as sets a nd li abi liti es; and • bas is r isk – th e ris k pre se nted by a mis match in the in terest ra te referenc e rate for as sets a nd li ab ili tie s. IRRBB is asse ssed and measur ed by applying k ey behavioural and modelling assumptions including, but no t limit ed t o, xed r ate loa ns su bje ct to pre pay me nt ri sk, be havi our of n on-m atur it y as sets, tre atme nt of own e qui ty a nd th e exp ect ation of i ntere st rate optio ns. T his is p er form ed ac ros s a ran ge of regulat or y prescribed and int ernal interest ra te sho cks a pprove d by the b ank ’ s ALCO. T wo measur e s are used for measuring IRR BB, na me ly Ea rn ing s at Ris k (“E aR” ) and Economic V alue (“EV”): • Ea R me asu res s hor t -ter m imp acts to earnings, including basis risk, highlight ing any earnings sensitivity should rates change une xpectedly . • EV measures longer -term earnings sensitivity due t o rate changes , highlighting the poten tial f utu re sen siti vi t y of ear ni ngs, and u ltim ately r is k to cap ita l. Th e grou p is ex pos ed to tran sac tio n, tran slati on an d str uctu ral fo reig n excha nge risk. T ransactio n risk is measur ed daily with in T rea sur y base d on n et ca sh ow s and contract ed future exposures . T ranslation ris k is mo nitore d with in lo cal b usi ne ss un its monthly , transla ting non-UK pro ts regularly to mitig ate uctu atio ns in fo reig n excha nge rates. S tru ctur al r isk i s ass es se d at lea st ann ua lly a s par t of the gro up’ s I CA AP a nd i s de em ed to be im mater ia l. Mitigation As noted a bove, the g rou p mai ntai ns a low app etite for i nteres t rate ris k with s imp le hedging stra tegies in place t o mitigate risk. The Banking division ’ s treasury is responsible for he dgi ng the n on-trad ed inte rest r ate risk. Any re sid ua l ris k whi ch c ann ot be n atura lly matche d is h edg ed u tili sin g vani lla d er ivati ve tran sac tions to rem ain w ithi n pres cr ibe d ris k lim its. T he ALCO is re sp ons ibl e for a pprov in g any ch an ge s to hedg ing st rategi es b efore implementation. De rivati ve tra nsa ctio ns ca n onl y be undertaken with approved counterparties and w ithi n the re spe cti ve cred it ri sk li mits assigned t o those count erpar ties. Forei gn exch an ge exp osu res a re ge ne ral ly hed ge d usi ng fore ig n excha nge fo r ward s or cur ren cy swaps w ith exp osure s mo nitored daily against approv ed limits. Monitoring ALCO is res pon sib le for m oni torin g the non -traded m ar ket ris k of the c urre nt a nd fu ture ris k prol e with in de ne d lim its. T rea sur y are responsible f or day -t o-day management o f all non- traded mark et risk s. Da y- to-da y oversigh t of non -trade d mar ket ri sk is exe rcis ed v ia a combination of daily reporting by bank nance and rev iew a nd ch all eng e throu gh lo ca l RCCs. Fur th er in de pe nd ent ove rs igh t is prov id ed v ia the se co nd lin e of defe nc e throu gh AL M ris k, with m onth ly rep or ti ng into the A LCO . Local businesses ha ve operational proc es se s an d cont rols i n plac e to mon itor thei r exp osu re to IRRB B and e ns ure it rema ins w ith in ap proved l oc al r isk a ppe tites. Any exce ptio ns are re po r ted to ALM r is k on the same working day . Residual IRRBB that is not tra nsfe rre d into trea sur y for ce ntral management t hrough t he Banking division ’ s funding transfer ence process is monit ored by the local busine ss th rough t heir RCC. ALM r is k is res po nsib le fo r mai ntai nin g proc es se s and c ontro ls to mon itor the divisional position and repor t exposur es t o ALCO, and subs eq ue ntly GRC C and B oa rd Ris k Co mmi t tee. A n ALM sy stem i s de ploye d as the primar y source for IRRBB reporting and risk measur ement. Change/Outlook In rec ent ye ar s, the Ba nk ing d iv isi on’ s exp osu re to IRRB B ha s be en d ri ven by embedded opt ionalit y with some variable rat e lending businesses utilising con tracts with oor s. Wi th rates n ow ris ing, thi s embedded opt ionalit y risk is decreasing, with re pr ici ng ri sk now th e big ge st dr ive r of EaR . Th e Ban ki ng di vi sio n cur ren tly has p osi tive s ens iti vit y u nde r both u p and down r ate sce nar io s for the g roup’ s Ea R as sh own i n note 28 on pag e 202. Operational risk Op erati ona l ri sk is d en ed as th e ris k of los s or ad ver se im pac t resu lti ng fro m inadequate or failed internal pr oce sses, pe opl e and sy stems o r fro m ex tern al eve nts. Th is inc lud es th e ris k of los s res ulti ng f rom fraud/nancial cri me, cyber attacks and infor mati on se cur it y bre ac hes. Exposure Th e grou p is ex pos ed to var iou s ope rati ona l ris ks thro ugh i ts day-to-day o per ation s, all of whi ch have th e potentia l to resu lt in n anc ia l los s or ad ver se i mpac t. Loss es t y pic all y cr ystal lis e as a res ul t of inadequate or failed internal pr oce sses, pe opl e, mode ls a nd system s, or as a re su lt of e x ternal fact ors. Impa cts to the bu sin es s, cus tome rs, thi rd par ties a nd the m ar kets in wh ich we o per ate are c onsi de red w ithin a m atur ing f ram ewor k for re sili en t del ive r y of im por tant b usi ne ss ser vices. Leg al an d reg ulator y risks a re al so con sid ere d as p ar t of o per ation al r isk. Fa ilu re to comply with exist ing legal or regulatory requ ire me nts, or to ada pt to chan ge s in the se req uire me nts in a tim ely f ash ion, may have ne gati ve co nse que nc es fo r the gro up. Similarly , changes to regulation can impact our nancial performance, capital, liquidity and th e ma rkets in w hic h we ope rate. Risk appet ite We mana ge ou r exp osu re to oper ation al ris k throu gh a ba la nce d con sid er ation of inves tme nt ca se an d ri sk, ac ce pting th at it is not pr opor tionate or feasible t o fully eliminat e operational risk. In lin e with th e gro up’ s c ons er vati ve app roac h to risk ma nag em ent, we imp lem ent c ontrol s in a ma nne r that re duc es the li kelih ood of h igh er -imp act r isk eve nts cr ys tal lis ing. Fur th er , we mon itor ag gre gate los s trend s and s ee k to limit a ggre gate los se s ar isi ng in a ny gi ven ye ar . The group has limit ed appetite for operational risks wit h signicant residual exposure and as suc h requ ires a n ea r -term m itig ation st rategy for any s uc h ide nti ed r isks. Measurement Operational risk is measured thr ough Key Risk Indicat ors (“KRIs”) , obser ved impact of ris k in cid ents, r is k and c ontro l se lf- assessment and scenario analysis . Eac h key ris k with in op erati ona l ri sk ha s a set of de ned K RIs. T he se a re regu la rly m oni tored via local , divisional and group commit tees wit h excepti ons re por ted to both the GRC C and Board Risk Commit tee. Th e populat ion of KRIs is revi ewed a nnu all y in lin e with th e sch ed ule d review of th e r m’ s r isk a ppe tite. Operat ional risk inciden ts are iden tied and re co rded i n a com mon sy stem. Th is fac ilit ates ro ot cau se an al ysi s, ena bl es themat ic and trend an a lys is, an d en abl es the co ns istent d el ive r y of ma nag em ent informat ion into risk committees. Ris k and c ontro l se lf-ass es sme nts are com pl eted by ri sk ow ner s on a re gu lar b asi s. Thi s en abl es the c ons istent i de ntic ation a nd as ses sm ent of key r isk s and c ontro ls. W he re a ris k own er se lf-as se sse s el evated leve ls of residual risk, additional management act ion is considered. Risk Repor t cont inue d Book 1.indb 86 27/09/2022 23:46:19 87 Cl os e B ro t he r s G ro u p pl c An nua l Re po r t 202 2 Gov er nance R eport Financial Statements Strategic Report Ke y Operational Risks Sce na ri o ana lys is is u tili se d to identi f y a nd consider pot ential low frequ ency / high impact event s. Complementar y approaches t o desk top scenario analysis and scenario testin g are d ep loyed to test th e ef c acy of risk and con trol self-assessments , ev aluate the r e silience o f important business services and d ri ve Pill ar 2a op era tion al r isk c ap ita l calculations. Mitigation Th e grou p see ks to mai nta in its o pe ratio nal resilience t hrough e f fective management of operational risks, including b y: • sustaining robust operational risk management processes, go vernance and management inf ormation; • i de ntif y in g key systems, th ird pa r t y relationships, processes and staf f , informing inv e stment decisions; • inves ting i n tech nol og y to provid e reliable and con temporary customer ser vic e of fe rin gs an d ef fe cti ve mod el outp uts; • a t tracting, retaining and developing high qua lit y s taf f th roug h the o per atio n of competit ive r e muneration and benet structur es and an inclusive environment that e mbr ace s di ver sit y a nd re cog nis es behaviours aligned t o our cultural at tributes ; • investing in cyber security including expe r ti se, tools a nd sta f f en gag em ent; • maintaining focus on personal data prot ection; • adopting fraud prevention and det e ction ca pab ili tie s ali gne d wi th our r isk p rol e; and • plan ning and r ehearsing strategic and ope rati ona l res po nse s to severe b ut plausible str e ss scenarios. Model Risk F ocus : Rob u st m od e l ri sk f r am ewo rk e mb e dd e d ac ro ss t h e gr ou p to r e du c e th e r is k of p ot en t ia l ad ve r se o ut co me s ar i si ng f ro m t he u s e of m od el s . Th e grou p use s mo del s for a ra ng e of dif fe re nt pur po ses, including pro v isioning, s tress t e sting, credit approval , risk man age me nt an d na nc ial re po r tin g. In doi ng so, it se ek s to minimise the occurrence of nancial loss , lost income or rep utati ona l da mag e as a re sul t wh ile e nsu rin g tra nspa re ncy reg ardi ng th e level of m ode l ri sk in cur red. A mod el r isk f ra mewor k is e mbe dd ed ac ros s the gro up to man age a nd m itig ate ris k throu gh th e mod el li fec ycle. T his is un de rpi nne d by a Gro up Mo de l Ris k Poli cy an d vari ous suppor ting standards a nd procedures outlining cle ar roles and res pon sib ili tie s in ter ms of mo del r is k man age me nt. A ded ic ated mod el r isk m an age me nt team i s als o in pl ace, re spo ns ibl e for the in de pe nde nt val idati on of a ll mo del s, the id enti c atio n of pot e ntial limitations and assumptions and the pr oposal of approv a l recommendations , including t he use of expert judgement t o adjust model outputs or identif y appropriat e post -model adjustments . Th e MGC p rovid es ove rsi ght of th e grou p’ s ex pos ure to mod el r isk through the r eview , approval a nd monit oring of mat erial models use d wi thin th e grou p, along sid e reg ul ar re por ting on a s et of de ned key r isk i ndi cator s whi ch fo rm pa r t of the G rou p Ris k Ap peti te. Ongo ing evo luti on of th e mod el r isk f ram ewor k is a lign ed to the rm’ s o ngo ing ad van ce d inter na l ratin g bas ed (“ A IRB” ) application. Cybe r Risk Foc us : Th e gr ou p r ec og n is es t h e im po r t a nc e of p r ot ec t in g information and systems from t he e ver-growing cyber t hr ea t fa c ed by t h e n a nc ia l s er vic es i n du s t r y. Th e grou p use s an i ndu str y s tan dard f ra mewo rk to anc hor i ts cyber risk management , continually asses sing and developing its ma turi t y . We ack nowl ed ge the c ha lle ng e of preve nting a ll inc ide nts as t he ca pa bili tie s an d tacti cs of m ali cio us ac tors adva nc e and fo cus e f for ts a cros s a sp ec tru m of contr ols to mitigat e occurrence and pot ential impacts . A grou p chi ef info rm atio n sec ur it y of c er m aint ain s a de dic ated team a nd se ts the po lic y for the g roup’ s po sture, w ith an em pha sis o n de live ri ng co ntrols a ga inst i de nti ed ex ter nal a nd intern al thre ats. The cyber risk management lifecy cle is aligned t o the group ’ s broa der a pp roac h to oper atio nal r isk m an age me nt. The g rou p has s trateg ic pa r tne rs hip s with ex te rna l exp er t s, par ti cip ates in in dus tr y fora a nd u tili ses t he thre e lin es of d efen ce m ode l to man age c yb er r isk. T hi s is un der pi nne d by sup por ting st and ard s and b ase lin es w hic h set th e term s for th e man age me nt of cyb er r isk . The B oa rd Ris k Co mmi tte e has ove rs ight of th e grou p’ s cy be r ri sk pro le, sup por ted by deta ile d over sig ht by the Op erat ions a nd T ec hn olo gy R isk C omm it tee. Operational Risk Areas of Fo cus Data Protec t ion Information Securit y Financial Crime Fr au d Third Par t y W orkplace Data T echnolog y Process Peo pl e Model Regulatory and Compliance Ope rational R isk PPI PPI JOB: 18_Risk Report _74-92 PR OOF R EA D BY: OPERA TOR: r o b PROOF: S et Up SE T- U P : r o b EDIT DATE: 28 Sep tem ber 2 022 4: 38 PM FIR ST READ/REVISION S 18_Risk Report_74-92.indd 87 18_Risk Report_74-92.indd 87 28/09/2022 16:39:18 28/09/2022 16:39:18 88 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Leg al a nd reg ulator y ris ks are m itig ated by: • responding in an appropriat e, risk -based and proportionat e manner t o any change s to the leg al a nd reg ula tor y env iron me nt as well a s thos e dr ive n by strateg ic in iti ative s; • implementing appropriat e and proportionate policie s, standar ds and procedures designed t o capture relevant regulat or y and legal requirement s; • prov idi ng cl ea r ad vic e on l eg al an d regulat or y requirements, including in rel ation to the sc op e of regu lator y pe rmi ss ion s and p er im eter gu id anc e; • de live rin g rele vant tra inin g to all staf f , including ant i-money laundering, anti- bri be r y an d cor ru ption, c ond uct r isk , data pr ot e ction and information secur ity . Th is is au gm ented by t ail ore d trai nin g to rele vant e mpl oyee s in key ar eas; • deplo y ing a risk -based monit oring programme designed to assess t he ex tent to whi ch c omp lia nt pr acti ce s are embedded within the business; • maintaining , where possible, const r uctive and p osi tive re latio nsh ips a nd di alo gu e with r e gulat or y bodies and authorit ies; and • maintaining a prudent capital position with headr oom above minimum capital requ irem ents. Monitoring Th e boa rd de leg ates au thor it y to the GR CC to manage the group ’ s operational risk framework on a day -to-da y basis and pro vide over sig ht of its ex po sure. T he co mm it tee is su ppo r ted by the O pe ratio ns an d T echnology Risk Committee ( “O TRC”) which is responsible for o versight of technology , infor mati on se cur it y , thi rd par ty a nd ce r ta in other resilience -relat ed risks. Regular man age me nt info rm ation i s pre sente d to and discussed by these committees. Th e ris k fu ncti on ha s a de dic ated op erati ona l ris k team th at is res pon sib le for m ain tain ing the fr amewo rk, too lsets a nd rep or ti ng Reputational risk Rep uta tion al r isk is d en ed a s the ri sk of detr ime nt to stake hol der p erc eptio n of the rm, leading t o impairment o f the business and i ts fu ture go als, d ue to any ac tio n or ina ctio n of the co mpa ny , its e mp loyee s or associat ed thir d par ties. Exposure Protectio n an d ef fec tive stewa rdsh ip of the grou p’ s re put ation a re fu nda me nta l to its long-t erm success. Detrimental stak eholder perception could lead t o impairment of the group ’ s current bus ine ss a nd f uture g oal s. Th e grou p rema ins ex pos ed to potentia l rep utati ona l ris k in the c our se of i ts usu al ac tiv itie s, such as t hrough employ e e, supplier or inter me dia r y c ond uc t, the provi sio n of prod ucts a nd s er v ic es, cr ysta llis atio n of anoth er r isk t y pe, or a s a resu lt of c han ge s outs id e of its in ue nce. Risk appet ite Th e grou p has a s trong re pu tatio n whi ch it has b uil t over m any ye ar s an d con sid er s it a valuable as set , managing it accordingly throu gh co nsi stent fo cus o n a set of c ultu ral and re sp ons ibl e attr ibu tes. Th e grou p ha s no t ole rance for behaviours that con tradict thes e at trib utes in a m ann er th at cou ld ha rm the org an isati on, an d avoid s en gagi ng wi th third par ties, mark ets or products tha t would inh ibi t the r m’ s ad he renc e to them. Th e grou p see ks to ope rate in a re spo nsi ble man ne r that ha s cli ent o utcom es at the h ea r t of ever y thing th at it do es. Protec tion of th e group ’ s reputation is rmly embedded in it s business-as-usual activities, and the group , as pa r t of it s overa ll str ateg y , ado pts a pru de nt app roac h to ris k ta kin g. nec es sa r y for e f fec tive op er ation al ri sk management . Operational risk managers are a lig ned to bu sin es se s wi th a tech nic al second line o f defence team providing specialist o versight of technology , infor mati on se cur it y , da ta an d resi lie nc e- rela ted ris ks. Mo nitor ing of a ll op er ation al ris k t yp es i s con duc ted vi a di vis io nal R CCs with e sc ala tion to the G RCC an d Boa rd Ri sk Committee as appropriat e. In add itio n to the de live r y of st and ard ise d management inf ormation across all operational risks, periodic deep div e s are als o con du cted o n key focus a re as an d reviewe d by the G RCC a nd Bo ard Ri sk Com mit tee. I n the la st yea r , th es e have covere d thir d par t y r isk , cyb er a nd mo re broad ly op er ation al re sili en ce. Fur the r independent assurance is ob tained through review s conducted b y the compliance monitoring team, specialist ex ternal partners (e. g. reg ardi ng cy ber r is k man age ment), and grou p inter na l aud it. Change/Outlook Op erati ona l ris ks ar is ing f rom Cov id- 1 9 sub sid ed d uri ng the ye ar fo llow ing a glo bal va cci ne ro llou t. Ways of work ing have sta bil ise d with a sso ciate d contro l environment considera tions ha v ing em be dde d. Inves tme nts in o pe rati ona l and c ybe r re sili en ce co ntin ue to de live r imp roved c ontro l matu rit y . Notwithstanding these impr ovements, the ove rall o pe ratio nal r is k prol e has increased. Drivers include mark et- wide pe opl e ris ks rela ting to recr ui tmen t and ret e ntion , industr y- w ide inf ormation sec ur it y , cyb er th reats a nd sup pl y cha in im pac ts ar isi ng fro m the Ru ss ia n / Uk rai nia n co ni ct a nd exp ec ted in c re a si n g tr e nd s i n a t tem pte d ex te r na l fraud coinciding wit h increasing cost of living pressures. Driv ers Impact Areas Reputational Risk 1. E m p l o y e e c o n d u c t 2 . Supplie r and intermediary conduct 3. Product s and ser vices 4 . Changes in business/ societal conduct 5. C r yst all isati on of a nothe r ris k t yp e 1 . C ustom er s an d cli ents 2 . Intermed iaries 3. Emplo yees 4 . Suppliers 5. Re gulat ors and gov e rnment 6. C omm un itie s an d the e nviro nme nt 7 . Inve stor s Core Driv ers of Reputational Risk Risk Repor t cont inue d Book 1.indb 88 27/09/2022 23:46:20 89 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Th e grou p also re co gni ses th at its re puta tion is lin ked to broad er re spo nsi bil itie s to help address social , economic and environmen tal challenges, and main tains appropriat e sustainable objectiv es that the gr oup sets itself as a business. Measurement Th e grou p rec ogn ise s ve c ore dr ive rs of reputational risk and considers po tential imp act ac ros s seve n are as as s how n in the diagram. Risk identica tion and subse quent man age me nt acti on are e mbe dd ed wi thin business-as-usual activities. Addi tion all y , the g roup ac tive ly mo nitor s for changes in t he business, legal, regulat or y and s oci al e nviro nme nt in w hic h it op er ates to ensure t he timely iden ticat ion, asse ssment and m itig ation of a ny potenti al rep utati on con ce rns th at may a ris e foll owin g cha ng es in the exp ec tatio ns of key sta keho lde rs. Mitigation Reputational risk mana gement is embedded throu gh the o rga nis atio n, incl udi ng vi a: • focus on employ e e conduct , with cultural attr ibu tes em bed de d throug hou t the group ; • supplier and int ermediar y conduct management t hrough t he relationship lifecycle ; • new product appr oval and e xisting product r eview processes for business products and ser vices; • a pr oactive approach to e nvironmen tal, social and gov ernance matt ers; • em bed din g of repu tati ona l ris k man age me nt with in the m ana ge men t fra mewo rks of othe r ri sk t yp es; an d • proact ive communicat ion and engagement with i nv estors , analysts and othe r mar ket par ticip ants. In add itio n, the gro up ma inta ins p oli cie s an d sta nda rds that s er ve to protect the gro up’ s reputation , most notably t hose covering anti-b ri ber y , c oni cts of in terest, di gni ty at work and high-risk client policies . These are re gul arl y revi ewed an d upd ated wi th staf f re ce ivi ng an nua l trai ning to rei nforce understanding of their obligat ions. Th e grou p cr isi s ma nag eme nt tea m supports management of case s where ther e is a potenti al r isk of re pu tatio nal i mpac t on the group on an e xceptional basis. A com mun ic ation s pla n als o form s par t of the grou p’ s re cover y pla n, whi ch sets o ut c ore pri nci ple s to ens ure fa ir an d tran spa rent com mun ic ation, to contro l the r isk of mis infor mati on a nd mi nim ise a ny ne gative reac tion to the i mpl ant ation of re cove r y opti ons. Monitoring Reputational risk is considered a cross all thre e line s of de fenc e as pa r t of ove rsi ght and assurance act ivities. Adhe ren ce to the gro up’ s c ultu ral f ram ewor k is monit ored through the cult ure dashboar d, whi ch is re po r ted to the boa rd on a q uar terly bas is an d inc lud es key metr ic s in rel ation to cultu re acro ss th e grou p and e ac h of its div is ion s. Cus tomer fo ru ms a re als o in pl ac e acro ss the rm, rei nforci ng the o rga nis ation’ s commitment t o fav ourable client out comes. Regular engagement with our invest ors also enables open communicat ion with this stakeholder gr oup . A series o f sustainability forums and com mit tee s ope rate at a di vis ion al an d grou p leve l to ensure th at the or gan isa tion appropriat ely addresses its sustainable and responsible priorities and expectat ions of wider stakeholder gr oups. Change/Outlook Th e grou p’ s foc us o n actin g res pon sib ly and s ust ain abl y en ab les i t to resp ond and a da pt to a rang e of sta keho lde r expectations with regard t o sustainable practices and addr e ss height ened public inter est in businesses taking a pr oactive, responsible approach to their ope rations , products and ser vice s. In ternal oversight of mat ter s rela ting to em ploye e s, the e nviro nme nt, wid er so ci et y and community impact at bo th an operat ional and s trateg ic le vel e nsu re the gro up gi ves due considerations to the reputational impact of its actions. Book 1.indb 89 27/09/2022 23:46:20 90 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Emerging Risk /Uncer taint y Mi ti ga tin g Ac ti ons and K e y D ev elo pm ent s Out look Eco no mi c un ce r ta i nt y Th e grou p’ s bu si nes s mo del a im s to ensu re that we are a bl e to trade su cce ss ful ly and s up por t our cl ie nts in a w ide r ang e of economic condit ions. By maintaining a stron g na nci al a nd c api tal p osi tion, we a im to b e a b l e to a b so r b s h o r t-te r m e c on o m ic downtu rn s, res pon d to any cha nge i n acti vit y or ma rket d em and, a nd in s o doi ng, bu ild long-t erm relationships b y supporting our cli ents w he n it re all y mat ter s. Th e grou p focu se s on qu ali ty a nd retu rn s rathe r tha n overa ll grow th or ma rket sh are and c onti nue s to inves t in the b usi ne ss fo r the lo ng ter m, to supp or t ou r cu stome rs a nd clients through the cycle . We test the rob ustn es s of our na nci al pos itio n by ca rr y ing o ut re gul ar stre ss te stin g on ou r pe r for ma nce a nd nan cia l po siti on in the eve nt of adve rs e ec ono mic c ond itio ns. Th e grou p ado pts a pru de nt an d con ser vative approach and regularly review s its risk appetit e to ensure it remains appropria te in the pr evailing economic environment . There remains signicant ongoing unc er t aint y re ga rding th e fu ture ec ono mic traj ector y in both the U K and a cros s glo bal markets mor e gene rally . Notwithstanding the res ilie nc e of our m od el, we are c onti nui ng to plan fo r a ra nge of d if fe re nt ec ono mi c and business scenarios to e nsure we ha ve the re sou rces a nd c apa bil it y to conti nue to perform effectively . Further commen tar y on the attribut es and r esilience of t he group ’ s dive rs i ed bu si ne ss mo de l is sh own o n pag es 1 0 to 1 3 w ith co mm enta r y o n the mar ket env iro nme nt an d its im pac t on e ach of our d iv isi ons o utli ne d on pag es 6 5 to 7 3. Geopolitical uncer tainty The group operates predominantly in t he UK and R ep ubli c of Ire lan d, with a pproxi matel y 99% of our l oa n boo k exp osu re to the UK, Republic of Ireland and Channel Islands. Mon itor ing is i n pla ce to trac k cha ng es in the geopolit ical landscape t hat could hav e an im pac t on the g roup a nd it s ope ratio ns, its cust omers and its supply chain, either directly or indirectly . Th e grou p has a s trong na nci al po siti on and m ai ntai ns c api ta l and l iqu idi t y leve ls well i n exces s of reg ula tor y mi nim ums. Further inf ormation on t he group ’ s nancial pe r for ma nce d ur ing th e yea r can b e fou nd on pa ge s 61 t o 73 Regular stress t e sting is unde rta ken on our pe r for man ce a nd n anc ial p osi tio n in the event of va ri ous a dve rse c on diti ons to test the rob ustn es s and re si lie nce of th e grou p. Th e grou p ado pts a pru de nt an d conser vat ive appr oach and regularly review s its ri sk ap peti te t o ens ure it re ma ins appropriat e in the pr evailing geopolitical and economic environment . The geopol itical environmen t rem ains unc er tain, w ith co nic t in Uk ra in e, poss ibl e Brex it-related c han ge s to the Nor t her n Ire lan d protoco l an d the potenti al fo r a Scot tis h independence refer endum amongst o thers. Goi ng for ward, we wil l conti nue to clo se ly monitor changes in the geopolitical landscape and r e gularly t est the nancial and operational resilience of the group under an evolving range of scenarios. Em e rg in g R is ks a nd U nc e r t ai n t ie s In addit ion t o day- to-da y management of its pr in cip al ri sks, th e grou p uti lis es a n established framew ork t o monitor it s por tfolio for emerging risk s, consider b roader market uncer tainties , and support its organisational readi nes s to respo nd. Th is inc or porate s inp ut an d ins ight f rom both a t op-down and bo t tom-up perspe ctiv e : • T op -down: ident ied by direct ors and exe cut ives at a g rou p leve l via th e GRCC a nd th e boa rd. • Bot tom -u p: ide ntied at a business level and escalated , where appropriat e, via r is k upd ates into the G RCC. Addi tion all y , acti ve mo nitor ing of th e correlat ion impact s acr oss emerging risks , unc er tain tie s an d pri nc ipa l ris ks is u nd er t aken. Gro up- leve l eme rgi ng r isks a re mo ni tored by the GR CC an d Boa rd Ri sk Co mmi t tee on a n ongoing basis, with agreed actions t racked to ensu re the gro up’ s pre pare dn es s sho uld a risk crysta llise. Eme rgin g ri sks a nd un ce r tai ntie s cu rre ntly trac ked by the gr oup i nclu de: Risk Repor t cont inue d Book 1.indb 90 27/09/2022 23:46:20 91 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report Emerging Risk /Uncer taint y Mi ti ga tin g Ac ti ons and K e y D ev elo pm ent s Out look Financial loss or disrupt ion resulting from t he impacts o f climat e change Sin ce 201 9 the gr oup h as be e n work in g to embed an appropriat e and regulat or y- com pli ant c lim ate risk f ram ewor k, over see n by a Cli mate Ris k Stee ri ng Co mmi t tee an d suppor ting working groups for credit risk , scenarios, disclosures and sustainability . Reg ul ar up dates a re prov id ed to the Bo ard Risk Committee , which retains oversight responsibility , while senior management responsibility is assigned t o the gr oup chief risk o f cer . Mon itor ing is i n pla ce to con tinu all y ide nti f y and a ss es s cli mate ris ks an d op por t uni tie s, suppor ted by annual climat e-related scenario analysis. For fu r th er de tai l, see th e rm’ s i nau gura l T a sk Forc e on Cl imate-re lated F ina nci al Dis clo sure s (“TCFD”) R epo r t on pa ge s42 to 59. Clim ate ris k repre se nts an a rea of c ontin ue d focu s, both wi thin th e grou p and a cros s the in dus tr y mo re broad ly . We co ntinu e to closely monit or government and regulatory deve lop me nts as we ll as e me rgi ng be st practice. Th e sho r t-dated ten or of ou r le ndi ng b ook and str ong business model resilience capabilities mitiga te current risk exposure whi le the c onti nue d em be ddi ng of ou r clim ate fra mewor k wil l ena ble u s to review the evol utio n of the r isk l and sc ape o n an ongoing basis. Legal and regula tor y change The group maintains an established horizon scanning and monit oring framework t o identify regulat or y and legal changes t hat cou ld mate ri all y imp act i ts ope ratio ns, including legislativ e and regulat or y reform , changes in regula tory practice and case la w development s. We engage regularly with regu lators i n the ju ris dic tion s in wh ich we ope rate, incl udi ng the PR A a nd FCA in the UK, a s wel l as in du str y b odi es a nd ex ter na l advisers , t o understand r elevant changes . Hig h-leve l ga p and i mpa ct an al yse s are und er taken to as se ss n ew com pli an ce requ ire men ts and i de ntif y a ny cha ng es requ ire d to the group’ s system s an d contro ls, processes and pr ocedures, with pr ogrammes of w ork initiat ed to a ddress any ident ied iss ue s. Th e ex tent an d nature of th is wor k ranges from simple isolat ed remedial activity to large m ulti -year pro je cts, de pe ndi ng on th e com pl exit y a nd sc al e of the ch ang e. A sus tai ned i ncr eas e in le ga l an d regu lator y change has been experienced in recent yea rs a nd thi s is exp ec ted to cont inu e in the sh or t to me diu m term, in clu din g the possibility of r egulato r y and legal divergence bet wee n the U K and EU. Inc reas ing re gul ator y foc us on c ons ume r and small business customer out come s is see n fro m the gro up’ s reg ulator s in the U K, the Republic o f Ireland and ot he r jurisdictions in wh ich th e grou p ope rates. Evol v i ng wo r k i n g practices Th e grou p con tinu es to as se ss the appropriat eness of its work patterns on an ongoing basis through considerat ion of four key p rin cip le s: custom er a nd cl ie nt outcomes ; risk appet ite ; culture and collaboration ; and emplo yee choice . Ways of work in g are r isk a ss es se d qua r ter ly , enabling the iden tication and mitigation o f any r isks a ri sin g. Al l role s are a ss es sed to e nsure exi bili t y ca n be of fe red w here a pp ropr iate in res pon se to com peti tive pre ss ure for t ale nt at tracti on an d retention. Ma rket develo pme nts contin ue to be mon itored fo r fu r the r sh if ts i n work in g pat ter ns wh ic h cou ld im pac t em pl oyee a nd candidate expectations . We remai n focu se d on ma inta in ing ou r com pany c ult ure an d en sur ing o ptimi satio n of the wor ksp ace a nd in -of c e ac tivi tie s to sup por t coll abo ratio n an d inc lus ion. Man agem ent co ntinue s to monitor ma rket exp ect ation s rega rdi ng wor k pat tern s to ens ure le vels of exib ili ty c an b e of fe red to com pete ef fe cti vel y in a tig ht lab our m ar ket. Book 1.indb 91 27/09/2022 23:46:20 92 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Emerging Risk /Uncer taint y Mi ti ga tin g Ac ti ons and K e y D ev elo pm ent s Out look T echnological change and new business models T echnological change and ne w business models hav e the pot ential t o impact the gro up’ s m ar ket posi tion a nd f uture protability . Whi le re gul ation re mai ns a ba rr ier to e ntr y for many po tential new competit ors, consumer expectat ions cont inue t o evolve , challenging existing capabilities and traditional approaches. Competit ors are adap ting in response, while new nancial t echnology companies cont inue to de velop alterna tive business models. Notwithstanding, the group prides itself on its de e p kn owle dg e of its cu stom er s and cli ents a nd the i ndu str ie s/sector s in wh ic h they op erate. Ma rket deve lop me nts are closely monit ored to identify and understand em ergi ng d yna mi cs as we ll a s the evol vin g prefe re nce s of ou r cus tome rs. Th e grou p is c ontin uin g to inves t in str ategi c data c ap abi liti es a s par t of our bu sin es s an d technology st rat egies. Data go vernance rema ins a key fo cus a s par t of this as we l ook to fur th er m an age a nd ex plo it o ur dat a as sets. Our businesses, particularly wit hin Retail , also cont inue t o prioritise digital channels and m es sa gin g to enha nc e the cu stome r jou rn ey and a ss oci ated exp er ie nce. The technology funct ion is actively planning to ben et f rom cl oud a rr ang em ents w hi ch match the a gil it y an d sca la bil it y of any pot ential competit or or new e ntran t. Th e grou p is al so foc use d on u psk il lin g cur rent s taf f a nd stra tegic th ird pa r t y provider partnerships t o suppor t the digital transforma tion of our busine sses. Supply chain risk Th e grou p’ s thi rd pa r t y man age me nt fra mewor k en sure s a ri sk-based a ppro ach is ado pted with re ga rd to the ide nti catio n, classication and management of the many pot e ntial busine ss impacts that can result from f ail ure s in the s upp ly ch ai n. Th roug h the id enti cati on of inh ere nt ri sks at the ou tset of a ll thir d par t y e ng age me nts, appropriat e due diligence is comple ted prior to onboarding, suitably r obust contracts are pu t in p lac e and ef fecti ve life cycl e management is implemen ted . Ongoing reporting of k ey risk and per formance indicat ors coupled with periodic supplier review s from our thir d par ty m oni torin g tea m hel p to man age sup pl y cha in r isk. O ver si ght of a ll mate ria l sup pli ers i s retai ne d via th e GRCC w hil e conti nui t y of ser vic e is a key foc us for a ll critical r e lationships through resilience and substitutability planning. Th e grou p is al so c ontin uin g to buil d ou t its understanding of supply chain concentrat ion risk acr oss mat erial thi rd an d fo urth parties. Wh ile C ovid - 1 9 c onti nue s to impa ct su pp ly cha ins g lob all y , this h as b ee n fur ther agg ravated by the c oni ct in Uk ra ine a nd the general inati onar y economic envir onme nt in key ma rkets. D irec t imp acts h ave thus fa r prov ed relativ ely moderat e across t he sect or and l es s so for th e grou p gi ven its re lati vel y low leve l of rel ian ce o n of fs hore s er vic e provision , although close monit oring and management is ongoing in more sensitive goods and services cat egories. Notwithstanding, con tinued improvement to the grou p ’ s thi rd par ty m ana ge men t fra mewor k is li kely to be re qui red to keep p ace with t he evolving r e gulat or y landscape ov e r the sho r t to med ium ter m, noting th is re mai ns an area o f heightened r e gulat or y focus, par ticularly with r e spect t o material suppliers. F uture p andemics and abilit y t o respond Capa bi litie s de live red th roug h the gro up’ s focu s on op erati ona l res ili en ce are p rim ar y mitigants against plausible and cont rollable imp acts of a f uture p an dem ic. Th e gro up’ s abi lit y to res pon d to pand emi c-in duc ed dis rupti on was te sted thro ugh C ovid - 1 9. Th e resi lie nc e of the gro up’ s wo rk fo rce, sup pli er s and sy stems i s tested on a risk -based cycle , considering severe but plausible disrupt ions. This appr oach to ong oin g testi ng e nab le s ma inten anc e of suitable readines s should ano ther pandemic emerge in t he future . Pand em ics of a n ature th at cau se ma teri al societal impact are inherently low -likelihood, high-impact ev e nts. It is un likel y that a nothe r pan de mic w ill em erg e in any g ive n yea r , a ltho ug h it is prob abl e that at so me fu ture po int a nothe r one will emerge. Risk Repor t cont inue d Book 1.indb 92 27/09/2022 23:46:20 93 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial Stat ements Strategic Report The group ’ s business activit ie s, nancial per formance , capital levels , liquidity and fu ndin g pos iti on, an d ris k ma nag eme nt fra mewor k, al ong w ith the p ri nci pal a nd eme rgi ng ri sks like ly to af fec t its fu ture pe r for man ce, are d es cr ibe d in the S trateg ic Rep or t a nd th e Ris k Rep or t. Th e grou p co ntinu es to have a s trong, p roven and conservative busine ss model supported by a dive rs e po r t foli o of bus in es se s, mai nta inin g its c ons istent tr ack re co rd of de live ri ng pro ts. The g rou p rema ins we ll positioned in each of its core businesses, and is str ongly capitalised, soundly f unded and has good le vels of liquidity . As pa r t of the d irec tors’ cons id erati on of the appr opriateness of adopting the going con ce rn ba si s in pre par in g the A nnu al Re po r t, a ran ge of for ward-l ook in g sc ena ri o an aly se s have be en c on sid ere d. Th is in clu de d a cen tral scenario and a downside scenario . Th e sce na ri os mo de lle d are b ase d on a range of e conomic assumpt ions, considering the hi ghl y un ce r tai n ex ter nal e nvi ronm ent, including the recent impact o f increasing geopolitical t ensions and rising ina tion on our c ustom er s an d wid er nan ci al ma rket con dit ion s. In all m od ell ed s ce nar io s it ha s be en co ncl ude d that n o sig ni can t stru ctur al cha ng es to the c omp any or g roup w ill b e requ ire d. Fur the r deta ils of th es e sce na rio s are se t out i n the V iab ili ty S tatem ent. Going Concern Statement Und er b oth sce na rio s the co mpa ny an d grou p conti nue to ope rate with s uf cie nt leve ls of liq ui dit y a nd ca pi tal fo r the nex t 1 2 mont hs, with th e grou p’ s c ap ita l ratio s and liquidity comfortably in ex ce ss of regulatory requ irem ents. For ea ch of the d iv isi ons, th e dire ctor s have al so co nsi der ed the i mpa ct of the ce ntra l and d owns id e sce na ri os on na nci al pe r for man ce. For B an kin g the se in clu de expect ed cust omer demand tha t underpins loa n boo k grow th, the i mpa ct of ri sin g intere st rates a nd in atio nar y pres sure s on ou r cus tomer s an d the im pact th is wi ll have on th e bad de bt rati o and n et intere st marg in. For A sse t Man age me nt, the leve l of mar kets an d am oun t of net ow s as a pe rce ntag e of ope ni ng ma nag ed a sse ts was con sid ere d. For W inter ood, th e volu me of tradi ng ac tivi t y with in the ir ma rkets a nd exp ecte d tradi ng reve nue wa s as ses se d. Acros s all th e di vis ion s, the im pact of th e selected downside scenario demonst rated the r e silience of our business model. Th e grou p ack now led ge s that the r isk lan dsc ap e is co nst antl y evolv in g and a s suc h conti nua lly rev iews i ts pri nci pal a nd em erg ing ris ks. As pa r t of thi s revi ew , ri sks a re as ses se d with ro bus t over sig ht exerc ise d at both a lo ca l business unit and group level through risk and compliance committees and the board. The group ’ s st rong risk assessment frame work prov ide s a so lid fo und atio n to asse ss g oi ng concern thr oughout the organisa tion on a regu la r and c ons iste nt bas is. In making th is assessment , the direct ors have al so co nsi dere d the o pe ration al ag ili ty and re si lie nce of th e co mpa ny and g roup, noting that the business has succes sfully ada pted to new ways of wor ki ng a nd that operational and syst em per formance ha ve be en m ain tai ned, a nd a re exp ec ted to continue to be. In co ncl usi on, the d irec tors have d eterm ine d that they h ave a reas ona ble ex pe ctati on that the co mpa ny an d the gro up, as a who le, have ade qu ate reso urc es to con tinu e as a goi ng co nc er n for a pe ri od of at l eas t 1 2 mont hs fro m the da te of approva l of the nancial statements . Acco rdin gly , th ey con tinue to ado pt the go ing con ce rn ba si s in pre par in g the A nnu al Re po r t. Book 1.indb 93 27/09/2022 23:46:21 94 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Viabilit y Statement In ac cord an ce wi th prov isi on 31 of the UK Corporat e Governance Code , the boar d has a ss es sed th e pros pe cts of the g roup and c on rms th at it ha s a rea son abl e exp ect ation th at the co mpa ny an d grou p will c ontin ue to ope rate and m eet the ir lia bil itie s, as th ey fall d ue, for th e three -year pe rio d up to 31 July 2025. Th e boa rd con sid er s thre e yea rs to be an appropriat e period for the assessment t o be ma de. A pe ri od of thre e yea rs h as be en cho se n give n the g roup’ s prove n an d resi lie nt business model , prudent ma turity pro le and b ec aus e it is th e pe ri od cove red by th e grou p’ s we ll e mbe dd ed str ategi c pla nn ing cycl e. We continu e to adopt a th ree -year period for our regulatory and int ernal stress testing processe s, including : (i) group- wide inter nal fo rec asti ng an d stres s testi ng, whi ch ha s und erg one s ign ic ant rev iew an d cha lle ng e, t o con rm th e via bil it y of the gro up; (ii) the Internal Capital Adequacy Asse ssment Process ( “ICAAP ”) , which assesses capital requ irem ents; an d (ii i) the In terna l Li qui dit y Adequacy Assessment Pr ocess (“ILA AP”) , which identies liquidity requirements. In ma ki ng its a ss es sme nt, the bo ard ha s ide nti ed a nd as se ss ed the p rin cip al a nd em ergi ng ri sks fa cin g the gro up a nd the se a re hig hli ghted o n pag es 78 to 92 . T he g roup’ s approach t o monitoring and managing principal risks faced by the group’ s business, including nancial , business, mark et and operational risks, have remained consistent give n the g roup’ s ac tivi tie s, bus ine ss m ode l and s trateg y ar e unc ha nge d. Th e grou p uti lise s an e st abl ish ed r is k management framew ork to monit or its port foli o o f emerg ing risk s incorporat ing the gro up’ s “bot tom up” a nd “ top dow n” app roac h. Th ese a re mo nitore d by the lo ca l and group risk and compliance committees with agr e ed actions regularly tracked . Key emerging risks include : • e co nom ic unc er t ain ty re ga rding th e fu ture ec ono mic tra je ctor y in b oth the UK a nd acro ss gl oba l ma rkets m ore ge ne ra lly; • g eo pol itic al u nce r ta int y w ith co nic t in Ukraine, possible Brexit -relat ed changes to the Nor ther n Ire lan d protoco l an d the potenti al fo r a Scot tis h ind ep en de nce refer endum amongst o thers; • nancial loss or disrupt ion resulting from the im pacts of c lim ate cha nge; • legal and regulat or y changes including the possibility o f regulat or y and legal dive rge nc e bet wee n the U K and EU; an d • s upp ly c hai n ri sk, wi th Cov id- 19 continu ing to impac t su ppl y ch ain s glo bal ly , f ur t her agg ravated by the c on ict i n Ukr ain e and th e ge ne ral in atio na r y ec ono mic env iron me nt in key ma rkets. Th e grou p wil l co ntinu e to mon itor an d as ses s the se ri sks, ad he rin g to our e sta bli she d and pro ven business model , as out lined on page s 1 0 to 1 2; imple me nting a n integ rated risk management approach based on t he con ce pt of “ thre e lin es of d efen ce” ; a nd set ting a nd o pe rating w ithi n cle ar ly d en ed and m oni tored r isk a pp etites. T he g roup’ s bus ine s s mod el, su ppo r ted by a s oli d trac k rec ord an d sus tai ned p rota bi lit y , ha s wor ked well t hrough a range of economic, social and e nvi ronm en tal c ond itio ns ove r mul tipl e ec ono mic c ycle s and th is is p roje cted to con tinu e over the m ed ium te rm. Gi ven th e dive rs ie d po r t foli o of the bu sin es se s acro ss the gro up, the boa rd con sid er s me diu m- term economic, social , environmental and technological t rends at the indiv idual business uni t leve l as pa r t of the s trateg ic pl an nin g cycle . This includes focusing on the long- term s trateg ic a ppro ach to prote ct, grow an d sus tai n our b usi ne ss mo de l, with key pr ior iti es outlined on page 32 . Th e boa rd has a lso a ss es sed th e gro up’ s viability by considering r e gular for e casting and s tres s testin g und er t aken to ree ct uncertainties in t he economic en vironment. A ran ge of for ward-l ook in g sc ena ri os ha s be en considered, with dist inct social and e conomic assumptions . Dif fering macr oeconomic assumpti ons hav e been assessed across the sce na ri os inc lud ing G DP gr ow th, inati on, int erest rat es, unemployment , resident ial house prices and equity prices. The modelling con sid er s the gro up’ s fu ture pro jec tio ns of protability , cash ow s, capital requirements and re so urce s, an d other key nan cia l an d regu lator y r atios ove r the p eri od. In the mod el led s ce na rio s, it h as be e n ass um ed that no s ign ic ant str uctu ral c ha nge s to the com pany o r grou p wil l be req uire d. These scenarios hav e been built using the sa me p rin cip les a s thos e in the g oin g con ce rn a sse ss me nt, exte nde d out ove r the thr ee-y ear period : • th e ce ntra l sce na rio p res ents o ur ba se case assuming in ation levels r e main elevat ed, r eecting t he lat est economic outl ook, w ith m inim al G DP grow th, whils t unemployment remains low; and • the downside scenario assumes a pronounced and sudden rise in in ation and i ntere st rate leve ls, wi th imp air me nt losses front -loaded as cust omer affordability is impact ed, coupled with lower income in market -facing businesses as e qui t y pri ce s an d mar ket leve ls d ec lin e. Th e grou p ma inta ins c ap ita l ratio s signicantly above regulatory minima, which are cu rre ntl y set at a mi nim um co mmo n equ it y tie r 1 rati o of 7 .6% and a min imu m total ca pi tal r atio of 1 1 .5% , exclud in g any applicable Prudent ial Regulati on Authority (“PR A ”) b uf fe r . In al l sce na ri os, the c om pany and g roup c onti nue to op erate wi th suf cie nt leve ls of ca pi tal, wi th the gr oup’ s ca pi tal ratios and fu nding and liquidity posit ions well with in a ppeti te and c omfo r ta bly i n exces s of regulat or y requirements. Acros s the di vi sio ns, the nan cia l imp act of each scenario demonstrat es the resilience o f our business model . In addition , the direct ors have revi ewed th e key mana ge ment a ctio ns whi ch wou ld b e take n in the eve nt of a down sid e, in orde r to mitig ate the stre ss, an d the vi ab ili ty of th es e acti ons. In making th is assessment , the direct ors have co nsi de red a w ide r ang e of info rmati on, including: • th e boa rd’ s r is k app etite an d rob ust as ses sm ent of th e pr inc ipa l and e me rgi ng ris ks, wh ich c ou ld im pact th e pe r for ma nce of the gro up, and how th ese a re ma nag ed – ple as e refer to the Ri sk Re po r t on pa ges 74 t o 9 2 ; • th e grou p’ s c urre nt n an cia l pos itio n and pros pe cts – pl eas e refer to the F ina nci al Ove r vi ew on pa ge s 61 t o 6 4; and • the gro up’ s bus in es s mod el a nd stra tegy – please re fer t o the Business Model on pages 1 0 to 1 2, and Str ateg y and Key Pe r fo rma nc e Ind icator s on p age s 32to33. Th e dire ctors h ave als o con sid ere d the resu lts f rom the m ost re ce nt ver sio n of the follow ing rev iews: • th e ann ua l review of th e Rec over y Plan which included emplo ying a number o f sce na ri os to test ou r rec over y p la n, our wid e ran ge of r isk i ndi cators a nd re cove r y optio ns avai lab le to the gro up; • th e 2021 ICAA P , wh ich i ncl ude d both stres s testi ng a nd sc ena ri o ana ly sis. At a grou p level, t wo seve re stre ss tes t scenarios were assessed representing prot racted downside scenarios . This took ac cou nt of the ava ila bi lit y an d like ly ef fec tive ne ss of mi tigati ng acti ons th at cou ld b e take n by ma nag em ent to avoi d or red uc e the im pact o r occ ur ren ce of underlying risks . As part of the ICA AP , rever se stre ss te sting wa s al so em ploye d to suppor t the identica tion of po tential adve rs e circ ums tan ce s and eve nts; and • th e 2021 IL A AP , whi ch wa s und er t aken to assess the group ’ s liquidit y across a range of mark et- wide and idiosyncrat ic scenarios de mons tratin g the on goi ng stre ngth of th e group ’ s funding and liquidity model. This forward-looking viability stat ement mad e by the bo ard is b as ed on infor mati on an d kn owle dg e of the gro up at 27 Septem be r 2022 . Unex pe cte d ris ks an d unc er t ain ties m ay ar ise f rom f uture eve nts or conditions, such as economic changes and business conditions , which ar e bey ond the grou p’ s c ontrol a nd co uld c aus e the gro up’ s actu al pe r for ma nce a nd re sul ts to dif fe r fro m those ant icipated. Th is Str ategi c Re por t wa s ap prove d by the boa rd an d sig ne d on i ts be ha lf by: Adrian Sainsbury Chief Execut ive 27 Septem ber 2022 Book 1.indb 94 27/09/2022 23:46:21 95 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Aud it Co mm it tee m em be r Risk Committee member A RI Committee chair Remuneration Commit tee member Nomination and Governance Committ ee member R N Board of Direct or s Mike Biggs R N Ch ai r ma n | A p po in te d to t h e Bo ar d o n 1 4Ma r ch 2 017 , an d a s Ch ai r ma n on 1M ay 2 0 1 7 Back ground and E xperience Mike was th e ch air ma n of Di rect L in e Ins ura nce G rou p plc f rom 201 2 until Au gus t 2020. He was p revio usl y ch air ma n of Res olu tio n Lim ited, the n a F TSE 1 0 0 U K life a ssu ran ce bu sin es s, an d has a cted as b oth chief e xecutive o f cer and group nance direct or of Resolution plc. Mike was g roup na nce d irec tor of Aviva p lc an d is an A ss oci ate of the Ins titu te of Char tered Acc oun tants i n Eng lan d and Wal es. Adrian Sainsbury Ch ie f E xec u t ive | A p po i nt ed o n 21Se p te mb e r 2 02 0 Current External Appointments Non -exec uti ve dire ctor of UK F ina nc e, the ban ki ng an d na nc e industry body . Back ground and E xperience From 201 6 u ntil S eptem be r 2020, Adri an was m an agi ng di rec tor of Clo se Broth er s’ Bank in g di vis ion. S inc e Augu st 201 3 he ha s be en a direct or of Close Brothers Limit ed, the group’ s banking subsidiary . Adri an h as prev io usl y he ld execu tive ro le s at Barc lays, R BS an d Ba nk of Irel an d and wa s ch ief exec uti ve of ANZ B an k in Euro pe. Adr ia n ha s als o ser ved as c hai rma n of the A sse t Bas ed Fi na nce A sso ci ation, the UK a nd Ire la nd in dus tr y bo dy . Mik e Morgan Gr ou p F in an c e Di r ec to r | A pp oi n te d on 15Nove mb e r 2 018 Back ground and E xperience From 201 0 to 20 18, Mike was ch ief na nci al of ce r of Cl ose B rothe rs’ Ban ki ng di vi sio n and h as b ee n a dire ctor of Cl ose B rothe rs L imi ted, the grou p’ s b ank in g sub sid ia r y , si nc e 201 0. Mi ke is a ch ar tere d ac cou nta nt and f rom J une 201 9 to Jun e 2021 was cha ir of the I CAE W Fin an cia l Se r vi ce s Facul t y Boa rd an d an ICA E W Cou nc il me mb er . Mi ke also h el d sen ior ro le s at Scot ti sh Provi de nt an d RBS, m ost re ce ntly as nan ce direct or of the Wealth Manageme nt Division o f RBS. Mark P ain R N RI Se n io r In d ep en d en t D ir ec t or | A p po in te d o n 1Ja nu a r y 2 0 21 Cu r re nt E x t e rn a l Ap p oi nt m en t s an d C ha ng e s Ma rk now s er ve s as th e cha ir ma n of A X A UK pl c whe re he c ha irs th e Nom inati on an d Ris k Co mmi tte es a nd he se r ve s on the I nvestm ent and Remuneration Commit tees, London Squar e Limit ed and E mpiric Stud ent Pro pe r t y plc (al so ch air of th e No min ation C omm it tee a nd a member of the Remuneration Commit tee ). Back ground and E xperience Ma rk ha s ex tens ive na nce, r isk m an age me nt an d co mme rci al exp er ien ce, hav ing h eld b oard p os itio ns at Ba rrat t D evel opm ents plc a nd A bbe y Natio na l Grou p. Mar k has p revi ous ly be en a n on- execu tive d irec tor of Y o rks hi re Bui ldi ng So ci et y (whe re he s er ved as senior independent dir ector) , Ladbrokes Coral G roup plc , Punch T ave rns p lc, Spi ri t Pub Co mpa ny plc, Jo hns ton Press p lc, an d Aviva Insu ra nce L im ited, am ong oth er s. Book 1.indb 95 27/09/2022 23:46:33 96 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Boar d of Dir ector s cont inued Patricia Halliday A RI Independent Non-e xecutive Director | Appointed on 1 August 2 021 Back ground and E xperience Patric ia h as over 3 0 yea rs’ exp er ie nce i n ris k ma nag em ent ac ros s the inve stme nt, cor po rate and ret ail b ank ing s ec tors. Patr ici a was chi ef ri sk of ce r (“CRO”) of S ant and er U K wi th res pon sib ilit y fo r ris k man ag eme nt a nd over si ght ac ros s retai l and c om me rcia l ba nki ng. Prio r to Sant and er , Patri cia wa s CRO of G E Cap ita l Inter natio na l Hol din gs Li mite d. She b ega n he r ca ree r at NatWe st, followe d by senior credit risk roles at Bar clays Capital and then Deutsche Ban k, in clu din g as H ead of Le vera ged a nd S tru ctu red Fi na nce a nd Com me rcia l Re al Es tate, and ch air of th e Un der wri ting C omm it tee, cove rin g the UK , Euro pe an a nd US m ar kets. Tr a c e y G r a h a m R RI Independent Non-e xecutive Director | Appointed on 22 March 2 022 Current External Appointments Non -exec uti ve dire ctor of Ib stock p lc, Di sc overI E Grou p pl c and L INK Scheme Limit ed. Back ground and E xperience T r acey h as bro ad exec utive ex pe ri en ce f rom co mpa ni es op er ating i n the na nci al a nd bu sin es s ser vic es s ector s, both in th e UK a nd inte rnati ona ll y . She h as ex ten si ve expe ri en ce as a re mu ne ratio n co mmi tte e cha ir a nd als o ser ves as a s eni or in de pen de nt dire ctor . T rac ey beg an h er c are er at HSBC a nd su bse qu entl y hel d the rol e of dire ctor of cu stome r se r vi ce s at A X A Insu ra nce p lc. Sh e was c hie f execu tive of ce r of T a la ris L im ited, a n int ernational cash management busine ss. Be fore tha t, she held a number of sen io r role s in D e La R ue pl c, incl udi ng as m an agin g dire ctor – Id en tit y Sys tems, pr esi de nt – Se quo ia Voting Sys tems a nd ma na ging d ire ctor– Cas h Sys tems. T rac ey se r ved a s a no n-exe cuti ve dire ctor of Roya l Lond on Mu tua l Insu ra nce S oci et y Li mited fo r nin e yea rs u ntil Ma rch 2022. Pet er D uf f y R RI Independent Non-e xecutive Director | Appointed on 1J an u ar y 2 019 Current External Appointments Chi ef exec uti ve of c er of M one ysup er ma rket.com G rou p plc. Back ground and E xperience Peter pr evio us ly se r ve d as c hie f execu tive of ce r of Ju st Eat L im ited, havi ng b ee n inter im c hie f execu tive of ce r an d chi ef cu stome r of ce r of Jus t Eat p lc be fore that. Be twe en 201 1 a nd 201 8, Peter h eld a n um ber of sen ior ro le s at ea syJet plc, in clu din g as c hief c om merc ia l of c er an d grou p com me rcia l dire ctor . Pri or to that, Peter hel d role s at Aud i UK Ltd and B arc lays Ba nk p lc over a p er io d of more th an 1 5 ye ar s. Peter was als o pre sid ent of th e Inc or porate d Soc iet y of B riti sh Ad ver ti se rs. Oliver Corbett A N RI Independent Non-e xecutive Director | Appointed on 3J un e 2 014 Current External Appointments Chi ef n an cia l of c er of M cG ill & Pa r tn er s Ltd. Back ground and E xperience Oli ver wa s for me rl y chi ef n an cia l of c er of H yp er ion I nsu ran ce G roup Lim ited a nd nan ce di rec tor of LCH. Cle ar net G roup L im ited a nd of Novae G roup p lc. Oli ver i s a cha r tere d acc ount ant a nd prev iou sly work ed for KPMG , SG W arburg, Phoenix Se curities (la ter Donaldson Luf k in Je nre tte) and D re sdn er K le inwo r t Wass er stein, w he re he wa s man agi ng di rec tor of inves tme nt ban ki ng. Ol ive r was al so a no n- ex e cutiv e direct or of Ra thbone Br others plc. Book 1.indb 96 27/09/2022 23:46:46 97 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Lesley Jones A R N RI Independent Non-e xecutive Director | A ppointed on 2 0De ce m be r 2 013 Current External Appointments Cha ir of S ain sbu r y’ s B an k; non -exec uti ve dire ctor of M ood y’ s Inves tors Se r v ic e Lim ited; an d non -exec uti ve dire ctor of Moneysupermark et. com Group plc. Back ground and E xperience Les ley h as ex ten sive b an ki ng exp er ie nc e, havin g prev iou sl y he ld seve ral li ne ma na gem en t pos itio ns wi thin C itig roup a nd was g rou p chi ef cr edi t of c er of Royal B ank of S cotl an d plc f rom 20 0 8 to 20 1 4. Les ley was p revi ous ly a no n- execu tive di rector of N B rown G rou p plc, ReA ssu re Gro up pl c (wh ere sh e als o ch aire d the R isk C omm it tee) and Northern Bank Limit ed. Te s u l a M o h i n d r a A RI Independent Non-e xecutive Director | A ppointed on 15Ju ly 2 0 21 Cu r re nt E x t e rn al A p p oi nt m en t s an d C ha ng e s Non-ex e cutive director of NHBC (National House-Building Council) andtr us tee of Variet y , th e Chi ldre n’ s Cha ri t y , a nd wa s app oin ted as non -exec uti ve dire ctor of the R AC gro up in S eptem be r 2022. Back ground and E xperience T e sul a qua lie d as a c har te red ac cou ntant w ith Pr icewater hou seC oo per s, and h eld m an agin g dire ctor rol es at J P Morg an an d at UBS, s pe cia lis ing in co rp orate na nc e for n anc ia l insti tuti ons a nd p ens ion f un d ris k man age me nt. She was a lso a fo und ing m emb er of th e man age me nt team of Pater no ster , the s pe cia list b ulk a nn uit y in sure r , w he re sh e was a me mbe r of the exe cuti ve co mmi tte e. Sin ce the n, she h as wo rked a s an ind ep end en t na nci al c ons ult ant o n bus in es s pla ns a nd ca pi tal r ais ing. Sally Williams A RI Independent Non-e xecutive Director | A ppointed on 1 Jan uary 2020 Current External Appointments Non -exec uti ve dire ctor of L an cas hi re Hol din gs L imi ted an d of Famil y As sura nc e Frie nd ly So ci et y Lim ited (O ne Famil y) an d ch air of th e aud it committee at both companies. Back ground and E xperience Sal ly is a m em be r of the Ins titu te of Char tered Acc ou ntan ts of Eng lan d an d Wale s. Sal ly h as ex ten sive r is k, com pl ian ce a nd governance experie nce, having held senior e xecutive posit ions at Mar sh, Nati ona l Austr ali a Ban k and Avi va. Pri or to that, Sall y hel d role s at Pri cewater hou seC oop er s LLP i n both the ir ri sk ma nag eme nt and a udi t tea ms over a p er io d of 1 5 yea rs. Aud it Co mm it tee m em be r Risk Committee member A RI Committee chair Remuneration Commit tee member Nomination and Governance Committ ee member R N Th e Bo ar d co nsi de re d an d ap pr ove d the a dd iti on al ex te r na l co mm itm e nts t ake n on by M ar k Pa in a nd T es ul a Mo hi nd ra du r ing t he p er i o d. In e ac h ca se, i t was a gr ee d th at th ere w ou ld b e no impact on the time commitment required as non-executive direct ors, or on the independence and objectivity required t o discha rge t he agreed responsibilities of the roles. Bridget Ma caskill R RI N Independent Non-e xecutive Director | A ppointed on 21Nove mb e r 20 13 Current External Appointments Non -exec utive d ire ctor of Jon es L a ng L aSa lle I nco rp orated a nd chairman of Cambridge Associates LLC . Back ground and E xperience Br idg et was fo rm er ly ch air ma n of Fir st E agl e Hol din gs, In c. and a se ni or adv ise r to Fir st Ea gle I nves tme nt Ma nag em ent L LC , of w hi ch sh e was pre si de nt an d chi ef exec uti ve of c er . Br id get wa s als o a tru stee of the TI A A- CR EF fun ds a nd a no n-exe cuti ve dire ctor of Ju pi ter Fund Ma nag eme nt pl c, Prud enti al pl c, Scot tis h & Newc astl e plc, J Sa ins bur y plc, Hi lls down H old ing s plc a nd of th e Fed era l Nati ona l Mo r tgage Ass oci ation i n the US. Book 1.indb 97 27/09/2022 23:47:07 98 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Executive Commit te e Members at 2 7 Sept ember 202 2 Adrian Sainsbury Chief Executiv e Robert Sack Gr o up C hi e f Ri sk O f c er Fr an k P e nn a l Chief Executiv e Of cer Property Bradley Dyer Winterood Chief Executive Rebekah Etherington Gr ou p H ea d of H u ma n Re so ur c es Angel a Y oto v Gr o up G e ne r al C ou ns e l Mart yn Atkinson Group Chief Operat ing Ofcer Neil Da vies Chief Executiv e Of cer Commercial Mik e Morgan Group F inance Director Eddy Reynolds Asset Mana gement Chief E xecutive Rebecca McNeil Chief Executiv e Ofcer Retail Naz Kazi Gr o up H ea d of I n te rn a l Au di t Book 1.indb 98 27/09/2022 23:48:19 On b e ha l f of t h e boa r d, I a m p le as e d to i nt r od uc e t h e Co rp or a te G over n an ce R ep o r t fo r t he ye a r en de d 31 Ju l y 2 02 2 . The f ol low in g pa g es ex pl a in t h e gr ou p’s gove rn an c e st r u ct u re a n d key ac t i vi t i es u nd e r t a ken by t h e bo a rd a n d it s c om mi t t ee s du r in g t he y ea r . T h e re po r t d e sc ri b es h ow we ha ve co mp li e d wi t h th e U K Cor p or a te G over na n ce Co de i n fu l l du r in g t he y ea r . At Clos e Brothe rs, we rml y be lieve i n the im por tant rol e that high standards of corporat e governance and ef fective boar d over sig ht pl ay in su ppo r ting th e gro up’ s p er form anc e, the de live r y of its str ategy a nd a chi evin g lo ng-term s ust ain ab le su cce s s for the co mpa ny’ s s ha reh old er s and oth er s take hol de rs. T he bo ard is co mmi t ted to main tai nin g a robu st an d ef fe ctive g over na nce, con trol an d ri sk ma nag em ent f ra mewor k an d I have be en p le ase d onc e aga in thi s yea r to see the b ene ts of that f ra mewor k. As the c oun tr y ha s moved o ut of the p and em ic a nd res tric tio ns ea sed, the b oar d has retu rn ed to a more n orm al sc he dul e of me eting s an d boa rd ope rati ons. T he m eeti ngs h ave bee n ma inl y in pe rs on, exce pt whe re ci rcum sta nc es h ave prevente d ind iv idu als from at ten din g. The b oard h as wel co med th e retur n to the of ce and th e op por tunit y to me et bo ard c oll ea gue s an d em ploye es i n person again . Strategy , Purpo se and Culture Th e boa rd play s an im po r ta nt role i n set tin g the gr oup’ s stra tegy , pur pos e, bus ine ss m ode l an d cul ture a nd the b oard s pe nds ti me on ea ch of the se a rea s throu gho ut th e yea r . E ach of th e dire ctors rec ogn ise s the ir rol e in set tin g the tone f rom the top a nd in mon itori ng how th e grou p’ s cu ltu re and va lu es a re com mun ic ated and e mb ed ded. We al so ac kn owle dg e the cr uc ial l ink b et wee n cul ture, gove rna nc e and l ead er shi p an d the rol e that de cis io n- mak in g pl ays as a key dr ive r of cul ture. O nc e aga in thi s yea r , i n my own e nga ge men t with e mp loye es, I h ave bee n pl ea se d to see the grou p’ s s trong a nd di stin cti ve cul ture in a ctio n, as sh own by th e con tinu ing c omm itm ent o n the pa r t of ou r em ploye e s to supp or t customers , clients and par tners. Michael N. Biggs Chairman Corporate Go vernance Repor t Co mp li a nc e wi t h th e U K Co rp or a te G over n an ce C od e Th e UK C orp orate G over na nce C od e 201 8 (th e “Cod e”), published by the Financial Reporting Council (“FRC”) , applied to the co mpa ny throu gh out th e na nci al ye ar . A co py of the C ode ca n be fou nd on th e FRC’ s web site: w w w .frc.org.uk. It is the b oard’s view that, throu gho ut th e year , th e com pany h as app lie d the p rin cip le s an d com pli ed w ith the p rovis io ns set o ut in the Co de. De tai ls on how th e co mpa ny has a ppl ie d and c om pli ed with th e Co de are s et ou t in this C or por ate Gover na nce R epo r t and i n othe r sec tio ns of the A nn ual R ep or t. We have ali gne d our re por t with th e ve se ctio ns of the C od e and th e und er ly ing principles and pro visions. Boa rd le ad er sh ip Page 10 1 Division of responsibilities Page 1 08 Composition , succession and e valuation Page 1 1 3 Audi t, risk a nd inte rna l co ntrol Page 1 1 7 Remuneration Page 1 23 Gov ernance Report 99 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 F inancial S tatement s Strate g ic Repor t Book 1.indb 99 27/09/2022 23:48:25 Ch a ng es t o th e B oa rd Dur in g the yea r , we were p lea se d to welco me Patr ici a Ha llid ay and T ra cey G rah am a s non- execu tive d ire ctors. M ore de tai ls on thei r ap poi ntme nts and th e pro ce ss may b e foun d on pa ge 1 1 4. Les ley Jo ne s and B rid get M aca sk ill w ill reti re from th e boa rd at the co ncl usi on of th e ann ualg en era l me eting (“ AGM ”). Patrici a wil l ass um e the rol e of cha ir of the R is k Com mit tee f rom th e date of the AG M. Th e boa rd co ntinu es to be d ive rse, w ith di rector s fro m a ran ge of bac kgroun ds, an d I am pl ea se d that we co mpl y wi th the rec omm end atio ns of the F TSE Women Le ad er s and Pa rker R evi ews in ter ms of the c omp os itio n of the bo ard. Board Ef fectivenes s Th is yea r , i n lin e with th e Co de, the bo ard un de r took a n inter na l proc es s to review its e f fec tive nes s an d pe r for man ce. Th e revi ew con clu ded th at the bo ard re mai ns stro ng an d ef fec tive, and th at it ha s res pon ded we ll to the ch all en ge s ari sin g fro m the un cer tain c urr ent ec ono mic si tuatio n. The eva lu ation a lso ac kn owle dg ed that th e boa rd has a ddre ss ed e ach of th e rec omm en datio ns ma de in th e ex tern al evalu atio n in 2021 . Th e boa rd wel com es th e nd ing s and w ill wo rk to con sid er o ppo r tu niti es fo r inc rem ent al im prove me nts dur in g the yea r ahe ad. Fur th er d eta il on th e evalu ation c an b e foun d on pa ge 1 1 1 . Stakeholder Engagement Sta keho lde r en gag em ent re mai ns a pr ior it y for th e boa rd. Dur in g the yea r the bo ard h as us ed for ma l me etin gs an d othe r opp or tu nit ies to dis cus s the g roup’ s pe r for ma nc e and d el iver y of its str ategy w ith g roup and divisional e xecutives. T hese discussions included considera tion o f sta keho lde rs a nd the ir in teres ts, as wel l as r isks a ri sin g from th e wi der regulat or y , economic and polit ical environment . As par t of the board ’ s regu la r mee ting s and i n ses si ons s pe ci cal ly fo cus ing on s trateg y , the dire ctors h ave spe nt c ons ide rab le tim e as ses si ng an d havi ng reg ard to the impa ct of in div idu al d ec isi ons a nd the g roup’ s op erati ons o n dif ferent stak eholder groups. This has included extensive discussion of poi nts ar isi ng f rom e nga ge men t with s ha reh old er s, cus tome rs, em ploye es, re gu lators a nd oth er g roup s. Th e boa rd has e ng age d with i ts em ploye e s in a var iet y of fo ru ms as p ar t of i ts wor k forc e eng age me nt acti vi tie s. Y o u can nd ou r for mal s tateme nt in re latio n to sec tio n 1 72 of the Com pa nie s Act 20 0 6, togethe r wi th fur ther d eta il abo ut how th e dire ctor s have en gag ed wi th, and h ad reg ard to the intere sts of, stake hol de rs in th e Strate gic R ep or t o n page s 1 4 to 1 7 an d in the C or por ate Gover nan ce Re po r t on p age s 1 0 6 to1 07 . Sustainabilit y Th e boa rd an d its co mm it tee s spe nt tim e on a bro ad ra nge of sustainability considerations, including as par t of its regular discussions abo ut the g rou p ’ s str ategy a nd re gul ar e nviro nme nta l, soci al a nd gover na nc e (“ESG”) up dates. I h ave be en pl ea se d to discu ss th e board ’ s approach in this area as par t of my regular mee tings wit h sha reh ol der s. As p ar t of w ide r su sta ina bil it y dis cu ssi ons, th e boa rd has c onti nu ed to focu s on ex ter na l an d inter na l deve lop me nts in rela tion to cli mate cha ng e. This h as in clu de d disc us sio n of the gro up’ s cli mate strateg y an d goa ls, togeth er w ith ove rsi ght of p rogre ss toward s disc los ure req uire me nts rel ating to the T ask Fo rce on C lim ate-rel ated Fin anc ial D is clo sure s (“TCFD”) w hic h app ly to the gro up for th e rs t time th is yea r . The board and the Nomination and Go vernance Committee ha ve con tinu ed to mo nitor d ive rsi t y and i nc lus ion, b oth as pa r t of on goi ng boa rd suc ce ssi on pl an ning a nd in re lati on to activ iti es ai med at deve lop ing a d ive rs e and i ncl us ive ta le nt pi pel ine bel ow boa rd leve l. Fur the r info rm ation o n the b oard’s appro ach to di ver sit y a nd in clu si on ca n be fou nd on p age 1 1 5. Engagement with S hareholders Engagement and dialogue with shar eholders continues to be a k ey focu s for the b oa rd and I h ave be en p lea se d to meet w ith a nu mb er of our s ha reh old er s dur in g the yea r to disc us s a ran ge of topi cs a nd to ensu re that the b oard i s aware of ou r sh are hol der s’ views. We are de lig hted to wel com e sh are hol de rs to an i n-pe rs on AGM this ye ar . Fur th er d eta ils w ill be s et ou t in the N otice of AGM s ent to shareholders in due course. On b eha lf of th e boa rd, I would l ike to thank s ha reh old er s for the ir con tinu ed e nga gem ent a nd s upp or t. My fe llow d irec tors a nd I loo k for wa rd to conti nue d e nga gem en t with yo u in the ye ar a he ad, including at the A GM. Mi ch a el N . B ig gs Chairman 27 Septem ber 2022 10 0 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Corporate Go vernance Repor t continued Book 1.indb 100 27/09/2022 23:48:25 Effec tive Leadership Th e boa rd’ s p ri mar y role i s to provid e ef fe cti ve le ade rs hip a nd dire ctio n for the g rou p as a wh ole, an d to ensu re that the c omp any is ap prop ri ately m ana ge d, del ive rs lo ng-ter m sha reh old er va lue a nd con trib utes to wi de r soc iet y . I t est abl ish es th e grou p’ s p ur pos e and strateg ic ob jec tive s ens ur ing that th es e are a lig ned w ith the g roup’ s culture and monitors management ’ s performance on an ongoing bas is ag ain st thos e obj ec tives. T he b oard a ls o sup er v ise s the g roup’ s ope ratio ns, wi th the ai m of ens ur ing th at it ma inta ins a f ram ewor k of pr ude nt an d ef fe cti ve cont rols w hic h en abl es r is ks to be prop er ly assessed and appr opriately managed . Th e boa rd ack now le dge s its ro le in a ss es sin g the ba sis o n wh ich th e grou p ge ne rates a nd pre se r ve s valu e over th e lon g term. It s pe nds time d uri ng the ye ar , in s ch edu le d boa rd me eting s, dur in g its an nua l strat e gy discussions and in other sessions with senior management and s take hol de rs, co nsi de rin g how op po r tun itie s an d ris ks to the fu ture su cce ss of th e grou p’ s b usi ne ss sh oul d be ad dres se d. The se dis cus sio ns in clu de the s ust ain ab ilit y of th e grou p’ s m ode l. Fur the r infor mati on on th ese c ons id erati ons c an be fo und i n the Str ategi c Rep or t o n pag es 3 to 59 of thi s An nua l Re por t. An other key f un ctio n of the bo ard i s to dene, pr omote an d mon itor the co mpa ny’ s c ultu re an d valu es, se tti ng the “ ton e from th e top” . It als o ens ure s ef fec tive e nga gem ent w ith, an d par ticipati on f rom, shareholders and other stak eholder s. When making decisions, t he boa rd has re ga rd to the intere sts of a r ang e of sta keho lde rs, i ncl udi ng em ploye es, c ustom er s, cl ie nts an d sha re hol de rs, as we ll a s its broa der d uti es u nde r se ctio n 1 72 of the Co mpa nie s Act 20 0 6. Th e com pa ny’ s for ma l sec tio n 1 72 stateme nt c an be fo un d on pag e 1 7 of this Annual Report. Bo ar d S iz e an d Co m po si t io n Th e boa rd ha s 1 2 m em be rs: the ch air ma n, two exe cuti ve di rector s and n in e ind ep en den t non -exec uti ve dire ctor s. Th e bo ard’ s me mbe rs com e fro m a ran ge of ba ckgrou nd s and th e boa rd is str uc ture d to ens ure that n o ind iv idu al or g roup of i ndi vi dua ls is a bl e to domin ate the de ci sio n-ma ki ng pro ce ss a nd no u ndu e reli an ce is p lac ed on a ny individual. T he Nominat ion and Gov ernance Committee monit ors the overa ll s ize of the b oard a nd th e bal anc e be twe en i ts execu tive a nd non-ex e cutiv e membership. Dur in g 2022, the board a ppo inted t wo ad diti on al no n-exe cuti ve dire ctor s as pa r t of its p roac tive a nd ord er ly a ppro ach to su cc es sio n pla nni ng. Th e over all s ize of the b oard h as grow n sl ightl y in rec ent yea rs as n ew di rector s have b ee n app oin ted to brin g add itio na l and com pl em ent ar y k now le dge, s kil ls a nd exp er ie nc e, and to en sure con tinu it y of me mbe rs hip a nd k now led ge a s other d ire ctors n ea r the end of th ei r term s in the ye ar s ah ead. Th e boa rd con sid er s that rec ent a ppo intm ents h ave resu lted in a valu ab le ref res hin g of the bo ard, prov idi ng ne w pe rsp ec tive s and cha lle ng e whi ch h ave fur ther s treng the ne d the bo ard’ s e f fec tive ne ss and th e qu ali ty of i ts de lib er ation s. As me ntio ne d above, Le sl ey and Br idg et, who have s er ve d on th e Boa rd for ni ne yea rs, w ill reti re at the forthcoming A GM. Rol e o f th e B oa rd i n Re l at i on t o St r at e gy a n d Pu rp os e The board r e cognises its r e sponsibility for establishing and monit oring the str ategy a nd p urp ose of th e grou p. Dur ing th e yea r , a r ang e of acti viti es e na ble d the b oard to foc us on th ese a re as. Th es e inc lud ed a strate gy se ss io n in May 2022. The s es sio n cove red a b road ra ng e of st rategic issues, including t he group ’ s three- year strategic plan, shareholder feedback during the year , oppor tunities f or individual bus ine ss es a nd pe opl e-r elated i ss ues, i ncl udi ng the re sul ts of the recent employ ee opinion sur vey . In add itio n, the boa rd co nsi de rs stra tegic i ssu es a nd the g rou p ’ s bus ine ss m ode l as pa r t of re gul ar m eeti ngs th roug hou t the ye ar . At each scheduled meet ing, group and div isional e xecutives pr ovide upd ates on p er form anc e aga ins t strate gic g oal s and re leva nt deve lop me nts in the w id er ma rket, inc lu ding f rom a c om petitor o r regu lator y p er spe cti ve. Dur ing th e yea r , th e boa rd has h el d a numb er of “ deep-dive” strat e gy sessions, each focused on an individual bus ine ss. T he b oard a im s to cover ea ch of the g rou p ’ s bu sin es se s at suc h a se ss ion o n a roll ing t wo-ye ar ba sis. 10 1 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Board lea dership Book 1.indb 101 27/09/2022 23:48:26 Gov ernance F ramew ork and Board R esources Th e gover na nce f ra mewor k su ppo r ts go od gove rn anc e acro ss th e grou p and f acil itate s de live r y of the s trateg y throu gh ef fecti ve d ecision -making . Th e boa rd has d el eg ated res po nsib ili t y for ce r ta in ma tte rs to its co mmi t tees. E ach c omm it tee h as wr it ten ter ms of refe ren ce. Th e ch air of e ac h com mit tee re po r ts reg ula rl y to the boa rd on ma tte rs di scu sse d at co mmi tte e me eting s. All m em be rs of the b oa rd have acc es s to th e pa pe rs of all c om mit tee s, an d have a sta nd ing i nvit ation to at tend a ny co mmi t tee me etin g. Rep or ts f rom th e boa rd’ s c omm it tee s are s et out lat er in this repo r t an d they in clu de f ur the r det ail o n eac h co mmi tte e’ s ro le an d res pons ibi liti es, a nd the ac tiv itie s un der taken d uri ng the ye ar . Th e boa rd Th e role of th e boa rd is to pro mote the l ong -term su cc es s of the g roup a nd to de li ver val ue to sh are ho lde rs a nd oth er st akeh ol d ers. It sets th e gove rn anc e fr ame wor k and h as re sp ons ib ili ty fo r the l ead er sh ip, mana ge me nt dir ect ion, c ult ure a nd pe r fo rma nc e of th e g rou p E xecu t ive D ir ec to rs Th e boa rd de le gate s the exec uti on of the g rou p’ s s trateg y an d the d ay-t o -d ay ma nag em ent of th e bus in es s to the execu tive d ire ct ors E xecu t ive Co mm it t ee T ogether wit h the E xecutiv e Direct ors, the E xecutiv e Committee is responsible for the da y-t o-day execu tio n of the gro up’ s str ateg y an d man ag eme nt of th e bus ine ss Suppor t ing Committees Supporting committees pro vide oversight on key business activities and risk Audit Committee – O ve rs ee s th e gro up’ s nancial reporting – M ai nta in s an d ma nag e s the relationship with the ex te rn al au di tor – Receives reports from gro up In ter na l Aud it – Monitors int ernal nancial cont rols Risk Committee – R ev iew s an d mon ito rs th e pr inc ip al a nd e me rgi ng risks – R ev iew s the e f fe cti ven es s of the g rou p’ s ri sk management s ystems – O versees compliance Nomination and Gov ernance Committee – Reviews board composition, structure and diversity – M on itor s th at the b oa rd co lle ct ive ly ha s the s k ill s an d exp er ie nc e to ope rate a nd de live r th e stra tegy – O ve rs ee s th e boa rd ef fective nes s review – Considers succession pl ann in g for t he bo ar d and Ex ecut iv e Committee – R ev iew s ESG str ate gy Remuneration Committee – D ete rm in es th e remuneration policy for the exe cu tiv e dir ec tors an d en sur es th at th ere i s a cl ea r lin k be tw ee n rewa rd and performance – R ev iews wo rk f orc e remuneration policie s – R ev iews a nd a pp roves the re mu ne rat ion of t he chairman, executiv e dir ec tors a nd oth er s en io r employees 10 2 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Corporate Go vernance Repor t continued Board lea dership Book 1.indb 102 27/09/2022 23:48:26 Meetings of t he Bo ard At eac h sch edu led m eeti ng, the bo ard re ce ives re po r ts fro m the chi ef execu tive a nd gr oup nan ce di rec tor on the p er fo rm anc e an d results o f the group . The board discusses performance, strat e gic initiativ e s and de velopments in each o f the group ’ s divisions, including upd ates f rom di vis io nal c hie f execu tive s on the ir re spe cti ve are as. Th e grou p chi ef r isk of ce r and th e gro up ge ne ral c ou nse l have a sta ndi ng inv itati on to atten d and p rovi de up dates o n the ir res pe ctive fun ctio ns. T he bo ard al so re cei ves re gul ar re por ts from the g roup human resources , operations, corporate development, compliance and int er nal audit funct ions. Each scheduled boar d meeting includes t ime for discussion between the ch air ma n an d the no n-exe cuti ve dire ctor s with out th e execu tive direct ors. Th e non -exec utive d ire ctors m ee t dur ing th e yea r on a n infor ma l bas is to discu ss m atte rs re levan t to the grou p. In add itio n to the sche du led m eeti ngs, a ll dire ctor s atten de d a strate gy se ss io n with s en ior m ana ge me nt in May 2022. The re we re a fu r the r ei ght ad h oc me etin gs du ri ng the ye ar to dis cu ss pro gre ss o n ke y project s and t he Annual Repor t. The Nomination and Go vernance Com mit tee h el d two a ddi tion al ad h oc me etin gs du rin g the ye ar to dis cus s, amo ng oth er thi ngs, n on- execu tive di rector re cr uitm ent, an d to cons ide r and re co mme nd to the bo ard th e app ointm ent of T ra cey Graham. The Remuneration Commit tee held two a dditional a d hoc me eting s dur in g the ye ar to disc us s, amo ng oth er thi ngs, m at ters relating to compensat ion planning. The Risk Commit tee held one add itio nal a d hoc m eeti ng du rin g the ye ar to rec ei ve proj ect u pd ates. Th ese a ddi tion al me etin gs a re not ree cted i n the ta ble b el ow . Th e ann ua l sch ed ule of b oard m ee ting s is de ci ded a s ubs tan tial ti me in ad vanc e in o rder to e nsu re, so far a s pos sib le, the ava ila bil it y of eac h of the di rector s. In the eve nt that d irec tors a re una ble to at tend me eting s, they rec ei ve pap er s in the n orm al ma nn er a nd have the opp or tu nit y to rel ay thei r com me nts and q ue stio ns in ad van ce of the me eting, a s well a s foll ow up wi th the c hai rm an if n ec es sa r y . T he sa me pro ce ss a ppl ies i n res pe ct of the va ri ous b oard c om mit tee s. Board Nomination and Governance Committee Risk Committee Audit Committee Remuner ation Committee Ex ecu tive dire cto rs Adri an Sa ins bur y 7 / 7 Mike Morgan 7 /7 Non-ex ecutive directors Mike Biggs 7 / 7 5/5 5/5 Oliver Corbett 7 /7 5/5 5/ 5 5/5 Peter D uf f y 7 / 7 5/5 5/5 T racey Graham 1 3/3 1 /1 3/3 Patr ici a Ha ll iday 2 7/ 7 5 / 5 5 / 5 Lesley Jones 7 /7 5/5 5/ 5 5/5 5/5 Br idg et M ac as ki ll 7 / 7 5/5 5/5 5/5 T esula Mohindra 7 /7 5/5 5/ 5 Ma rk Pa in 7 / 7 5/5 5 /5 5/5 Sally Williams 7 /7 5/5 5/ 5 1 T r ac ey G ra ha m was a pp oi nte d as a n in de pe nd en t no n- exec ut ive d ir ec tor a nd a m em be r of th e Re mu ne ra tio n an d Ri sk C om mi t tee s wi t h effect from 22 March 2022 . 2 Patr ic ia H al li day w as a pp oi nte d as a n in de pe nd en t no n- exec ut ive d ir ec tor a nd a m em be r of th e Au di t an d Ri sk C om mi tte e s wi th e f f ec t fr om 1 Au gu st 20 21 . 10 3 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Book 1.indb 103 27/09/2022 23:48:26 Bo ard Acti v iti e s Strategy • He ld an of fsi te strateg y se ssi on in co nju ncti on wi th the E xec uti ve Committee • Rev iewed I nvestm ent Pro gra mme st ra teg y an d u p da te • Rev iewed th e grou p’ s su sta ina bil it y strat egy • Received regular business unit updat es • Re cei ved d ee p-d ive rev iews of selected business areas • Received regular updat es on clima te and sustainability activities • Ap prove d ann ua l ta x st rateg y Fi na nc i al a n d Co rp o ra te R ep o r t i ng • Received regular reports from t he group nance director on nancial performance • Reviewed r olling forecasts and approv ed 202 3 budget • Ap prove d fu ll-yea r and h al f- year r esults • Received repor ts from group Internal Audit • Review e d new disclosure framew ork to ensu re com pli anc e wi th TCFD reporting Structure/ Capital • Revi ewed th e grou p ’ s stre ss testing policy • Rev iewed th e grou p’ s tre asu r y po licy • Rev iewed th e grou p’ s c api tal s trateg y 202 1 August • Boa rd pa pe rs • Ap poin tmen t of Patri cia Halliday as a non-ex ecutive director on 1 Augu st 2021 Board and committee meetings Announcements an d inve st or engagement Sept embe r • Boa rd • Remuneration • Audit • Ris k • Nominat ion and Gov ernance • • Y e ar - en d res ults and Annual Repor t • Y ear -end analyst brieng • Y ear -end roads how Oct ober • Boa rd • Nominat ion and Gov ernance Nov ember • Boa rd pa pe rs • Ris k • Audit • Annual General Meeting • T r adin g u pd ate • Re sul ts of AGM December • Board updat e 10 4 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Corporate Go vernance Repor t continued Board lea dership Book 1.indb 104 27/09/2022 23:48:26 Stakeholders • Received regular updates on cust omers • Received regular updates on suppliers • Rev iewed th e an nua l em ploye e opinion survey results • Revi ewed re gul ar u pdates o n the culture dashboard • Received regular updat es on inv e stor relati ons a ctiv itie s inc lud ing m eetin gs with s ha reho ld ers a nd p ost-resu lts roads hows • Ap prove d the an nua l Mo de rn Slav er y Statemen t • He ld the 2021 Ann ual G en era l Me eting i n hybr id fo rmat Ri sk a n d Co nt r ol • Rec ei ved re por t s from th e chi ef r isk of ce r • Approv ed the group ’ s Ent erprise Risk Management Framework • Ap proved th e gro up’ s R ec over y Pl an • Ap proved th e an nua l review of th e ICA AP and IL A AP • Rev iewed th e grou p’ s r isk ap p et ite st ate m e nt s • Review e d Pillar 3 disclosures • Rev iewed th e grou p’ s p rin cip al ri sks and considered emerging r isks • Rev iewed th e grou p’ s a nnu al compliance plan • Review ed the gr oup’ s whistleblowing pol icy a nd rec ei ved a n upd ate on activity • Ap proved th e an nua l ren ewal of the group ’ s insurances Gov ernance • Appointed T racey Graham as an independent non-ex ecutive direct or • Rev iewed th e boa rd an d com mit tee pe r for man ce eval uatio n an d the review of th e ch air man’ s pe r fo rma nc e by t he senior independent director • Mon itored p rogre ss o n acti ons f rom previous years ’ board and committ e e performance evalua tions • Revi ewed the te rms of refe ren ce of t he Audit, Remunerat ion, Risk and Nominat ion and Gov ernance Committees • Rev iewed th e mat ters re se r ved fo r the bo ard • Ap prove d the bo ard D ive rsi t y and Inclusion Policy • Received regular tr aining and updat es • Und er too k a revi ew of NED fe es a nd recommended no change • Ap proved th e ar ran ge me nts for the An nua l Ge ne ral M ee ting 2021 • Recommended t he reappointmen t of direct ors Januar y • Boa rd • Remuneration • Audit • Ris k • Nominat ion and Gov ernance • Pre-close tradin g update Feb ru ar y • Boa rd pa pe rs March • Boa rd • Audit • Ris k • Half -year results • Half -year analyst brieng • Half -year roads how • Ap poin tmen t of T r acey Graham as a non-ex ecutive director on 22 Ma rch 2022 April • Boa rd • Remuneration • Nominat ion and Gov ernance May • St rat egy session • Board updat e • T r adin g u pdate June • Boa rd • Remuneration • Audit • Ris k July • Boa rd • Remuneration • Nominat ion and Gov ernance • Pre-close tradin g update 2022 10 5 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Book 1.indb 105 27/09/2022 23:48:26 Engagement with Stak ehold ers Th e boa rd rec ogn ise s that, for the c omp any to be su cce ss ful over th e lon g term, i t is imp or t ant to bu ild a nd ma int ain s uc ce ssf ul rela tion shi ps wi th a wid e ran ge of st akeh old er s and fo r the bo ard to und er sta nd the v iews of key st akeh old er s. Wh en t ak ing d eci sio ns, the bo ard c ons ide rs th e intere sts of, and im pac t on, key sta keho lde rs, inc lud ing i ts rela tion shi ps wi th sha reh old er s, cus tomer s, pa r tne rs, regulat ors, employ ees and suppliers. Stakeholders include: • Col le agu es • Cust omers, clients and par tners • Suppliers • Regulat ors and government • Communities and environment • Inves tors Fur the r de tai l and ex amp le s of how the b oa rd has c on sid ere d sta keho lde r intere sts, a s well a s the c ompa ny’ s s ec tion 1 72 statem ent, ca n be fo und i n the Str ategi c Rep or t o n pag es 1 4 to 1 7 . Th e se ctio ns be low d es cri be th e boa rd’ s a ppr oac h to enga ge me nt with e mp loye es a nd sh are hol de rs. Fur t her i nfor matio n ab out h ow the di rec tors have e nga ge d with e mp loyee s an d had re ga rd to thei r intere sts is s et ou t in the S trateg ic Re por t on pag e 1 4. Th is sec tio n fur ther ex pl ains h ow the di rec tors have h ad reg ard to the ne ed to foster th e com pany’s busin es s rel ation shi ps wi th sup pli er s, cus tomer s an d other s, an d the ef fe ct of thi s on the p ri nci pal d eci sio ns take n by the co mpa ny du rin g the n an cia l yea r . Dur in g the yea r , as pa r t of the g roup’ s res po nsi bili t y to wide r so ciet y , the bo ard di scu ss ed the g roup’ s ch ar ita bl e ef for ts and co mm uni ty acti viti es, i ncl udin g don atio ns of £1 50,00 0 ea ch to Stop Hate UK , Th e Wil dli fe T r us ts and S mar t Works. Engagement with Employ ees As pe rm it ted by th e Cod e, the bo ard ha s pu t in pl ace i ts own ar ran gem en ts to enga ge wi th em ploye es a cros s the gro up ra ther than u sin g on e of the sp ec ic m ethod s set o ut in th e Cod e. Th e boa rd bel ieve s that the re is va lue to be de ri ved f rom a ll dire ctor s par ticipati ng in meaningful emplo yee engagement ac tivities and , following discussion by the Nomina tion and Governance Committee , a framew ork for board en gag em ent w ith e mpl oyee s is ma na ged by th e co mpa ny se cret ar y. Th is fra mewo rk bu ild s on exi stin g emp loye e eng age me nt acti vi ties th at have be en i n pla ce fo r som e time, an d pre se nts a ra nge of d if fe re nt oppor tunities for boar d members to engage directly wit h employees and a lso to rec ei ve fee dbac k on re levan t iss ue s from m ana ge men t. The fra mewo rk ta kes ac co unt of gu id anc e an d sug ge stio ns pu blis he d by the FRC in th is are a. Th e boa rd ack now le dg es the b en et s of mea ni ngf ul t wo-way engagement between the directors and senior manage ment ( on the on e ha nd) a nd e mpl oyee s (on the othe r ha nd). T o thi s end, th e board and se nior management pr ovide employees wit h regular infor mati on on m at ters of in teres t or co nce rn to the m an d con sul t with th em o r releva nt rep res enta tives i n orde r to take the ir vi ews into acc ount w he n mak in g releva nt de cis ion s whi ch ar e likel y to affe ct thei r intere sts. A n exam pl e of eng age me nt an d con sul tatio n in the yea r inc lud ed wor k ing a rra ng eme nts on th e ea sin g of res tric tion s. In add itio n, eng age me nt with, a nd co nsi de ration of th e intere sts of, employe e s con tinu es to for m a si gni c ant p ar t of th e boa rd’ s over sig ht of pro gra mme s ac ross th e gro up. Th e dire ctors u nd er t ake a ran ge of d irec t and i ndi rec t emp loye e eng age me nt acti vi tie s dur ing th e yea r to ensu re that they a re aware of r elevant issues and considerations as part of t heir decision-making and ov er sight act i vities. The direct ors have opportunities t hroughout the ye ar to disc us s the ir own o bse r vatio ns fol lowi ng e nga gem ent acti viti es a nd a lso to fee d bac k com me nts rai sed w ith th em by em ploye es. T he b oar d con sid er s that it s emp loye e en gag em ent acti viti es d uri ng the ye ar have b ee n ef fec tive. Emp loyee e ng age me nt ac tivi tie s und er taken by th e boa rd in the ye ar included: • attendance or par ticipation in business and ot her functional T own Hal l se ssi ons to exp la in the g roup’ s str ategy a nd o per ation s; • regular communica tions from e xecutive directors t o employees on the pe r for ma nce a nd o per ation s of the gro up, in relatio n to the hal f- yea r and f ull -year re sul ts; • deta il ed di scu ssi on of th e resu lts, the me s an d nex t step s ar isin g out of th e gro up’ s e mp loye e opi nio n su r vey; • atte nda nc e at com mit tee s an d othe r foru ms b elow b oard l evel to understand employ ee-related is sues and priorities ; • re viewing the quar terly cultur e dashboard which summarises the gro up’ s cul tura l at trib utes a nd prov id es a n overa ll cu ltu ral assessment ; • site v isi ts by non -exec uti ve dire ctors to me et e mpl oyee s at di f fer ent leve ls of the g roup’ s op erati ons. T he b oard h as st ar ted to res um e its pro gr amm e of vi sits, i n par ticul ar fo r new ly a ppo inted n on- execu tive di rec tors as p ar t of th ei r indu cti on pro gra mm es; • pa r tici patio n by dire ctor s in pro gra mm es a nd ini tiati ves o pe rated for dif ferent gr oups of employ e es, including training and development programmes ; • par ticip ation by exe cuti ve an d non -exec uti ve dire ctors i n Q& A sessions with emplo yees; and • attendance or par ticipation in diversity and inclusion events. Th e boa rd rec ogn ise s that the a ctiv iti es a bove are i mpo r ta nt in he lpin g to achi eve a co mmo n aware ne ss o n the pa r t of al l em ploye es of the n anc ial a nd e con omi c fac tors af fe ctin g the pe r for ma nce of the co mpa ny . T his c ontr ibu tes to a bet ter u nde rs tan din g of the group ’ s activities, purpose, strat e gic aims, and the long- term suc ce ss of th e com pany. Th roug hou t the ye ar , both a s par t of i ts over sig ht of bu sin es s pe r for ma nc e and d evel opm en ts, and i n the cont ext of st rategic discussions, individual board members have prov ide d ins igh t fro m thei r own e nga ge me nt with e mp loye es ac ros s the gro up. Thi s ins ight m akes a m ea nin gf ul co ntri buti on to the board’ s discussions and decision-m aking. By wa y of example, the Remuneration Commit tee has considered points arising from the em ploye e opi nio n su r vey un der taken i n the ye ar in i ts dis cus si ons in relat ion to compe nsation . Members of the Nomination and Gove rna nc e Com mi tte e have di scu sse d the ir own o bse r vati ons fro m thei r en gag eme nt w ith em ploye e s as pa r t of the c omm it tee’ s over sig ht of di ver sit y a nd in cl usi on in iti ative s arou nd th e grou p. Th e boa rd su ppo r ts a nd en co urag es th e invo lve men t of em ploye es in the c omp any’ s pe r for ma nce th roug h two t y pe s of sha re sc he me ope rated by th e grou p: Save As Y o u Ear n (“SA YE” ) and B uy A s Y o u Ear n (“BA Y E”). Both sch em es a re op en to eli gib le e mpl oyee s wh o have completed six months ’ continuous employment with t he group . Dur in g the yea r , the Re mu ner atio n Com mit tee h as co ns ide red data s how ing th e par t ici pation of e mp loye es in th e sc hem es a nd discussed steps to improve participation le vels. 10 6 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Corporate Go vernance Repor t continued Board lea dership Book 1.indb 106 27/09/2022 23:48:27 Engagement with S hareholders Th e grou p has a c om preh en sive i nvestor re lati ons p rogr amm e to ens ure that c ur rent a nd pote ntial s ha reh old er s, as wel l as n anc ia l ana ly sts, are ke pt info rme d of the g roup’ s pe r fo rm anc e an d have app ropr iate ac ces s to man age me nt to unde rst and th e co mpa ny’ s business and st rat egy . Th e grou p ’ s inve stor re latio ns tea m, repo r ting to the g roup nan ce director , has primary responsibility for managing t he group ’ s rela tion shi p with s har eho lde rs. T he tea m ru ns a str uc tured p rog ram me of me eting s, ca lls a nd pre se ntatio ns a roun d the n anc ial re po r tin g ca len da r , a s well a s throu gho ut the ye ar . T he tea m als o reg ula rl y se eks invest or feedback, bo th directly and via the group’ s corporate brokers, whi ch is c omm un icated to the b oard a nd m ana ge men t. Once a gai n throu gho ut the ye ar , the te am ha s res pon de d to a rang e of enq uir ie s and p oin ts of fee dbac k rai se d by sha reh old er s, inc lud ing i n relati on to ESG i ss ue s. Th e boa rd is reg ula rl y up dated on th e inve stor rel ation s prog ram me throu gh a rep or t, wh ich i s prod uc ed for e ac h boa rd me eting a nd summarises share price pe rformance, share register composition and fee dba ck fro m any i nvestor m eeti ngs. I n addi tio n, per iod ic s pec ic “deep d ive s” on inve stor re latio ns mat ter s are p rovi de d to the boa rd. Th e boa rd be lieve s it i s imp or t ant to ma inta in op en a nd c onst ruc tive relationships with shareholders and f or them t o have opportunities to share th ei r view s with th e boa rd. Th e chi ef execu tive a nd group nance director engage wit h the group ’ s major instit utional sha reh old er s on a re gul ar ba sis. I n addi tion, th e cha ir man m eets with major institutional shar eholders t o discuss matters such as strat egy , corporate governance, and succession planning. The Remuneration Committee chair is av ailable t o discuss remuneration mat ter s. Fee dbac k on th ese m ee ting s is prov ide d to the bo ard du ri ng the co ur se of the ye ar . Se par ately , th e se nio r ind ep end ent d ire ctor is avail ab le to mee t with s ha reh old er s. Th e cha ir s of the bo ard’s commi t tee s per io dic al ly se e k eng ag eme nt with s ha reho lde rs o n sig ni can t mat ters th at ari se re latin g to their are as of re spo nsi bil it y an d are avai la ble fo r eng age me nt wi th shareholders a t other times. Per iod ic all y , the g rou p run s se min ar s cove ri ng di f fe rent a sp ec ts of its bu sin es s to provi de ad diti on al de tai l to investor s an d ana ly sts. Relevant presentations , toget her with all results announcements, Annual Reports, regulat or y news announcements and other relevan t doc ume nts a re avail ab le on th e inves tor rela tions s ec tion of th e com pa ny’ s web si te. Th e grou p en gag es w ith in stitu tio nal s ha reh old er b odi es a nd pr oxy adv ise rs d uri ng the ye ar . Annual General Meeting Th e dire ctors re ga rd the co mpa ny’ s AGM a s an im por tant opportunit y for shareholders to engage directly with the boar d. Th e boa rd ack now le dg es the i mpo r ta nc e of sha reh ol der s rec eiv ing p res ent ation s from th e boa rd at the me etin g and bei ng a ble to as k que stio ns on th e bus ine ss of th e AGM and the pe r for ma nc e of the gro up. Al l voting at g ene ra l me eting s of the c omp any is c on duc ted by way of a pol l whi ch re sul ts in a fa ire r and m ore ac cur ate indi cati on of the vi ews of sh are ho lde rs a s a who le. Al l sh are hol der s have th e opp or tu nit y to ca st the ir votes i n res pe ct of pro pos ed re sol uti ons by prox y , ei the r ele ctro nic al ly or by p ost. Fol lowi ng the AGM, th e voting resu lts fo r eac h res olu tion a re pub lis he d and m ade ava ila ble o n the com pa ny’ s web si te. Th e com pany w ill retu rn to a so lel y in-p er son m ee ting th is yea r . T he me eting i s sc hed ul ed to take p lac e on T hur sd ay 1 7 Nove mb er 2022 at 1 1 .00 a m. Pr in ci p al B oa r d De ci s io n: C li ma te R i sk S ce n ar i o An a ly s is Stress T esting As a re gul ated le nde r , we are re qui red by th e Ban k of Eng lan d/ Prudential Regulation A uthority t o conduct st ress testing annually as pa r t of ou r Inter nal C api tal Ad eq uac y Ass es sm ent Pro ce ss (“ICA A P ”). This ye ar , we fu r the r en ha nce d ou r con sid erati on of cli mate ris k imp acts w ithi n our ICA AP ap proa ch an d sp eci c all y addressed long-horizon clima te scenario analysis, aligning with PR A Sup er v is or y S tateme nt SS 3/1 9, to asse ss th e potenti al nancial implicat ions of climate-relat ed risks and opportunities and ass es s our re si lie nc e to both physi cal a nd tra nsi tio n ris ks. Th e Clo se Broth er s Gro up al so en ha nce d its c lim ate risk dis clos ure s to align w ith th e reco mm end ation s of the T ask Force on Climat e-related Financial D isclosures (“T CFD”) , which inc orp orated th e sce na rio a na lysi s and s tres s testin g con duc ted on certain lending por tfolios. How t h e bo ar d c on s id er e d, a n d ha d r eg ar d t o, t he interests of key stakeholders and the requirements of section 1 72(1 ) • Th e boa rd rec ogn ise s its re qui rem ent by th e regu lator to understand the nancial risks and opportunities from climate cha ng e and a sse ss th ei r impa ct on th e com pa ny , i ncl udi ng bus ine ss str ategy a nd r isk a ppeti te. The rev iew of the c lim ate ris k sc ena ri o an aly sis by th e boa rd for me d a core p ar t of satisfying this requirement. • Th e ana lys is c ons ide red va ri ous s cen ar io tem per ature tran siti on paths a nd th e impa ct that th ese wo uld h ave on the env iron me nt, our pe op le, ou r custom er s an d strate gic p ar tn er s. • Th e be havi our of c ustome rs i n res pon se to the var iou s cli mate sce na ri os was c ons id ere d an d take n into acc ou nt wh en de cid ing o n likel y ma nag em ent a ctio ns an d any p otentia l imp act on business st rategy . In t he se scenarios, some customer be havi our s were l ikel y to be gui ded by p er so nal c hoi ce, wi th othe rs im pac ted by gove rn me nt po lic y . • Th e imp act of a ny man age me nt acti ons i nue nc e fu ture business strat egy and risk appe tit e. • Th e cli mate dis clo sure s prod uc ed by the G rou p are fo cus ed on enhancing transparen cy f or the Gr oup ’ s stakeh olders. 10 7 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Book 1.indb 107 27/09/2022 23:48:27 10 8 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Corporate Go vernance Repor t continued Division of responsibilit ies Th e role s an d res pon sib ili tie s of the ch air ma n an d chi ef execu tive a re se par ate with c le ar di vi sio ns an d set o ut for ma lly i n wr iting . Each member of the bo ard ha s a di stinc t rol e and i s par t of the coh es ive m emb er sh ip of the b oard. Ea ch ro le on th e boa rd is di scu sse d be low . Role Responsibility Mike Biggs Chairman • Re spo nsi ble fo r lea din g the bo ard a nd en sur ing i t ope rates e f fec tive ly • Sets th e age nda fo r me etin gs an d ens ure s ef c ie nt an d bal anc ed d ec isi on-m ak ing a nd s uf cie nt tim e for boardroom discus sion • Ensu res th at the bo ard a s a who le deve lo ps the g roup’ s strate gy • Ensures t he culture in the boar droom pr omot e s effective debate and good governance • Sup por ts the deve lop me nt of the g roup’ s cul ture a nd se ts the tone f rom the top • Promote s ef fec tive e nga ge me nt bet wee n the b oard, i ts sha reh old er s an d other s take hol de rs • Lea ds the a nnu al bo ard eva luati on pro ce ss • Chairs t he Nomination and Governance Committee and monitors the board’ s composition Adrian Sainsbury Chief Execut ive • E xecu tes the gro up’ s strateg y as a gree d wi th the bo ard • Lea ds the E xe cuti ve Co mmi tte e in the d ay-t o -d ay man age me nt of the g roup • Ensu res th e grou p’ s b usi ne ss is c ond ucte d with th e hig he st sta nda rds of i ntegr it y al ign ed wi th the group ’ s culture • Ma nag es th e grou p’ s r isk ex pos ure in l ine w ith b oard p oli cie s an d ri sk ap peti te • Lea ds the g roup’ s inve stor rela tion s acti viti es Mark P ain Senior Independent Director • Provid es a s oun din g boa rd for th e cha ir man • Provid es a n al tern ative c han ne l of com mun ic ation fo r sha reh old er s an d other s take hol de rs • Lea ds the a nnu al m eeti ng of no n-exec uti ve dire ctors w ith out th e cha ir man p res ent to ap pra ise th e chairman ’ s per formance Non -E xecu tive D ire ctor s • Provi de c ons truc tive c hal le nge a nd sc ru tiny of th e per form anc e of ma nag em ent • Br ing a n ex ter nal p er sp ec tive, kn owl ed ge an d exp er ie nce to the b oa rd • As sist i n the d evelo pm ent of st rateg y and th e de cis ion -ma kin g pro ce ss • Promote the h igh es t sta nda rds of in tegr it y an d gove rna nc e • Through membership of the group ’ s committees, de termine appropriat e levels of remuneration , review the integ rit y of th e na nci al st ateme nts, revi ew suc ce ss ion p la ns for the b oa rd and th e E xecu tive C omm it tee and m oni tor the r isk p role of th e grou p • Gath er the v iews of th e wor k forc e throu gh at tenda nc e at key busi ne ss eve nts and th roug h em ploye e engagement Com pany S ec reta r y • Ensu res th e boa rd rec ei ves hi gh qu ali t y infor mati on an d in su f c ien t time • Advises on corporate go vernance • Facil itate s boa rd ind uc tion a nd tra ini ng • Availa bl e to provid e ad vic e an d ser vic es to su ppo r t al l dire ctor s • Org an ise s the A nnu al G ene ra l Me eting Th e cha ir ma n and c hi ef execu tive h ave var iou s pre sc rib ed res pon sib iliti es u nde r the S eni or M ana ger s Re gim e over se en by the PR A. Non-Executive Directors’ Independence and Time Commitment Th e boa rd has a ss es se d the in dep en de nce of e ac h of the no n- execu tive di rec tors, in a cco rda nce w ith p rovis io n 1 0 of the C od e, and i s of the op ini on that e ac h acts in a n ind ep en de nt and o bje cti ve man ne r and th ere fore, und er th e Cod e, is ind ep en den t and f ree f rom any rel atio nsh ip that c oul d af fec t thei r jud ge men t. The bo ard’ s opi nio n was de term ine d by co nsi de rin g for e ach n on- execu tive d irec tor , among ot her things: • wh ethe r they ar e ind epe nd ent i n cha rac ter an d jud ge men t; • how they c ond uct th em sel ves i n boa rd an d com mit tee m eeti ngs; • whe the r they have a ny intere sts w hic h may gi ve ris e to an actu al o r pe rcei ved c on ict of i nteres t; and • whe the r they act i n the b est i nteres ts of the co mpa ny , its sha reh old er s an d other s take hol de rs at al l time s. Th e cha ir ma n, Mike Bi ggs, wa s co nsi de red to be i nde pe nd ent o n app oin tmen t in lin e wi th the prov isi ons of th e Co de. Th e com pany h as c omp lie d with th e Co de prov isi on that at l ea st ha lf the bo ard, exclu din g the ch ai rma n, sho uld c om pri se in de pen de nt non -execu tive d irec tors. E ach n on- execut ive di rector i s requ ired to con rm at l ea st an nu all y wh ethe r any ci rcum sta nc es ex ist w hic h cou ld im pai r thei r ind ep en den ce. At the st ar t of e ac h boa rd me eting, all d irec tors a re remi nde d of the ir ob lig ations re lati ng to con icts of intere st an d as ked to dec lar e any ch ang es s inc e the l ast m eeti ng. Th e com pany s ec reta r y ma ins a re gis ter of co nic ts of intere st. In add itio n, the bo ard is s atis ed that e ac h non- execu tive d irec tor is ab le to de di cate th e ne ce ss ar y amo unt of time to the co mpa ny’ s af fa ir s, foll owin g con sid er ation of e ach n on- execu tive d irec tor’ s othe r tim e com mit ments. T he l et ters of a ppo intm ent fo r eac h of the c ompa ny’ s non -exec utive d ire ctors s et ou t a min imu m time c omm itm ent i n disc ha rgin g thei r duti es a s a dire ctor , a nd re qui re them to se ek pr io r board appr oval bef ore they take on additional commitmen ts. As req uir ed by the C od e, and in a dva nce of T e sul a Moh ind ra ta ki ng on an a ddi tion al di rector sh ip of a non -lis ted enti t y and th e cha ng e of res pons ibi liti es at A X A U K for Ma rk Pa in, the bo ard rev iewed th e proposed r oles. It consider ed the time commitment and whe ther the role s pre se nted any p otentia l co nic ts of intere st for th e grou p. In eac h cas e foll owin g that revi ew , th e boa rd was s atis ed that n one of th e proposed appoin tments would restrict t he se direct ors from carrying out th eir d uti es an d res pon sib iliti es a s a dire ctor of the c omp any , an d accordingly it approved the appoint me nts . Book 1.indb 108 27/09/2022 23:48:27 10 9 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Power s o f Di r ec to r s Th e dire ctors a re res po nsib le fo r the ma nag em ent of th e com pany . Th ey may exerc ise a ll powe rs of th e com pany , s ubj ec t to any dire ctio ns gi ven by s pe cia l res olu tion a nd th e ar ti cle s of as soc iatio n. Th e dire ctors h ave be en au tho ris ed to all ot and i ssu e ord ina r y sh are s and to ma ke mar ket purc ha se s of the co mpa ny’ s o rdin ar y s ha res by vir tue of res olu tio ns pas se d at the co mpa ny’ s 2021 AGM. Fur the r deta il reg ard ing th ese a utho ris ation s is set o ut on p age 1 4 1 . Ap p oi nt m e nt a nd R em ova l of D ir e ct or s Th e app oin tmen t of dire ctors i s gover ne d by the c omp any’ s a r tic le s of as soc iatio n, the Co mpa nie s Act 20 0 6 an d othe r app lic ab le regu latio ns a nd po lic ies. D ire ctors m ay be e lec ted by sh are hol de rs in ge ner al m eeti ng or a ppo inted by th e boa rd of di rector s in ac co rdan ce with th e prov isi ons of th e ar ti cle s of as soc iati on. In acc ord anc e with th e Cod e, all d irec tors retire a nd su bmi t them se lves fo r rea ppo intm ent at e ach AGM. T he bo ard w ill on ly rec omm en d to share ho lde rs th at execu tive a nd no n-exe cuti ve dire ctors b e prop ose d for re app ointm ent at a n AGM af ter eval uatin g the pe r for ma nce of th e ind iv idu al di rec tors. Appointment and Re appoint ment of Directors at the 2022 A GM T r acey G rah am j oin ed the b oa rd on 22 Ma rch 2022 a nd wi ll be prop ose d for a ppo intme nt at the AGM. Foll owin g pe r for man ce eva luati ons u nde r ta ken du ri ng the ye ar , the boa rd has c onr me d that ea ch dire ctor co ntinu es to be ef fe cti ve and demonstrat e commitment t o their r ole. On the recommendation of the Nomina tion and Governance Committee , the board will therefor e be re com me ndin g that a ll othe r ser vin g dire ctors b e rea ppo inted by sha reh old er s at the 2022 AGM, w ith the exce ptio n of Les ley Jo ne s and B ri dget M ac ask ill, w ho wi ll retire f rom the b oard at th e co ncl usi on of the AGM. Induction and Professional De velopment On a ppo intme nt, all n ew dire ctors re ce ive a c omp rehe ns ive an d personalised induction programme t o familiarise them wit h the group and th e reg ulator y , m ar ket, risk a nd gove rna nc e fra mewor k wi thin whi ch it o pe rates, an d to meet a ny spe ci c deve lop me nt requ irem ents ide nti ed du ri ng the re cr uitm ent p roc es s. Th e com pany a lso p rovi des be spo ke indu ctio ns for d ire ctors w he n they are a pp ointe d as a committee chair or membe r . Induction pr ogrammes are tailored to a direct or’ s par ticular requirement s, but would t ypically include sit e visits, one -to-on e me eting s wi th execu tive di rec tors, the c omp any se cre tar y , sen ior m an age me nt for th e bus ine ss a rea s an d sup por t f un ctio ns and a c ond enti al me etin g with th e ex tern al au ditor . D irec tors al so receive guidance on dir e ct ors ’ respon sibil itie s an d the Se nio r Ma nag er s Reg ime, tog ethe r with a r ang e of rel evant c urr ent a nd hi stori cal infor mati on ab ou t the gro up an d its b usi nes s. A key aim of th e ind uc tion is to ens ure that n ew boa rd me mbe rs a re eq uip pe d to contri bute to the grou p and th e wor k of the bo ard a s qui ck ly as p os sib le. Directors provide input on how their individual induct ions should be ta ilo red b oth in ter ms of co ntent a nd str uc ture. T he co mp any sec reta r y en gag es re gul ar ly wi th ind iv idu al di rector s as the ir ind ucti ons p rogre ss a nd, onc e they h ave ser ved on the b oard fo r a pe rio d, see ks the ir i npu t on a ny fur ther i ndu ctio n or d evel opm ent requ ire me nts they may h ave. The c hai rm an al so di scu sse s in duc tion pla ns a nd tra inin g an d devel opm en t more b roadl y , wi th new jo in ers as part of r e gular one- to-one meet ings. Th ere is a c entr al tra ini ng pro gra mme i n pla ce for th e dire ctors, w hi ch is revi ewed at l eas t an nua lly by th e Nom inati on a nd Gove rn anc e Com mit tee. In a ddi tion, the c ha irm an di scu sse s an d agre es a ny spe ci c req uire me nts as p ar t of e ach n on- execu tive di rec tor’ s re gul ar review s. Dur in g the yea r , tr ain ing a nd deve lo pme nt acti vi tie s took a number of forms, including meetings wit h senior management with in the businesses and control funct ions, in-dept h business review s, attendance a t external seminars and dedicat ed briengs from man ag eme nt a nd ex ter nal a dv ise rs c over ing top ics s uc h as cl imate change, regulatory developments and horizon-scanning , corporat e governance changes, account ing updates , the regulat or y Senior Man age rs R egi me, cha ng es in re mun era tion re gul ation a nd pr actic e, and c ons ume r du t y of ca re, climate r isk a nd ESG. Induction Programme for T esula Mohindra , Patricia Hallida y and T racey Graham All n ew di rector s joi nin g the bo ard un de r ta ke a comp reh ens ive and t ail ore d ind uc tion p roc es s wh ich i s de sig ne d to provid e an und er sta ndi ng of the c om pany’s busin es s, strateg y , cu ltur e, gover na nce, m ana gem ent a nd st akeh old er s. In re latio n to the most rec ent no n-exe cuti ve dire ctor s that have j oin ed the b oard, n ame ly T e sul a Mo hin dra, Patr ici a Ha lli day an d T r acey G rah am, p ers on ali sed induction pr ogramme s hav e been completed or are ongoing . The cha ir man a nd th e com pany s ec retar y des ign a nd fa cil itate the prog ram me a nd the ir on goi ng tra ini ng. For the se n ew non -exec utive d ire ctors, th eir i ndu cti on programmes included the f ollowing elements : • one-to-o ne me etin gs w ith the exe cuti ve dire ctor s, cove rin g strateg y , op erati on al an d na nci al m atte rs, p eop le, the regulat or y framework and culture and v alue s; • brie ngs f rom the c om pany se cre tar y , th e inves tor relati ons team a nd the g rou p ’ s ex ter na l le ga l adv ise rs o n le gal a nd gover na nc e mat ters a nd s ha reho ld er re latio nsh ips, w hi ch are foll owed up by s es sio ns w ith the c omp any’ s cor po rate broker s; • meetin g wi th the ex ter na l aud it pa r tne r; • brie ngs f rom E xe cuti ve Co mmi t tee me mb er s and s en ior man age rs a bo ut the ir bu sin es s are as a nd su ppo r t f unc tion s inc lud ing r isk, c or por ate devel opm ent, hum an re sou rce s, IT and c yb er se cu ri ty; • acce ss to refere nce m ateri als i ncl udi ng rel evant c urre nt an d histor ic al in form ation a bo ut the g roup a nd i ts bus ine ss s uch a s nancial data, the corporat e t e am and policies suppor ting our business practices ; • acce ss to boa rd pap er s throu gh the o nli ne bo ard pa pe r por tal ; and • site visi ts to the grou p’ s of ce s with th e rele vant se nio r man age me nt re com me nce d foll owin g the e asi ng of Cov id- 1 9 restr ictio ns. Addi tion al se ss ion s are ta ilo red to the in div idu al to ree ct the ir previous e xperie nce and committ e e responsibilities : • in her rol e as a m emb er of th e Audi t and R is k Com mit tee s, T e sul a at tende d, in an o bse r ve r ca paci t y , a num be r of the bus ine ss r is k com mit tee s as we ll as th e Gro up Ri sk a nd Compliance Committee ; • as a mem ber of th e Ri sk Co mmi t tee, Patric ia met w ith rel evant s ubj ect m at ter exp er ts on tech nic al r is k mat ter s and m ode lli ng a nd at tend ed a nu mbe r of the b usi nes s ri sk committees and Gr oup Risk and Compliance Committee; and • T rac ey , i n he r role a s a me mbe r of the R emu ne ratio n Committee, met with the Remune ration Commit tee ’ s advisers. Reg ula r me etin gs wi th the ch air ma n and c om pany s ecr etar y were hel d to moni tor prog res s and e nsu re that the n on- execu tive di rector s were re ce ivi ng al l the info rm ation th ey requ ire d to full th ei r role s. Book 1.indb 109 27/09/2022 23:48:28 11 0 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Corporate Go vernance Repor t continued Division of responsibilit ies In add itio n to train ing o rgan ise d by the g roup s pe ci ca lly fo r the boa rd, dire ctors at ten d a ran ge of othe r tra ini ng an d deve lop men t se ssi ons a s par t of other ro le s they ho ld. T r ain ing a nd d evel opm ent rec ords a re ma inta ine d by the co mpa ny se creta r y a nd revi ewed annually b y the chairman and each individual di rect or . Conict s of Interest Th e ar ti cle s of as soc iati on in clu de prov isi ons g iv ing th e dire ctor s auth or it y to appr ove con icts of i ntere st an d potenti al c oni cts of intere st as p er mi tted u nd er the C om pan ie s Act 20 06. Dire ctor s are re spo nsi ble fo r notif ying th e cha ir man a nd the c om pany sec reta r y of a ny actu al or p otentia l con ic ts as so on as th ey be com e aware of th em. A pro ce dure h as b ee n est ab lis hed, w he reby actu al an d potenti al co nic ts of intere st ar e regu lar ly rev iewe d and appropria te authorisat ion so ught. T his procedur e includes me cha nis ms for th e ide nti catio n of co nic ts pri or to the ap poi ntme nt of any ne w dire ctor or i f a new c oni ct a ris es du ri ng the ye ar . T he de cis ion to au thor ise a c on ict of i ntere st ca n onl y be m ade by n on- con icte d dire ctors a nd in m ak ing s uch a d ec isi on the d irec tors m ust act i n a way they co nsi de r , i n goo d fai th, wil l be mo st like ly to prom ote the su cc es s of the co mpa ny . T he co mpa ny se cret ar y m ain tain s a regi ster of c oni cts au thor ise d by the b oard. T he bo ard b eli eves th is proc ed ure op erated e f fec tivel y throu gho ut the ye ar . Culture and Value s Th e boa rd rec ogn ise s the im por tanc e that c ultu re and va lu es pl ay in the lo ng-term s uc ce ss an d sus tai nab ili t y of the gro up, and the ro le of the bo ard in e st abl ish ing, mo ni torin g and a ss es sin g cul ture. T he boa rd als o ack now le dge s the i mpo r ta nce of i ndi vi dua l dire ctor s, and the bo ard a s a who le, acti ng w ith inte gri t y , le adi ng by exa mpl e an d promot ing the desired cultur e. Th e ong oin g as ses sm ent of th e co ntri buti on of cu ltu re and va lu es to the grou p’ s lo ng-ter m suc ce ss re mai ns a key focu s for th e boa rd. Th e boa rd als o spe nd s time m oni torin g, and s atisf ying i tse lf as to, the ali gnm ent of th e gro up’ s p ur pos e, value s an d strate gy w ith its c ultu re. Dur in g the yea r , th e boa rd mo nitore d, ass es se d and p romoted th e grou p’ s c ultu re in th e foll owin g ways: • revi ew and d isc uss ion by th e bo ard of a qu ar te rl y cul ture das hb oard, s et ting o ut a n ass es sm ent of c ult ure, an d cul ture a nd con duc t metr ic s, acro ss th e grou p and e ac h of its di vi sio ns f rom the pe rs pe cti ve of custom er s, pe opl e an d con trol; • reg ula r upd ates to the bo ard o n ex tern al gu ida nc e and i nsi ght o n culture , including from r e gulat ors and industry bodies, which ar e use d by the b oard to be nc hma rk th e grou p’ s a ppr oach a nd p lan s; • dis cus sin g fee dba ck rec ei ved f rom em pl oyee s acro ss the g roup i n regular employ e e opinion surveys ; • infor ma l fee dba ck f rom me etin gs of no n-exe cuti ve dire ctor s with e mp loye es in th ei r work force e nga ge men t ca paci t y an d attendance a t various employee f orums; • upd ates on a ctiv itie s ac ross th e grou p in rel atio n to culture a nd values, including e mployee training pr ogra mmes, activities in rela tion to the gro up c ode of c ond uct, the C los e Brothe rs Way , an d other initiatives ; • the employee opinion sur vey included specic que stions in the ar eas of c ul ture a nd in clu siv it y , c ustom er s and c lie nts a nd well be ing; • foll owin g the ac tiv itie s of em ploye e net wo rks co nsi de rin g dis crete are as in re lati on to dive rs it y an d inc lus ion, i ncl udi ng ge nd er , ethn ic dive rs it y , LGBTQ+ , d isa bil it y , wor ki ng pa rents a nd ca rer s, me ntal wellbeing and social mobility; • inclusion o f culture-relat ed objectives as par t of the ex e cutiv e direct ors ’ balanced scorecard asse ssed by the Remuneration Com mit tee (f ur ther de tai l on wh ich c an b e foun d in the D ire ctors’ Remuneration Repor t on page 1 32) continuing t o focus on rewar ding and inv e sting in the group ’ s employees, including discussions by the Remuneration Committee in relation t o gender pay rep or ti ng an d a stron g focu s on e mpl oyee c ons ide ratio ns as par t of boa rd de cis io n-ma ki ng a nd over si ght; • con sid er ation of c ultu re, be havi our a nd c ond uct i ssu es by th e Remuneration Commit tee ; • dis cus sio n of cul tura l an d beh avi oura l at trib utes by th e Nom inati on and G over na nce C omm it tee as p ar t of re gul ar ta le nt revi ews an d succession planning ; • revie wing the group ’ s whistleblowing arrangements by which em ploye es c an r ais e con ce rns i n co nde nc e an d, if they wi sh, anonymously ; • the Risk Committee’ s regular r eview o f a conduct risk dashboard cover in g an as se ss me nt of rel evant i ss ues a nd d evel opm ents fo r eac h of the g roup’ s di vis ion s; • discussing cultur e and conduct issues arising out of specic acti vi ties a nd p rogr amm es b ei ng un der taken by th e grou p; • supporting and participating in training and dev e lopment programmes f or employ e es; and • en cou rag ing a nd en ab lin g eli gib le e mpl oyee s to par ti cip ate in sch em es to pro mote sh are ow ne rs hip. Eli gib le e mpl oyee s are abl e to par ti cip ate in the gro up’ s S A Y E and B A Y E sch em es, w hic h provide cost -ef fective opportunities f or employ ees to acquire shares in the company . Th e acti viti es d es cr ibe d ab ove have al lowed th e boa rd to moni tor ef fe ctive ly the g roup’ s cu lture d ur ing the ye ar a nd to ens ure that cul ture c ontin ue s to be ali gne d wi th the gro up’ s pur po se, valu es a nd strate gy . I n the yea r , th e bo ard an d its c omm it tee s con sid ere d the ro le and i mpa ct of cu ltu re as pa r t of i ndi vi dua l de cis io ns an d its ove rs ight of the gro up’ s o pe ratio ns. Co nsid er ations re lati ng to cultu re an d valu es h ave als o for me d an im por tant p ar t of th e boa rd’ s d isc us sio ns on the g roup’ s str ategy , mod el a nd pu rp ose, in clu din g in the c ontex t of M& A o ppo r tun itie s co nsi de red by th e grou p. Whistleblowing Th e boa rd ha s resp ons ib ilit y fo r over sig ht of the g roup’ s whistleblowing arrangements. I t monitors t he operation and effectiv eness of these arrangements and ensur es th at processes are in p lac e for th e prop or tio nate an d ind ep end ent i nvesti gati on of mat ters r ais ed th roug h the me ch ani sms ava ila bl e to the work fo rce and fo r foll ow-up ac tio n. Am ong othe r thi ngs, the b oard d isc harg es th is res pon sib ilit y thro ugh the prov is ion of h alf-yea rl y upd ates by the g roup h ea d of ope rati ona l ris k an d com pli an ce. T hes e up dates i ncl ude: • an ove r vi ew of the g roup’ s wh istl ebl owin g ar ran ge men ts and a n ass es sme nt of the ir ef fe ctive nes s; • infor mati on on s teps ta ken by th e grou p to ensu re the prote ctio n of those using the group ’ s whistleblowing arrangements ; and • a sum ma r y of wh istl eb lowi ng even ts, inc lud ing o utcom es a nd a ny follow -up actions. In add itio n, the boa rd ap poi nts one of th e dire ctor s to act as the grou p’ s w his tleb low ing c ham pio n. Th is is cu rre ntl y Oli ver C or bet t. As par t of his rol e, Oli ver e nga ge s with th e grou p he ad of op erati ona l ri sk and compliance r e gularly in r e lation to whistleblo wing matters during the co ur se of the ye ar . Book 1.indb 110 27/09/2022 23:48:28 111 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Th e boa rd und er takes a fo rm al an d ri goro us eval uatio n of its ef fe ctive ne ss a nd the p er forma nc e of the wh ol e boa rd, its ind iv idu al direct ors and it s committees annually . In acc ord anc e wi th the Co de, the bo ard h as a thre e-yea r cycl e for evalu atio ns of its p er fo rm anc e. In 2021 , the bo ard a ppo inted a n ex tern al eval uator to und er take the bo ard p er fo rma nc e revi ew and the re sults of th at revi ew were se t out i n ful l in that A nnu al Re po r t. Th is yea r , th e boa rd un de r took a n inter nal eva lu ation l ed by th e cha ir man. E ach of th e dire ctors c om plete d a que stio nna ire w hic h con sid ere d a ra nge of d if fe rent a re as rel evant to bo ard ef fecti vene ss and corporat e governance, including: • the rol e an d com pos itio n of the b oard; • strate gy; • ov ersight of business performance; • culture , purpose and v alues; • ma nag eme nt of the wo rk of th e boa rd; Bo ar d a nd C om m it t ee E f f ec t iv en es s Annual board and committee evaluation • board behaviours ; • the op er ation of th e boa rd dur ing th e Cov id- 1 9 pan de mic (with a re du ce d focu s this ye ar re co gni sing th e ea sin g of restr ic tion s and retu rn to the of ce fo r emp loye es); • the wor k an d co ntri buti on of the b oa rd’ s c omm it tee s; • stak eholder engagement and wider socie tal impact; and • risk management. Th e resu lts we re pre sen ted and d isc us sed at th e Jul y boa rd me eting. T he bo ard a lso di scu sse d the p rogre ss ion a ga inst th e key outco me s ide nti ed in th e 202 1 ex tern al eval uatio n, rec ogn isin g that a con tinu ous a pp roac h to impr oveme nt w ill c onti nue to de li ver g ood gov ernance. The over all c on clu sio n of the eval uatio n was th at the bo ard an d its com mit tee s rem ain s trong a nd ef fe cti ve, with cl ar it y as to thei r role and p ur pos e. In terms of th e op erati on of the b oard, th e evalu ation foun d that the b oard i s cha ire d well, de mo nstrati ng r igo ur an d focu s in its wo rk, w hil st cre atin g an atmo sph ere of i ncl usi vi t y and o pe nne ss, com bi ned w ith c ons tru cti ve cha lle ng e, whi ch al lows fo r dive r sit y of opinion. 2022 rev iew Fin di ng s Act i ons t a ken • T o re duc e the l eng th and d en sit y of Boa rd pa pe rs • T o consider t he number o f and fre qu enc y of Boa rd me etin gs • T o p rovi de mo re det ail ed reporting on stakeholders and engagement • Th e strate gy se s sio n was we ll- rec eive d an d the for mat wor ked well. T his w ill be re pe ated on a n ann ua l basi s wi th the E xecu tive Committee • Th e boa rd rec ogn ise d the strate gic fo cus ove r the l ast twe lve mont hs • F urther suggestions on topical are as for B oa rd trai ning a nd deve lop me nt were p rovi de d for inclusion in t h e annual t raining programme • A deta ile d revi ew of t h e ndings fr om the e valuation will be und er taken a nd a programme scheduled to continue t o improv e the mat ter s rai se d 202 1 r evi ew Fin di ng s Act io ns t a ken • Inc rea sed cus tome r - rela ted data fo r ind iv idu al businesses • Inc lud ed the a nn ual t ale nt review w ithi n a ded icated ses si on of the N omi nati on and Go vernance Committee, with all non- ex e cutiv e direct ors invit ed to at ten d • Addit ional topics for inclusion in t he board’ s annual t raining and development programme • More detailed repor ts t o the boar d on committee discussion points and decisions • More detailed informat ion has be en pr ovid ed to the b oard • A more fre que nt tale nt review by the No min atio n and Gov ernance Committee has be en intro du ced a nd a ll no n- execu tive di rec tors inv ited to atte nd the c omm it tee for th ese sessions • The addit ional t opics have been incorporated int o the an nua l trai nin g and development programme • E x tra tim e has b ee n incorporat ed in t he board age nd a to provid e for mo re deta ile d rep or ts to the boa rd fro m the ch air s of the committees. F ull minutes of all committee mee tings ar e available to all dir e ct ors 202 1 Ext ern al ev al ua ti on 2022 Internal evaluat ion Con sid er ex te rn al eva luati on recommendations 2023 Internal evaluat ion Consider int ernal evalua tion recommendations Ev aluation Cycle Book 1.indb 111 27/09/2022 23:48:28 11 2 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Corporate Go vernance Repor t continued Division of responsibilit ies Directors’ performance Dur in g the n anc ial ye ar , the c ha irm an ho lds re gu lar m eeti ngs w ith individual direct ors at which , among o ther things, their individual pe r for ma nce i s dis cus se d. Infor med by th e ch air ma n’ s c onti nui ng obser vation of individual direct ors during the y ear , these discussions form p ar t of th e bas is for re co mme ndi ng the a ppo intm ent a nd rea ppo intme nt of di rector s at the c omp any’ s AGM, a nd in clu de con sid erati on of the d ire ctor’ s p er fo rma nc e and c ontr ibu tion to the boa rd an d its co mm it tees, th ei r time c omm itm ent a nd the b oa rd’ s overall composition. Chairman’ s per formance As in p revi ous ye ar s, Ma rk Pa in, in hi s rol e as the s en ior i nde pe nd ent dire ctor , has l ed a n an nua l per form anc e as se ssm ent p roc es s in res pec t of the c hai rma n. Th is invol ves rev iew m eeti ngs du ri ng the yea r with th e othe r non- execu tive d irec tors in di vid ual ly , w itho ut the cha ir man b ei ng pre se nt, and c ons ult atio n with th e chi ef exec utive, grou p na nc e dire ctor an d othe r me mbe rs of s en ior m ana ge men t. The senior independent direct or subsequently pro vide s feedback t o the ch air ma n. Directors’ tness and propriety In line wit h its regulat or y obligations, the group undertakes annual review s of the tn es s and p ropr iet y of a ll tho se in se ni or ma nag er fu ncti ons, i nclu di ng al l of the co mpa ny’ s d irec tors a nd a nu mbe r of othe r sen io r execu tive s. Th is pro ce ss c om pr ise s as se ss men ts of individuals’ honest y , int egr ity and reputat ion, nancial soundness, compet ence and capability , and continuing professional deve lop men t. This ye ar’s reviews have c on rme d the tne ss an d prop ri et y of all of th e co mpa ny’ s di rec tors an d othe r se nio r execu tive s who perform senior manager functions . Consideration of matters rela ting to tne s s and p ropr iet y a lso for m an i mpo r ta nt par t of the board’ s recruitment process for non-e xecutive directors. Pen ny Th om as Company Secretar y 27 Septem ber 2022 Book 1.indb 112 27/09/2022 23:48:28 11 3 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t No mi na t io n a nd G over n an ce C om m it t ee R ep or t Chair’s Overview Dear Shareholder On b eha lf of th e boa rd, I am pl eas ed to pre se nt the re por t of th e Nomination and Governance Committ ee for 202 2. The report sets out a n over view of th e Com mit tee’ s ro le s and re sp ons ibil itie s an d its key activ iti es du ri ng the ye ar . Dur in g the yea r , non -execu tive s ucc es si on an d rec rui tme nt rem ain ed an im por tant fo cus fo r the Co mm it tee as th e lon ge r -term su cc es sio n pla nn ing that h as b ee n imp le me nted over th e pas t two ye ar s cul minate d in the a ppo intme nt of Patri cia H all iday i n Augu st 2021 and T r acey G rah am i n Marc h 2022. The Co mm it tee ad opts a pro acti ve and s tru cture d ap proa ch to suc ce ss ion p lan nin g an d rema in ed min dfu l of boa rd ch ang es th at wil l natu rall y oc cur i n the ye ars a he ad, as di rector s rea ch the e nd of the ir ter ms, a nd the n ee d to ensu re con tinu it y of k now led ge a nd ex pe ri enc e am on g the bo ard a s a who le. Th e Com mi tte e spe nt tim e co nsid er in g suc ce ss ion p lan nin g an d tal ent m an age me nt for ro les b el ow boa rd leve l. Onc e ag ain th is yea r , i t has m oni tored ac tiv itie s an d ini tiati ves to deve lop th e grou p’ s tal ent p ipe lin e an d imp rove ge nde r an d othe r dive rs it y am ong s en ior man age me nt. Th e Com mit tee rev iewe d the s kil ls an d exp er ie nce of the no n-exe cuti ve dire ctors to e nsure th at the bo ard c ontin ue s to be abl e to per fo rm i ts role e f fec tive ly . I n ligh t of this a nd othe r acti vi tie s in the yea r , it rec om men de d to the boar d that al l ser ving d irec tors w ith the exce ption of L esl ey Jo nes a nd B rid get M ac ask il l, be rea ppo inted at the 2022 AGM. Le sley a nd B rid get w ill reti re at the co ncl usi on of the AGM. The Committee has closely monit ored sustainability and env iron me ntal, s oci al a nd gove rn an ce (“ESG” ) deve lop me nts rele vant to the grou p, inclu ding c ons ide rati on of po ints ar isi ng f rom eng age me nt wi th sha reh old er s and oth er st akeh old er s in the se are as. T he se wi ll co ntinu e to be key area s for the C om mit tee a nd the boa rd as a w hol e in the c om ing ye ar s. Th is yea r , th e an nua l evalu atio n of the bo ard a nd its c omm it tee s was an in tern all y co ndu cted p roc es s and i s dis cus se d on pa ge 1 1 1 . Membership Mike Biggs ( Chair) Oliver Corbett Lesley Jones Bridget Macaskill Mark P ain Th e chi ef exec utive, g roup h ead of h uma n re sou rce s and g rou p he ad of sus tai nab ili ty at ten d the C omm it tee by inv itati on. Meetings Five scheduled meetings held 10 0 % a t te n d a n c e (s e e a l s o p a g e 10 3 ) Ke y Responsibilities • reg ula rl y review ing th e stru ctu re, size an d com pos itio n of the boa rd and i ts co mmi tte es, a nd ma ki ng rec omm en datio ns to the boa rd wi th rega rd to any ch ang es. • con sid er ing th e le ade rs hip n ee ds of th e grou p and c ons id er ing succession planning for directors and se nior ex ecutives. • con sid er ing th e app ointm ent o r retire ment of d irec tors. • revi ewin g the co ntinu ed i nde pe nde nc e of the no n-exec uti ve direct ors. • as se ssi ng the b oa rd’ s ba la nc e of sk ills, k now le dg e and experience . • evalu ating th e sk ill s, know le dge a nd ex pe rie nc e req uire d for a par ticul ar a ppo intm ent, nor ma lly w ith th e as sist an ce of ex ter nal adv ise rs to fac ilit ate the se arch fo r sui tab le ca nd idates. • assessing the contribution and time commitment of the non - execu tive d irec tors. Th e Com mit tee’ s ter ms of refe ren ce are ava ila bl e at ww w .closebrot he rs. com. 202 2 Highlights • considering board composition and succession, including the search f or additional non-executiv e directors. • revi ewin g tal ent a nd exec utive m an age me nt suc ce ss ion planning, including ov e rsight o f activities to support and enc ou rag e the deve lo pme nt of a di ver se a nd in clu si ve tal ent pipeline. • the a nnu al revi ew of the bo ard d ive rsi t y and i ncl usi on po lic y . • over sig ht of the b oard a nd c omm it tee eva luati on pro ce ss und er t aken d ur ing th e yea r . • monit oring sustainabilit y and E SG development s and con sid er ing th e imp lic ation s for the g roup. • revie wing the T CFD framework and disclosure. Composition , succession and evaluat ion Michael N. Biggs Chairman Book 1.indb 113 27/09/2022 23:48:29 11 4 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Corporate Go vernance Repor t continued Composition , succession and evaluat ion Overview o f Main Activities During t he Y ear NED succession Patric ia H alli day jo in ed the b oard o n 1 Aug ust 2021 . T he se arc h proc es s for thi s ap poi ntme nt was de sc rib ed i n the A nnu al Re por t 2021 . Th is yea r , th e se arc h con tinu ed for a f ur ther n on- execu tive di rec tor . Th e Com mit tee ove rs aw the fo rm al an d robu st se arc h pro ce sse s that cu lmin ated in the d ec isi on by the b oard to ap poi nt T r acey Gra ha m as a n ind ep end en t non- exec utive d ire ctor . Th e Com mit tee rev iewe d an d app roved a d etai le d des cr iptio n for the rol e, havin g co nsi der ed the p ar ti cul ar sk il ls, exp er ie nce a nd backgro und re qu ired. As p ar t of b oard re cr uitm ent s ea rche s, the Com mi tte e as ses se s the b ala nc e of kn owle dg e an d expe r ti se ne ed ed to ensu re the co ntinu ed ef fecti ve le ade rs hip of the g roup, and th e deve lop me nt an d over sig ht of its s trateg y , pu rp ose a nd c ultu re. In identifying and recommending candidat es for appoin tment to the boa rd, the Co mmi t tee co nsid er s ca ndi dates f rom a w ide r ang e of bac kgroun ds, as se ss ing th em o n mer it a gai nst o bje ctive c ri teri a an d with d ue re gard fo r the b ene ts of di ver si ty o n the bo ard. Th e sea rch fo r T r acey G rah am fo llowe d the s ame d eta ile d an d con sid ere d ap proa ch a nd was c ond uc ted in co nju nc tion w ith a n ex tern al s ea rch r m, Ru sse ll R eyn old s. Th e rm wa s ins tru cted to cons ide r ca ndi dates f rom a d ive rsi t y of bac kgroun ds an d exp er ie nce s. Th e r m is not c onn ec ted to the co mpa ny in a ny way and i s a sig nator y to the Volun tar y Code of C ond uc t for E xecu tive Search Firms . Foll owin g the pre pa ratio n of a lon g-lis t of ca ndi dates, a s hor tl ist was se le cted by th e Com mit tee a nd i nter v iews we re he ld wi th the invol vem ent of b oth non -exec uti ve an d execu tive m emb er s of the boa rd an d me mbe rs of s en ior m an age me nt. As pa r t of the p roc es s, the Co mmi t tee co nsi dere d the oth er c omm itme nts of c and idate s to ens ure that th ey woul d have su f c ie nt time to devote to thei r duti es to the gro up. Follow ing c om ple tion of th e proc es se s to the Com mit tee’ s satis fac tion a nd rec ei pt of all n ec es sar y regu lator y a pprova ls, it rec omm end ed T rac ey’ s a ppo intm ent to the bo ard. Th e Co mmi ttee als o con sid ere d and re co mme nd ed to the bo ard he r ap poi ntme nt to the Remunera tion Committ e e. Fur the r de tai ls on T ra cey’ s ex pe ri en ce m ay be fou nd in h er b iog rap hy on page 96 . T racey brings signicant experience from operational role s an d na nc ial s er v ic es a nd is a st rong ad diti on to the ex istin g ran ge of s kil ls an d exp er tise on th e boa rd. Executive Director and Non-Executive Director T enure Y ears Non-ex ecutive direct or tenure Executive director t enure Mike Biggs Mark P ain Oliver Corbett Bridget Macaskill Lesley Jones Peter D uf f y Sally Williams T esula Mohindra Pat ricia Halliday T racey Graha m Adri an Sa ins bur y Mike Morgan 0123456789 1 0 Committee memberships Th e Com mi tte e wil l con tinu e to moni tor the co mp osi tion of e ac h of the bo ard’ s com mi tte es. L ast ye ar , the c om mit tee rev iewe d the com pos iti on of its c om mit tee s an d mad e a num be r of ch ang es. T he cur ren t com pos iti on of the c om mit tee s is a s foll ows: Nomination and Governance Committee Audit Committee Risk Committee Remuner ation Committee Mike Biggs 1 Chair • Oliver Corbett • Chair • Peter D uf f y •• T racey Graham •• Patr ici a Ha ll iday •• Lesley Jones •• Chair • Bridget Macaskill •• Chair T esula Mohindra •• Mark P ain •• • Sally Williams •• 1 Mik e Biggs attends all Risk Committee meetings though he is not a member of the committee No n- exec ut ive di re c tor s’ s ki ll se ts Th e Com mit tee h as co nsi de red a nd reaf rme d the s ki ll sets a nd exp er ien ce of th e com pany’s non-exe cuti ve di rector s, inc lu din g thei r ex tens ive exp er ie nc e with in n an cia l se r vi ce s and i n reg ula ted or liste d com pan ie s. Th e Com mit tee a lso a ss es se s the co ntri buti on a nd time c omm itm ent of th e non -exec utive d ire ctors. A sum ma r y of the ra ng e of sk ill s of the no n-exe cuti ve dire ctor s is set out below . Th e foll owin g cha r t in dic ates th e num be r of non -exec uti ve dire ctors who p os ses s the b road c ross-s ec tion of s ki lls se t out b el ow on the board . Broad nancial services T echnolog y/digital/operations Strategy Leadership UK listed company Risk Finance/audit/accounting Regulatory framework ESG People/culture 9 9 10 9 10 10 10 10 9 10 Fur the r info rm ation o n the ba ckgrou nd an d exp er ie nce of e ac h of the non -exec utive d ire ctors c an b e foun d in the ir b iog rap hie s on pa ge s 95 to 97 . All d ire ctors a re req uire d to und er t ake the a nnu al PR A tn es s an d proprietary assessment. Book 1.indb 114 27/09/2022 23:48:30 11 5 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Appointment and reappointment o f director s T r acey G rah am jo ine d the B oard d ur ing the ye ar a nd w ill the refor e sta nd for a ppo intme nt at the AGM. Prio r to the co mpa ny’ s AGM e ach ye ar , the C omm it tee c ons ide rs, and m akes re co mme nd ations to the b oard c onc er nin g, the rea ppo intme nt of di rector s, havin g reg ard to thei r pe r for man ce, suitability , time commitment and ability t o continue t o contribut e to the bo ard. Fol lowi ng thi s year’s review in a dvan ce of th e 2022 AGM, the Co mmi t tee has re co mme nd ed to the bo ard that a ll se r v ing dire ctor s, with th e excepti on of Le sl ey Jon es a nd Br id get M aca sk ill, be re app ointe d at the AGM. Le sley a nd B rid get h ave ser ved nin e yea rs on th e boa rd of the c omp any an d wil l retire at the c on clu sio n of the AGM. Oli ver C or bet t ha s se r ved a s a dire ctor for m ore tha n si x yea rs. T he ex tens ion of h is ter m of of c e ha s be en su bje ct to pa r tic ula rl y ri goro us review by th e Co mmi tte e, inclu din g wi th resp ec t to his pe r for ma nce, contribution and independence. He did not participat e in the discussion on the p rop ose d ex tens ion of h is ter m of of c e. Th e Com mi tte e has noted the s ign ic ant c ontri buti on that h e make s, incl udi ng wi th res pec t to the par ti cul ar re spo nsib ili tie s he und er takes a s cha ir of the Au dit Com mi tte e. The C om mit tee va lu es the k now le dg e, expe ri enc e an d continuity that his continued appointment would bring. Senior management talent de velopment and succession planning Th e Com mit tee s pe nt co nsid er abl e time d uri ng the ye ar rev iew ing tal ent a nd co nsi de rin g the gr oup’ s suc ce ss ion p la nni ng at boa rd and s eni or ma nag em ent le vel. Activ iti es in clu ded a fo rma l revi ew by t he Committee of senior management succession planning , loo ki ng at the c ap abi lit y a nd potenti al of i ncu mbe nts in key rol es and th e suc ce ss ion p ipe lin e acro ss th e grou p. The Co mmi t tee als o con sid ere d sp ec ic a ppo intm ents to se nio r man age me nt rol es at both gro up an d div is ion al leve l. Th e Com mit tee re co gni ses th e imp or ta nc e of tal ent d evel opm ent a nd e nsu rin g that the g rou p conti nue s to attra ct, retain a nd deve lo p sk ille d, high p otentia l ind ivi du als, a nd thi s wil l rema in a n imp or ta nt foc us in th e yea r ah ead. All n on- execu tive d irec tors ar e invi ted to atten d the se ss ion s of the Com mit te e whi ch co nsi de r tal ent a nd de velo pme nt to give th em f ull visibility of t he succession pipeline . Dur in g the yea r , the Co mmi t tee was u pdate d on the va ri ous i niti ative s in pl ace a cros s the g roup to su ppo r t tal en t devel opm en t at dif f ere nt leve ls of the gro up’ s ope rati ons. Fur th er i nfor matio n in rel atio n to the gro up’ s acti viti es i n this a rea c an b e foun d on pag e 38 of the Sustainability Repor t. Sustainability Th e Com mit tee re co gni se s and we lc ome s the c ontin uin g focu s on sust ain abi lit y a nd the c ontri buti on that b usi nes s ma kes to the wid er com mun it y . O n be hal f of the b oard, du ri ng the ye ar , the C omm it tee regularly discussed sustainability considerations across a br oad ran ge of d if fe ren t are as, in cl udi ng di ver si ty a nd i ncl usi on a nd ESG. Fur the r de tai ls on e ach of th es e are as a re set ou t be low. Di ver s it y a nd i ncl us io n Di ver sit y a nd in clu sio n rem ain a key fo cus of th e Com mi tte e. The Committee recognises t he impor tance of ha ving directors with a ran ge of s kil ls, k nowl ed ge a nd exp er ie nc e and e mb rac es th e adva nta ge s to be de ri ved f rom hav ing a d ive rs it y of ge nd er a nd soc ial a nd eth nic b ackgro und s repr ese nted o n the boa rd. Suc h dive rs it y br ing s di f fere nt p er spe cti ves a nd the c ha lle ng e ne ede d to ensure e f fectiv e decision-making. Diver si t y and i ncl us ion h ave be en discussed throughout the year , including in the cont ext of succession pla nni ng at both b oard a nd s eni or ma nag em ent l evel a nd in th e consideration o f par ticular appoint me nts . In addit ion, the Committ e e und er too k its a nnu al rev iew of the b oard d ive rs it y an d inc lus ion p oli cy , and re co mme nd ed a n umb er of in cre me nta l enh an ce men ts. Th e upd ated po lic y was su bse qu ently a pp roved by the b oa rd. 1 Comprises Executive Committee, Company Secr etary and their direct reports 2 Number of employees e xcluding board and senior management Board Diversit y Q Mal e – 50% (6) Q Fema le – 50% (6) W orkforce Diversity 2 Q Mal e – 56% (2 , 1 22) Q Fema le – 4 4 % (1 ,68 1 ) Senior Management 1 Q Mal e – 69% (52) Q Fem ale – 31 % (23) Book 1.indb 115 27/09/2022 23:48:31 11 6 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Corporate Go vernance Repor t continued Composition , succession and evaluat ion Th e Com mit tee c ons ide rs th at the bo ard re ma ins di ver se, draw ing on the k now le dge, s kil ls a nd exp er ie nce of d ire ctors f rom a r ang e of bac kgroun ds, bu t wi ll se ek to ta ke opp or tu ni tie s to fur th er i mprove the di ver sit y of th e boa rd, whe re it i s con sis tent wi th the sk il ls, exp er ien ce a nd ex per tise re qui red at a pa r tic ul ar po int in ti me. T he Com mit tee i s ple as ed w ith the p rogre ss m ade i n rece nt ye ars to ens ure that th e boa rd co mpr is es in di vid ual s fro m a dive rs e ran ge of bac kgroun ds. Th e boa rd su ppo r ts the re co mme nd ation s set ou t in the Par ker R eview a nd a ims at a ll tim es to have at le ast o ne d irec tor of col our . T he g roup c ur rentl y me ets the t arge t. Dive rsi t y and i ncl us ion at boa rd leve l wil l conti nue to be a n are a of foc us for th e Com mit tee, par ticul arl y as d irec tors rea ch the e nd of th eir n ine -year ter ms i n the yea rs a hea d and th e size of th e boa rd red uc es. Th e Com mi tte e take s ser io usl y its ro le in ove rs ee ing th e deve lop me nt of a dive rs e pip el ine fo r sen ior m an age me nt po siti ons a nd the l ink bet we en di ver si ty a nd i ncl usi on a nd de li ver y of th e co mpa ny’ s pu rp ose and s trateg ic ai ms. T o th at en d, it con sid ere d upd ates du ri ng the yea r in rel atio n to diver si ty a nd in clu si on in itiati ves a cros s the g roup. Am ong oth er thi ngs, th e Com mit tee d isc us sed th e grou p’ s a ppro ach to recruitment, t raining and development programmes for employ ee s, management’ s work with diversit y and inclusion campaign gr oups, and a ctiv iti es of di scre te empl oyee n et works i ncl udi ng in th e are as of ge nde r , e thni c dive rs it y , di sab ili t y , LGBTQ+ , wor ki ng pa rents a nd ca rers, m ent al wel lbe ing a nd so ci al mo bil it y . T he gro up is a m emb er of Movi ng A he ad, Mis sio n Inc lud e and i s a sig nator y to the Wom en in Fin anc e Cha r ter , the R ace at Wor k Cha r ter a nd the B usi ne ss Di sa bili t y Foru m. Th e Com mit tee re co gni se s the im por t anc e, and th e be ne ts to the gro up, of devel opi ng a di ver se p ipe lin e an d it wi ll c ontin ue to wor k with s eni or ma nag em ent in th is are a. In lin e wi th the Co de, se e the ch ar ts o n pag e 1 1 5 for the b rea kdown of the gro up’ s ge nde r di ver sit y . M ore d etai l on the g roup’ s a ppro ach to dive rsi t y and i ncl us ion c an b e foun d in the S ust ain ab ilit y R ep or t o n pages 3 7 to 38 . Environmental, social and governance Th roug hou t the yea r , the Co mmi t tee rec ei ved an d co nsid ere d ded ic ated up dates o n ESG issu es re leva nt to the grou p. The gro up’ s he ad of sus tai nab ili ty at ten ds rel evant p ar ts of th e Co mmi tte e’ s me eting s to provid e upd ates o n the gro up’ s a ctiv iti es i n this a rea. Th e Com mi tte e’ s d isc uss io n of ESG iss ue s covere d a wi de ra ng e of are as a nd was i nfor med by , amo ng oth er thi ngs, e ng age me nt with s ha reho ld ers a nd oth er st akeh old er s, leg isl ative an d reg ulator y ini tiati ves a nd wi de r mar ket deve lo pme nts. A rea s of focu s this ye ar inc lud ed the g roup’ s su sta ina bil it y strate gy an d targ ets (i ncl udi ng prog res s in the ye ar a nd fu ture p lan s) , w ide r mar ket the me s and tre nds and th e grou p’ s pro gre ss towards d isc los ure req uire me nts rel ating to the T ask Fo rce on C lim ate-rel ated Fin anc ial D is clos ure s (“TCFD”). The Com mi tte e wil l con tinu e to cons id er ESG an d broa de r sus tai nab ili t y mat ters i n the ye ar ah ea d and m ake suc h rec omm en datio ns to the boa rd as i t con sid er s ne ce ss ar y . Fur the r info rm ation o n the g roup’ s ap proa ch to sus tai na bili t y ca n be fou nd in the S usta in abi lit y Re po r t sta r tin g on pag e 35 of thi s Ann ua l Rep or t. Commit tee Effect iveness As de sc rib ed i n more d eta il on pa ge 1 1 1 , a n inter na l evalu atio n of the ef fe cti ven es s of the bo ard a nd its c omm it tee s was un de r ta ken dur ing th e yea r in lin e with th e req uire me nts of the UK C or porate Gov ernance Code . Th e Com mit tee c ons id er s that, dur ing th e yea r , i t cont inu ed to have acc es s to suf cie nt re sou rce s to enab le i t to carr y out i ts duti es a nd has c onti nue d to per fo rm ef fecti vel y . Du rin g the ye ar , the C omm it tee reviewe d its ter ms of refere nc e to ensure th at they re mai n app ropr iate. Mi ch a el N . B ig gs Chair of the Nomination and Governance Committ ee 27 Septem ber 2022 Book 1.indb 116 27/09/2022 23:48:31 11 7 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Membership Lesley Jones ( Chair) Oliver Corbett Patr ici a Ha ll iday T esula Mohindra Sally Williams Peter D uf f y Bridget Macaskill T racey Graham Mike Pain Th e cha ir man of th e boa rd, the exec uti ve dire ctors, th e grou p ch ief ris k of c er , the g rou p hea d of com pli an ce a nd the g roup h ead of in te rn a l a ud i t at ten d by in vi t ati o n. Meetings Five scheduled meetings held 10 0 % a t te n d a n c e (s e e a l s o p a g e 10 3 ) Ke y Responsibilities • to supp or t th e boa rd in its ove rs igh t of ris k man age me nt ac ross the gro up; • over se e the ma inten an ce a nd deve lo pme nt of a su pp or ti ve cul ture a nd “ tone fr om the top” in rel ation to the m ana ge men t of ris k; • review a nd re co mme nd to the bo ard for a pp roval the g roup’ s ris k ap peti te, which i s the leve l of ri sk th e grou p is wi llin g to take in pursuit o f its strat egic objectives; • mon itor the g roup’ s ri sk pro le ag ain st the pr esc ri bed a pp etite; • review th e ef fe ctive ne ss of th e ris k man age me nt fra mewo rk to ensure t hat key risks are iden tied and appropriately managed; • prov ide i npu t fro m a ris k pe rs pe cti ve into the al ig nme nt of remuneration with performance against risk appe tit e (through the Remunera tion Committ e e) ; and • und er take a robu st as se ss men t of both the p rin cip al an d em ergi ng r isks f aci ng the g roup ove r the c our se of the ye ar , a nd review re po r ts fro m the ri sk an d com pli anc e fu ncti ons o n the ef fe ctive ne ss of the p roc es ses th at sup por t the ma nage me nt and mitiga tion of t hose risks . 202 2 Highlights • further strengt hening of the risk infrastruct ure t hrough the rec rui tme nt an d devel opm ent of a ddi tion al s kil ls an d res ourc e. • enhanced our conduct and compliance operating model to streng the n sec ond l ine rev iew a nd im prove the q ual it y of infor mati on that th e Com mit tee a nd bo ard re cei ve on the effectiv eness of o ur cust omer processes . • inc rea se d usa ge of qu anti tati ve ana lys is to sup por t our r isk appetit e decisioning. • mon itor ing the r is k pos ed by cy be r cr ime, wi th reg ula r upd ates prov ide d over th e cou rs e of the ye ar . • over sig ht of bro ade r ope ratio na l res ilie nc e, incl udi ng a revi ew of entity- s pecic self -assessments, appr oval of standards adopt ed for de li ver y of i ts im por tant bu si nes s se r v ice s, an d a dat a cen tre failover simulation ex ercise. • inc rea sed fo cu s on the r isk s face d by cl imate ch ang e wi th regu la r upd ates rec ei ved on o ur pro gre ss in d evel opi ng a regulat orily-compliant clima te risk framework. • cha ll eng e on ex pe cted c red it lo ss es a nd bad d ebt a s a res ult of estimat ed increased stress in an inationary environment . • pe rio dic rev iews of th e Prop er t y a nd Motor bu sin es se s cover in g pe r for ma nce, cre di t qua lit y i n the lo an bo ok a nd not abl e developmen ts. Th e Com mit tee’ s ter ms of refe ren ce are ava ila bl e at ww w .closebrot he rs. com. Risk Committee Audit , risk and int ernal contr ol Chair’s Overview On b eha lf of th e boa rd, I am pl ea sed to intro duc e the R isk C omm it tee Rep or t fo r the ye ar e nde d 31 July 2022. The rep or t s ets ou t an over v iew of th e Com mit tee’ s key re spo nsi bili tie s and th e pr inc ipal are as of r isk u pon w hi ch we have fo cus ed d uri ng the ye ar . Look in g bac k over the l ast 1 2 m onth s, I am pl ea sed w ith th e way in wh ich th e grou p ha s bee n ab le to ma nag e ris k ef fe ctive ly , a nd in par ticul ar o ur evol vi ng ap proa ch to the ne w hybr id wo rk ing p at tern s that we an d the w hol e ban ki ng ind ustr y are adj usti ng to post th e pan dem ic sh utdown. We are co nde nt in th e stren gth of ou r contro l env iron me nt but we w ill n ee d to keep a c los e eye in co min g mo nths on the p eo ple a nd op er ation al r isk a spe cts of th es e new wor k ing prac tic es. Fur ther d etai l on ou r ap proac h to ris k and th e inter na l con trols fo r ris k ma nag em ent a re prov ide d in th e Ris k Re por t on pages 7 4 to 77 . Whi le the i mme di ate risks a ss oci ated wi th Covi d have now b egu n to rec ede, c hal le nge s of a di f fer ent k ind h ave ar ise n. Th e adve nt of war in Uk ra ine h as he ig htene d the U K’ s ge op oli tica l ri sk e nviro nme nt, and whi le ou r UK- fo cu sed m od el prote cts us f rom m ateri al d irec t imp acts, we mus t rema in a ler t to the indire ct i mpac t on ou r cus tomer s an d wid er sta keho lde rs, a s well a s dis ru ption to key sup pli er s and th ird pa r tie s. T u rbu le nce i n the UK p oli tic al e nviro nme nt an d the exce ptio nal cha lle ng e pos ed by th e traj ector y for in ation a nd i ncre as ed co st of liv in g, pred omi na ntly d ri ven by a c ontin ue d ris e in e ne rgy c osts, p ose additional risks for t he group. The Committee has r eceived r egular upd ates on th e ri sk ar ea s most i mpa cted: cre dit r is k, wh ere ba d de bt is like ly to ris e in the s hor t to mediu m ter m; interest r ate ris k, whe re the b en et of e mb edd ed o ption ali t y in so me of ou r le ndi ng bus ine ss es d ec rea sed a s bas e rates i ncr eas ed; an d ope ratio na l ris k, given the traditionally str ong linkage between recessionar y economic cycl es a nd ins tan ce s of fra ud as we ll a s the ch all en ge to ope ratio na l ca pac it y sh oul d bad d ebt c ase vo lu me s inc rea se. Th e grou p is wel l pre par ed to fac e into eac h of the se ch all en ge s. We have for s ome ti me be en p rep ari ng for th e nex t c redi t dow ntur n and con tinu e to rene ou r bus ine ss-ta ilo red pl ayb ooks to en sure th at we are re ady fo r a ran ge of e co nom ic sc en ar ios. Lesley Jones Chair of the Risk Committee Book 1.indb 117 27/09/2022 23:48:32 11 8 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Corporate Go vernance Repor t continued Audit , risk and int ernal contr ol Th e grou p’ s u se of n anc e an d ris k mo de ls ha s evolve d fu r the r wi th the co ntin ue d deve lop me nt of our c red it a nd im pai rme nt mo de ls. Foll owin g the su bmi ssi on of ou r IRB a ppl icati on in th e prev iou s na nci al ye ar , we co ntinu e to work c los ely w ith th e PR A as we progress through the regulat or y approv al process. Our model risk framew or k and supporting model governance infrastruct ure are op er ating we ll an d in li ne wi th reg ulator y expe ctati ons. Not wit hsta ndi ng thi s, we conti nue to re ne ou r proc es se s and app roac h, both to reec t the in cre asi ng matu rit y of o ur mo del suite and the aw arene ss/understanding of the boar d and senior man age me nt. We are als o clo se ly mo nitor in g devel opm en ts in the regu lator y l and sc ape to en sure we re ma in ali gne d wi th exp ect ation s in thi s are a. Gi ven re ce nt deve lop me nts in the m acro ec ono mic env iron men t, we are als o lo oki ng cl ose ly at th e be havi our of o ur mod els to mo nitor th eir p er forma nc e as we move th roug h a more testi ng ec on omi c cycl e. Th e Com mit te e als o rema ins a le r t to the ri sk p ose d by cyb er c ri me, with re gu lar u pd ates prov id ed ove r the co ur se of the ye ar . T he gro up con tinu es to inve st in i ts dete ctio n an d mon itor ing c apa bi liti es a nd is making good pr ogress with its cyber matu rity plan. In addition, t he Com mit tee h as ra ise d the ba r on th e sta nda rds the g roup n ee ds to be ab le to dem ons trate on its b roade r op erati ona l res ili enc e. Thi s has inc lud ed a rev iew of en tit y-spe ci c se lf-ass es sme nts an d ap proval of sta nda rds ad opted fo r de live r y of i ts imp or t ant bu si ne ss se r v ice s. In Nove mbe r , th e Co mmi tte e reviewe d the re sul ts of a data c entre fai lover s imu lati on exerc ise i n the Ba nk wh ic h fur ther i nfor me d the grou p’ s d isa ster re cover y strateg y . As the th reat of c limate ch an ge inc rea sin gly d omi nates o ur da ily live s, we have i ncre as ed ou r Co mmi t tee foc us on th e ri sks we as a grou p wil l face a nd h ave rece ive d reg ula r upd ates on o ur pro gre ss in dev e loping a r e gulat orily-compliant climat e risk framew or k. Spe ci ca lly , the se have in clu de d the evol utio n of cre dit r isk c lim ate MI an d repo r tin g, and a rev iew of ou tputs f rom th e Ban k’ s i nau gur al long-t erm scenario analysis ex e rcise which focused on our Mo tor and A ss et an d Lea sin g por tfo lio s. The C om mit tee h ea rd pl ans fo r the grou p’ s r st TCFD rep or t w hic h is in clu de d in ou r An nua l Rep or t th is yea r (see pa ge s 42 t o 57 . Wh ile we h ave mad e stron g pro gres s as a rm i n bui ldi ng ou t our r is k man age me nt ap proa ch to cli mate ris k, we kn ow that we, alo ng wi th the b roade r in dus tr y , have m uch m ore to do an d we rem ain c omm it ted to en han cin g our d isc los ure s over the com in g yea rs. Ove r the co ur se of 2022, the Com mit tee h as al so co ntin ue d to ex ercise robust o versight o f Novitas as it naviga tes t he legal, regulat or y and commercial challenges o f wind down whilst continuing to deli ver g oo d cus tome r outco me s. Th is ha s in clu de d over sig ht of the assessment of cust omer outcomes and relev ant remedia tion whe re ne ce ss ar y and on goi ng revi ew of the ef fecti ven es s of loc al and g roup -leve l ri sk a nd co ntrol gove rn anc e, togethe r wi th cha lle ng e and discussion on both the nancial and non-nancial risk s in t h e business. Remun erat ion Th e link age b et wee n cul ture, r isk a nd co mpe ns ation re ma ins a n imp or ta nt on e an d the Ri sk C omm it tee an d the gr oup c hief r is k of c er h ave provi de d inp ut to the Re mu ner atio n Com mi tte e aga in this ye ar to ens ure th at ris k be havi our s and th e ma nag eme nt of ope ratio na l ris k inc id ents ove r the c our se of the nan ci al yea r are appropriat ely reected in decisions taken about per formance and reward. We also co ntinu e to progre ss a gai nst the b road er re gul ator y age nd a, in pa r ticu la r with re ga rd to climate r isk, c ond uct r isk , new Co nsu me r Duty regulation , operational resilience, cyber risk and outsourcing/ third p ar t y r isk. T he C omm it tee ha s rec ei ved re gul ar up dates o n eac h of the se are as a nd I rem ain c ond ent th at we are we ll pos itio ne d to me et the ch all en ge s and u nce r ta inti es that e ac h of thes e wil l pos e. In addit ion, the Committee has r e gularly re viewed reports from the ris k an d com pli anc e fu ncti ons o n the ef fe cti ven es s of the pro ce sse s that su ppo r t the m ana gem ent a nd m itig ation of b oth pri nci pal a nd em ergi ng r isks. T he b oard a lso e ng age s in thi s pro ces s thro ugh i ts ann ua l ass es sm ent of th e pri nci pal r is ks and u nc er t ainti es th at mig ht threat en its business model , future pro tabilit y , solvency or liquidity . A sum ma r y of the se pr in cip al an d em erg ing r isk s and u nc er t ainti es i s set ou t on p age s 78 t o 92. Membership and Meet ings The Committee comprises all Close Brothers G roup independent non -exec utive d ire ctors a nd mys el f as ch air . Six m ee ting s were h eld d ur ing th e yea r (ve sc he dul ed a nd on e ad hoc). Full deta ils of at tend an ce by the n on- execu tive di rec tors at sch ed ule d me eti ngs a re set o ut o n pag e 1 0 3. Me mbe rs of th e Co mmi tte e are re gul ar ly jo ine d by the c ha irm an of the bo ard, the exec uti ve dire ctors, th e gro up ch ief r isk of cer , th e grou p he ad of co mpl ia nce a nd the g rou p he ad of inter na l aud it, all of whom receive standing invitations t o attend. Oth er exe cut ive s, sub jec t mat ter ex pe r ts, r is k team m em be rs a nd ex tern al ad vi ser s are i nvite d to attend th e Co mmi tte e fro m time to time a s requ ire d, to prese nt an d adv ise o n repo r ts co mmi ss ion ed. I con tinu e to meet f req ue ntly w ith the g rou p chi ef ri sk of ce r and h is ris k team i n a com bin atio n of form al a nd info rm al se ss ion s, and w ith sen ior m an age me nt acro ss a ll di vis ion s of the gro up, to discus s the business envir onment and t o gather the ir v iews o n eme rgi ng ri sks, business performance and t he competitiv e environment . Commit tee Effect iveness As de sc rib ed i n more d etai l on pag e 1 1 1 , a n evalu ation of th e ef fe ctive ne ss of th e boa rd an d its co mm it tee s was un de r take n dur ing th e yea r in lin e with th e req uire me nts of the UK C or porate Gover na nce C od e. The re sul ts con rm th at the Co mmi tte e is ope ratin g ef fe ctive ly . T he C omm it tee co nsi de rs that d ur ing the ye ar i t co n ti n u ed to h av e a c c es s to s u f c i e nt re s o ur c e s to e n a b l e i t to ca r r y out i ts du ties a nd h as co ntin ued to pe r for m ef fe cti vel y . Ac ti v it y in t he 2 0 2 2 Fi n an ci a l Y ea r Th e man date and s co pe of the r isk f un ctio n conti nue s to evolve, with th e thre e lin es of de fenc e mo del n ow well e sta bl ish ed an d a mature a nd ef fecti ve ris k man age me nt fr amewo rk in p lac e. Over th e cou rse of th e las t yea r , th e ris k inf rastr uc ture ha s be en stre ng then ed fur ther th roug h the re cru itm ent a nd deve lop me nt of add itio nal s ki lls and re so urce. T he fa ir tre atme nt of cus tomer s an d goo d outco me s has l ong b ee n imp or t ant to the gro up a nd as th e regu lator y a ge nda con tinu es to de ep en in th is ar ea, we h ave resp on ded by e nh anc ing our c ond uct a nd c omp lia nce o pe rating m ode l to stren gthe n se con d lin e review a nd im prove th e qua lit y of in form ation th at the Co mm it tee and b oar d rece ive o n the ef fe cti ven es s of our c ustom er pro ce ss es. Th e Com mit tee b el ieve s stron gly i n the val ue of go od m ana ge men t infor mati on an d as the r isk f ram ewor k has c ontin ue d to mature, we have se en i ncre as ed u sag e of qua ntit ative a na lys is to supp or t o ur r isk app etite de ci sio nin g. Thi s ha s all owed us to un de rst and o ur po r t fol ios at an increasingly granular level and t o ant icipat e areas wher e cont rols and limits may be appropria te for tight ening or growth. Book 1.indb 118 27/09/2022 23:48:32 11 9 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Looking Ahead to 202 3 Gi ven the fo rec ast m acro e nvi ronm ent, an d in pa r ticu la r the threat p ose d by in ation a nd hi gh er inte rest r ates, the ye ar a hea d prom ise s to be an other c ha lle ngi ng on e, with a n ee d to bala nce th e Com mit tee’ s tim e bet we en ma na gem ent of e me rgin g thre ats and fullment o f its normal duties. Not wi thsta nd ing, we wi ll not l ose s igh t of the lo nge r -ter m focu s are as we have id enti e d for fu r th er foc us a nd ch all en ge in F Y202 3, nam el y: • Rev iew an d ren eme nt of the B an k’ s c red it pl aybo oks, n oting they may ne ed to be u tili sed a s we move thro ugh th e ec ono mic c ycle. • Gre ater u se of sc en ari o an aly sis a nd oth er qu anti tati ve ana ly sis tools and techniques t o suppor t the modelling of pot ential nancial impacts. • Con tinu ed ove rsi ght of th e grou p’ s evo lvi ng cl imate ri sk f ram ework, inc lud ing rev iew an d ch all eng e of the n ex t stag e of lon g-term scenario analysis. • Enh anc em ent of o ur co nd uct r isk f ra mewor k wi th a view to ens ur ing th e grou p con tinu es to ens ure po siti ve cu stome r outcomes . • Rev iew an d cha ll eng e of the r m’ s pl ans to add res s new C ons ume r Duty requir ements . • Con tinu ed foc us on th e grou p’ s op er ation al re sili en ce fr amewo rk, and th e pla nn ed matu ratio n of its cy be r ris k fra mewo rk. • As pa r t of the I RB pro gra mme, c ontin ue d review a nd a sse ss me nt of the gro up’ s mod ell ing c ap abi liti es, in clu din g the fu r th er deve lop me nt of ou r mod el s strate gy . Fin all y , I ex tend my th anks to my fel low me mb er s of the R isk Com mi tte e, whos e en gag em ent a nd c ontr ibu tion h ave be en of gre at sup por t to me over the p ast 8 ye ar s as Ch ai r . At the AGMI wil l be step pin g down f rom b oth the bo ard a nd as C hai r of the Risk Committee , to be replaced by P atricia Halliday . Pa tricia brings with h er s ubs tanti al ex pe ri enc e in si mil ar ro le s and I a m sure th e Com mit tee w ill b en et f rom thi s in the ye ar s to com e. Lesley Jones Chair of the Risk Committee 27 Septem ber 2022 Book 1.indb 119 27/09/2022 23:48:32 12 0 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Corporate Go vernance Repor t continued Audit , risk and int ernal contr ol Chair’s overview Th e work u nd er t aken by th e Com mi tte e to disc harg e its res pons ibi liti es is s et ou t bel ow . Dur in g the ye ar the C omm it tee h as ag ain h ad a fu ll ag en da an d conti nue d to focus o n its pr in cipa l rol es a nd res po nsib ili tie s. A key area of d isc us sio n over the p ast 1 2 m onths h as be en o n the leve l of ECL prov isi on ing, in clu din g as ses si ng the i mpa ct of the war in U kr ain e an d of inc rea sin g ina tion e sp ec ial ly e ne rgy c osts on ou r cus tomer b ase, pa r tic ula rl y with in the b ank . The re ha s be en a revi ew of the B EIS prop osa ls o n audi t refor m an d on the increasing disclosure relating t o climate change . We have focused on ch all en ging th e key acc ounti ng ju dge me nts ac ross th e grou p, as ses si ng the i ntegr it y an d fai r pre se ntatio n of the g roup’ s ex ter nal na nci al rep or ti ng an d review ing th e mai ntena nce a nd ef fective ne ss of t he group ’ s internal cont rol framework. T he Committee monitor e d and rev iewe d the ac tiv itie s an d per form anc e of inter na l and ex terna l audit, along with ov e rsight o f non-audit ser vices provided by t he ex ter nal aud itor . Fur the r de tai ls of wor k in re spe ct of th es e and oth er key ar eas a re se t out i n the se cti ons b elow. Th e Com mi tte e me mbe rs b ri ng a di ver se ra ng e of exp er ie nc e in na nc e, risk , cont rol an d bus ine ss, w ith pa r ti cul ar exp er ie nc e in the na nci al se r v ice s se ctor . Th e boa rd ha s con rm ed th at the me mb ers of the Co mm it tee have th e nec es sa r y ex pe r tise re qu ired to prov id e ef fe ctive c hal le nge to ma nag eme nt. Th e boa rd als o con sid er s that I have ap prop ri ate rece nt and re leva nt exp er ie nce. T he qu al ic ation fore ach of th e mem be rs i s outl ine d on pa ge s 95 to 9 7 . In add itio n to the Com mit tee m em be rs, st and ing i nvit ation s are ex tend ed to the ch air ma n of the b oard a nd a ll othe r dire ctor s. Th e Grou p Fin an cia l Con troll er , the G roup H ea d of Op erati ona l Ris k an d Com pli an ce, the G roup C hie f Ris k Of ce r and th e Gro up He ad of Inter nal Au dit at ten d mee ting s by invi tatio n. I meet w ith thi s grou p as well a s the G roup F ina nce D ire ctor ah ead of e ac h me eting to agre e the ag end a an d to rece ive a fu ll br ie ng on a ll rel evan t iss ue s. Invi tatio ns to atten d are ex ten de d to other me mb ers of m an age me nt to brie f the Co mm it tee on s pe ci c is sue s as n ec es sa r y . T he ex te rna l aud itor at tends e ac h mee ting a nd I had re gu lar c ont act w ith the le ad aud it pa r tne r du rin g the ye ar . Th e Co mmi tte e hol ds pr ivate se ssi ons w ith i ntern al a nd ex ter na l aud it fol lowi ng e ach m eeti ng of the Committee, without members of management. Membership Oliver Corbe tt (Chair) Lesley Jones Patr ici a Ha ll iday T esula Mohindra Sally Williams Meetings Five scheduled meetings held 10 0 % a t te n d a n c e (s e e a l s o p a g e 10 3 ) Ke y responsibilities • mon itori ng the i ntegr it y of the nan cia l state me nts and a ny other fo rm al a nnou nc eme nts re latin g to the grou p ’ s n an cia l performance; • revi ewing th e an nua l repo r t an d acc ounts i ncl udi ng si gni ca nt na nci al re por ti ng ju dge me nts an d reco mm end ing to the Bo ard whe the r it is f air , ba la nce d an d un der st and ab le; • revi ewing a nd m oni torin g the grou p’ s i ntern al co ntrol s and th e ef fe ctive ne ss of th e grou p inter na l audi t fu ncti on; • mon itori ng an d revi ewin g the ef fe cti vene ss a nd q ual it y of the ex tern al au di t proc es s an d the in de pe nde nc e of the ex ter na l auditor ; • rec omm end ing th e app ointm ent, re-a ppo intme nt and re moval of the ex ter na l aud itor of the g roup o r any of i ts sub sid ia r y com pan ie s, and of th ei r fee s; • revi ewin g the n ding s of the au dit w ith th e ex tern al au ditor s; and • revie wing and challenging t he group ’ s Recovery and Resolution Plan s. Th e Com mit tee’ s ter ms of refe ren ce are ava ila bl e at ww w .closebrot he rs. com. 202 2 highlights • discussing and challenging key account ing judgements made by man ag eme nt, wi th a par ticul ar fo cus o n exp ec ted cre di t los s (“ECL ”) provisioning , and rev enue recognition ; • reg ula r mee ting s with key bu sin es s are as to review a nd challenge ; • assisting with the det ermination of the appropriat ene ss of ado pting the g oin g co nce rn b asi s of acc oun ting a nd in pe r for min g the as se ss men t of the vi ab ilit y of th e grou p; • revi ewin g, chal le ngi ng an d app rovin g the a nnu al inte rna l aud it plan and in ternal audit reports; and • ov e rseeing the r e lationship with Price wat er houseCoopers LLP and eva lua ting i ts ind ep end en ce, obj ect ivi t y , qua li cati ons a nd effectiv eness. Au di t Co mm i t te e Oliver Corbett Chair of the Audit Committee Book 1.indb 120 27/09/2022 23:48:33 12 1 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Commit tee Effect iveness An i ntern al eva luati on of the b oar d and i ts com mi tte es was und er t aken th is yea r in li ne wi th the req uire me nts of the U K Cor por ate Gover na nce C od e. The re sul ts of this rev iew c onr me d that the Committee is opera ting effectively . The Committee considers during the n anc ia l year th at it h ad acc es s to suf cie nt res ourc es to e nab le it to car r y ou t its d utie s. Ac ti v it y in t he 2 0 2 2 Fi n an ci a l Y ea r Ke y accounting judgements Th e Com mit tee s pe nt con sid era bl e time rev iewi ng the i nteri m rep or t and Annual Report. The Committ ee discussed and challenged the key are as of a cco unti ng ju dge me nt ta ken by ma nag em ent i n pre par ing th e na nc ial s tateme nts an d the ex ter na l aud itor’ s wo rk. Th is al so inc lud ed c ons id erati on of the i ntern al c ontro ls over na nci al repo r tin g. The C omm it tee noted th at the re were no n ew sta nda rds, or am en dme nts to stan da rds, rel evant to the g roup th at had b eco me effective f or the reporting period. Th e key judg em ent a rea s were l arge ly u nch an ged f rom th e pri or yea r , re ec ting th e grou p’ s ad he renc e to its bus ine ss m od el an d consistency o f its approach to nancial r e porting. A mor e pessimistic ec ono mic o utlo ok h as le d to a par ti cul ar fo cus by th e Co mmi tte e in challenging expect e d credit loss pro visioning with management. Th e mai n are as of fo cus a re ou tlin ed be low. Each of the se m at ters was discussed with the e x ternal audit or and, wher e appropria te , have be en ad dre sse d in th e ex tern al au ditor’s repor t. IFRS 9 Gi ven the m ater ial it y of the gro up’ s loa n boo k, en sur ing th at the grou p’ s ECL m ode ls a nd rel ated IFR S 9 jud gem en ts and d isc losu res are appr opriate, remains a k ey priority f or the Commit tee . Regular upd ates we re provi de d to the Com mit tee th roug hou t the ye ar . Th e Com mi tte e cha ll eng ed th e leve l of prov isi ons h el d by the gro up, and th e jud ge me nts and e stim ates us ed to ca lcu late the se prov isi ons. Par ti cu lar fo cu s was gi ven to: • the Aug ust M one tar y Policy C omm it tee Re por t sets out th e ec ono mic a na lys is an d ina tion p red icti ons w hic h wil l for m par t of the decision- mak ing process f or future int erest rat e decisions • the o ngo ing u se a nd ap proval of m ode l adj ustm ent s, and th e evolu tion of th es e adj ustm ents a s the im pac t of Cov id- 19 mod er ates • imp act of in cre as ing in teres t rates a nd in ation o n the gro up’ s cli ent bas e and th e ex tent to wh ich m ode ls a re ab le to ca pture the r is ks, such as in ation. • the hi gh le vel of e stim ation u nce r ta int y in s et ting fo r war d-lo ok ing macroeconomic assump tions; and associat ed weights ; • management’ s model enhancement plans ; • prov isi oni ng le vels fo r Nov ita s and key a ssu mpti ons. Credit risk and provisions disclosures w e re discussed t o ensure the y were cl ea r an d gave a tra nspa re nt ar ti cul ation of th e grou p’ s c red it ris k prol e, and key dr ive rs of th e exp ec ted cre dit l os s cha rge. In th e nex t n anc ia l yea r , th e Com mi tte e wil l con tinu e to moni tor IFRS9 provi sio ns an d dis clo sure s wi th a focu s on a d eteri orati on in th e broader nancial outlook. Revenue re cognition Th e Com mit tee rev iewe d man age me nt’ s app roac h to revenue rec ogn itio n, high lig hting th e key area s whe re ju dge me nt is req uire d acro ss inte rest, fee a nd c omm iss ion i nco me. T he Co mmi tte e noted the con sis tency of a ppro ach w ith p rio r yea rs a nd co ncl ude d that reve nu e rec ogn itio n for e ach of th e grou p ’ s key bu sin es se s is ap prop riate. Ot h e r Fi na nc i al R ep o r t in g a nd C on t ro l Going concern and viability statement Th e Com mit tee a ss isted th e boa rd in d eterm ini ng the app ropr iaten es s of ado pting th e goi ng co nce rn b asi s of acc oun ting and i n pe r for min g the as se ss me nt of the vi ab ili ty of th e grou p. The Com mit tee rev iewe d a pap er f rom m ana gem ent i n sup por t of the goi ng co nc er n bas is an d the lo nge r -ter m via bil it y of the g roup. Th e Com mit te e ass es se d the prove n sta bi lit y of the g rou p ’ s bu si nes s mod el w hic h is s upp or ted by a d ive rs e por tfo lio of b usi ne sse s, res ilie nc e whe n su bje cted to inter na l stres s testi ng, and a s trong capital base wit h adequate acce ss t o liquidity . Th e Com mit te e disc us sed th e gro up’ s p ri nci pal r is ks whi ch m ay affect future development , per formance , and nancial position. The Committee considered projected protability and capital rat ios, over a p er iod of th ree ye ars; in ad diti on i t con sid ere d cha ng es in th e economic, t echnological and regulat or y environment . Overall t he Committee concluded that it r e mained appropria te t o pre pare th e acc ou nts on a go ing c onc er n ba sis, ad vi se d the bo ard that thre e yea rs wa s a sui tab le pe ri od of revi ew for the v ia bil it y statem ent, an d reco mme nd ed the v ia bil it y statem ent to the b oard fo r app roval, se t out o n pag e 94. Fair , balanced and underst andable On b eha lf of th e boa rd, the Com mit tee rev iewe d the n an cia l statem ents a s a who le to ass es s wh ethe r they were f air , ba la nce d and u nde rs tan da ble. T he gro up’ s pe r for ma nce wa s revi ewed in lig ht of the r isks a sso ci ated with c ur rent e co nom ic env iron me nt an d rela tive to pe ers. T he C om mit tee d isc uss ed a nd ch all en ged th e bal anc e an d fai rne ss of th e over all re por t with th e execu tive di rector s and c ons ide red th e vi ews of the ex ter nal a udi tor . D uri ng thi s review the Co mmi t tee ca refu lly c ons ide red th e cl ari t y and c oh ere nce of dis clo sure s, in pa r tic ula r in re spe ct of th e impa ct of ECL ’s and cli mate risk. Th e Com mit tee c on sid ere d the ove ral l pres ent atio n of the n anc ia l statem ents a nd was s atis ed that th e An nua l Re por t c oul d be rega rde d as fa ir , b ala nc ed an d und er sta nda ble a nd pro pos ed that the boar d approves the Annual Report in tha t respect. Risk Management and Internal Controls In co nju ncti on wi th the R isk C omm it tee, we have s atis ed ou rs elve s that the g roup’ s inter na l con trol fr am ework i s ef fec tive a nd ad equ ately ali gne d wi th the gro ups r isk p role. We are s atise d that th e inter nal controls in relation to the nancial reporting process is appropriately de sig ned a nd ef fecti ve in id enti f y ing r isks f ace d by the g roup. Full deta ils of th e inter na l con trol fr amewo rk a re gi ven w ithi n the ri sk ma nag em ent s ec tio n on pa ge s 7 6 an d 77 . At eac h mee ting we re ce ive a re por t f rom th e He ad of Inter na l Audi t, and we revi ew maj or n din gs into co ntrol we ak ne sse s an d management’ s response. We actively follow-up w ith ma nag em ent the recticat ion of ident ied control weaknesse s. Imp ai rm en t of Go od will an d Int an gib le A ss et s Acq uir ed o n Acquisition Th e Com mit tee wa s pre se nted wi th the a nnu al go od wil l impa ir me nt review a nd wa s satis ed th at the re were no i mpa irm ent i ndic ators. The Committee challenged the appropriat eness of the assessme nt , including discussing the outcome with the group ’ s auditor , and concluded the approach was r easonable. Whistleblowing champion I act a s the gro up’ s Wh istle bl owin g Polic y cha mp ion. T he gro up con tinu es to pl ace a h ig h pri or it y on e mp loye es’ und er sta ndi ng of the pro ce ss to en abl e the m to spea k ou t with c on de nce w he n app ropr iate. Fur the r info rm ation o n the bo ard’ s a ctiv iti es in th is ar ea ca n be fou nd on p age 1 1 0 of th e Co rpo rate Gove rna nc e Rep or t. Restoring trust in audit and corporate gov er nance Th e com mit tee h as, a nd wi ll co ntin ue to, evaluate the im pac t of the De par tment fo r Bus in es s, Ene rgy a nd Ind ustr y Strate gy (“B EIS”) consultation and resulting proposals f or restoring t rust in audit and corporat e gov er nance on the gr oup . Book 1.indb 121 27/09/2022 23:48:33 12 2 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Corporate Go vernance Repor t continued Audit , risk and int ernal contr ol Other policies Th e Com mit tee h as a lso rev iewed a nd a pprove d the a ppro ach to hed gi ng for s har e awards a nd th e pol icy for th e prov isi on of no n-au dit ser vic es by th e ex tern al au ditor . It c ons ide red th at the gro up’ s ta x policy cont inued t o be appropriat e. Internal Audit Th e Com mit tee rev iewe d, cha lle ng ed, an d app roved th e ann ua l inter na l audi t pl an a nd am end me nts mad e du rin g the ye ar . It rec ei ved regular reports on in ternal audit activities across t h e group detailing are as id enti ed d ur ing au dits fo r stre ngth en ing ac ros s the gro up’ s ris k ma nag eme nt an d inter na l cont rol fr amewo rk. 31 audits we re dist rib uted to the C omm it tee du rin g the n an cia l yea r . A ll au dits we re summarised at me etings of the Committ e e t ogether with an update on the s tatus of i ssu es i den tie d by inter na l aud it. Th e An nua l Inter nal Au dit A ss es sme nt, whi ch fou nd th e gover na nce and r is k and c ontro l fra mewo rk of the g roup to be g en era ll y ef fec tive, was re cei ved by th e Com mit tee i n acc orda nc e with th e Cha r tere d Institut e of Int ernal Auditors ’ guidance. Th e Com mit tee c omp leted i ts an nua l revi ew of the ef fe cti vene ss of the inte rn al au dit f un ctio n and i ts leve l of ind ep en de nce. T he evalu ation fo r the ye ar un de r review wa s co mpl eted inte rna lly a nd sup por ted by feed bac k fro m sta kehol de rs ac ros s the gro up. The inter na l aud it fu nc tion wa s foun d to be wor ki ng to all a ppl ic abl e internal audit ing standards. In add itio n to reviewi ng the i ntern al au dit f un ctio n’ s ef fecti vene ss, the Co mmi t tee as se sse d the l evel of in tern al au dit re sou rce a nd the app ropr iate nes s of the s ki lls a nd exp er ie nce of th e inter na l aud it fu ncti on. I was a lso invo lve d dur ing th e yea r in the re cr uitm ent of a new he ad of the g roup’ s inte rna l aud it f unc tion a nd e nsure d that dur ing th e pe rio d pr ior to his s tar ting in ro le the f unc tio n per form ed in line with e xpe ctations . Exte rna l A udi t Th e Com mit tee ove rs ee s the rel atio nshi p with Pricewa terhouseCoopers LLP ( “P wC”) , its external audit or , covering eng ag eme nt ter ms, fe es a nd ind ep en de nce. Both th e Co mmi tte e and th e ex ter nal a udi tor have po lic ie s an d proc ed ure s de sig ne d to prot ect the independence and object ivit y of t he external audit or . Pw C ha s be en au di tor to the grou p sin ce Aug ust 201 7 . M ar k Han na m stood d own as th e grou p’ s l ead a udi t par tner i n Ma rch 2022 at wh ich time H eathe r Varley re plac ed h im. Eithe r He ather o r Ma rk at tend ed al l meetings o f the Committee . Dur in g the yea r the C omm it tee revi ewed th e ex tern al au dit p la n as well as the resulting ndings. Principal matt ers discussed with PwC are se t out i n the ir rep or t o n page s 1 44 to 1 50. The Committee assesses t he independence and objectivity , qua li cati ons a nd ef fecti vene ss of th e ex ter nal a udi tor on an a nn ual basis as w ell as making a r ecommendation on the reappointmen t of the au ditor to the bo ard. T his ye ar ou r eval uatio n focu se d on the foll owin g key are as: • the qu al it y of aud it ex pe r tise, ju dg eme nt a nd di alo gu e with th e Committee and senior manage ment ; • the in de pen de nce a nd ob je ctiv it y de mo nstrated by th e aud it tea m; • ch ang e of P wC au dit p ar t ner a nd e nsu ri ng ef fe cti ve ha ndove r • the se ni or le ade rs hip of th e aud it tea m; and • the qu al it y of se r vi ce i ncl udi ng co nsi stenc y of app roac h an d responsiveness ; Th e proc es s was f aci lita ted by a gro up-w ide s ur vey of na nce, a sur vey of the Pw C se nio r aud it tea m’ s v iew on th e grou p an d a review of aud it an d non -aud it fe es. O vera ll, the C omm it tee ha s co ncl ude d that P wC re mai ns in dep en de nt, and it wa s sati se d with th e aud itor’ s pe r for man ce a nd rec om men de d to the boa rd a prop osa l for th e rea ppo intme nt of the a udi tor at the co mpa ny’ s AGM. St a tu to r y Aud i t Se r v ic e s Co mp l ia nc e Th e com pany c on rm s com pli anc e wi th the prov is ion s of the Statu tor y Audi t Se r vi ce s for L arge C om pani es M ar ket Investi gatio n (Ma ndator y Use of Co mpe titive T e nde r Proc es ses a nd Au dit Com mi tte e Re spo nsi bil itie s) Ord er 201 4 for th e yea r to 3 1 J uly 2022. Sub jec t to sha reh old er a ppr oval, P wC wi ll un de r ta ke the aud it of the co mpa ny an d the gro up for th e yea r en ded 31 Jul y 2023. In conformance with t he required r ules, pr ovisions, and good corporate gover na nce i n res pe ct of au dit ten de rin g an d rotatio n the gro up wil l be req uir ed to tende r for th e ex tern al au dit i n the 2027 na nci al yea r end. T he C omm it tee w ill c ons ide r in d ue co ur se its p la n for the ex tern al au diti ng ten der in g ahe ad of 2027 but th ere i s no ma ndator y rotatio n poi nt. Non-Audit S ervices Th e Com mi tte e over see s the g rou p ’ s po li cy on th e provi sio n of non -aud it se r v ice s by the ex ter na l aud itor , whi ch in co rpo rates th e Financial Reporting Council’ s Revised E thical Standard from March 2020. Th e grou p’ s p olic y is that p er mis si on to eng age th e ex ter nal a udi tor wil l always b e refu sed w he re the re is an a ctua l or potenti al thre at to ind ep end en ce. Howeve r , th e Co mmi tte e wil l give p er mi ssi on w her e the se r v ice c omp lie s wi th the gro up p olic y and w he re: • wor k is clo se ly rel ated to the au dit; • a deta il ed un de rst and ing of th e grou p is req uir ed; and • the ex ter na l aud itor c an prov id e a hig he r qua li ty a nd / or b ette r valu e ser vice. Th e regu lator y cap o n the an nua l val ue of no n-au dit s er v ic es of 70% of the aver age of th ree ye ar s’ audit fe es h as be co me ma nd ator y , foll owin g the fou r th n an cia l yea r foll owin g the c han ge of au ditor . Dur in g the yea r , tota l aud it fee s am oun ted to £2. 9 mil lio n (202 1 : £2 .6 million ) while to tal non-audit fees including those relating to ser vic es re qui red by le gis latio n am ounted to £0.8 mil lion (2021 : £0. 7mil lio n) repre sen ting 28% (2 021 : 27 % ) of th e cur re nt yea r audi t fee. This includes non-audit services not required b y legislation of £0.3 milli on (202 1 : £0.3 mil lio n) , 1 0% (2021 : 1 2% ) of th e aud it fee, pre dom ina ntly re latin g to the review of th e grou p ’s interim nancial stat ements and funding assurance w ork. The Committee was sa tise d that the se fe es, in div id ual ly an d in agg reg ate, were con sis tent wi th the no n-aud it se r v ice s po licy a nd di d not be lieve th at they po sed a th reat to the ex ter na l audi tors’ inde pe nd enc e. Oliver Corbet t Chair of the Audit Committee 27 Septem ber 2022 Book 1.indb 122 27/09/2022 23:48:34 12 3 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Membership Meetings Ke y responsibilities Annual Statement from the Remuneration Committee Chair On b eha lf of th e boa rd an d the Re mun er ation C omm it tee, I am ple as ed to pres ent th e Di rector s’ Remu ner ation R epo r t for th e 2022 na nci al ye ar . T his s ets ou t our p ay dec isi ons fo r the ye ar , inc lud ing h ow we imp le me nted the R em une rati on Poli cy a pprove d by sha reh old er s at the 2021 A G M. How the group per formed during the 2022 nancial y ear Clo se Broth er s has a we ll- es tab lis hed b usi ne ss mo de l that en ab les us to sup por t o ur cl ie nts and d el iver s trong re turn s for sh are hol de rs in a wi de ra ng e of mar ket co ndi tio ns. Ou r mod el i s focu se d on sus tain ab le le ndi ng, wi th a stron g net inte rest m argi n and d isc ipl ine d und er w ri ting, s upp or ted by a c le ar ly d ene d ri sk a ppeti te and a prudent approach to managing our busine ss and nancial resources. As de sc rib ed i n the Ch air ma n’ s a nd Ch ief E xec uti ve’ s S tatem ents, i n 2022 the gro up p er fo rm ed so lid ly d es pite a ba ckdrop of c onti nue d mar ket unc er taint y . Adju sted op er ating p rot was d own 1 3% to £234.8 mil lio n (202 1 : £27 0. 7 mil lio n) and we ac hieve d a retur n on ope ni ng eq uit y (“ RoE” ) of 1 0.6% ( 202 1 : 1 4.5 %) . T he gro up m aint ain ed strong capital, funding and liquidity posit ions. The common equity tier 1 (“C E T 1 ”) c api tal r atio de cre as ed to 1 4.6% (2 021 : 1 5.8% ), but re ma ine d well a he ad of the a ppl ic abl e min imu m regu lator y requ irem ents. Th e Ban ki ng di vi sio n pe r for me d well re ec ting c onti nue d go od de ma nd acro ss ou r le ndi ng bu sin es se s, wi th loa n boo k grow th of 5%, and stron g net inte rest m argi n of 7 .8%. Adjusted o per ating p rot in th e Ban ki ng di vi sio n inc rea se d 7% t o £ 227 . 2 mil lio n (202 1 : £21 2.5mill ion). While our mark et -facing businesses w e re nega tively impacted by volati lit y a nd fa lli ng ma rkets, we c ontin ue d to attrac t cli en t ass ets in CBAM, w ith n et in ows of 5 %. C BAM’s adjusted o pe ratin g prot was dow n 8% t o £21 .7 millio n (202 1 : £23.7 millio n) . W inter ood’s pe r for ma nce wa s adve rs el y imp acted by c ycli ca lit y in th e trad ing bus ine ss, w ith a ma rket w ide s lowd own in tra din g acti vi ty a nd p er iod s of volati lit y in f all ing m ar kets. Winter ood’s operati ng pro t was dow n 77% to £ 1 4. 1 m ill ion (2021 : £6 0.9 mill ion), followi ng the exc eptio na lly s trong tradi ng pe r fo rma nc e in the p rio r yea r . Foll owin g the gro up’ s sol id n anc ia l pe r for man ce i n the yea r an d stron g ca pit al po siti on, an d to reec t our c onti nue d co nde nc e in bu sin es s mod el, the b oar d is pro pos ing a nal d iv ide nd of 4 4. 0p p er s ha re. Th is wi ll res ult i n a ful l-year d iv ide nd p er sh are of 6 6.0p (202 1 : 6 0.0p) , retur nin g to the pre-p and em ic leve l. Bridget Ma caskill Chair of the Remuneration Committee Directors’ R emuneration Repor t Membership Bridget Macaskill (Chair) Mike Biggs Peter D uf f y Lesley Jones Mark P ain T racey Graham Th e chi ef execu tive, gro up h ead of h uma n res ourc es a nd th e hea d of reward a nd HR op er ation s also at ten d me eting s by invi tatio n. Meetings Five scheduled meetings held T wo ad diti ona l ad-h oc me eti ngs h eld 10 0 % a t te n d a n c e (s e e p a g e 10 3 ) Ke y responsibilities • Deter mi ne the ove ra rchi ng pr in cip les a nd p ara meter s of the Remuneration Policy on a group-wide basis. • Esta bli sh a nd ma inta in a c omp etiti ve remu ne ratio n pac kag e to attr act, motivate an d reta in hig h-c ali bre exec utive d ire ctors a nd senior management across the group . • Al ign s eni or exec utive s’ remu ner ation w ith th e intere sts of shareholders. • Promote the a chi evem ent of th e grou p’ s a nnu al p lan s and strateg ic ob je ctive s by prov idi ng a rem une rati on pac kag e that contains appr opriately mot ivating targe ts that ar e consistent with th e grou p’ s r isk a ppe tite. • Provid e over si ght of a ll the g roup’ s rem un erati on po lic ie s an d pra ctic es, to en sure f air a nd e qui ta ble p ay for al l em ploye es. Th is rep or t se ts out o ur ap proa ch to remu ne ratio n for the g roup’ s em ploye es a nd di rec tors for th e 2022 na nc ial ye ar . The Directors ’ Remuneration Report is divided in to three sections : Annual Stat ement from t he Remuneration Committee Chair P ages 1 23 t o 1 25 Dire ctor s’ Remu ne ratio n Polic y Pag es 1 26 to 1 28 Annual Repor t on Remunerat ion P ages 1 29 t o 1 40 Remuneration C ommittee Book 1.indb 123 27/09/2022 23:48:35 12 4 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Directors’ Remuneration Repor t continued Th e tab le b elow s ets ou t an ove r vi ew of ou r one -year a nd thre e-yea r key per form an ce in dic ators w hi ch prov id e con text fo r the Remuneration Committee ’ s decisions taken this year . Key per formance indicator 2022 2021 Return on ope ning equity 10 .6 % 14 . 5 % Averag e retur n on op eni ng eq ui ty ove r three ye ar s 1 11 . 0 % 12 .7 % CET1 capital ratio 14 . 6 % 15 . 8 % Adjusted ope rating prot ( £ million) 234.8 270.7 Adju sted e ar nin gs pe r sh are g row th over three ye ar s 1 (18 . 4 )% 0. 1 % Distributions t o shareholders (£ million ) 2 98.4 89.5 1 For t he th re e-y ea r pe ri od s en de d 31 Ju ly 20 22 an d 31 Jul y 2021. 2 For the 2022 nancial year , interim dividend paid and proposed nal dividend. Executive director r emuneration outcomes f or the 2022 nancial year La st ye ar , as re qui red by new re gu latio ns, we in trodu ce d a new ca pi tal requ irem ent d ire ctive V (“C RD V ”) co mpl ian t Rem une rati on Poli cy (the “Pol icy ”). I am ple as ed that th is was w id ely s upp or te d by our sha reh old er s, rec ei vin g an 8 4.2% vot e i n favou r at the AGM. Th e 2021 Policy included much-reduced maximum incent ive opportunities t o reect r equirements t hat the group adopt the ma ximum 2 : 1 variable: xed p ay cap re qu ired fo r Leve l 3 ban ks und er C RD V . Und er th e new Policy , the ma ximum opportunities for both direct ors under the annual bon us a nd lo ng-term i nc enti ve pla n (“L TI P” ) are 95% and 1 25 % of salar y r espectively . In dete rmi nin g execu tive d irec tor outco me s for the ye ar , w hic h are th e rst under t he new Polic y , the Remunerat ion Committee considered the ne ed to ma inta in a fa ir ba lan ce b et wee n the inte rests of a ll ou r sta keho lde rs, w hil e rewardi ng the m an age me nt team fo r de live r y of good performance, including on culture and conduct aspects. For 2022, the overa ll bo nus o utco me was 46.7 % of m a xi mum fo r both di rector s. Th e na nc ial e le me nt of the exec uti ve dire ctors’ bon us, wh ic h is lin ked to RoE a nd the C E T 1 c ap ita l ratio, pa id out at 4 1 . 1 % of ma xim um. Per form anc e ag ain st the s trateg ic sco rec ard wa s as se sse d at the ye ar e nd, an d an ou tcom e of 55% of ma x imu m was a pprove d for th is el em ent. T his sc ore ca rd ou tcome ree cts pro gre ss ag ai nst key strate gic, pe op le, cus tomer a nd r isk pri or itie s, inc lud ing c omp leti on of a stra tegic rev iew of th e grou p, mai nta ini ng go od e mpl oyee e ng age me nt, de live ri ng stro ng cu stome r satisfaction a nd impro v ing on risk obje ctives. Full details, including deta il o n per form anc e aga ins t the ba la nce d sc ore card, i s set ou t on pag es1 3 1to 1 3 3. Th e 201 9 L TI P veste d at 27 .5% of ma xi mum. T he awa rd was ba se d on ad jus ted EPS grow th, ave rag e RoE a nd a sc ore ca rd of ri sk management objectiv es assessed o ver the three- year performance pe rio d. Unfor t unatel y , ne ithe r the EPS n or the R oE n anc ial m etri cs ach ieved th e thre sho ld ta rget, due to the d if c ult c ond itio ns fol lowi ng the pa nde mi c, whi ch have d ep res sed o ur p er fo rm anc e over th e pas t three ye ar s. Adju sted EPS grow th over the th ree -year pe ri od de cli ned by 18. 4 % a ga inst a p er form anc e thre sho ld of 1 0%, whil e avera ge a nnu al Ro E over th e per form an ce pe ri od was 1 1 .0% aga inst a pe r for ma nce th res hol d of 1 2%. The r isk m ana ge me nt obj ect ives el eme nt s core d 27 .5% out of a m a xi mum 3 0%, bas ed on exe cu tive s demonstrating prude nt capital manage ment and strong pe r formance in ri sk, c omp lia nce a nd c ontro ls an d cap ita l ma nag em ent ac ros s the period. Al thou gh ac kn owle dgi ng that th ere h ave be en a nu mb er of he adw ind s over w hic h our exe cut ives had no c ontro l, the Co mm it tee dec ide d af ter c aref ul co nsi der ation th at the ri sk ma nag em ent obj ecti ves, a nd the refor e the L TIP o utcom e, shou ld be re du ced by 25 % to alig n bet ter w ith the re turn s our s ha reh old er s exp eri en ce d over the th ree ye ar s of the ve stin g pe rio d. The tota l award that w ill ves t is the refo re 20.6%. Th e Com mit tee d ec ide d to app ly no re duc tio n to the ann ual b onu s outcome as it considered t hat t he outcome appr opriately re ects pe r for man ce ac hi eved in th e yea r , w ith si gni c ant pro gre ss m ade in key strateg ic a rea s. Whi le c ontin ue d pre ssu re on th e sha re pr ic e over the last year is disappointing , the Committ ee believed it appropriat e to reect th is throu gh the d iscreti ona r y L TIP adju stme nt, rather th an an ad jus tmen t to the ann ual b onu s. Both the L T IP an d ann ual b onu s vesti ng ou tcom es a re lower th an th ose a chi eved la st ye ar , wh ich th e Committee judged as appropria te in light of group per formance. Proposed implementation of the Policy for the 2023 na ncial year For the 2023 n an cia l yea r , th e Co mmi tte e has d ec ide d to app ly no inc rea se to the execu tive d irec tors’ sa lar ie s. Th ere w ill b e no ch ang e to the incentiv e opportunities av ailable to t he execut ive direct ors, whi ch w ill re mai n at 95% and 1 25 % of sa lar y for both di rec tors un de r the an nua l bo nus a nd L TIP re sp ec tivel y . T he re wil l als o be no c ha nge to the leve l of pen sio n prov isi on, wh ich w ill re ma in al ign ed w ith the wid er wo rk fo rce at 1 0% of sal ar y. Ove r the la st yea r , th e Com mi ttee h as rev iewed th e pe r for man ce metr ics i n the a nnu al bo nus a nd L TIP to en sure th ey cont inue to ree ct the g roup’ s stra tegy , i nce ntiv ise o utpe r fo rma nc e and re ec t group object ives around risk and conduct . Th e Com mit tee d eterm ine d that th e cur rent m etri cs i n the an nua l bon us rem ain a pp ropr iate, and th erefo re the an nua l bo nus for th e 2023 na nc ial ye ar w ill c onti nue to be bas ed on R oE (40% ), CET1 (20 % ) and a s trateg ic sc ore ca rd (40 % ). Th e Com mit tee d ec ide d to retai n the cur ren t targ et ran ge o n the Ro E and C E T 1 m ea sure s for 2023 (1 0% to 1 8% an d 1 2.6% t o 1 5.6% resp ec tive ly). The C omm it tee ha s als o refre sh ed the s trateg ic sc ore car d to align w ith th e for wa rd-lo ok ing obj ecti ves fo r the gro up. Deta il on p er forma nc e aga ins t the sc ore ca rd wil l be prov id ed in n ex t yea r’ s re por t. F u r th er de tai l on the t arge ts for 2023 is set o ut on p age 135 . Th e Com mit tee a lso d ec ide d to retai n the cu rre nt ba lan ce of metr ics i n the L TIP , and s o the awar d will c onti nue to be b ase d on avera ge thre e -year Ro E (35% ), adjus ted EPS grow th (3 5 %) and r isk man age me nt ob jec tive s (30%) . Fur th er de tai l on the t arge ts for thi s yea r’ s awa rd is se t out o n pag e 1 36. Environmental, social and governance metrics Th e Com mit tee i s con sci ous th at sh are hol de rs are i ncr eas ing ly expecti ng en vironmental , social and governance measur es (“ES G”) to be emb ed ded w ithi n remu ne ratio n fra mewor ks for se ni or man age me nt. As par t of the revi ew of per form anc e obj ecti ves fo r 2023, the Com mit tee c ons id ere d how ESG is re ecte d with in ou r inc enti ves, a nd wh ethe r the re are ad diti ona l ESG metr ics th at sho uld be intro duc ed. Cu stome r , p eop le a nd ri sk metr ic s alre ady fe ature i n the str ategi c sco rec ard fo r dire ctors i n the a nnu al bo nus, a nd r isk management objectives , including su stainability , form a signicant par t of the L T IP . Clo se Br other s is cu rre ntly rev iew ing i ts broad er ESG strate gy , a nd the C omm it tee ex pe cts to ree ct any key o utpu ts fro m that in th e remu ne ratio n fra mewor k in the 2023 n an cia l yea r and fu ture yea rs. Group-wide employee remuneration Th e Com mit tee i s als o resp ons ibl e for de term inin g the rewa rd prac tice s on a gro up-w ide b asi s. As in p revio us ye ars, th e Co mmi tte e conti nue s to direc t ef for t into review ing a nd ap provi ng the ove ra ll rem une rati on for all l evel s of em ploye es a cros s the g roup. For f ur th er d eta ils, p lea se s ee the Re mun er ation C omm it tee ac tiv it y tab le on p age 1 29. Dur in g the 2022 n anc ia l yea r , th e avera ge sa la r y in cre ase fo r the ge ner al p opu latio n was 5. 7%, whi ch in cl ude d a 3% mid-yea r sa lar y inc rea se for a ll B ank in g em ploye e s, exclud ing exe cut ive di rec tors an d grou p E xecu tive C omm it tee me mb er s. At the sta r t of th e 2023 nan cia l yea r a fu r the r aver age s al ar y i ncr ea se of 4.3% was awarde d acro ss the gro up wi th bas e sa lar y upli f ts foc use d on mo re jun ior s taf f. The se inc rea ses re e ct the c ontin uin g pre ssu res o n wage s an d the co st of Book 1.indb 124 27/09/2022 23:48:35 12 5 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t liv ing, d rive n by the c urr ent in atio na r y env iron me nt an d ens ure s thos e mos t sus cepti ble to the e co nom ic e nviro nme nt ar e bes t protec ted. Th e grou p con tinu es to pay al l staf f at or ab ove the nati ona l li vin g wage, whi ch is i n exces s of the n ation al m inim um wag e. Dur in g the yea r , th e Co mmi tte e also rev iewe d the a pproa ch to remuneration within gr oup subsidiaries Close Brot he rs Asset Man age me nt (“CBA M”) a nd W inter ood S ecu ri ties (“ WI NS”) to en sure that the re mun erati on po lic ies w ithi n eac h com ply w ith req uire me nts und er th e new Inve stm ent F irm s Prud en tial R egi me (“I FPR”) a nd the associa ted MIFIDPRU r e muneration code. While t he ex ecutive dire ctors a re id enti ed a s Mater ia l Ris k T a kers u nde r the M IFIDPRU cod e for both C BAM a nd WIN S, no ch ang es to the ir re mun erati on wil l be req uire d gi ven the ex isti ng di rector s’ remun erati on po lic y ree cts the n ec es sar y remu ner ation fe ature s. As WIN S is an E x tend ed r m for M IFIDPR U pur pos es, c han ge s have be en m ade to the rem une rati on for so me af fe cted st af f to reec t new d efer ral a nd paym ent i n instr um ents re qui rem ents. Di ver s it y a nd i ncl us io n Th e FCA has intro du ced n ew lis ting r ule s that i ncl ude re po r ting requ ire men ts arou nd di ver sit y . Whi le the se w ill o nly t ake ef fe ct for C los e Brothe rs fo r the 2023 na nc ial ye ar , wi th the r st ma nd ator y co mpl y-or - expl ai n repo r tin g in nex t ye ar’s repor t, Clo se B rother s cu rre ntly m eets the req uire me nts that m ore tha n 40% of the bo ard a re wome n an d one boa rd me mb er is f rom a m ino ri ty e thni c bac kgroun d. Th is yea r the R emu ne ratio n Com mi tte e has a gai n over see n the pub lic ation of o ur g end er p ay gap re por t, whic h is pub lis he d on ou r webs ite. We are co nde nt that m en a nd wom en a re pa id eq ual ly fo r performing equivalent r ole s acro ss our businesses and are committed to tak ing ste ps to redu ce ou r ge nde r pay g ap, whic h is pr im ari ly dri ven by a l ower p ropo r tio n of wom en in s en ior a nd f ront of ce rol es whe re ma rket r ates are h igh er . O ur foc us on c los ing th e ge nd er pay gap i s throu gh in cre asi ng fem al e repre se ntati on at al l leve ls by set tin g representation targets and supporting de velopment programmes. Whi lst g end er p ay provi de s the mo st dire ct li nk to remu ne ratio n, our broad er fo cus o n inc lus io n ens ure s we pri or itise f air ne ss a nd e qua lit y fo r all c oll eag ue s. We are sig nator ies of th e So cia l Mob ili t y Pled ge a nd of the Rac e at Work Ch ar te r to help d irec t our a ctio ns aro und r ace e qua lit y . Obj ec tive s to supp or t in clu si on are l inke d to executi ve pay thro ugh risk management objectives wit hin our ex ecutives ’ long-t erm inc enti ve pl an. We are pl ea sed th at our e mp loye es co ntin ue to fee l that we are a n inc lus ive or gan isa tion, as d em onstr ated by res pon ses in the e mp loyee o pin io n sur vey , a nd we co ntin ue to pus h for wa rd and i mpl em ent a ctiv iti es a nd ini tiati ves i n this s phe re to ensu re we are bui ldi ng an i ncl usi ve env iron me nt wh ere a ll ou r col lea gue s fe el pro ud to work for u s. Concluding remarks I woul d like to aga in tha nk s hare ho lde rs w ho s upp or ted o ur n ew Rem un erati on Poli cy at the 2021 AGM. Tho ugh p ass ed w ith a stron g vote in favou r , I a m con sci ous th at som e sh are hol de rs felt unable to suppor t our proposals. The Commit tee unde r t ook sig ni ca nt sh are hol de r con sul tatio n in ad vanc e of the n ew Polic y and we re ma in co mmi t ted to ongo ing d ial og ue wi th our sha reh old er s on re mun erati on ma tte rs. I ho pe that yo u wil l nd th is repo r t on th e dire ctors’ remu ner ation a cce ss ibl e and c lea r , a nd that you ag ree w ith the d ec isi ons we have t aken, w hic h bal an ce the interests of all stak e holders. Fin all y , I woul d like to than k my fel low me mb ers of th e Re mun era tion Com mit tee fo r the ir co mmi tme nt and e ng age me nt in the l ast ye ar . Af ter ni ne ye ars o n the B oard of C los e Brothe rs, at th e AGM, I wil l be step pin g down f rom th e Boa rd an d as Ch air of th e Re mun era tion Committee. Bridget Ma caskill Chair of the Remuneration Committee 27 Septem ber 2022 Book 1.indb 125 27/09/2022 23:48:35 12 6 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Directors’ Remuneration Repor t continued Directors’ R emuner ation P olicy Th e dire ctors’ Re mun era tion Pol icy wa s app roved by s ha reho ld ers at th e 2021 A G M on 1 8 N ovemb er 2021 . It i s inten ded th at the po licy will app ly fo r three ye ar s up to the 2024 A G M, unl es s am end me nts are re qu ired, in w hi ch ca se f ur th er s har eho lde r ap prova l wil l be so ught . Th e pol icy c an b e read i n ful l on pa ge s 1 0 0 to 1 1 0 of th e 2021 Annu al Re po r t, whic h is ava ila ble o n our we bs ite at w w w .close bro th er s.com. A sum mar y of the ma in el em ents of th e Re mun erati on Pol icy is s et ou t in the t abl e be low . Infor mati on on h ow the Re mun er ation Po licy w ill b e app lie d in 2023 is in clu de d in the A nn ual R ep or t on R em une ratio n se ctio n, on pa ge s 1 35 to 1 36. Remuneration Policy f or ex ecutive directors Element and how it supports the group’ s short-t e rm and long-term strategic objectives Operation and ma ximum payable Perfor mance framework, recovery and withholding Base salary Attra cts an d reta ins hi gh calibre employees. Re ec ts the in div id ua l’ s rol e and ex pe ri en ce a nd ex ter na l fac tors, as applicable . Paid m onthl y in c ash. Inc rea se s wil l gen er all y not exce ed th ose fo r the bro ade r em ploye e pop ulati on un le ss the re is a c han ge in ro le, res pons ibi lit y or th e regulat or y environment . Not applicable . Benets Ena ble s the ED s to per fo rm thei r rol es ef fe cti vel y by contribut ing t o their w ellbeing and security . Pro vide s compet itive benets con siste nt with th e role. Benets ma y include privat e medical cov er , health screening, life as sur anc e, inc ome p rotecti on c over an d an a llowa nc e in li eu of a company car . Other benets may also be pr ovided in certain circumstances, such as r e location expenses. Not applicable . Pen si on Pro vide s an appr opriate and competit ive level of personal and dependant retiremen t benets . EDs re cei ve a leve l of pe nsi on co ntri bu tion ( in the fo rm of a c ash all owanc e or c ontr ibu tion to a pe nsi on ar ra nge me nt) that is i n line with th e wid er wo rk fo rce. Not applicable . Annual bonus Rewar ds good performance. Mot ivat es ex ecutives t o suppor t the group’ s goals, strate gie s an d val ue s over both the m edi um an d lon g term . Ali gns th e intere sts of se ni or emplo yees and ex ecutives with t hose of k ey stak eholders, including shareholders, and increases ret ention for senior employ ees, thr ough the use of deferrals . 60% of the a nnu al b onu s wil l usu all y be d efer red i nto sha res (in th e form of n il co st opti ons o r co ndi tion al awa rds) and wil l usu all y ves t in eq ua l tran che s over th ree ye ar s, sub je ct to rema in ing in s er vice. T he re mai nin g an nua l bon us wi ll be d eli vere d immediat ely in cash. Th e ann ua l bon us is c ap ped at 9 5% of base sa la r y . At the Remuneration Commit tee ’ s discretion , dividend equivalents wil l usu all y be pa id in c as h or add itio nal s ha res w hen th e defe rre d award s vest. Individual bonuses are determined based on bot h nancial and non- nancial pe r for ma nce m ea sure s in th e na nc ial ye ar , inc ludi ng ad here nc e to relevant r isk a nd cont rol fr amewo rks. At the R emu ne ratio n Com mit tee’ s d iscre tion, a n ele me nt of the bon us may a lso b e ba sed o n pe rso na l performance. At lea st 6 0% of the an nua l bon us oppor tunity will be based on nancial performance. Th e non -nan ci al e lem en t wil l be det ermined based on per formance measured against a balanced scor ecard , including (but no t limited t o) : • strat egic objectives; and/or • people and customer metrics ; and/or • risk, conduct and compliance measures . The Remuneration Commit tee has overriding discre tion t o adjust vesting outcomes where it considers appropriat e. Th e ca sh el em ent i s sub je ct to claw bac k and th e defe rre d el em ent is s ubj ec t to malus and cla wback conditions. Book 1.indb 126 27/09/2022 23:48:36 12 7 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Element and how it supports the group’ s short-t e rm and long-term strategic objectives Operation and ma ximum payable Perfor mance framework, recovery and withholding Long- T erm Incentive Plan Mot ivat es ex ecutives t o ach ieve the g roup’ s longer -t e rm strat egic obj ecti ves a nd al ign s thei r intere sts wi th thos e of shareholders. Aid s the at trac tion a nd retentio n of key staf f. Awards a re mad e in the fo rm of ni l co st optio ns or con diti ona l award s and u su all y vest af ter three ye ar s su bje ct to achieving performance conditions and remaining in ser vice. On ve stin g, award s wil l usu all y be s ubj ec t to a fur th er two -year p ost-vesting rete ntio n per io d before o ption s ca n be exerci se d by , or c ond itio na l award s pai d to, EDs. EDs ar e eli gib le to rece ive a n an nua l award of s hare s wi th a fac e valu e of up to 1 25 % of ba se sa la r y , excl udi ng di vid en d eq uiva le nts. Ind iv idu al awa rds ve st ba sed o n per formance against bot h nancial and non- nancial performance measures. At lea st 70% of the award wi ll be b ase d on per formance against nancial measures. Th e rema ind er w ill b e bas ed o n non- nancial performance. The Remuneration Commit tee has overriding discre tion t o adjust vesting outcomes where it considers appropriat e. L T IP award s are s ubj ect to ma lu s and clawback pr ovisions. Shareholding requirement Ali gns th e intere sts of ex e cutiv es with those o f shareholders. EDs ar e exp ecte d to buil d and m ai ntai n a ho ldi ng of co mpa ny sha re s equ al to at le as t 200% of ba se s al ar y. EDs wi ll no rm all y be ex pe cted to ma inta in a m ini mum s ha reh old ing of 200% of ba se s ala r y fo r the r st t wo yea rs af te r step pin g down as an ED. Not applicable . Other Th e gro up wi ll pay le ga l, train ing a nd oth er re aso nab le a nd appropriat e fees, including any r e levant ta x liabilities, incurred b y the EDs a s a res ult of d oin g thei r job. Th e EDs are a ls o per mi tte d to par tic ipate in th e grou p-wi de Save As Y ou Ea rn s che me s an d Sha re Inc enti ve Plan. Legacy arrangements S hare awa rds g rante d und er the p revi ous R emu ne ratio n Policy w ill con tinu e to vest an d be re lea se d on the ir us ua l time sc ale s. Th es e awards to exec uti ve dire ctors a re al so su bje ct to a thre e-yea r pe r for ma nce p er iod a nd u sua ll y post-vestin g to a two -year retentio n pe rio d. The s ing le g ure for 2022 i ncl ude s val ue s relati ng to the 201 9 L TI P gra nt. Additional details on the directors’ Remuneration Poli cy Th e Rem une rati on Co mmi t tee has d isc retio n to amen d per formance conditions in appropriat e circumstances , pro v ided that the per formance condition is not made eit her materially easier or mat erially more difcult to achieve. The Committee also has dis cretio n to adjus t vest ing ou tcom es w here i t co nsi der s the application o f formulaic performance conditions t o be inappropriat e. The Remuneration Commit tee ma y make minor ame nd me nts to this Poli cy (for re gul ator y , exch ang e co ntrol, ta x o r adm inis trati ve pur pos es, to co rre ct cl er ic al e rror s or to ta ke acc oun t of a cha ng e in le gis latio n) witho ut o btai nin g sha reh old er approv al for t hat amendment . Rat io na le fo r cho ic e of per formance conditions The Remuneration Committ e e selects nancial and non-nancial per form anc e me asu res that s tren gthe n the a lign me nt of the remunerati on arrangement s t o the business model and the intere sts of ou r sh are hol de rs. T he Co mmi t tee be lieve s the cu rre nt com bin atio n of metr ics p rovi de s a goo d bal an ce be twe en na nci al and non- nancial measures, and supports the medium and lon g-term str ategi c obj ec tives of th e gro up. Malus and claw back Mal us a nd cl awba ck prov is ion s app ly to the va ria bl e pay that c an be e ar ned by exe cu tive di rec tors. T he sp ec ic c ircu mst an ce s in whi ch m alu s an d claw bac k ca n be a ppl ied a re se t out i n our f ul l Polic y on pa ge s 1 05 a nd 106 of the 2021 Annu al Re po r t, whi ch is avail ab le on o ur we bsi te. Book 1.indb 127 27/09/2022 23:48:36 12 8 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Directors’ Remuneration Repor t continued Dates of EDs’ service contracts Name Date of serv ice cont ract Adri an Sa ins bur y 1 May 2020 Mike Morgan 1 5 November 20 1 8 Remuneration Policy f or the chairman and non-ex ecutive directors Element and how it supports t he group ’s shor t- term and long- term stra tegic objectives Operation and ma ximum payable Fee s Attra ct a nd reta in a ch air ma n and independent non-ex ecutive direct ors who h ave the req uis ite sk ill s and experience to de term ine t he stra tegy of the gro up a nd over se e its implementation. Fee s are pa id in c as h and a re revi ewed p er iod ica lly. Fee s for the c ha irm an a nd no n-exe cuti ve dire ctor s are s et by the b oard. T he no n-exe cuti ve di rector s do not pa r tic ipate in d ec isi ons to set the ir ow n remu ne ratio n. Th e cha ir man of th e boa rd rec ei ves a fe e as ch air ma n but re ce ive s no othe r fee s for c hai rm ans hip o r me mbe rs hi p of any co mm it tee s. Non -execu tive d irec tors re ce ive a ba se fee. Th e sen ior i nde pe nde nt di rector re ce ives a n add itio nal fe e for th is rol e. Addi tion al fe es a re pai d for ch air ma nsh ip of ea ch of the Au dit, Re mun era tion a nd Ri sk Co mmi t tees. Addi tion al fe es a re pai d for me mb er shi p of com mit tee s, wi th the exce ption of th e Nom ina tion a nd Gov ernance Committee, for which no additional fees are payable. Additional fees may be pa yable for o ther additional boar d responsibilities and/ or time commit ments. Th e cha ir man a nd no n-exe cuti ve dire ctor s are e ntitle d to cla im rei mbu rse me nt for re aso na ble exp ens es a nd as soc iated t a x lia bil iti es in cur red i n con ne ctio n with th e pe r for ma nce of th ei r duti es fo r the co mpa ny , in clu din g travel ex pe nse s. Ove rall a ggre gate fee s wi ll rem ain w ithi n the £1 .25 mill ion a utho ris ed by ou r ar ti cle s of as soc iatio n. There is no pe rformance framework, recov er y or with holding. Non-executiv e directors’ appointment letters Name Date of appointment Current let ter of appointment start date Mike Biggs 1 4 M arc h 201 7 21 Septemb er 2020 Lesley Jones 23 December 20 1 3 2 1 November 20 1 9 Bridget Macaskill 2 1 November 201 3 21 November 2 01 9 Oliver Corbett 3 Jun e 201 4 21 Novem be r 201 9 Peter D uf f y 1 Jan ua r y 201 9 21 Novem be r 201 9 Sally Williams 1 Jan ua r y 2020 1 Jan ua r y 2020 Mark P ain 1 Jan ua r y 2021 1 Janu ar y 202 1 T esula Mohindra 15 J u l y 2 0 2 1 15 J u l y 2 0 2 1 Patr ici a Ha ll iday 1 Augu st 2021 1 Augu st 2021 T racey Graham 22 Ma rch 2022 22 Ma rch 2022 Consideration of shareholders’ and employees’ vie ws Th e cha ir man of th e boa rd co nsu lts ou r maj or sh are hol de rs on a re gu lar b asi s on key is sue s, inc lud ing re mun er ation. A fo rma l co nsultation exerci se was u nde r ta ken du ri ng 2021 with ou r maj or sh are hol de rs a nd sh are ho lde r adv is or y b odi es a s par t of th e pro ce ss of rev ie wing this Pol ic y . Th e pay an d term s and c ond iti ons of e mpl oym ent of e mp loyee s wi thin th e gro up are t aken i nto cons id erati on w hen s et ting th e Di re ctors ’ Rem un erati on Pol icy a nd pay of th e EDs. Th e Re mun er ation C om mit tee d oe s not for mal ly c ons ult w ith e mpl oyee s wh en se tti ng the Po licy , although t he employee opinion sur vey conduct ed every year includes r emuneration as one of t he t opics sur vey ed. The Remuneration Com mit tee a lso re ce ive s fee dbac k fro m eng age me nt with, a nd co mmu nic atio n to , e mp loyee s on m atte rs re latin g to remun erati on is su es, whi ch it u se s to inform i ts broa de r app roac h to remun era tion, in clu din g with re sp ec t to the alig nm ent b et wee n execu tive rem une r atio n and th e ap proac h to comp en satio n for e mpl oyee s acro ss the g rou p. A t eac h sc hed ule d me etin g, the Rem une rati on Co mmi t tee revi ews a ‘Rem un erati on D ash boa rd’ co nta ini ng metr ic s, an al ysis a nd oth er in form atio n, whi ch the C om mit tee u se s as pa r t of its d ec isi on-m aking, inc lud ing a s par t of the ann ua l com pe nsati on p roce ss. It c over s a wid e ra nge of a rea s throu gho ut th e yea r , s uch a s wor k force d e mographic s, pay an d reward at di f fer ent l evels a cros s the gro up, gend er p ay and SA Y E par ticip ation. Book 1.indb 128 27/09/2022 23:48:36 12 9 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Annual Report on Remunerat ion Remuneration Committee The Committee ’ s main responsibilities are to : • revi ew and d eter min e the total re mun era tion p ack age s of execu tive d irec tors a nd othe r se nio r execu tive s, inc lud ing g roup m ate rial risk -tak ers and s en ior c ontro l fun ctio n staf f in con sul tatio n with th e cha ir man a nd c hief exe cuti ve an d with in the ter ms of th e agre ed p oli cy; • app rove the d es ign a nd ta rgets of a ny pe r for man ce -rel ated pay sc he me s ope rated by th e grou p; • revi ew the de si gn of al l-e mpl oyee s har e inc enti ve pla ns; • ens ure that c ontr actu al ter ms on te rmi natio n and a ny paym en ts made a re fa ir to the ind iv idu al an d the gro up, that fail ure is not reward ed a nd that a du t y to mitigate r isk is f ull y rec ogn ise d; • revi ew any ma jor c ha nge s in e mpl oyee b ene ts str uc ture s throu gho ut the g rou p; • ens ure that th e rem une ratio n str uctu res in th e grou p are c omp lia nt wi th the ru le s and re qu irem ents of re gu lators, a nd al l rel evan t legislation ; • ensure t hat provisions r e garding disclosur e of remuneration are fullled ; and • se ek ad vic e fro m grou p con trol fu nc tions to en sure re mu ner ation s tru cture s an d ann ua l bon use s are a ppro pr iately a lig ne d to th e grou p’ s r is k appetit e. Membership activit y in the 2022 nancial year Th ere we re seve n me etin gs of the C om mit tee h el d dur ing th e yea r . Th ere i s a sta ndi ng ca le nd ar of ite ms wh ic h is su ppl em ented by other sig ni ca nt is sue s that a ris e dur ing th e yea r . T he key m atte rs ad dre sse d du rin g the ye ar we re as fol lows: September 2021 Additional September 2021 Additional September 2021 Januar y 2022 April 2022 June 2022 July 2022 Remuneration policy and disclosures Rev iew an d app roval of R emu ne ratio n Poli cy State men t for 2021 • Review and appro val of Dir ectors ’ Remuneration Report for 2 02 1 • Revi ew an d app roval of the re mu ner ation s ec tion of th e Pill ar 3 disclosure f or 20 2 1 • Annual remunerat ion governance r eview • An nua l review of T ota l Rewa rd Prin cip les • Risk and reward Review and appro ve risk -adjustment process/ outcomes •• •• An nua l revi ew whe ther to ap pl y mal us an d cl awbac k to remuneration • Annual remuneration discussions Ap proval of L T IP pe r for ma nce t arg ets for 2022 awa rds • Fin al revi ew an d app roval of ED s’ annua l bon us ta rgets a nd objectives • Rev iew of pe r fo rma nc e testi ng res ul ts for ve sting 201 8 L TIP awa rds • Revi ew EDs’ per form anc e aga ins t thei r an nua l bon us ta rgets a nd objectives •• •• • Rev iew an d ap proval of a pp roac h to year - en d co mpe ns ation • Y e ar -e nd al l-e mpl oyee gro up -wide s al ar y a nd bo nus a na lys is/ proposals f or 2022 •• Gove rna nc e review of th e sa le s inc entive s che me s • Rev iew an d app roval of th e ris k ma nag eme nt ob je ctive s for th e 201 9 L T IP ves tin g •• Rev iew of the r isk m an age me nt obj ec tive s for the 2023 L TIP • Rev iew pro pos ed 2022 c omp ens atio n for M ateri al R isk T ake rs •• Ini tial rev iew of ED s’ annua l bo nus ta rgets a nd o bje ctive s for 2023 • Rev iew of sa le s inc en tive sc he me s and a pp roval of sc he me s for 2023 • Regulatory and external de velopments Mater ia l Ris k T a kers i de ntic atio n for 2022 • • MIFIDP RU impact on CBAM’ s and Wint er ood’ s remuneration • • •• Ge nde r pay ga p revi ew • Special business Ap prove Save A s Y ou Ea rn p la n ru le s • Approv e Omnibus Scheme rules changes • • Rev iew an d ap prove mi d-yea r sa lar y incr ea ses, i ncl ud ing M ateri al Ris k T a ker s in gro up an d ce ntra l fun ctio ns • Co mm it tee r e mi t a nd e f f ec t ive n es s Revi ew term s of refere nce • UK Corporate Go vernance Code We conti nue to be c omp lia nt wi th the exe cuti ve pay prov isi ons of th e 201 8 U K Cor po rate Gove rna nc e Co de. Ou r pay ar ra nge me nts ar e a lso con sis tent wi th the fol lowi ng pr in cip les s et ou t in the C ode: Book 1.indb 129 27/09/2022 23:48:36 13 0 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Directors’ Remuneration Repor t continued • Clarity – this D irect ors’ Remuneration Repor t provides open and transparent disclosure of our ex ecutive remunerat ion arrangem ents f or our int ernal and e x ternal stakeholders . • Sim pli cit y a nd a lig nme nt to cul ture – in ce ntive a rr ang em ents fo r ou r execu tive s are str aig ht for wa rd, wi th ind ivi du als e lig ibl e for a n ann ua l bon us a nd, at more s en ior l evel s, a sin gle l ong -term in ce ntive p la n. Per fo rma nc e me asu res u se d in the se p lan s are d es ign ed to s uppor t de live r y of the g rou p ’ s key str ategi c pri or itie s an d our c om mitm ent to ad opt a res po nsi ble, su sta ina ble b us ine ss m ode l, in li ne with our purpose and v alues. • Predi cta bi lit y – ou r inc en tive ar ra nge me nts co nta in ma x im um op por tunit y l evel s with o utcom es va r y ing d ep end ing o n the l evel o f pe r for man ce ac hi eved ag ain st sp ec ic m ea sure s. T he ch ar ts o n pag e 1 07 of the 2021 annua l rep or t pr ovid e es timate s of the poten t ial totalreward o ppo r tun it y for th e execut ive di rector s und er th e Polic y . • Propo r tio nal it y an d ris k – ou r vari ab le rem une rati on ar ra nge me nts are d es ign ed to prov ide a f air a nd pro por tionate li nk be twe en gr oup pe r for man ce a nd reward. In p ar ti cul ar , pa r tia l defe rr al of the a nnu al b onu s into sha res, ve-yea r rel ea se pe ri ods fo r L T IP awar ds and stretchi ng sh are hol din g req uire me nts that a ppl y dur ing a nd p ost-em ploy men t provi de a cl ea r lin k to the ong oin g pe r for man ce of t he group and th ere fore lo ng-term a lig nm ent w ith st akeh old er s. We are als o sati se d that the va ri abl e pay str uct ure s do not e nco ura ge in a ppropriate ris k -ta ki ng. Not wit hsta ndi ng thi s, the Re mun erati on C omm it tee reta ins a n over rid ing d isc retion th at all ows it to adju st for mul a ic annual bonus and /or L TIP o utco me s so as to gu ard ag ain st di spro por tion ate out-turns. Ma lu s and c law back p rovi sio ns al so ap pl y to both the an nual bonus and L TI P and c an b e tri gge red in c ircu mst anc es o utli ned i n the Poli cy . Advice Dur in g the yea r und er rev iew a nd up to the d ate of this rep or t, the R emu ne ratio n Com mit tee c ons ulted a nd re ce ived i npu t from th e ch ai rma n of the bo ard, the c hie f execut ive, the gro up he ad of HR , the he ad of reward a nd H R ope ratio ns, the g roup c hie f ris k of c er a nd the company sec reta r y . W he re the Re mu ne ratio n Com mit tee s ee ks ad vic e fro m em ploye es, th is neve r rel ates to thei r own re mun era tion. Th e Rem une rati on Co mmi t tee’ s re mu ne ratio n adv ise rs a re De loi tte LL P (a mem ber of th e Re mun erati on C onsu lta nts G roup) who we re app oin ted by the R emu ne ratio n Co mmi tte e foll owin g a co mpet itive te nde ri ng pro ce ss. D ur ing th e yea r , s epa rate team s wi thin D el oi tte pro vide d adv ic e to the group o n ri sk, cy be r , IT , inter nal a udi t an d relate d proj ects. T he R em une ratio n Co mmi tte e is sati se d that the p r ovi sio n of the se other s er vic es do es n ot af fec t the ob je ctiv it y an d ind ep en den ce of th e remu ne ratio n adv ice p rovi ded by D el oit te as th e other s e rvi ce s ar e unre lated to reward m at ters. T ota l fee s paid to De lo it te were £1 1 2, 750 dur ing th e 2022 na nci al ye ar , ca lcu lated on a ti me an d material basis . Sla ugh ter an d May prov id ed le ga l adv ic e on the c om pany’s equi ty s ch eme r ul es. Fe es p aid to Sl aug hter a nd May we re £46,800, c alc ulat ed on a time a nd ma teri al ba sis. Statement of v oting on the Directors’ Remuneration Policy at the 2021 A GM For Against Number of abstentions Directors ’ Remuneration P olicy 84.2 % 1 5.8 % 3,2 1 8,903 Statement of v oting on the Directors’ Remuneration Report at the 2021 AGM For Against Number of abstentions Annual Repor t on Remuneration 9 7 .8% 2 .2% 386 , 1 54 Implementation of the P olicy in 2022 Single total gure of remuneration for e xecutive directors 2022 (Audit ed) Salary Benets Pension To t a l x e d remuneration Annual bonus 1 Performance awards 2,3 T otal variable remuneration T otal remuneration 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 Name £’00 0 £’ 000 £’000 £’ 000 £’000 £’ 000 £’000 £’ 000 £’000 £’ 000 £’000 £’ 000 £’000 £’00 0 £’0 00 £’00 0 Adri an Sa ins bur y 4,5,6 930 475 37 30 93 47 1, 0 6 0 552 412 843 14 6 325 558 1,16 8 1, 618 1,7 2 0 Mike Morgan 6 560 400 8 14 56 35 624 449 24 8 55 1 13 6 263 384 81 4 1, 0 0 8 1, 2 6 3 1 60% o f Adr ia n Sa in sb ur y ’s and Mi ke Mo rg an’s ann ua l bo nu s is d efe rr ed i nto s ha re s. 2 Th e g ure s fo r th e pe r fo rm an ce aw ar ds fo r 2021 , gr an ted i n 201 8 , hav e be en r ec al cu lat ed u si ng th e ac tua l s ha re pr ic e on t he da te of ve st ing f or th e LTIP of £15.27 . Th e th ree -m on th ave ra ge to 31Jul y 2021 wa s use d fo r th e 2021 re po r t gi ven t ha t the a war ds we re ve st in g af te r pu bl ic ati on of t he re po r t. 3 Th e g ure s fo r th e pe r fo rm an ce aw ar d for 20 22, gr ante d in 2 01 9, h ave b ee n ca lc ul ate d us in g the t hr ee -m ont h ave ra ge to 31 Ju ly 2022. A s thi s sh ar e pr ic e is l owe r tha n th e gr an t date s ha re p ri ce, none of this value r elates to share price appreciat ion. 4 Adr ia n S ai nsb ur y was a pp oin ted c hi ef exe c uti ve o n 21 Sep tem be r 2020. H is 20 21 sal a r y , be ne ts , bo nu s an d pe ns io n rel ate to t he p er io d he wa s a n exec ut ive d ir ec tor. 5 Adr ia n S ai nsb ur y’s per fo rm an ce a war ds fo r 2021 a nd 202 2 we re gr an ted b efo re h e was a pp oi nte d to th e boa rd. T h e fu ll aw ard s re late to v es ted LTIPs t hat w er e su bje c t to the p er for ma nc e cr ite ri a ou tli ne d in t he 20 21 ann ua l re po r t on p ag e 1 17 and i n thi s re po r t on p ag e 133 res pe ct ive ly. 6 Be ne ts f or 20 21 have b ee n re st ate d to in clu de a dd it io na l ta xa b le ex pe ns es . Adr ia n S ai nsb ur y’s bene t gu re h as c ha ng ed f ro m £22,46 3 to £29, 587 an d Mi ke Mo rg an’s from £ 9,091 to £13,67 4. Link between re ward and performance Th e grou p de live red a s oli d pe r for ma nce i n the 2022 n anc ia l yea r , w ith stro ng in co me grow th i n Ba nk ing, of f set by re duc ed i nco me in Win ter o od. Gro up ad jus ted ope ratin g pro t redu ce d 1 3% to £234.8 millio n (202 1 : £270 . 7 m illi on). The boa rd is p ropo sin g a na l dividend of 44.0p pe r sha re. Th is wi ll res ult i n a ful l-year d iv ide nd p er sh are of 6 6.0p (202 1 : 6 0.0p) , retu rni ng to the pre -pa nde mi c level . T his re ec ts the grou p’ s nan cia l pe r for ma nc e in the ye ar a nd stro ng ca pi tal p osi tion, a s well a s the bo ard’s continu ed c on de nce i n the bu sin es s mo del. Th e grou p ach ieved a n Ro E of 1 0.6% ( 2021 : 1 4.5 %) , ree cti ng the re du ctio n in Wi nter ood’s prot and c onti nue d grow th i n the eq u i ty b ase. T hi s has b ee n ree cted i n the ED’ s bo nus es, w ith thi s ele me nt ves ting at 3 6. 7% of the potent ial m a xi mum. T he CE T1 mea sure, intro duc e d i n the 202 1 na nc ial ye ar , ha s de cre ase d to 1 4.6% ( 202 1 : 1 5.8% ) a nd is ve stin g at 50.0%. The res ulti ng c omb ine d over all ve stin g of the t wo na nc ial me asu res is 4 1 . 1 % of the p otentia l ma x imu m. The exe cuti ve dire ctors d em ons trated a stro ng leve l of pro gres s ag ain st sp eci e d ob jectives, and this re sul ted in p er fo rm anc e sc ore s aga inst th e strate gic s cor ec ard of 55% ( se e page s 1 31 to 1 33 fo r fur ther d eta ils). For the 201 9 Lon g- T e rm I nce ntive p la n vest ing th is yea r , 70% of the ves ting i s bas ed o n na nci al g oal s and 3 0% is bas ed o n ris k , co mpl ia nce and c ontro l obj ec tive s. For the na nci al go als, th e adj usted e ar ni ngs p er s ha re grow th, wh ic h dec re ase d by 1 8.4 % over th e las t three ye ar s, Book 1.indb 130 27/09/2022 23:48:37 13 1 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t and th e avera ge a nnu al retur n on e qui t y of 1 1 .0% per a nn um, were b elow th e thre sho ld ta rgets of 10 % a nd 1 2.0 % pe r ann um, res pe c tive ly . Th e con tinu ed pr ud ent a ppro ach to c api tal m an age me nt com bi ned w ith a go od p er fo rm anc e in r isk, c omp lia nc e and c ontro ls me an th at th e r isk man age me nt ob jec tive s el eme nt ve sted at 91 . 7%, contri buti ng 27 .5% to the overal l ves ting. Ack now le dgi ng the retu rn s to share ho l ders ov er the past th ree ye ar s, whi ch we re de pres se d by the pa nde mi c, the Com mit tee d ec ide d af ter c aref ul co nsi de ratio n to reduc e the ri sk ma nagement obj ec tive s, and th erefo re the L TI P vest ing by 25 %. T he tota l award th at sha ll ve st is th erefo re 20.6%. Additional disclosures on the single total remuneration gure for e xecutive directors table (Audited) Salar y Th e per a nn um sa la ri es pa id du rin g the ye ar a re as sh own in th e si ngl e total rem une rati on g ure ta ble o n the pr evio us pa ge. Wh e n rev iewi ng sa lar y leve ls, the R emu ne ratio n Co mmi tte e take s into acc ou nt the in div id ual’s role and ex pe ri en ce, pay for th e broa der e mp loye e pop ula ti on, ma rket an d ex tern al fa ctors, w he re ap pli ca ble. N o me rit-bas e or co st of li vi ng in cre ase s were g ive n to the execu tive d irec tors, a ltho ugh b ase s al ar ie s did i ncr eas e from £5 50,000 to £93 0,00 0 for the g roup c hie f execu tive a nd £400,00 0 to £560,00 0 for the g rou p na nce d ire ctor as pa r t of a c om pensation mix adju stm ent in re sp ons e to the imp lem en tatio n of the bo nus c ap i ntrodu ce d as pa r t of CR D V dur ing th e 2022 na nc ial ye ar . T he co mpensation mix adju stm ents re ce ive d sha reh old er a pp roval at the 2021 AGM. The ave rag e inc rea se fo r the ge ne ral e mp loye e pop ulati on was 5.7 %; t his inc lud es the 3% mid-yea r sa lar y inc rea se gi ven to al l Ba nk ing e mp loye es. Benets Adri an S ain sbu r y re cei ved a n £1 8,0 00 a llowa nc e in li eu of a co mpa ny ca r . M ike Morg an d oe s not rec ei ve an a llowa nce i n lie u of a com pany c ar . Th ey als o rec eive d pr ivate he alth c over . T he di sco unt to the s hare p ri ce on g ran t of SA Y E optio ns is i ncl ude d in the ye ar of g r ant. Pen si on Adri an S ain sbu r y an d Mike Mo rga n rec eive d a pe nsi on al lowan ce e qui val ent to 1 0% of ba se sa la r y , the m a xi mum p erc enta ge the g en e ral employee population are eligible t o receive. Annual bonus Ma x imu m bo nus p otentia l for the 2022 na nci al ye ar was 9 5% of sala r y for Ad ria n Sa ins bur y and M ike Morg an. T he bo nus es fo r exec utive dire ctors we re dete rmi ne d with refe ren ce to RoE a nd CE T1 targets a nd a gro up -wide s trategi c sco rec ard. D etai ls of the ac hi eveme nts and targ ets are o utli ned b el ow . Summar y of annual bonus achiev ement Financial T arget (RoE) Financial T arget (CET 1) Group-wide strategic scorecard Overall total W e i g h t i n g Potent ial maximum £’ 000 Actu al percent of maximum Actu al amount award ed £’000 Wei gh tin g Potent ial maximum £’ 000 Actu al percent of maximum Actu al amount award ed £’000 Wei gh tin g Potent ial maximum £’ 000 Actu al percent of maximum Actu al amount award ed £’000 To t a l bonus percent awarded To t a l bonus award ed £’000 Adri an Sainsbur y 40% 353 36. 7% 1 30 20% 1 77 50. 0% 88 40% 353 55.0 % 1 94 46. 7 % 4 1 2 Mike Morgan 40% 2 1 3 36. 7% 7 8 20% 1 0 6 50.0 % 53 40 % 21 3 55.0 % 1 1 7 46. 7 % 248 Th e RoE fo r the 2022 n anc ia l yea r was 1 0.6% agai nst a t arge t ran ge of 1 0% to 1 8%, warr anti ng an awa rd of 36.7 % of the p otentia l ma x im um bon us for th is el em ent. Th e CE T1 capit al rati o for th e 2022 na nci al ye ar wa s 1 4.6% again st a ta rget ra ng e of 1 2.6% t o 1 5.6%, warra ntin g an awa rd of 50 % of the potenti al ma ximu m bo nus fo r this e le men t. Financial measures Financial measure Thresho ld 33.3 % of maximum potent ial Ta r g e t 50% of m a xi mu m potent ial Maximum 10 0 % o f m a x i m um potent ial Actual nancial element achie ved Percentage of nancial element paid RoE 1 0.0% 1 3.0% 18. 0% 10 .6 % 3 6.7 % CE T1 capi tal r atio 1 2.6% 1 4.6% 1 5.6% 14 . 6 % 5 0 . 0 % For Adr ia n Sai nsb ur y a nd M ike Morg an, 60% of a ny ann ua l bon us is d efer red i nto group s ha res ve stin g in eq ua l tran che s over th re e ye ar s in li ne with t he 20 21 Remuneration Policy . Group-wide per formance and ex e cutive dir ectors’ objectives f or the 2022 na ncial year (Audit e d) An nua l pe r for ma nce o bje cti ves a re deter mi ne d by the Re mun er ation C om mit tee at th e sta r t of ea ch n an cia l yea r , a nd a re de sig ne d to s up p o r t the gro up’ s wid er s trateg ic pr ior iti es to “Protec t ” , “G row” an d “Su sta in” our b usi ne ss mo de l. Th e tab le on p age s 1 32 to 1 33 s ets out ex am ple s of the s trateg ic sc ore ca rd obj ect ives w hi ch we re in pl ace i n 2022, per for ma nce metrics aga inst th es e obj ecti ves w he re app rop riate, and a n over view of th e factor s that the R em une ratio n Co mmi tte e has t aken i nto acco u nt whe n as ses si ng the p er fo rm anc e of the exec uti ves. Th e Rem une rati on Co mmi t tee dete rmi ne s the over all o utcom e of the ba la nce d sc ore car d and, if a pp ropr iate, adju sts the nal i ndi v idual rating t o take in to acco unt the i ndi vi dua l co ntri buti ons to su cc es sfu l outco me s of the sc ore ca rd obj ec tive s. Th is yea r , overa ll p er fo rm an c e aga inst th e strateg ic sc ore ca rd was ra ted at targ et or a bove ta rget fo r mos t goa ls, wi th som e de lays in th e imp le me ntatio n of ris k pro gra mm e s. T her e was no adj ustm ent o n the n al in di vid ual r ating. For re aso ns of co mme rci al s ens iti vit y , n ot all p er forma nc e cr iter ia a nd fac tors ta ken in to cons ide ratio n by the C omm it tee have be en disclosed. Book 1.indb 131 27/09/2022 23:48:37 13 2 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Directors’ Remuneration Repor t continued Key: Performance objectiv e has been achie ved Sati sfac tor y ou tcome, f ur th er pro gre ss to be ma de Per f orm an ce o bje cti ve ha s not be e n met Objective Asses sment o f per formance against objectives including performance me trics Em b ed a nd d e li ver o n t he evol ved “ Pr ote c t , Gr ow, Sustain” st rategy Per form an ce m etr ic s • Net in terest m argi n at 7 .8% ( 202 1 : 7 . 7% ) • Bad d ebt rati o of 1 .2% (202 1 : 1 . 1 %) • Go od lo an bo ok g row th of 5% ( 1 0 -yea r ran ge: 0%- 1 4% ) • Retu rn on n et lo an b ook of 2.6 % ( 10-year r an ge: 1 .3%-3. 7% ) • RoE of 10 .6% (202 1 : 1 4.5 %) • Ove r 90% of th e loa n boo k is se cure d or h as so me for m of str uc tura l protec tion • Averag e loa n boo k matu rit y of 1 7 month s (3 1 Jul y 2021 : 1 7 month s) • Averag e matu ri ty of f un din g all oc ated to loa n bo ok of 21 months (31 July 2021 : 24 months) • £1 .9 bil lio n of treas ur y a ss ets (31 July 2021 : £1 .8 bil lio n) , p red omi nan tly he ld o n dep osi t wi th the Ba nk of England • CE T1 capi tal r atio of 1 4.6% (3 1 Jul y 2021 : 15 .8% ) • Lever age r atio of 1 2.0% (3 1 Jul y 2021 : 1 1 .8% ) • Gro up’ s s trong c red it rati ngs h ave be en af rm ed by Mo od y’ s Inve stor s Ser vic es (“ Moo dy’s ”) an d Fitch R ating s (“Fi tch”) in the 2022 nan cia l yea r Assessment • Th e Ba nki ng di vi sio n pe r for me d wel l whi le the m ar ket -faci ng bu sin es se s were ne ga tivel y im pacte d by ex trem e volati lit y a nd fa lli ng ma rkets • Stron g net in terest m arg in at 7 .8% • Bad d ebt ra tio of 1 .2% incl ud ed the i mpa ct of up dated a ssu mpti ons fo r the Nov ita s loa n bo ok, wh ic h resu lted i n fur ther i mpa irm ent c ha rge s relate d to this bus ine ss. E xcl udi ng Nov ita s, the ba d debt r atio was 0.5 % (2021 : 0.2% ) • Th e grou p ach ieve d an Ro E of 1 0.6% ( 2021 : 1 4.5 %) , ree cti ng the re du ctio n in Wi nter ood’ s prot and c onti nue d grow th i n the e qui t y bas e • Conti nu ed foc us on d el ive rin g dis cip lin ed g row th. For exa mpl e, the as set c overa ge in A sse t Fin anc e has b ee n exp and ed w ith th e hir ing of a gri cul tur al eq uip me nt an d mater ia ls ha ndl ing te ams, w ith further initiativ es identied for future de velopment • Sig ni ca nt pro gres s ha s be en ma de de velo pin g our c lim ate strateg y , cove rin g not ju st ou r ope ratio na l impacts, but also understanding the implicat ions across our nanced act i vities Complet e a further r eview of the group ’ s growth pr ospects Assessment • Complet ed an in-dept h further revie w of exist ing businesses focusing on po tential gr ow th pr ospe cts, with a p ipe lin e of ide nti ed t arget a rea s that a re ali gne d wi th the gro up’ s mod el • E xam pl es of grow th initi ative s ca n be fo und o n pag e 27 Peop l e Maintain str ong employee engagement and re info rce po si tion a s emp loye rs of choice Per form an ce m etr ic s • 86 % employee engagement , closely aligned to pre-pandemic engagement score • 97 % of c oll eag ue s bel ieve th eir i mme diate tea m wor k well tog ethe r • 92% see co ll eag ue s go the ex tr a mil e to meet th e ne eds of c ustom er s and c lie nts • 96% of co lle ag ues b el ieve ou r cul ture e nc oura ge s the m to treat cus tomer s an d cli ents f air ly • 94 % of c oll eag ue s fee l incl ude d an d that they a re treate d with re sp ect • Org an isati ona l cul ture p ar ti cul ar ly stro ng w hen c om pare d to other nan cia l se r vi ce s r ms, wi th all sco res a lig ne d or hig he r tha n the Fin an cia l Se r vi ce s Cul ture Bo ard (“ FSCB”) Assessment • Employ e e opinion survey conrms the group’ s continued st rong employee engagement scor e s, abov e e xternal benchmark • Str ong organisa tional cult ure scor es, part icularly when compar ed to industry benchmarks Embed h y brid w orking model Assessment • Hyb ri d work in g mod el i mpl em ented w he re ap prop riate, aim ed at m ain tai ning a n ef fe cti ve bal anc e of customer se r vice, ope rational risk, collaborative culture and t urnover Book 1.indb 132 27/09/2022 23:48:37 13 3 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Objective Assessme nt o f per formance against objectives including performance me trics Customers Deliver strong cust omer satisfaction Per form an ce m etr ic s • A ll bu sin es se s sco red a bove ave rag e net pro moter s core (“ NPS” ) be nch mar k pe r fo rma nc e for the b road na nci al se r v ic es se ctor (+50) , wi th sco res r ang ing f rom + 73 to +8 7 in th e 2022 na nci al ye ar Assessment • In B ank in g, custom er s atisf actio n sc ore s are wel l ab ove indu str y ave rag es, w ith co mp lai nts rem ain ing at low le vels • Fun d per form anc e over th e 1 2 mon ths si nce 31 July 2021 at CBAM h as b ee n mixe d, ree ctin g volati le mar kets ac ross a ss et cl ass es s inc e the st ar t of 2022. In rel ative ter ms, e igh t of our 1 5 f un ds have outp er fo rm ed th eir re leva nt pe er gro up ave rage s • W inter ood c onti nu ed to de live r hi gh qu al it y execu tio n se r vi ce s to clie nts, w ith a ve r y stro ng exec uti on success rat e Enhance cust omer choice by delivering new digital platforms Assessment • Enh anc ed d igi ta l cap ab ili ties i n Ba nk ing, CB AM an d Wi nter ood, le ad ing to im proved c ustom er journeys and new business acquisition • Inve stm ent i n the Motor F ina nce tr ans for matio n prog ra mme e na ble d the bu si nes s to fur ther b roade n its of fer in g, improve c ustom er j our ney a nd ta ke adva nta ge of he ig htene d de ma nd for u sed c ar s. Th is inc lud ed the i ntrod ucti on of an e -si gn f unc tion ali t y and th e deve lop me nt of APIs th at ena bl e the bu sin es s to conn ec t into strate gic p ar tn er s and p rovi de n anc e of fe rin g at var iou s poi nts of the c ustom er jo ur ney • T e ch nol ogy tr ans form atio n proj ects i n CBA M inc lud ed the d eli ver y of a CRM pl at form, w hic h was integ rated into CB AM’ s c lie nt po r ta l and s up por te d an im prove d dig ita l en gag eme nt w ith cl ien ts • Fur th er de tai ls on th e grou p’ s i nvestm ent i n dig ita l ca n be fou nd o n pag e 1 3 Risk, conduct and compliance Op erate wi thin r isk a ppe tite, prese r ve compliance with le gal and r egulatory obligations , maintain strong con trol fra mewo rk an d over all o pe ration al resilience Assessment • Con tinu ed stre ng then ing of o pe ration al r isk a nd co mpl ian ce f ram ework a lth oug h ris k miti gatio n ne eds to be i mpl em ented i n ce r ta in ar eas to al ign w ith evo lvi ng e nviro nme nt a nd sta nd ards • Maintained key regulatory and compliance con trols • Con tinu ed pro gre ss on th e imp le men tatio n of the en han ce d cyb er se cu rit y s trateg y agre ed wi th the Boa rd Ri sk Co mmi t tee, with i mprove d cyb er r is k mea su rem ent a nd rep or ti ng ac ros s all of th e group ’ s divisions Long-term performance awards (Audited) Th e pe r for ma nce awa rds in the si ngl e total g ure of re mun era tion i ncl ude th e 201 9 L TI P gra nt. Thi s wil l vest o n 1 Oc tobe r 2022 , an d the over all vesti ng is o utli ne d in the ta bl e be low . De ta ils o f th e over al l ves tin g fo r the L T IP Performance measure Threshold target 1 Ma ximum ta rget Actual ach ieved Overall vestin g Adju sted EPS grow th 2 (35% weig htin g) 1 0% 3 0% (18 . 4 )% 0 .0 % RoE 3 (35% weig htin g) 1 2% 20% 11 . 0 % 0 . 0 % Risk management objectives ( “RMO”) (30%wei ghtin g) n/a n/a 91. 7% 27 . 5% Assessed outcome (before discretion) 27 .5% Discreti onar y adjust ment ( - 2 5 % ) (6.9) % Overall vesting (including application of discretion) 20. 6% 1 25% of the aw ard s ve st fo r sa tis f y ing t he t hre s hol d ta rg et. 2 Ove r th re e ye ar s. 3 A verage o ver three- year performance period . Th e Com mit tee d ec ide d af ter c aref ul co nsi der ation th at the ri sk ma nag em ent o bje ctive s, an d ther efore the L TI P outco me, sho uld b e red uce d by 25 % to alig n bet ter w ith th e retur ns ou r sha reh old er s exp er ie nce d over th e three ye ar s of the ve stin g pe ri od. In add itio n to the over all ve stin g of the pe r for ma nc e mea su res, both s ha re pri ce a nd di vid en d eq uiva le nts af fe ct the payo ut f rom the L TI P . Th e sha re pr ice d ur ing th e releva nt pe r fo rma nc e pe rio d for the L TI P de cre ase d by 22. 7% over th e three -year p er io d from th e date of gra nt to the end of th e pe r for ma nc e pe rio d. Th e avera ge sh are p ri ce us ed to val ue the awa rds d ue to vest i n Oc tobe r 2022 was 1 ,056.6p f rom 1 May 2022 to 3 1 Ju ly 2022, whi ch was th e pe r for ma nce m ea su rem ent p er iod. T he 201 9 L T IP award wa s or igi na lly g ran ted at 1 ,3 66.4p. Th e pe r for man ce awa rds a lso in clu de th e amo unt ( in ca sh o r sha res) eq ua l to the div id end w hic h wou ld have b ee n pai d dur ing th e period from the be gi nnin g of the p er fo rma nc e pe rio d to the time th at the award s vest. De ta ils o f the a s ses s men t of th e ri sk m an ag eme nt o bje ct ives f or th e L TIP Th e Com mit tee c ons ide rs i t to be of cr itic al im por tanc e that re mun era tion a rra ng eme nts co ntin ue to inc enti vis e dis cip lin e in th e m ana ge me nt of the r m’ s ca pit al an d bal an ce sh ee t and i n the de li ver y of th e bus in es s mod el. Th e Com mit tee u nd er t akes a ro bus t ass es sm ent of p er fo rm anc e aga ins t the ri sk ma na gem en t obje cti ves to en sure th at paym ents to e xe cu ti ve direct ors are fair and appropriat e with considerat ion for indivi dual and corporate performance. In doing so, the Committee asse sses pe r for ma nce a gai nst a n umb er of key me as ure s in ma ki ng its d eter min atio n. Book 1.indb 133 27/09/2022 23:48:37 13 4 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Directors’ Remuneration Repor t continued Per fo rma nc e was as se sse d af ter e ach of th e thre e yea rs of the L T IP pe r for ma nce p er iod, wi th ea ch yea r’ s rev iew c ar r yi ng a we igh ti ng of one -third towards th e over all ve stin g for the awa rd, ens ur ing a fa ir as se ss me nt of prog res s over th e thre e-yea r pe rio d. Y e ar o ne an d yea r two a ss es sme nts we re set ou t in th e 2020 and 2021 Dire ctors’ Re mun er ation R epo r ts re spe cti vel y . T he yea r thre e performance assessment is detailed below . Y e a r thr ee p er for ma nc e as se ss me nt ag a ins t r isk m an ag eme nt o bje ct ive s Key: Performance objectiv e has been achie ved Sati sfac tor y ou tcome, f ur th er pro gre ss to be ma de Per f orm an ce o bje cti ve ha s not be e n met Ele m ent M e asu re E xte nt to w hi ch t he C om mi tte e d eter mi ne d th e ta rg et ha s be e n met Capital and balance sheet mana gement Capital requirement s • CE T 1 ca pit al ra tio of 1 4.6 % (31 Jul y 202 1 : 1 5.8% ) p rovi din g si gni c ant h ead roo m above the applicable minimum regulatory requirement of 7 .6 % ex cluding any PRA buffers Dividend • Inter im di vi de nd in 2022 of 22.0p de cla red a nd pa id, ree cti ng the g roup’ s stro ng underlying performance • Th e boa rd is pr opo sin g a na l di vid en d of 44.0p pe r sha re, wh ich w ill re su lt in a f ull-ye ar div id end p er s har e of 66.0p (2021 : 6 0.0p) , retu rn ing to the pr e-pa nd emi c leve l. Thi s foll ows the gro up’ s sol id n anc ial p er form anc e in the ye ar a nd stro ng c api tal p osi tion, a nd re ect s the bo ard’s continu ed c on de nce i n the bu sin es s mo de l Funding • Averag e matu rit y of f und ing a llo ca ted to loan b ook wa s 21 months, we ll in exce ss of th e loa n boo k at 1 7 mo nths Liquidity • Con tinu ed to com for ta bl y me et the li qui dit y c overa ge rati o requ ire men t (“LCR”) w ith a 1 2 -mo nth aver age LCR to 3 1 J uly 2022 of 924 % (1 2 m onth ave rag e to 3 1 J uly 2021 : 1, 0 0 3 % ) Risk, compliance and controls Int ernal Ratings Based approach • Co ntin ue d to make go od pro gre ss o n the p rep ara tion s for a tra ns itio n to the IRB a pp roac h • Foll owin g the su bm iss ion of th e ini tia l app lic atio n to the PR A in De ce mb er 2020, the gr oup rec eive d con rm ation th at the ap pli catio n has s ucc es sf ully tr ans itio ned to Pha se 2 in the sec on d hal f of the ye ar • Wh ile a ll key obj ec tives a nd m ile stone s were a chi eved, the ti met abl e for the n ex t ph ase of form al rev iew rem ain s und er the d ire ctio n of the reg ulator Culture • Con tinu ed e nha nc em ent of th e grou p’ s C ond uct R isk Fra mewo rk w ith a gro up-w ide ro ll out c omm en ce d this nan cia l yea r , w ith a v iew to ens ure the g roup c onti nue s to achi eve positive customer outcomes • Ove ral l cul tura l as ses sm ent fo r the gro up re mai ns po siti ve with s trong s co res o n cult ure achieved in the lat e st employ e e opinion survey comple ted • Re mai n on trac k to achi eve ta rget of 36% of se ni or ma nag er ro le s be ing h eld by a fe ma le by 2025. A t 31 Jul y 2022, 33 % of o ur se ni or m ana ge rs we re fem ale (31 Jul y 202 1 : 32% ) • Th e grou p’ s eth nic it y da ta dis clo sure h as ma teri all y inc rea se d from 75 % at th e end of th e 202 1 na nc ial ye ar to 83% as of 31 July 2022, all owin g a more a ccu rate me as ure me nt of the gr oup ’ s ethnic balance • At 31 July 2022, 1 0% of our m ana ge rs id en tie d as b ein g fro m an eth nic m ino ri ty b ackgro un d, ver sus o ur ta rget of 1 4 % by 2025 Sustainabilit y • Sus tai nab ili ty t arg ets met, exce ede d or o n track. T he se i nclu de th e ach ievem ent of a 44.8% reduc tion i n grou p-wi de ove ral l Sco pe 1 a nd 2 em is sio ns si nc e the 201 9 na nci al yea r , m ainte na nce of s trong c ustom er s atisfa ctio n sc ore s acros s al l our b usi ne sse s, an d a 42 .6% imp rovem ent i n ee t veh icl e em iss io ns. Ou r e et of 63 9 ca rs is n ow al mos t who ll y bat ter y , e le ctr ic or hy br id an d we anti cipa te the maj ori t y of the ve hic les to be b at ter y , el ectr ic l ater in c al end ar ye ar 2022 • Sig ni ca nt pro gres s was m ade du ri ng the ye ar i n devel opi ng the g roup’ s cl imate str ategy , with a c om preh ens ive a sse ss me nt of the g roup’ s ind ire ct Sc ope 3 e mis si ons a cros s all categ or ie s of ope rati ona l em iss io ns as we ll as a n in itia l as se ss men t of na nc ed e mis sio ns, focu sin g on the l oan b ook • Th e grou p set w ide r an d lon ge r -term a mb itio n to alig n all of o ur op er ation al a nd attr ib uta ble G HG e mis sio ns f rom ou r len din g and i nves tme nt por tfol ios o n a path to net zero by 20 50. T o thi s en d, Clos e Broth er s joi ne d over 1 1 5 ba nks g lob all y , as a s ig nator y to the Ne t Zero Ba nk in g Al lia nce i n Se ptemb er 2022 Book 1.indb 134 27/09/2022 23:48:37 13 5 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Ele m ent M e asu re E xte nt to w hi ch t he C om mi tte e d eter mi ne d th e ta rg et ha s be e n met Operational resilience • Th e grou p’ s o per ation al re sil ien ce f ram ewor k and s trateg y have be en f ull y bu ilt o ut in th e nancial year • Self-assessment comple ted by businesses and functions , in line with regulatory compliance time lin es, w ith an ex ter na l revi ew con rmi ng the a ppro pr iatene ss of th e grou p’ s a ppro ach • Remediation plans established for vulnerab ilitie s id enti ed, wi th rem edi ation wo rk underway • Imp or ta nt bu sin es s se r vi ce s and i mpac t tole ran ce s agre ed w ith the B oar d Ris k Com mit tee Th e tab le be low su mm ari se s the Re mu ner ation C om mit tee’ s as se ss me nt of pe r for ma nce a gai nst the r is k man age me nt ob jec tive s af ter each of the thre e yea rs of th e L T IP pe r for man ce p er iod. Element Y ear one assessmen t Y ear two assessment Y ear three assessment Overall vest ing Cap ita l an d bal an ce sh ee t man age me nt 95% 1 0 0% 95% 96. 7% Risk, compliance and controls 95 % 9 0% 7 5 % 86. 7% Overall vesting 91. 7% Implementation of the P olicy in 2023 Base salary Salary effective from 1 August 2 022 Increase Chi ef execu tive – Ad ri an Sa in sbu r y £93 0,000 0.0% Grou p na nc e dire ctor – Mike Mo rga n £560,00 0 0. 0% Bas e sa lar ie s were d eterm ine d wi th refere nce to the exe cuti ve dire ctor’ s role, in cre ase s for th e broad er p opu latio n and ex te rna l fa ctors. T he Rem un erati on Co mm it tee dete rmi ne d that it wa s app ropr iate for th e execu tive di rec tors’ sal ar ies n ot to be inc rea sed. T he ave rag e sal ar y incre as e app roved i n Jul y 2022 acro ss th e wid er e mp loyee p opu lati on was 4.3%. Adri an S ain sbu r y a nd Mike M orga n’ s a llowa nc e in li eu of pe ns ion w ill b e 1 0% of bas e sa lar y , w hi ch is i n lin e with th e ma x imu m l evel o f benet of fere d to the ge ne ral e mpl oyee p opu latio n. Th e execu tive di rector s wi ll rec ei ve be ne ts in lin e wi th thos e outl ine d in the R em une ratio n Poli cy ta ble o n page 1 26. T he re wi l l be n o other inc rea se s to allowa nce s or b en ets oth er tha n any p otentia l inc rea se in th e co st of prov idi ng the m. 202 3 an nu al b onu s (i .e. bo nus awa r de d in re sp ec t of t he 2 023 p er f or ma nc e yea r) RoE c ontin ue s to be a lon g-sta ndi ng metr ic fo r the n anc ia l ele me nt of the exec uti ve dire ctors’ rem une rati on fr amewo rk. T he Re m uneration Com mit tee c on sid er s it to be a si gni ca nt key pe r for ma nce i ndi cator , as i t provi de s stron g evid en ce of ad he renc e to the grou p’ s business mod el. At the st ar t of th e 2022 na nci al ye ar , the R emu ne ratio n Co mmi tte e redu ce d the we ighti ng of CE T1 cap ita l ratio f rom 30% to 20% of the bon us op por tuni t y and h ave de cid ed to ma inta in thi s weig htin g for 2023. Nature of meas ures Choice of measu res T arg ets Percentage o f bonus opportunity Vesting range s Fin anc ia l RoE 1 0% to 1 8% 40% Th resh old – 3 3% 2 CE T 1 1 2.6% to 15.6% 20% M a xi m um – 100% Non- nancial Strat egic scorecard : Strat e gic, People , Cust ome rs and R is k, Co ndu ct and Compliance objectives Discr eti onar y assessment 1 40% M inimum – 0 % Maximum – 1 00% 1 Du e to co mm er ci al s en si tiv it y, the d eta il s of th e pe r fo rm an ce t ar ge ts an d ac hi eve me nt a ga in st th os e wi ll b e ou tl ine d i n the 2 023 Annual Report on Remunerat ion. 2 Per f or ma nc e be lo w thr es ho ld i n the na nc ia l me a su res w ou ld re su lt i n ze ro ve sti ng o f the na nc ia l me as ur e. Th e Com mit tee ret ain s dis cretio n to adjus t the ta rgets i f the Bo ard gi ves a pprova l for a m ateri al tra nsa ctio n, to ensure th at p e r for ma nce i s me asu red o n a fai r and c on siste nt ba sis. T he l evel of pay-o ut u nde r the C E T 1 e le me nt may a lso b e adj usted b ase d on a n as se ssm en t of h ow the CE T1 has be en a chi eved a nd wh ethe r this i s ali gne d wi th the ca pi tal s trateg y set ou t on pa ge 8. 202 2 L TIP ( i.e. L T IP awar d ed in r e spe c t of th e 20 23 to 20 25 cyc le) Th e 2022 L T IP award s due to be g ra nted in O ctobe r 2022 are s how n in the t abl e be low . Chief e xecutive Adrian Sainsbury Group nance director Mike Morgan 2022 L T IP award £ 1 , 1 62 ,5 00 £ 7 00, 000 Perce nta ge ch an ge in L TI P award f rom 2021 0% 0% 2022 L T IP award a s a pe rce ntag e of 2022 sa la r y 1 25 % 1 25 % Th e Rem une rati on Co mmi t tee deter mi ned th at it was a pp ropr iate to gran t the execu tive d irec tors a n L TI P award at th e ma x imu m lev el of 1 25 % of thei r bas e sa lar y , i n lin e with th ei r 202 1 L T IP award. T he Co mmi t tee wi ll revi ew the le vel of ve sting u po n com ple tion of th e performance pe rio d, bei ng pa r tic ula rl y mi ndf ul of w ind fal l gai ns, an d ap ply a n adj ustm ent to the ve sti ng ou tcome i f ap prop ri ate. Book 1.indb 135 27/09/2022 23:48:37 13 6 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Directors’ Remuneration Repor t continued Th e 2022 L T IP targ ets are d eta ile d in the t abl e be low . Nature of measures Choice of measures T argets Weigh tings Vesting ranges Fin anc ia l Ad jus ted EPS grow th 1 0% to 30% over 3 ye ars 35 % Th res hol d – 25 % Maximum – 1 00% RoE 1 0% t o 1 8% 1 35% Th res ho ld – 25 % Maximum – 1 00% Non- nancial Risk management object ives Discreti onar y assessment aga ins t spe ci c go als 30% Thr es hol d – 25 % Maximum – 1 00% 1 A verage o ver three- year performance period. The Remunerati on Committee belie ves these targe ts are appr opriatel y str etching and effectively align the e xecutive directors ’ i nt ere sts wi th thos e of sha reh old er s. Th e four r isk, c om pli anc e and c ontro l me asu res w ithi n the ri sk ma nag em ent o bje ctive s for th e 2023 nan cia l yea r are d eta ile d in the fo llow ing table. Measure Continue to e nhance Risk, Compliance, and Con trol Infrastructure Conti nue to deve lop th e ef fe ctive ne ss of o ur op erati ona l ris k an d resi lie nc e contro l env ironm ent Conti nue to evol ve the ove rsi ght of th e con duc t and c ultu re an d prog res s towards 2025 dive rsi t y repre se ntati on ta rgets Deve lop tra ns itio n pla ns an d me et targ ets set a gai nst cl imate stra tegy Due t o commercial sensitivity , the full details o f the milestones for the risk objectives will be outlined in t he Directors ’ Re muneration Report throughout the per formance period ra ther than pr ospectively . Relative spend on pa y Th e foll owin g tab le sh ows the total re mu ne ratio n pai d com pare d to the total di stri buti ons to sh are hol de rs. 2022 £ million 2021 £ million Remuneration paid 344.5 363.2 Distri butions t o shareh olders 1 98.4 89.5 1 In ter im d iv id en d pa id a nd na l di vi de nd p rop os ed f or th e n an ci al y ea r . Cha ng es i n re mu ner at io n of th e dir ec tor s a nd a ll e mpl oyee s Th e foll owin g tab le sh ows how the re mu ner ation of th e dire ctor s ch anged compared t o the a verage emplo yee population for the 2 02 2 nancial yea r . T he ye ar - on-yea r move me nt in fee s an d sa lar y for the di rec tors an d em ploye es re ec ts the a nnu al revi ew imp le me nted in Aug ust 202 1 and c ha nge s thro ugh out th e na nc ial ye ar e nd ing 31 July 2022, incl udi ng the m id-yea r sa lar y review c on duc ted for B ank in g emp loy ees in Jan uar y2022 . T he re we re a num ber of c ha nge s to the boa rd an d co mmi tte es w hic h are re ec ted in the s al ar y gur es be low. The yea r- o n - yea r sal ar y incre as e for the exec uti ve dire ctors re lates to the c omp en satio n mi x adju stme nts mad e in re spo nse to CR D V , wh ic h c ontributed to a reduc tion i n the bo nus o ppo r tun it y . D etai ls of the a nnu al b onu s dec rea se fo r the execu tive d irec tors is o utli ned o n pag e 1 31 . Th e aver age de cre ase i n bon us for th e ge ner al po pul atio n is la rgel y dr ive n by the red uct ion i n averag e bo nus es for W inter ood e mp loyee s du e t o business pe r for man ce. T esu la M ohi ndra wa s ap poi nted a dire ctor at th e end of th e 2021 nanc ial ye ar , howeve r no re mun erati on wa s paid u ntil th e 2022 na nci al ye ar a nd ha s the refore b ee n omi tte d from th e tab le b elow. Patricia H al lid ay and T ra cey Gr aha m were a pp ointed d ire ctors during the 2022 na nci al ye ar a nd have b ee n omi t ted fro m the ta ble b el ow as the re are n o yea r -o n-yea r remu ne ratio n co mpa ris ons. 2022 2021 2020 Salary Benets Bonus Salar y Benets Bonus Salar y Benets Bonus Av er age Emplo yee 1 5.7 % 5.7 % (32.7) % 0.0% 0.0% 21 . 2% 1 .8% 1 .8% 1 3. 1 % Execut ive Directors 2 Adri an S ains bur y 3 95. 7% 68.5 % (5 1 . 1 )% –––––– Mike Morgan 4 40.0 % 30.7 % (54.9)% 0.0% 32. 7% 1 52.2% 0.0% 0.0% (54.7)% Chairman & Non-Ex ecutive Directors 5 Mike Biggs 6 0.0% 1 5 9.9% – 0.0% 1 19.5 % – 0.0% (2 5. 7 )% – Lesley Jones 7 3.5 % 0. 4 % – 0.0% (0.4)% – 5.6% (57 .0)% – Bridget Macaskill 7, 8 0. 1 % 1 2 5.3% – (1 . 8)% 33. 5% – 5.6% (50.5 )% – Oliver Corbett 9 (1 .7 )% 87 . 3% – (0. 1 )% 0.0% – 5.6% 0.0% – Peter Du f f y 7 7. 7 % ( 7 7. 3 ) % – 2.8% 0.0% – 0.0% 0.0% – Sally Williams 10 3.8 % 1 , 1 65.6 % – 0 . 0 % ( 8 5 . 3 ) %–––– Mark P ain 11 27 . 5% 0.0% – –––––– 1 Cal cu la ted by d iv id in g st af f c ost r el ate d to sa la ri e s, bo nu s an d be ne ts b y the a ver ag e nu mb er of e m pl oye es. 2 Calculated using t he data from the single gure table in the annual repor t on remuneration. 3 Adr ia n Sa in sb ur y w as a pp oi nted a s G rou p CE O in Se pte mb er 2 020 a nd h is 2021 g ur es a re p ro- ra ted b as ed o n pa r t-yea r . A dr ia n’ s sa la r y an d be n et s hav e in cre as ed y ea r-on-y ea r an d th is is dr ive n by t he pa r t-ye ar i n 2021 an d the c om pe ns at io n mi x ad jus tm en t awa rde d d ur ing t he 20 22 n an ci al y ea r . 4 Mike M or ga n’s 2022 be ne ts i nc re as ed 3 0.7%, this i s dr ive n by a n in cr ea se i n pe ns io n al lowa nc e ba se d on the c om pe ns at ion m ix ad ju stm en t awa rd ed d ur in g the 20 22 n a nci al y ea r . 5 Calculated using t he fees and taxable benets from the single gure table f or non-ex ecutive direct ors on page 1 40. 6 Mike B ig gs’ 20 22 be n et s in cre a se d by £1 3,245, th is re la ted to a dd iti on al t rav el a nd e nte r ta in me nt ex pe ns es . 7 Les le y Jo ne s’ , Br id ge t Ma ca sk il l, Pete r Du f f y a nd S al ly W il li am s 2022 f ee s in cr ea se d as th e fe es f or s ta nd ard n on -exe cu ti ve d irector , committee chair and committee member increased. 8 Br id get M ac as k ill’s 2022 b e ne ts i nc re ase d by £8 ,00 0, th is r el ate d to rei mb ur se me nt o f trav el ex pe ns e s. 9 Ol ive r Co r bet t ’s 2022 fee s re du ce d a s the y are n o lo ng er i n a se ni or i nd ep e nd ent d ir ec tor ro le . 10 Sa ll y W ill ia ms’ 20 22 be ne t s in cre as e d fro m £75 in 2021 to £9 53 i n 2022. 1 1 M a rk Pa in’s 2022 fe es i nc re as ed a s the y jo ine d du r ing 2 021 and w as p ai d a par t yea r fee. Book 1.indb 136 27/09/2022 23:48:38 13 7 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Pay r atios Th e tab le be low c omp are s the ch ief exe cuti ve’ s s ing le total re mu ner ation gur e to the remu ne ratio n of the gro up’ s UK em pl oyee s as at 31July , over the l ast th ree nan cia l yea rs. T he Re mu ner ation C omm it tee is s atis ed th at the me dia n ratio i s con sis tent wi th the pay , re ward a nd progression policies for our e mploy ee population . Th e ratio fo r 2022 has d ec lin ed on th e prev iou s year . L arg el y this re lates to lowe r var ia ble pay o utcom es fo r the exec uti ve dir ectors having a cor re spo ndi ng im pac t on the p ay ratio, as we ll as st ruc tura l ch ang es to pay i ntrodu ce d las t yea r for CR D V pur po se s havi ng an i mpa ct on th e single gure value. Ye a r Method 25t h percentile Median 75t h percentile 2022 Optio n A 48 : 1 28 : 1 1 7 : 1 2021 Opti on A 79 : 1 37 : 1 29 : 1 2020 Opti on A 64 : 1 3 8 : 1 23 : 1 Our r atios h ave be en c alc ulated u sin g the mo st rob ust m ethod olo gy o ption “ A ” p resc ri bed u nd er the U K Co mpa nie s (Mi sce lla ne ous R eporting ) Reg ulati ons 201 8. Un der th is opti on, the ra tios a re ca lcu lated us ing th e foll owin g: • the f ull-tim e equ iva le nt sal ar ie s and a llowa nc es for e mp loye es in th e UK; • pe nsi ons a nd be ne ts pa id du rin g the n an cia l yea rs; • an nua l bon us awar ded fo r the n an cia l yea rs; • actu al a nd pro je cted ga ins re al ise d fro m exerci sin g award s fro m ta xa ble e mp loye e sha re pl ans; • sa les i nc entive s pa id du rin g the n anc ia l year s; and • proj ec tion of ve sted p er f orm an ce award s. Th e 2022 total rem une ratio n val ue for th e emp loye e at the 25th perce ntil e, med ian a nd 75th perce ntile wa s £33,57 1 , £56,952 and £93,459 res pec tive ly , of w hic h the s ala r y co mp one nt mad e up £ 26, 780, £30,000 a nd £85,00 0 re sp ecti vel y . Chief ex ecutive: Hist orical information 201 3 201 4 201 5 201 6 201 7 201 8 201 9 20 20 2021 1,2 2022 Preben Prebensen Single gure of to tal remuneration ( ’000) 3 £5 , 7 48 £ 7 , 4 1 1 £ 5, 962 £3, 995 £3 ,33 7 £2 ,54 1 £2 , 77 0 £2 ,043 £860 – Annual bonus against maximum opportunity 1 0 0% 1 00% 98% 95 % 9 1 % 86% 82% 40 % 7 8 % – L T IP , SM P an d Matchi ng S hare Awa rd ves ting 4 79% 95% 97% 68% 51 % 19% 3 0% 42% 4 0% – 1 Th e g ure s fo r th e pe r fo rm an ce aw ar ds fo r 2021 ha ve be en r ec al cu la ted u si ng th e ac tu al s ha re p ri ce o n the d ate s of ve st ing f o r t he LTIP of £15.27 . In th e 2021 re po r t, th e thr ee -m on th ave ra ge to 31 Jul y 2021 wa s use d, g ive n th at th e awa rd s wer e ve sti ng a f ter p ub li cat io n of th e re po r t. 2 Preb en P reb e nse n’s remu ne ra ti on fo r th e 2021 n an ci al ye ar h as b e en ti me p ro -ra ted to 21 Se pte mb e r 2020, th e da y he s tep pe d down as chief ex ecutive . 3 Th e g ure s fo r 201 2 to 201 4 i nc lu de th e Ma tch in g Sh ar e Awar ds th at we re g ra nte d in 20 0 9 at th e tim e of P reb e n Pre be ns en’s app ointme nt as chief executive. 4 SM P an d Matc hi ng S ha re Awa rd s wer e la st g ra nte d in th e 2016 nan ci al ye a r . 2021 1,2 2022 Adrian Sainsbury Single gure of to tal remuneration ( ’000) £1 ,720 £1 ,618 Annual bonus against maximum opportunity 7 8% 47% L T IP , SM P an d Matchi ng S hare Awa rd ves ting 40% 21 % 1 Th e g ure s fo r th e pe r fo rm an ce aw ar ds fo r 2021 ha ve be en r ec al cu la ted u si ng th e ac tu al s ha re p ri ce o n the d ate s of ve st ing f o r t he LTIP of £15.27 . In th e 2021 re po r t, th e thr ee -m on th ave ra ge to 31 Jul y 2021 wa s use d, g ive n th at th e awa rd s wer e ve sti ng a f ter p ub li cat io n of th e re po r t. 2 Adr ia n S ain sb ur y w as a pp oi nte d ch ief e xec ut ive o n 21 Sep tem be r 202 0 an d his r em un er ati on i nc lu de d in th e si ng le gu re h as b ee n ti me p ro- ra ted a cc ord in gl y. L T IP ve st ing f or th e la st n in e yea r s Vesting percentage Y ear aw arded Y ear vest ed Adjusted EPS TSR RoE RMO T otal 201 1 1 2 0 14 10 0 % 10 0 % – 8 5% 9 5% 201 2 2 2 0 15 10 0 % 10 0 % – 87 % 97 % 201 3 2 201 6 100% 25% – 89% 6 8% 201 4 2 201 7 56% 26% – 92% 5 1 % 201 5 2 201 8 0% 0% – 93% 19 % 201 6 2 201 9 0% 28% – 9 4 % 3 0% 201 7 3 2020 0% – 38% 9 4 % 42% 201 8 3 2021 0% – 32% 9 5% 40% 201 9 3,4 2022 0% – 0% 92% 28% 1 Vest in g was s ub je ct to o ne -thi rd a dj uste d EP S, on e-t hi rd ab so lu te TSR a nd o ne -th ir d str ate gic g oa ls f or a ll aw ard s gr an ted fo r 201 1. 2 Vest in g was s ub je ct to 4 0% ad ju ste d EPS, 4 0% ab so lu te TSR a nd 2 0% ri sk m an ag em en t ob je cti ve s fo r the 2 01 2 to 2016 awar ds. 3 Vest in g was s ub je ct to 3 5% adju ste d EP S, 35% Ro E an d 30% r is k ma na ge me nt o bj ec ti ves f or t he 201 7 , 2018 and 2019 awar ds. 4 In clu di ng t he 25% dis cr eti on ar y r ed uc tio n, th e 2019 L TIP a war d ve ste d at 20.6%. Book 1.indb 137 27/09/2022 23:48:38 13 8 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Directors’ Remuneration Repor t continued Per for ma nc e gr a ph Th e gra ph be low s hows a c omp ar iso n of TSR for th e com pany’s share s for th e 1 0 ye ar s end ed 31 July 2022 a gai nst th e TSR for th e companies com pr isi ng the F TSE 250 Index. July 2012 July 2013 July 2015 July 2017 July 2016 0 50 100 150 200 250 300 350 July 2014 FTSE 250 Index Close Brothers July 2022 July 2021 July 2020 July 2018 July 2019 Note : Th is g ra ph s how s the v al ue, by 31 Ju ly 2 022, of £100 in ves ted i n Cl os e Br oth er s Gr oup p lc o n 31 Jul y 2012 comp ar ed w it h the v al u e of £100 i nve ste d in th e F TS E 250 In dex . Th e oth er p oi nts p lo tte d are t he i nte r ve ni ng n an ci al y ea r en ds . TSR h as b ee n c al cu late d as su mi ng t hat a ll d iv id e nds a re r ei nve ste d on t he ir ex-d iv id en d da te. Th e in de x ha s be en s el ec te d be ca us e the c om pa ny h as b ee n a co ns tit ue nt of t he in de x thr ou gh ou t the p er i od. T he c lo si ng m id- ma rke t pr ic e of th e co mp an y’s sha re s on 29 J ul y 202 2 was 1, 1 10p a nd th e ra ng e du ri ng t he ye a r was 9 87p to 1 ,60 2p. Sc hem e in ter es ts awa rd ed d ur ing t he ye ar ( Aud ite d) Th e fac e valu e and key d eta ils of the s ha re award s gra nted in th e 2022 na nc ial ye ar a re sh own in th e tab le b elow. Thes e were a ll de li vere d as nil c ost o ptions. T he D efe rre d Sha re Award (“D SA ”) is a m and ator y d efer ral of a p or ti on of the a nnu al b onu s. Th e sha re pr ice u s ed t o calculat e the nu mbe r of sh are s award ed wa s £1 5.46, the averag e mi d-ma rket cl os ing pr ic e for the ve days p ri or to gra nt (5 Octob er 2021 ). Name Awar d type 1 Ve st i n g p e r io d Performance conditions Face va lue ‘000 Percentage v esting at t hreshold Number of shares Ve st i ng / performance period end da te Adria n Sainsbur y DSA 2 1- 3 y e a r s N o £ 5 2 7 n /a 3 4 , 0 76 0 5 - O c t - 24 LT I P 3,4 3 yea rs Y es £1 , 1 6 3 2 5% 75,204 05 - Oc t -2 4 Mike Mor gan DSA 2 1- 3 y e a r s N o £ 3 31 n / a 2 1, 3 8 4 0 5 - O c t - 24 LT I P 3,4 3 yea rs Y es £700 25 % 45,284 0 5- O ct- 24 1 Th e awa rd s are a ll d el iv er ed a s ni l co st op tio ns . 2 Th e DS A ves ts i n eq ua l tra nc he s ove r th re e yea r s. 3 Per f or ma nc e co nd it io ns a re d eta il ed i n th e 2021 An nu al R e po r t on p age 1 19. 4 L T IPs v es ted f ro m 2020 h ave a n ad di tio na l t wo-y ea r ho ld ing p e ri od. Ext ern al a pp oin tm ents No ex ter na l app oin tmen ts. Paym ent s to de par tin g an d pa st di re cto r s (Au di ted ) Th ere we re no pay me nts for lo ss of of ce, or pay me nts to past d ire ctors d uri ng the ye ar oth er th an ve stin g of outs tan din g sha re awar ds as disclosed in pre v ious remuneration repor ts. Book 1.indb 138 27/09/2022 23:48:38 13 9 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t E xecu tive d ir ec tor s’ s ha re hol din g an d sh ar e in ter es ts ( Aud ite d) Th e intere sts of the d ire ctors i n the ord ina r y s har es of the g rou p at 3 1 J uly 2022 a re se t out b el ow: Name Shareholding require ment at 31 J u l y 2022 1 Number of shares o wned outright 2 2022 Outstanding share awards not subject t o performance conditions 3 Ou ts ta ndi ng s ha re a war ds s ub je ct to performance conditions 4 Outstanding opt ions 5 2022 2021 2022 2021 2022 2021 Adrian Sainsbury 1 67 ,568 96, 79 7 44,289 22, 784 322, 287 275,59 6 2, 1 46 2, 1 4 6 Mike Morgan 1 00, 901 82,7 96 35, 223 23,573 19 4, 8 0 2 17 2 , 6 3 2 3,7 78 3, 778 1 Ba se d on th e cl os in g mi d-m ar ket s ha re p ri ce o f 1 , 1 10p o n 29 J ul y 2022. 2 Th is i nc lu de s sh ar es ow ne d ou tr ig ht by c lo se ly a ss oc ia ted p er so ns . 3 Th is in clu de s D SA . 4 Th is i nc lud e s L T IP aw ard s. 5 Th es e ar e co mp ri se d of SAYE opt io ns. No exec utive d ire ctors h el d sha res th at were ve sted bu t un exerci sed at 31 July 2022. Th ere we re no ch ang es i n noti ab le inte res ts b et wee n 1 Augu st 2022 an d 6 Se ptemb er 2022, other tha n the p urch ase of s ha res by Adr ia n Sa ins bur y withi n the SIP w hi ch in cre ase d his s h areholding to 9 6, 825 s h a re s . Executive directors’ sharehold ing Th e cha r t be low c omp are s the cu rre nt exec uti ve dire ctor s’ share ho ldin g ver sus s ha reh old ing p oli cy , as a p erc ent age of s al ar y. A t th e en d of the 202 1 na nc ial ye ar , both exe cuti ve dire ctor s excee de d the mi nim um re quir eme nt u nde r the D irec tors’ Rem un erati on Pol icy . Fo llow i ng the imp lem ent atio n of the co mpe ns ation m ix ad jus tmen ts in res pon se to CRD V , Adr ia n Sai nsbu r y a nd Mi ke Morga n are b uil ding u p the ir sha reh old ing ove r a rea son abl e time f ram e to meet th e revis ed m inim um re qui reme nt. Adrian S ainsbury Mike Morg an 200% 11 6 % Policy Actual 0 1 00 200 300 200% 16 4 % De ta ils o f exec uti ve dir e cto r s’ sh ar e exer cis e s dur in g th e yea r (A udi ted ) Name Awar d type Held at 1 August 2021 Cal led 1 Lapse d Market price on award p Market price on calling p To t a l v a l u e on calling 1 £ Dividends paid on vested sh are s £ Adrian Sainsbury 20 1 8 DSA 4 ,7 20 4, 7 20 – 1 ,588.8 1 ,544. 0 72 ,87 7 7 ,835 20 1 9 DSA 5, 489 5, 489 – 1 ,366.4 1 ,544. 0 84, 7 50 5,5 99 2020 DSA 2,362 2,362 – 9 87 .9 1 ,5 44.0 36,469 1 ,370 Mik e Morgan 201 8 DSA 31 5 31 5 – 1 ,588.8 1 ,52 4. 0 4,80 1 5 23 2019 D S A 4, 9 97 4, 9 97 – 1 , 3 6 6 .4 1,524.0 76, 154 5,0 97 2020 DSA 4 ,422 4,422 – 9 87 .9 1 ,524 .0 67 ,391 2,565 1 Th es e ar e the a ct ua l nu mb er o f sh are s a nd va lu es r ea li se d on c al li ng. A ny va r ia nc es i n tota ls a re d ue to ro un di ng. Note s to th e det a ils o f execu tive d ir ec tor s’ s ha re exe rc ise s du ri ng t he yea r Th e DSA is a m and ator y de fer ral of a p or tio n of the a nnu al bo nus. Th e DSA an d L T IP gi ve execu tive d irec tors the r ig ht to cal l for sh are s in the c om pany f rom th e emp loye e be ne t trus t or T rea su r y Sh are s, at nil cos t, t oge ther w ith a c ash a mou nt rep res entin g acc ru ed noti ona l di vid end s the reo n. They m ay be ca lle d for at a ny time u p to 1 2 months from the da te of vestin g. The D SA an d L T IP award s may b e for fe ited i n ce r tai n circ ums tan ce s if th e execu tive di rec tor le aves e mpl oym ent befo re the vesti ng da te. The val ue of th e awards i s cha rge d to the grou p’ s i nco me st ateme nt in the ye ar to wh ich th e award re lates fo r the DS A and s pre ad over the ve sti ng pe ri od for th e L T IP awar d. De ta il s of exec uti ve dir e cto r s’ opt io n exer cis es d ur in g the ye a r (Au di ted ) No exec uti ve dire ctor exerc ise d optio ns d uri ng the 2022 na nci al ye ar . Book 1.indb 139 27/09/2022 23:48:38 14 0 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Directors’ Remuneration Repor t continued Single total gure of remuneration for non-ex e cutive director s (Audited) Name 2022 2021 Basic fee 1 £’000 Committee chair £’000 Committee member £’000 Senior independent director £’000 Benets 2 £’000 To t a l £’000 Basic fee 1 £’ 000 Committee chair £’ 000 Committee member £’ 000 Senior independent director £’ 000 Benets 2 £’00 0 To t a l £’00 0 Mike Biggs 300 – – – 22 322 300 – – – 8 308 Lesley Jones 71 3 4 1 2 – 1 1 18 70 3 3 10 – 1 1 14 Bridget Macaskill 71 3 4 6 – 16 127 70 3 3 8 – 7 1 18 Oliver Corbett 7 1 3 4 6 – – 111 70 3 3 8 2 – 1 13 Peter D uf f y 71 – 12 – – 8 3 70 – 7 – – 77 Sally Williams 71 – 12 – 1 8 4 70 – 10 – – 8 0 Mark P ain 71 – 12 3 4 – 1 17 41 – 5 1 9 – 6 5 T esula Mohindra 3 74 – 1 2 – – 8 6 ––– – – – Patr ici a Ha ll iday 4 71 – 12 – – 8 3 ––– – – – T racey Graham 5 26 – 4 – – 30 ––– – – – 1 Non- exe cu tiv e di rec tor f ee s we re l ast i nc re as ed w it h ef fe ct f ro m 1 Au gu st 2021. 2 Be ne ts i nc lu de t rave l- rel ate d ex pe ns es i n re sp ec t of at te nd an ce at b oa rd m ee tin gs w hi ch a re t a xa bl e. Am ou nts d is cl os ed h ave b ee n g ros se d up u si ng t he a pp rop ri ate t a x rate a s th e co mp any pay s the n on -exe c uti ve di re cto rs’ t a x. 3 T e s ula M o hin dr a wa s ap po inte d a no n- exe cu ti ve di re ctor o n 15 Jul y 2021 an d fe es r el ati ng to th e 2021 n a nci a l yea r (1 5 J ul y 2021 to 31 Jul y 2021) were p ai d in t he 202 2 n an ci al ye a r . 4 Patri ci a Ha ll id ay was a pp oi nte d a no n- exe cu tiv e dir ec tor o n 1 Au gu st 2021. 5 T r ac ey G ra ha m was a pp oi nte d a no n- exe cu tiv e dir ec tor o n 22 M arc h 202 2. Notes t o the single total gure of remuneration for non-ex e cutive directors Th e fee s payab le to non -exec uti ve dire ctors fo r the 2022 a nd 2023 na nc ial ye ar s are a s foll ows. Role 2023 2022 Chairman 1 £300 ,000 £300 ,000 Non-ex ecutive dir e ctor £7 1 ,000 £ 7 1 , 000 Supplements Senior independent direct or £34 ,000 £ 34 ,000 Chair of Audit Committee £34 ,000 £ 34 ,000 Chair of Re muneration Committ e e £34 ,000 £ 34 ,000 Chair of Risk Committee £34 ,000 £ 34 ,000 Committee membership 2 £6,000 £6 ,000 1 The chairman receiv es no other fees for ch airmanship or membership of board committees. 2 No fees are pay able t o the chairman, or for membership , of the Nomination and Gov e rnance Committee . Non-ex ecutive d irectors’ share interests (A udited) Th e intere sts of the n on- execu tive d irec tors i n the ord ina r y sh are s of the c omp any a re set ou t be low: Name Shares held benecially at 31 Ju ly 2 0 22 Shares held benecially at 31 J u l y 2 021 Mike Biggs 1, 5 0 0 500 Lesley Jones – – Bridget Macaskill 2,50 0 2,5 0 0 Oliver Corbett – – Peter D uf f y 848 848 Sally Williams – – Mark P ain – – T esula Mohindra – – Patr ici a Ha ll iday – – T racey Graham – – Th ere we re no ch an ges i n noti abl e intere sts b et wee n 1 Augu st 2022 a nd 22 Se ptemb er 2022. Th is rep or t wa s ap proved by th e boa rd of di rec tors on 27 Se ptemb er 2022 a nd si gne d on i ts be hal f by: Bridget Ma caskill Chair of the Remuneration Committee Book 1.indb 140 27/09/2022 23:48:38 141 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t Directors’ R epor t Th e dire ctor s of Clo se Broth er s Gro up pl c (the “com pany ”) p res ent thei r rep or t fo r the yea r en de d 3 1 J uly 2022. Th e Strate gic R ep or t se t out o n pag es 1 to 94 of thi s An nua l Re por t, and the Corporate Go vernance Repor t, the committee reports and the D irec tors’ Rem une rati on Re por t set ou t on pag es 1 23 to 1 4 0 of this A nnu al R epo r t in clu de info rm ation th at would oth er wise n ee d to be in clu ded i n this D irec tors’ Rep or t. Re ade rs ar e also re fer red to the cautionar y stat e ment on page 2 1 1 of t his Annual Repor t. Disclosures by R eference Additional information, which is incorporated into this Directors ’ Repor t by refere nc e, inclu din g info rmati on re qui red by the C om pan ies Ac t20 06, Dis cl osu re and T ra ns pare ncy R ul e 7 .2, and Li stin g Rul e 9.8. 4R, ca n be loc ated by pa ge refe renc e el sewh ere i n this A nnu al Re po r t as fo llows: Content Page reference Strategic report Business activities 4 t o 5 Li ke ly fu tu re de ve lo pm e nts 9 a nd 1 3 Business relat ionships 1 4 to 1 6 Employment, human right s and environmental matters Assessing and monit or ing cultur e 22 to 23 Employment practices and approach t o disabled emplo yees 36 to 39 an d 4 1 Em pl oye e en g ag em e nt 1 4, 1 7 and 3 6 to 37 Ap proa ch to dive rs it y an d inc lus io n 36 to 38 Inves ting i n and rewa rdin g the wor k forc e 38 Charitable donat ions 39 Greenhouse gas emissions 54 to 56 Climat e-relat ed nancial disclosures 56 Directors Biographical details 95 t o 9 7 Powers a nd a ppo intme nt 1 09 Induction and continuing prof e ssional development 10 9 Agree me nts for l oss of of ce 1 38 Remuneration , including waiv er of emolument s 1 23 to 1 40 Cont racts o r ser vic e agre em ents 1 08 and 1 28 Intere sts in s ha re ca pit al 1 40 Miscellaneous Section 1 72 statement 1 7 Going conc ern 93 Viabilit y statement 94 Corporat e gov er nance stat ement 1 48 Risk management objectiv es and policies 7 4 t o 92 Cre dit, ma rket a nd li qui dit y r isk s 8 1 to 86 Fi na n ci a l i ns tr u me nt s Note 1 4 o n pag es 17 7 t o 17 9 Shareholder dividend w aivers 1 4 2 Results and Dividends Th e con sol idated re su lts for th e yea r are s hown o n pag e 1 5 1 of the na nci al st ateme nts. Th e dire ctors re co mme nd a nal d ivi de nd for th e yea r of 44p (202 1 : 42p ) o n eac h ord ina r y sh are w hic h, togethe r wi th the inter im di vi de nd of 22p (202 1 : 1 8p) pa id in A pr il 2022, makes a n ordi na r y dis trib utio n for th e year of 6 6p (2021 : 60 p) per s hare. T he nal d iv ide nd, if app roved by s ha reho ld er s at the 2022 A nnu al Ge ne ra l Me eting (“ AGM ”), wil l be pa id on 22 N ovemb er 2022 to sh are hol de rs on th e reg ister o n 1 4O ctobe r 2022. F ur th er i nfor matio n on the nal d iv ide nd re com me nde d by the di rec tors ca n be fo und o n page 6 3 of this A nn ua l Rep or t. Directors Th e nam es of th e dire ctors of th e co mpa ny at the date of thi s repo r t, togeth er wi th bi ogr aph ic al de tail s, are g ive n on pag es 9 5 to 9 7 of th is An nua l Rep or t. Al l the di rec tors lis ted on tho se pag es we re dire ctor s of the co mpa ny throu gho ut th e yea r , a par t from T rac ey Gr aha m, who was ap po inted a s a dire ctor on 22 M arc h 2022 . In acc ord anc e wi th the UK C orp orate G overn an ce Co de, ea ch of the cur rent d ire ctors w ill reti re at the 2022 AGM an d of fer th em sel ves fo r appointment or reappoint ment at that meeting. Di re cto r s’ in de mni ti es a nd in su ra nc e In ac cord an ce w ith its a r tic le s of as soc iati on, the c omp any ha s gra nted a de ed of in de mni t y to each of i ts dire ctor s on ter ms co ns istent w ith the ap pli ca ble s tatutor y p rovi sio ns. Th e de ed s ind emn if y th e dire ctor s in res pe ct of li ab ili tie s (and as soc iated c osts a nd ex pe nse s) incu rre d in co nne cti on wi th the pe r for ma nce of th ei r duti es a s dire ctors of th e com pany o r any as so ciated c om pany . Q ua lif ying th ird pa r t y ind em nit y prov isi ons fo r the pu rp ose s of se ctio n234 of the C omp ani es Ac t 20 06 were ac co rding ly i n force d uri ng the c our se of th e yea r , a nd rem ain i n force at th e date of this re por t. Th e com pany a lso m ai ntai ns di rec tors’ and of ce rs’ lia bili t y ins ura nce. Share C apital Th e com pa ny’ s sh are c ap ita l co mpr ise s on e cla ss of o rdin ar y sha re with a n om ina l valu e of 25p per s ha re. At 3 1 J uly 2022, 1 52 ,0 60,29 0 ordi na r y sh are s were i n iss ue, of wh ich 1 ,60 5, 1 0 0 were he ld by th e com pany i n trea sur y . Und er s ecti on 55 1 of th e Com pa nie s Act 20 0 6, the dire ctor s may al lot equ it y se cur iti es o nly w ith the ex pre ss a utho ris atio n of sha reh old er s whi ch m ay be gi ven i n ge ner al m eeti ng, bu t whi ch c ann ot la st mo re than ve yea rs. U nde r se ctio n 561 of the Comp ani es Ac t, the boa rd may not a ll ot sha re s for c ash (oth er w is e tha n pur su ant to a n em ploye e sha re sc he me) with out rs t mak in g an of fe r to existi ng sh are ho lde rs to allot su ch s har es to the m on the s am e or mo re favour ab le ter ms in proportion t o their respective shareholdings, unless t his requirement is wai ved by a s pec ia l reso lu tion of th e sha reh old er s. Deta ils of d ire ctors’ auth or itie s ap prove d by sha reh old er s at the 2021 AGM ca n be fou nd in th e 2021 Notice of Me etin g an d sub seq ue nt results announcement . Sin ce the d ate of the co mpa ny’ s 2021 AGM, with the exc eptio n of the au thor it y to make m arket p urch ase s, the d ire ctors h ave not use d the se au thor itie s. De tai ls of ma rket pu rcha se s of the co mpa ny’ s ordi nar y sha res d uri ng the ye ar c an b e foun d on pa ge 1 42 in the se ctio n he ade d “Pu rch ase of ow n sh are s” . Th e exis ting au tho riti es g ive n to the com pany at th e la st AGM to allot and p urch as e sha res w ill ex pire at th e co nclu si on of the fo r thc omi ng AGM. At the AGM, sha reh old er s wil l be as ked to ren ew the se auth ori tie s. Det ails of th e rel evant re sol utio ns to be pro pos ed wi ll be inc lud ed in th e Notic e of AGM. New i ss ues o f sh ar e ca pit a l No ord ina r y s hare s were a llot ted a nd is su ed du ri ng the ye ar . Spe ci ca ll y , n o ordi na r y sh are s were a llot ted an d is sue d dur in g the yea r to satisf y option exe rcis es. Ful l deta ils of o ptio ns exerci se d, the weig hted ave rag e optio n exerci se pr ic e an d the wei ghte d avera ge mar ket pr ic e at the date of exerc ise c an b e foun d in note 26 on p age s 1 89 to 1 9 0 of the n an cia l statem ents. Ri ght s at t ac hin g to sh ar es Th e com pany’s ar ticl es of a sso ci ation s et ou t the ri ghts a nd obl igati ons at ta chi ng to the co mpa ny’ s ord ina r y s hare s. Al l of the ordi nar y sha res ra nk e qua lly i n all re sp ec ts. On a s how of ha nds, e ac h me mbe r ha s the r ight to on e vote at ge ner al m eeti ngs of th e com pa ny . On a p oll, e ach m em be r woul d be enti tle d to one vote for ever y sha re he ld. Th e sha res c ar r y n o rig hts to xed in com e. No pe rs on ha s any s pe cia l ri ghts of co ntrol ove r the com pa ny’ s sh are c ap ita l an d all s ha res a re fu lly p aid. The articles of associa tion and applicable legisla tion provide that the co mpa ny ca n de cid e to restri ct the r igh ts att ach ing to ordi nar y sha res i n ce r ta in ci rcum sta nce s (suc h as the r igh t to attend o r vote at a sha reh old er s’ meeti ng), includ ing w he re a pe rs on ha s fai led to com pl y with a n otice i ssu ed by th e com pa ny und er se cti on 793 of the Com pa nie s Act 20 0 6. Restrictions on the transfer of sha res Th ere a re no sp ec ic re str icti ons o n the tra nsfe r of the co mpa ny’ s sha re s whi ch a re gover ne d by the g en era l prov isi ons of th e ar ticle s of association and pre vailing legisla tion. The articles of association set Book 1.indb 141 27/09/2022 23:48:39 14 2 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Directors’ Report cont inued out c er tain c ircu msta nc es in w hic h the d irec tors of the c om pany c an refu se to regi ster a tra nsfe r of ordi nar y shar es. Th e com pa ny is not awa re of any ar ra nge me nts be twe e n its sha reh old er s that may re sul t in res tric tion s on the tr ans fer of sh are s and/ or vot ing right s. Dire ctor s and e mp loye es of the g roup a re req uir ed to com ply w ith app lic ab le le gis latio n rela ting to de ali ng in the c om pany’ s sha res as wel l as the c om pany’s share d eal ing r ul es. T he se r ule s res tric t em ploye es’ and d ire ctors’ ab ili ty to de al i n ordi nar y sha res at c er tain time s, an d requ ire the e mp loye e or dire ctor to obta in pe rm is sio n pri or to dea lin g. Som e of the gro up’ s em ploye e sh are p lan s als o co ntai n restr ic tion s on the tra nsfe r of sh are s hel d with in tho se pl ans. Pur cha se o f own sh ar es Und er s ec tion 72 4 of the C om pan ie s Act 20 0 6, a com pany m ay purc has e its ow n sha res to be h eld i n trea sur y (“T r eas ur y S ha res”). Th e exis ting au tho rit y g ive n to the com pany at th e las t AGM to purc ha se T rea sur y Sha res of u p to 1 0% of its is su ed sh are c ap ita l wi ll expi re at the c onc lus ion of th e nex t AGM. Th e boa rd con sid er s it wou ld be a ppro pr iate to renew thi s auth ori t y and i ntend s to see k sh are hol de r ap proval to pu rcha se T re asu r y Sha res of u p to 1 0% of its is su ed sh are c ap ita l at the for thco min g AGM in lin e wi th cur rent i nves tor senti me nt. Deta ils of th e reso lu tion rene win g the au thor it y wi ll be in clu de d in the Noti ce of AGM. Awards u nde r the c omp any’s employe e sh are p la ns are m et fro m sha res p urch ase d in th e mar ket (and he ld ei the r in trea sur y or in the em ploye e sh are tr ust). Dur in g the yea r , the co mpa ny mad e ma rket pu rcha se s of 4 1 5,000 T re as ur y S hare s wi th an ag gre gate nom ina l valu e of £1 03, 750 and repr ese ntin g 3.96% of its is su ed s hare c ap ita l, for an a ggre gate con sid er ation of £6.0 mil lio n. It tran sfer red 70,9 78 sha res o ut of trea sur y to sa tisf y s ha re optio n awards, w ith an a ggre gate no min al valu e of £1 7 ,7 45 a nd rep res enti ng 0.05 % of th e Co mpa ny’ s is su ed sha re ca pi tal, for a tota l con sid erati on of £0.84 m illi on. At 3 1 J uly 2022, the co mpa ny hel d 1 ,605, 100 T r eas ur y S ha res w ith a nom ina l valu e of £0.4 millio n an d repr ese ntin g 1 .07 % of i ts is sue d sha re ca pi tal. T he ma xim um nu mbe r of T rea sur y Sha res h eld at a ny time d uri ng the ye ar wa s 1 ,66 9,288 with a no min al va lue of £0.4 mil lion a nd re pre se nting 1 . 1 1 % of its is su ed s hare c ap ita l. Signicant Shareholdings Th e tab le be low s ets out d eta ils of th e intere sts in voti ng ri ghts noti ed to the co mpa ny und er th e prov isi ons of the FCA ’ s D isc lo sure Gui da nce a nd T ra nsp are ncy R ule s. Info rm ation p rovi ded by th e company pursuan t to t he Disclosure Guidance and T ransparency Rules is publicly available via the regulat or y informa tion services and on the c omp any’ s webs ite. 20 Sept ember 2022 Vo ting rights 31 Ju ly 2 0 22 Vo ting rights a br d n p l c 1 2. 42% 12.07% B l a c k R o c k , I n c . 5 .11 % 5 . 8 3 % FIL Limited 5.06% 5.06% Royal London Asset Managemen t 4.99% 4 .99% M&G plc 4.83% 4.83% Substantial shareholders do no t have dif ferent vot ing rights from those of othe r sha reh ol der s. Employ ee Share T rust Oco ri an T ru stee s (Jers ey) Li mited i s the tr ustee of th e Clo se B rother s Gro up Emp loye e Sha re T ru st, an in de pe nde nt tru st w hic h hol ds sha re s for the b en et of e mpl oyee s an d for mer e mp loye es of th e grou p. The tr ustee w ill o nly vote on th ose s har es in a cco rda nce w ith the in stru ctio ns gi ven to the tr ustee a nd i n acc orda nce w ith th e term s of the tr ust d ee d. The tr us tee ha s agre ed to sati sf y a n umb er of awa rds und er th e emp loye e sha re pl ans. A s pa r t of the se ar ra nge me nts the com pany f un ds the tr ust f rom tim e to time, to enab le the tr us tee to acq uire s har es to sati sf y the se awa rds, d etai ls of wh ich a re set o ut i n note26 on pag es 1 8 9 to 1 9 0 of the na nci al st ateme nts. Th e tru stee has wa ive d its r ight to di vid en ds on a ll sh are s he ld wi thin th e tru st. Dur in g the ye ar , the e mpl oyee s hare tr us t mad e mar ket purc ha se s of 23 1 ,544 or dinar y shares . Audito r Pricewa terhouseCoopers LLP (“PwC”) has expressed its willingness to contin ue in of ce a s the co mpa ny’ s ex ter na l aud itor . Re sol utio ns to rea ppo int P wC a nd to deter min e the ir rem une ratio n wil l be pro pos ed at the for thcom ing AGM. T he f ull tex t of the re levant re so luti ons w ill be set ou t in th e Notic e of AGM. Si g ni c a nt A gr ee m en t s Af f ec t ed by a C h an ge o f Co nt r ol A cha ng e of con trol of the c om pany , fo llow in g a take over bi d, may cau se a nu mb er of ag ree me nts to whic h the c omp any is a pa r t y to take ef fe ct, alter o r term inate. Th es e inc lud e cer tain i nsu ran ce policies, bank facility agreements and emplo yee share plan rules. Th e grou p had c omm it ted fa cili tie s totall ing £1 .8 b ill ion at 31 July 2022 whi ch c onta in c lau ses re qu iri ng le nd er c ons ent fo r any ch an ge of con trol. Sh oul d con se nt not be g ive n, a cha ng e of con trol wou ld trig ge r man dator y re paym ent of th ose fa cili tie s. Al l of the co mpa ny’ s e mp loye e sha re pl an r ule s co nta in prov is ion s rela ting to a cha ng e of cont rol. Ou tstan din g award s and o ption s may vest a nd b ec ome exerci sa ble o n a cha ng e of co ntrol, su bje ct, wh ere app lic ab le, to the satis facti on of any p er fo rm anc e con diti ons at th at time a nd pro -rati ng of award s. Research and Dev elopment Activities Dur in g the no rm al co ur se of bu sin es s, the gro up co ntin ue s to invest in new te chn olo gy a nd sys tems a nd to deve lop n ew prod uc ts and ser vic es to imp rove op erati ng ef cie ncy a nd stre ng the n its cu stome r proposition . Post -Balance Sheet Events Th ere we re no mate ria l po st-bala nce s he et events. P oli tical Donati ons No po liti cal d on ation s were ma de du rin g the ye ar (202 1 : £n il). Branches Th e Com pany h as no b ran ch es ou tsid e the U nited K in gdo m. Di sc l os ur e o f In fo rm at i on t o t he A u di to r Eac h of the pe rs ons w ho a re dire ctor s at the date of ap prova l of this An nua l Rep or t c onr ms th at: so far as th e dire ctor is awa re, there is no re leva nt aud it info rm ation of w hic h the c omp any’ s a udi tor is unawa re; and they h ave take n all th e steps th at they ou ght to have take n as a di rector i n orde r to make the ms elve s aware of a ny rel evant aud it info rm ation a nd to est abl ish th at the co mpa ny’ s a udi tor is aware of that info rm ation. Th is con rm ation i s give n and s hou ld be i nterp reted in ac co rdan ce with th e prov isi ons of s ec tion 4 1 8 of th e Co mpa nie s Act 20 0 6. Th e Dire ctor s’ Repo r t ha s be en a pprove d by the b oard a nd s ign ed o n its b eh al f by: Pen ny Th om as Company Secretary 27 Septem ber 2022 Book 1.indb 142 27/09/2022 23:48:39 14 3 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Report Financial Stat eme nts Strategic Repor t St a te me n t of D ir e ct or s’ R es p on si b il it i es i n Re s pe c t of t h e Financial Statements Th e dire ctor s, who se na me s an d fun ctio ns a re lis ted on pa ge s 95 to 97 , are re sp ons ibl e for pre pa rin g the A nnu al Re po r t an d the n anc ia l stat ements in accordance wit h applicable la w and regulation . Company la w requires the directors t o prepare nancial statements for e ach n an cia l yea r . U nde r that l aw the di rec tors have p repa red the gro up n anc ia l statem ents i n acc orda nc e with U K -a dopted int e rnational accounting standar ds and the comp any nancial statem ents i n acc orda nce w ith Un ited K ing dom G en era ll y Acce pted Accounting Practice (Unit e d Kingdom Accoun ting Standards, comprising FRS 1 02 “The Financial Re por ting Standar d applicable in the UK a nd R epu bli c of Ire lan d” , and a pp lic ab le law). In pre par in g the gro up n anc ia l statem ents, th e dire ctor s have al so elected t o comply with International Financial Repor ting Standards iss ue d by the Inter nati ona l Acco untin g Sta nda rds B oard (I FRSs a s issued by IA SB) . Und er c omp any law, direc tors mu st not a pprove th e na nc ial statem ents u nle ss they a re sati se d that they g ive a tr ue an d fai r view of the st ate of aff air s of the gr oup a nd co mpa ny and of th e pro t or los s of the gro up a nd the c omp any for th at pe rio d. In pre par ing th e na nci al st ateme nts, the d irec tors a re requ ire d to : • sel ect s uit abl e acc oun ting po lic ie s and th en a ppl y the m consist ently; • state whether applicable UK- adopted in ternational account ing sta nda rds a nd IFR Ss is su ed by IA SB have b ee n foll owed fo r the gro up n anc ia l statem ents a nd U nited K in gdo m Acco unti ng Sta nda rds, c omp ri sin g FRS 1 0 2 have be en fo llowe d for the com pany na nci al st ateme nts, sub je ct to any mate ria l de par tures disclosed and e x plained in t he nancial stat ements; • make jud ge me nts and a cco unti ng es timates th at are re aso na ble and prudent ; and • prep are th e grou p and c om pany nan cia l state me nts on the g oi ng con ce rn ba sis u nle ss i t is in app ropr iate to pres ume th at the gro up and c om pany w ill c onti nue i n bus in es s. Th e dire ctors a re res pon sib le for s afeg ua rdin g the as sets of th e grou p and c om pany a nd he nc e for ta ki ng rea so nab le ste ps for th e preve ntion a nd d etecti on of f raud a nd oth er ir reg ula ri tie s. Th e dire ctors a re al so res po nsi ble fo r keep ing a deq uate ac cou nting rec ords th at are su f c ie nt to show a nd exp lai n the gr oup’ s an d company’ s transactions and disclose with r easonable accuracy at any tim e the n anc ia l pos itio n of the gro up a nd co mpa ny and e na ble them to en sure th at the n anc ial st ateme nts an d the Di rector s’ Rem un erati on Re po r t co mpl y wi th the Co mpa nie s Act 20 0 6. Th e dire ctors a re re spo nsi ble fo r the ma inten an ce an d integ ri ty of the co rp orate and na nci al info rm ation in clu de d on the c ompa ny’ s webs ite. Legi slati on in th e Uni ted K ingd om g overn ing th e pre parati on and d iss em inati on of n anc ial s tateme nts may d if fe r fro m le gisl atio n in other jurisdictions. Directors’ Conrmations Eac h of the cu rre nt di rec tors, wh ose n am es a nd fu nc tions a re li sted on page s 95 to 97 , co nr m that, to the best of th ei r know le dge: • the gro up n anc ia l state men ts, whi ch h ave be en pr epa red i n accordance wit h UK -adopted international accoun ting standards and I FRSs i ss ued by I ASB, gi ve a tru e an d fai r view of th e as sets, liabilities, nancial position and prot o f the group ; • the co mpa ny na nci al st ateme nts, wh ich h ave bee n pre pa red in accordance with United K ingdom Account ing Standards, com pr isi ng FRS 102 , gi ve a tru e and f air v iew of th e ass ets, liabilities, nancial position and prot o f the company ; • the Stra tegic R epo r t, togethe r wi th the Di rec tors’ Repo r t an d the Co rp orate Gove rn anc e Rep or t, in clu des a f air rev iew of the deve lop me nt and p er form anc e of the b usi ne ss an d the p osi tion of the gro up a nd co mpa ny , togeth er wi th a de scr ipti on of the p rin cip al ris ks an d unc er t ainti es th at they fa ce; and • the An nua l Re por t and n an cia l statem ents, t aken a s a who le, are fai r , ba la nce d an d und er sta nda bl e and p rovi de the i nfor matio n ne ce ssa r y fo r sha reh old er s to ass es s the gro up’ s an d com pany’s position and per formance, business model and strat egy . By ord er of th e boa rd Adrian Sainsbury Mik e Morgan Chief Executiv e Group Finance Director 27 Septem ber 2022 Book 1.indb 143 27/09/2022 23:48:39 14 4 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Repor t on the au dit of t he n ancia l st atement s Opinion In our opinion : • Clo se Broth er s Gro up pl c’ s grou p na nc ial s tateme nts a nd co mpa ny na nc ial s tatem ents (th e “n anc ial s tatem ents”) g ive a tr ue an d fair v iew of the st ate of the grou p ’ s a nd of the c omp any’ s af fa irs a s at 3 1 Jul y 2022 and of th e grou p’ s p rot a nd the g roup’ s ca sh ow s for the ye ar then ended; • the gro up n an cia l statem ents h ave be en pr ope rl y pre pare d in ac cord an ce wi th UK-adopted inter nati ona l acc ou nting s tan dard s; • the co mpa ny na nc ial s tateme nts have b ee n prop er ly pre pa red in a cco rda nce w ith Un ited K ing dom G en era ll y Acce pted Acc oun ting P ractice (Un ited K ing do m Acco unti ng Sta nd ards, c om pri sin g FRS 1 02 “T he F ina nci al Re po r tin g Sta nda rd ap pli ca ble i n the UK a nd Re pu bli c of Ireland” , and applicable law ); and • the n anc ia l statem ents h ave bee n pre pare d in ac co rdan ce w ith the re qui reme nts of the C om pan ie s Act 20 06. We have audi ted the nan cia l statem ents, i ncl ude d wi thin th e Ann ua l Rep or t, wh ich c omp ris e: the con sol idated a nd co mpa ny bal an c e sheets as at 3 1 July 20 22 ; the consolidated income stat ement , the consolidat ed stat ement of comprehensive income , the consolida ted c a s h ow state men t and th e con sol idated a nd c omp any state men ts of cha nge s in e qui t y for the ye ar th en e nde d; and the n otes to the n ancial statem en ts, whi ch in clu de a d es cri ption of th e sig ni ca nt ac cou ntin g pol ici es. Our o pin ion i s con sis tent wi th our re por ting to the Audi t Co mmi tte e. Se par a te opi nio n in r ela ti on to IFR Ss a s is su ed by t he IA SB As exp la ine d in Note 1 to the n anc ial s tateme nts, the g rou p , in add itio n to appl yi ng UK-adopted inte rnati on al ac cou nting s tan d ards, has also app lie d inter natio na l na nci al rep or ti ng sta nda rds (IF RSs) as is sue d by the In ternati ona l Acc ounti ng St and ards B oa rd (IASB). In ou r opi nio n, the gro up n anc ia l statem ents h ave be en p rope rl y pre par ed in a cco rda nce w ith IF RSs a s iss ue d by the IAS B. Ba si s for op in ion We cond ucted o ur au dit i n acc orda nce w ith In tern ation al St and ards o n Audi ting ( UK ) (“I SAs (U K )”) and a ppl ica bl e law . O ur re spo n sibilities under ISAs ( UK ) a re fu r the r de scr ibe d in the Au ditor s’ respo nsi bil itie s for the a udi t of the n anc ia l statem ents s ecti on of ou r rep or t. We beli eve that the aud it evi de nce we h ave obta ine d is su f c ie nt an d app rop riate to prov ide a b asi s for ou r opi nio n. Independence We remai ne d inde pe nd ent of th e grou p in acc ord anc e with th e ethi ca l requ irem ents th at are re leva nt to our au dit of th e na nci al statements in the U K, wh ic h inc lud es the F RC’ s Ethi ca l Sta nda rd, as ap pli ca ble to li sted pu bli c intere st e ntitie s, an d we have fu ll led o u r othe r eth ica l res pons ibi litie s in ac cord an ce wi th thes e req uire men ts. T o th e be st of ou r know le dg e and b eli ef, we dec lare th at non -aud it se r v ic es pro hib ited by th e FRC’ s Eth ica l St and ard we re not p rov id ed. Oth er th an tho se di scl ose d in N ote 5, we have provid ed no n on-a udi t se r vi ce s to the com pa ny or its c ontro lle d und er tak ing s in t he period under audit. Our audi t approach Overview Audit scope • Th e sco pe of o ur au dit a nd the n ature, tim ing a nd ex tent of a udi t pro ced ure s pe r for me d were d eter min ed by ou r ri sk as se ss me nt , the nancial signicance o f components and othe r qualitativ e fact ors (including history of missta tement t hrough fraud or error ) . • We per fo rm ed a udi t proc ed ure s over c omp on ents c ons ide red na nci all y si gni c ant in th e co ntext of th e gro up (fu ll sc op e aud it) or in the co ntex t of ind iv idu al p rim ar y statem ent a cco unt b ala nc es (aud it of s pe ci c acc oun t bal an ce s) . • We per fo rm ed othe r pro ce dure s in clu ding te stin g rele vant c ontrol s and a na ly ti ca l review p roc edu res to mi tigate the r is k of ma te r i al misstat ement in t he residual components . Key au d it m at ter s • Dete rmi natio n of exp ec ted cre dit l os s (‘ECL ’) provis io ns on l oan s and a dva nce s to custom er s (Grou p) • Evalu atio n of the c arr yin g valu e of inve stme nt in s ubs idi ar ie s (Comp any) Materiality • Ove ral l grou p mate ria lit y: £1 1 .6m (2021 : £1 3.2m) bas ed o n 5 % of Pro t Befo re T a x. • Ove ral l com pa ny mater ia lit y: £1 1 . 1 m (202 1 : £1 1 . 1 m) bas ed on 1 % of T ot al As sets. • Per fo rma nc e mater ia lit y: £8.7 m (202 1 : £9.9m) (Gro up) and £8.3 m (202 1 : £8.3m) (Com pany). Th e sco pe of o ur a udi t As pa r t of de si gni ng ou r aud it, we deter min ed m ateri ali t y and a ss es se d the ri sks of m ateri al mi sst ateme nt in th e na nc ial s tate ments. Key aud it ma t ter s Key audi t mat ter s are tho se ma tter s that, in the a udi tors’ profes si ona l jud ge men t, were of mos t sig ni can ce i n the aud it of th e nancial statem ents of th e cur re nt pe rio d an d inc lud e the mo st si gni ca nt as se ss ed r isks of m ater ial m iss tatem ent (w heth er or n ot due to fraud) iden tied by the au ditor s, inc lud ing tho se w hic h had th e grea test ef fe ct o n: the overa ll au dit st rateg y; the all oc ation of re so urce s in t h e audi t; and dire cti ng the ef fo r ts of the e ng age me nt team. T he se mat ter s, an d any co mme nts we ma ke on the re su lts of ou r proc ed ure s ther eon, we re add r essed i n the co ntex t of our a udi t of the n an cia l state me nts as a w hol e, and i n form ing o ur o pin ion th ere on, an d we do n ot provi de a se p arate opinion on the se mat ter s. Inde pen de nt Audi tors’ Repor t to th e Mem ber s of Close Br oth er s G roup p lc Book 1.indb 144 27/09/2022 23:48:39 14 5 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial St atements Strategic Repor t Th is is n ot a com ple te list of a ll ri sks i de ntie d by ou r aud it. Evalu atio n of the ca rr yin g valu e of inve stme nt in s ubs idi ar ies (C omp any) is a n ew key aud it ma tte r this ye ar . Th e foll owin g, whi ch we re key audi t mat ter s la st yea r , a re not i ncl ude d be ca use of th e foll owin g fac tors: • Th e imp act of C ovid - 1 9 (Gro up a nd co mpa ny) is no l ong er c ons ide red to be a key a udi t mat ter be ca use o ur c ons ide ratio n of the pande mic in the cu rre nt ye ar is ad eq uatel y ca pture d by othe r key aud it mat ter s an d it do es n ot rep rese nt a n are a of inc rea se d aud it foc us i n i ts own r ig ht. • Ap pli catio n of ef fe cti ve intere st rate (“EIR ”) ac co untin g (Grou p) is no lon ge r con sid ere d to be a key audi t mat ter b ec aus e we do not c ons id er the leve l of es timati on u nce r ta int y as so ciated w ith EIR to be s ign ic an t. Oth er w is e, the key audi t mat ter s be low are c on sis tent wi th las t yea r . Key a ud i t ma t t er Ho w ou r au d it a d d re s se d t he k ey a ud i t ma t t er De te rm i na t io n of ex p ec te d c re d it l os s (‘E CL ’ ) pr ovi s io ns o n lo an s a nd a dv an ce s to c u st om e rs ( Gr ou p) As at 31 July 2022, the Grou p ha s gros s loa ns a nd ad vanc es to cus tome rs of £9, 1 4 4.5m, with ECL p rovi sio ns of £ 285.6m held against them. Th e deter mi natio n of ECL prov isi ons i s inh ere ntly j udg em ent al an d invol ves s et ting a ssu mptio ns us ing fo r wa rd loo ki ng info rm ation ree ctin g the G roup’ s vi ew of potenti al f uture e co nom ic eve nts. Th is ca n give r ise to in cre ase d es timati on un ce r ta int y . Th ere co ntinu es to be u nce r ta int y in the d eterm inati on of ECL provisions in relat ion t o economic factors, including assess ing how a hig h inati on e nviro nme nt c oup led w ith th e cos t of ene rgy , sup ply cha in a nd othe r ec ono mic d evel opm en ts may imp act th e cre dit pe r for ma nce of th e le ndi ng bo ok. E xp eri en ce co ntin ues to de velo p in rel atio n to the Novit as Loa ns bus ine ss, w hic h the G roup h as us ed to upd ate the dete rmi natio n of the ECL. T his re ma ins s ubj ecti ve an d the ECL i s sen siti ve to pot e ntial outcomes. Mod el s are u sed to co lle cti vel y as ses s an d dete rmi ne ECL all owanc es o n loa ns a nd ad van ce s whi ch a re not cl as si ed a s bei ng cr edi t imp aire d at the re por ti ng da te, or are ind ivi du all y sma ll. We cons id er the fo llow ing e le me nts of the d eterm inati on of mod ell ed EC L to be sig ni ca nt: • The application of forward-looking economic scenarios used in the models and the weightings as signed t o those scenarios; • The complet eness and appropriat eness of post -model adju stme nts that a re rec ord ed to take into ac cou nt laten t ris ks and k now n mo del l imi tati ons; an d • The appropria teness of assump tions used in the det ermination of the pro bab ili t y of ca se fa ilu re and l os s give n ca se fa ilu re in relation to No vitas. Ind ivi dua ll y larg e exp osu res to cou nter par ties w ho are i n defa ult at the rep or ti ng date a re esti mated o n an in div idu al ba sis. We con sid er th e foll owin g ele me nts of the d eter min ation of EC L to be signicant : • Estim ating th e am ount a nd tim ing of th e exp ecte d futu re ca sh ows under multiple , probability weight ed, scenarios. Rel evant refere nc es: • Note 2, cr itic al ac co untin g esti mates a nd j udg eme nts o n page 16 2 ; • Note 1 1 , Loa ns a nd ad vanc es to cu stome rs o n pag e 1 72 , a nd • not e 28c , nancial risk managemen t on page 1 95. With t he suppor t of our credit risk modelling specialist s and ec ono mic s exp er ts, we per form ed th e foll owin g pro ced ure s: For collect ively assessed pro visions: • We unde rs tood an d cri tic all y as se sse d the a ppro pri atene ss of the ECL a cco unti ng po licy a nd m ode l meth odo lo gie s use d by management . • We tested mo del p er form anc e by rep lic ating key mo de l components and comparing actual out come s with those pr eviously predict ed by the mode ls. W e assessed man age me nt’ s jud ge men t as to wheth er th e res ults of th ese acti viti es i ndi cated w heth er th e mod els c onti nue d to per fo rm appropriat ely or if an y post -model adjustmen ts w ere requir e d. • W e critically assessed t he reasonableness of management’ s selected economic scenarios and associated scenario weightings , giving specic consideration to current and future economic uncertainty . We as se ssed their reasonableness aga ins t kn own or l ikel y ec ono mic, po liti ca l and oth er re leva nt events i ncl udin g the p otentia l futu re ec ono mic i mpa ct of development s in pr olonged ination . • We comp are d the seve ri t y and m agn itud e of the a ssu mptio ns use d in the b ase s ce nar io to ex ter nal fo rec asts a nd h istor ic trend s. • Based on our knowledge and understanding of the limitat ions in ma nag em en t’ s m ode ls a nd e mer gin g ind ustr y ris ks, we evalu ated the c omp leten es s of the p ost mo de l adju stme nts proposed b y management. • We tested the va luati on of in -sco pe p ost mo de l adj ustm ents by cri tic all y as ses si ng the m ethod olo gy a nd tes ting th e und er ly ing ass umpti ons u sed i n the ca lcu latio n to supp or tin g evid en ce. • We evaluate d man age me nt’s model to de ri ve the Nov it as Loan s ECL, we cr iti cal ly a sse ss ed th e ass um ptions u se d by ma nag em ent a nd we pe r fo rm ed ou r own s ens iti vi t y ana ly sis using plausible scenarios de rived fr om available experience. From the evi de nce we o btai ned we fo und th at the a ppli cati on of forward-looking economic assumptions and the completeness and appropriat ene ss o f the post model adjustments as they r e lat e to the ECL p rovis io n to be reas ona bl e. Book 1.indb 145 27/09/2022 23:48:40 14 6 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Ind epe nd ent Au ditor s’ Repor t to t h e Mem ber s of Close Br oth er s G roup p lc continued Key a ud i t ma t t er H ow o u r au d it a d dr e ss e d t he ke y au d i t ma t te r Individually assessed provisions : For a sa mp le of in div id ual ly a sse ss ed l oan s in def aul t and re late d ECL al lowan ce s, we: • Evalu ated the b asi s on wh ich th e al lowan ce s were de term ine d, and th e evi den ce s upp or ti ng the a na lys is pe r for me d by management ; • Independent ly challenged whe ther the k ey assumpt ions used, suc h as the re cove r y stra tegie s, co llater al val ue s and r ang es of potenti al ou tcom es we re app ropr iate gi ven th e bor rower’s circumstances ; • Re-performed management’ s provision c alculation , critically as ses si ng key inp uts in clu din g exp ec ted fu ture c ash ows, dis cou nt rates, va luati ons of c oll atera l hel d and th e wei ghtin gs app li ed to sce na ri o outco me s; and • Con sid ere d the ex te nt to whic h the ex pos ure is i mpa cted by the economic conditions including high ination le vels and whether these fact ors had been appropria tely reect ed in the E CL provision . We tested and eva lu ated the re aso nab le nes s of the d isc losu res made in the nancial stat ements. Bas ed on th e evid en ce obt ain ed, we co nclu de d that the methodologies , modelled assump tions, managemen t judgements and collectiv e and individually assessed expected credit losses t o be appropria te. Ev aluat ion of the carr ying v alue of in vestment in subsidiaries ( Company) Ide ntif yin g and m ea sur in g any im pai rm ent of i nvestm en ts in sub sid ia rie s is s ubj ecti ve an d is ba se d on an a ss es sm ent of imp air me nt ind ic ators in th e und er ly ing i nvest men ts at the ye ar en d. Man age me nt dete rmi ne d that the re are n o ind icator s of impairment. See n ote 30 for the re leva nt dis clo sure. We tested ma nag em en t’ s i mpa irment assessment , including evalu ating th e key inpu ts an d ass umpti ons. Bas ed on th e evid en ce obt ain ed, we co nclu de d that the methodology , inputs and assumptions w ere appropriat e. How we t ail or ed t he au di t sc ope We tailo red th e sco pe of o ur aud it to en sure th at we per form ed e nou gh wor k to be ab le to give a n opi nio n on the na nci al state m ents as a who le, tak in g into acc oun t the str uctu re of the g roup a nd the c om pany , th e acc ounti ng pro ce ss es a nd co ntrols, a nd th e indu str y in which they operat e. Th e grou p is str uc ture d into four p rim ar y seg men ts be ing th e Clo se Broth er s Gro up pl c com pa ny and B an k, Win ter o od Se cu ri ties a nd Asset Ma nag eme nt co mp one nts. T he Ba nk is s ubs eq uen tly di vi de d into Reta il, Co mme rci al an d Prope r t y se gm ents. T he c ons oli dated nan cia l statem ent s are a co nso lid atio n of thes e co mpo ne nts. In es tab lis hin g the ove rall a pp roac h to the grou p audi t, we deter min ed the t y pe of wo rk that i s requ ire d to be pe r for med ove r t he components by us, as th e grou p en gag em ent tea m, or au ditor s wi thin th e Pw C net wo rk of r ms o per ating u nde r ou r inst ruc tio n (‘ c omp one nt au d itors ’) . Wh ere th e work wa s pe r for me d by co mpo ne nt aud itors, we d eter min ed th e leve l of invol vem ent we n ee de d to have in the ir au dit wo r k to be abl e to conc lud e wh ethe r suf cie nt ap prop ri ate audi t evid en ce ha d bee n obt ain ed as a b asi s for ou r opi nio n on the c ons oli dated nancial statem ents a s a who le. Th is in clud ed re gul ar c omm uni catio n wi th the co mpo ne nt aud itors thro ug hou t the aud it, the is sua nc e of in structions, a review of th e res ults of th ei r work o n the key au dit m atte rs a nd for mal c le ara nc e me eting s. Any c omp one nts w hic h were c ons ide red i ndi vid ua lly nan cia ll y sig ni ca nt in the c ontex t of the g roup’ s co nso lid ated n anc ial s ta te me n ts (dene d as c omp one nts wh ic h repre se nt mo re than o r eq ual to 1 0% of the tota l prot b efore ta x of the co nsol idate d grou p) were c onsidered full sco pe co mp one nts. We cons id ere d the in div idu al nan cia l sig ni ca nce of oth er c omp one nts in re lati on to pri mar y statem ent ac co un t ba la nce s. Ou r sco pin g als o con sid ere d the p res enc e of any s ign ic ant a udi t ri sks a nd othe r qu ali tative fa ctor s (in clu din g histor y of mis s tatement s through fra ud or e rro r) . Ce r ta in acc ou nt bal anc es we re aud ited c entra ll y by the gro up en gag em ent tea m. As pa r t of co nsi de rin g the im pac t of cli mate cha ng e in ou r ris k as ses sm ent, we eval uated m an age me nt’ s a ss es sme nt of the i mpa ct of cl imate ris k, wh ich i s set ou t in the S ust ain abi lit y R epo r t, incl udi ng the ir c onc lus ion th at ther e is no ma teri al im pact o n the n an cia l statem ents. I n par ticul ar , we co nsi der ed ma nag em ent ’ s as se ss me nt of the im pac t on ECL o n loa ns an d adva nc es to cus tomer s, the nan cia l state me nt li ne item we d eterm ine d to be mos t likel y to be imp acted by c lim ate ris k. Man age me nt’ s as ses sm ent g ave cons id erati on to a num ber of matters , inc lud ing th e expo sure of u nde rl yi ng po r t foli os to trans itio n ris k. Ma nag em ent ’ s co ncl usi on that th ere i s no mate ria l imp act i s consisten t with our audit ndings. Book 1.indb 146 27/09/2022 23:48:40 14 7 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial St atements Strategic Repor t Materiality Th e sco pe of ou r aud it wa s inu en ced by o ur a ppl icati on of m ateri ali t y . We set ce r ta in qu anti tati ve thre sho lds fo r mater ia lit y . These, toge ther with q ua litati ve co nsi der ation s, hel pe d us to deter min e the sc ope of o ur au dit a nd th e nature, tim ing a nd ex tent of o ur au dit p roc edu res o n the ind ivi dua l na nc ial s tateme nt li ne item s an d disc los ure s and i n evalu ating th e ef fe ct of mi sst ateme nts, both in div id ual ly an d i n aggregate on the nancial stat ements as a whole. Bas ed o n our p rofes sio nal j ud gem ent, we de term ine d mater ia lit y fo r the n anc ia l statem ents a s a who le a s foll ows: Financial statements – group Financial statements – company O ve ra l l m at e r i a l i t y £1 1 . 6 m ( 20 21 : £13. 2m). £1 1. 1m (2 0 21 : £1 1. 1m). How we dete rm ine d it 5% of prot be fore ta x 1 % of T otal A ss ets Ratio na le for b en chm ar k app lie d Prot before t a x is a p rim ar y m ea sur e use d by the s hare ho lde rs i n as ses si ng the pe r for ma nce of th e grou p an d is a ge ne ral ly acc epte d ben ch mar k for d eter min ing a udi t mat eriality . We have sel ec ted total a sse ts as an appropriat e benchmark for company mater ia lit y , a s it i s an inve stm en t hol din g company . For e ach c omp one nt in th e sc ope of o ur gro up au dit, we al loc ated a m ateri ali t y that is l es s tha n our ove ral l grou p mate ria lit y . Th e ran ge of mater ia lit y a llo cated a cros s co mpo ne nts was b et wee n £4 .0 mi lli on an d £1 0.4 millio n. Ce r tai n co mpo ne nts were a udi ted to a loc al statutory aud it mate ria lit y th at was a lso le s s than o ur over all g roup m ater ial it y . We use pe r for ma nce m ateri ali t y to reduc e to an ap prop riatel y low l evel the p roba bil it y that th e agg reg ate of unco rre cted a nd un det ected mis state me nts exce eds ove ra ll mate ri ali t y . Sp ec ic all y , we us e pe r for ma nce m ater ia lit y in d eter min ing th e sc ope of o ur au dit a n d th e nature a nd ex tent of ou r testi ng of ac co unt ba la nce s, cl as se s of tran sac tio ns an d dis clo sure s, for ex amp le i n deter mi nin g sa mpl e size s. Ou r pe r for ma nc e mater ia lit y was 75 % (2021 : 75 %) of overal l mater ia lit y , a mou nting to £8. 7 m (202 1 : £9.9m) for th e grou p na nc ial s tateme nts a nd £8.3m (2021 : £8.325m) for the com pany nan cia l state men ts. In dete rm inin g the p er fo rm anc e mate ria li ty , we con sid ere d a nu mbe r of fac tors - th e his tor y of mis sta teme nts, ri sk a sse ss me nt a nd aggregation ris k an d the ef fe cti vene ss of c ontro ls - a nd co ncl ude d that a n amo unt in th e up per e nd of o ur no rma l ra nge wa s app rop riate. We agree d wi th the Aud it Co mmi t tee that we wou ld re por t to the m mis sta teme nts ide nti ed d uri ng ou r aud it ab ove £50 0, 00 0 (g roup audit) (202 1 : £500,00 0) a nd £50 0, 00 0 (com pany a udi t) (2 021 : £50 0,00 0) as wel l as mi ssta teme nts bel ow thos e amo unts that, in ou r view, warr anted reporting for qualita tive reasons. Conclusions relating t o going concern Our eva lu ation of th e dire ctor s’ asse ss men t of the gro up’ s a nd th e com pany’s abili t y to contin ue to ado pt the go ing c onc er n bas is of accounting included: • A det ail ed r isk a sse ss me nt to ide ntif y factors th at co uld i mpac t the g oin g con ce rn ba sis of a cco unti ng, inc lud ing th e cos t of living and ec ono mi c cha ll eng es l in ked to Covi d- 1 9 an d wid er e co no mic u nc er t ain ty; • Evalu atio n of man age me nt’s going c onc er n as se ssm ent a s wel l as the I CA AP a nd IL A AP s ub mis sio ns to the PR A; • Evalu atio n of stres s testi ng pe r for me d by ma nag em ent a nd co nsi de ration of w het her th e stre sse s ap pli ed a re app rop riate for a s ses sing going concern ; • Evalu atio n of the Gr oup’ s fore ca st n anc ial p er form anc e, liqu idi t y and c ap ita l pos itio ns ove r the go ing c onc er n pe ri od; and • Con sid er ation of c red it rati ng ag enc y ratin gs an d any ac tion s. Bas ed on th e wor k we have pe r for me d, we have not id enti ed a ny mater ia l unc er t ainti es re lati ng to events or c ond itio ns that, in dividually or col le ctive ly , m ay ca st sig ni ca nt dou bt on the g rou p ’ s a nd the c omp any’ s abi lit y to co ntinu e as a go ing c onc er n for a p er iod of at l ea st t wel ve month s fro m whe n the n an cia l statem ents a re auth or ise d for is sue. In aud itin g the n an cia l statem ents, we h ave con clu de d that the d irec tors’ use of th e goi ng co nce rn b asi s of acc ou nting i n the pre par ation of th e nancial stat eme nts is appropriate . However , b ec aus e not all f utu re events o r co ndi tion s can b e pre dic ted, this c onc lus ion i s not a gu ara ntee a s to the grou p’ s a nd the c om pany’ s abi lit y to conti nue a s a goi ng co nc er n. In rel ation to the d irec tors’ repo r ting o n how they h ave app lie d the U K Cor por ate Gover na nce C ode, we have n othing m ater ial to ad d or d raw atte ntion to in re latio n to the dire ctors’ statem ent in th e na nci al st ateme nts abo ut w hethe r the d irec tors co nsi dere d it a ppro pr iate to adopt the goi ng co nc er n bas is of ac cou ntin g. Our re sp ons ibi litie s an d the re spo nsi bili tie s of the di rector s wi th resp ec t to goin g con cer n are d es cr ibe d in the re leva nt se ct ions of t his report. Repor ting on other infor mation Th e other i nfor matio n co mpr ise s al l of the info rm ation i n the A nnu al Re po r t othe r than th e na nc ial s tateme nts a nd ou r aud itors ’ rep or t ther eon. T he di rec tors are re sp ons ibl e for the oth er info rm ation, w hic h incl ude s rep or ti ng ba sed o n the T as k Force o n Clim ate-r elated Financial Book 1.indb 147 27/09/2022 23:48:40 14 8 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Ind epe nd ent Au ditor s’ Repor t to t h e Mem ber s of Close Br oth er s G roup p lc continued Dis clo sure s ( TCFD) rec omm end atio ns. Ou r opi nio n on the nan cia l state ments d oe s not cove r the othe r info rm ation a nd, acc ordi ngl y , we do n ot expr es s an au dit o pin ion o r , exc ept to the ex tent oth er wise ex pli ci tly st ated in thi s rep or t, any for m of as su ran ce the re on. In co nne cti on wi th our a udi t of the n anc ia l statem ents, o ur re spo nsi bili t y is to read the oth er i nfor matio n and, in d oin g so, consider whe ther the othe r info rm ation i s mater ial ly in co nsis tent wi th the n an cia l state men ts or ou r kn owle dg e obta ine d in the a udi t, or othe r w ise appears t o be mate ria ll y mis stated. If we id enti f y a n app arent m ater ial i nco nsis tency o r mater ia l mis statem ent, we are re qui red to pe r for m procedures t o con clu de w hethe r the re is a m ateri al mi sst ateme nt of the nan cia l statem ents o r a mater ia l mis state men t of the othe r info rmati o n. If, base d on the wor k we have pe r fo rme d, we con clu de that th ere is a m ater ial m iss tateme nt of thi s other i nfor matio n, we are req uire d to rep o r t that fa ct. We have nothi ng to repo r t bas ed o n thes e res pons ibi liti es. With re sp ec t to the Strate gic Re po r t an d Dire ctor s’ Repor t, we also co nsi de red wh ethe r the d isc losu res re qui red by th e UK Co mpa nies Act 200 6 h ave be en i ncl ud ed. Bas ed o n our wo rk un de r ta ken in the c ou rse of th e aud it, the Co mpa nie s Act 20 0 6 req uire s us al so to repo r t ce r ta in o pini ons a nd m at ters a s described belo w . St ra teg ic Re po r t a nd D ir ec tor s’ R epo r t In ou r opi nio n, base d on the wo rk u nde r ta ken in th e cou rs e of the au dit, the in form ation g ive n in the S trateg ic Re po r t an d Dire ctors ’ Report for the ye ar e nd ed 31 July 2022 is c ons isten t with th e na nc ial s tateme nts a nd ha s be en pre pa red in a cc orda nc e with a ppl ic abl e legal requ irem ents. In lig ht of the k now le dge a nd u nde rst and ing of th e gro up an d com pa ny and th eir e nvi ronm ent o btai ne d in the c our se of th e audi t, we did not ide ntif y any mater ia l mis statem ents i n the St rategi c Rep or t a nd D irec tors’ Rep or t. Directors’ Remuneration In ou r opi nio n, the par t of the Dire ctor s’ Remu ner ation R ep or t to be au dite d has b ee n prop er ly pr epa red i n acc orda nc e with th e Companies Ac t 20 06. Corporate gov er nance statement Th e Lis ting Ru le s requ ire us to revi ew the d irec tors’ stateme nts in re lati on to goin g con ce rn, lo nge r -term v ia bili t y and th at p ar t of the cor po rate gover na nce s tatem ent re latin g to the com pa ny’ s co mpl ian ce w ith the p rovis io ns of the U K Cor por ate Gover na nce C ode s pe ci ed fo r our review. Our add itio nal re sp ons ibil itie s wi th resp ec t to the cor por ate govern an ce state men t as othe r infor mati on are d es cri be d in the R epo r tin g on othe r info rmati on se cti on of thi s repo r t. Bas ed o n the wor k und er taken a s par t of our au dit, we have co nc lud ed that e ac h of the fol lowi ng el em ents of th e co rpo rate gover nance statem ent i s mater ial ly c ons istent w ith the na nci al st ateme nts and o ur k nowl ed ge obt ain ed du ri ng the a udi t, and we have noth in g m ater ial to add or d raw at tentio n to in relati on to: • Th e dire ctors’ co nr matio n that they h ave car ri ed o ut a rob ust a sse ss me nt of the e me rgin g and p rin cip al r isks; • Th e dis clo sure s in the A nn ual R ep or t that d es cr ibe th ose p rin cip al ri sks, w hat pro ce dure s are i n pla ce to ide ntif y eme rgin g r i sks an d an expl an ation of h ow the se ar e bei ng ma nag ed o r miti gated; • Th e dire ctors’ state men t in the n an cia l statem ents a bo ut wh ethe r they c ons ide red i t app ropr iate to adopt th e goi ng co nce rn b asis of acc oun ting in p rep ari ng the m, an d thei r ide nti cati on of any m ateri al u nce r ta inti es to the gro up’ s and c om pany’s abilit y to co ntinu e to do so over a p er iod of at l ea st t wel ve month s fro m the da te of approva l of the nan cia l state me nts; • Th e dire ctor s’ expla natio n as to thei r as ses sm ent of th e grou p’ s a nd co mpa ny’ s p rosp ec ts, the pe ri od thi s as ses sm ent c over s a nd w hy the period is appr opriate ; and • Th e dire ctors’ statem ent a s to whethe r they h ave a reas ona ble ex pe ctati on that th e com pa ny will b e abl e to contin ue in o per at ion and me et its li abi liti es a s they fa ll du e over th e per io d of its as se ss men t, inclu din g any re lated d isc losu res d rawi ng at tentio n to any necessar y qualications or assumptions. Our rev iew of th e dire ctors’ statem ent re ga rdin g the lo nge r -term v ia bil it y of the gro up wa s subs tan tial ly le ss i n sco pe tha n an a udi t and o nl y con siste d of mak in g inqu iri es a nd co nsi de rin g the di rector s’ proce ss su ppo r tin g thei r statem ent; ch eck in g that the s tateme nt is in alignment with th e rel evant p rovis ion s of the UK C or porate G over nan ce Co de; and c ons ide ri ng wh ethe r the st ateme nt is c ons istent w ith the nancial statem ents a nd ou r kn owl edg e an d und er sta ndi ng of the g roup a nd c ompa ny an d the ir env iron me nt obta ine d in th e cou rse of th e aud it. In add itio n, bas ed on th e wor k und er t aken a s pa r t of our a udi t, we have con clu de d that e ach of th e foll owin g ele me nts of the c o rporat e gover na nc e statem ent i s mater ia lly c ons iste nt with th e n anc ial s tatem ents a nd o ur k nowl ed ge obt ain ed du ri ng the a udi t: • Th e dire ctors’ state ment th at they c ons ide r the A nnu al Re po r t, taken a s a who le, is fa ir , bal anc ed a nd un de rst and abl e, and p r ovi de s the infor mati on ne ce ss ar y for the me mb er s to asse s s the gro up’ s a nd c omp any’ s pos itio n, per form anc e, bus ine ss m ode l an d strate gy; • Th e sec tio n of the An nu al Re por t that de scr ibe s the rev iew of ef fecti ven es s of ris k man age me nt an d inter na l contro l system s; and • Th e sec tio n of the A nnu al Re po r t de scr ibi ng the wo rk of th e Audi t Com mi tte e. We have nothin g to repor t i n res pec t of our re sp ons ibi lit y to repo r t wh en the d irec tors’ stateme nt re latin g to the comp any’ s co m pli anc e wi th the Cod e do es not p rope rl y di scl ose a d epa r tur e from a re leva nt prov isi on of th e Cod e spe ci e d und er th e Lis ting R ule s for rev iew b y the a udi tors. Book 1.indb 148 27/09/2022 23:48:40 14 9 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial St atements Strategic Repor t Responsibilities for the nancial statements and the audit Responsibilities of the dire ctors for the nancial statements As exp la ine d more f ull y in the S tatem ent of D ire ctor’ s R es pons ibi liti es in re sp ec t of the Fi nan cia l State me nts, the di rector s a re re sp ons ibl e for the pre parati on of the na nci al state men ts in acc ord anc e with th e ap plic ab le fr am ework a nd for b ei ng sati se d that they g ive a tr ue an d fair v iew . Th e dire ctors a re al so res po nsi ble fo r suc h inter na l contro l as th ey deter min e is ne ce ss ar y to enab le the p repa ratio n of na nc i al s tateme nts that are f ree f rom m ateri al m iss tatem ent, wh ethe r du e to frau d or er ror . In pre par in g the n anc ial s tatem ents, th e dire ctors a re re spo nsi ble fo r ass es sin g the gro up’ s an d the co mpa ny’ s a bili t y to cont inue as a going con ce rn, di scl osi ng, as a ppl ica ble, m atte rs re lated to goi ng c onc er n and u sin g the go ing c on ce rn ba sis of a cco unti ng un les s the d irec tors ei the r inten d to liqui date the g roup o r the co mpa ny or to ce ase o pe ration s, or have n o real isti c alte rnati ve bu t to do so. Auditors’ responsibilities f or the audit of the nancial statements Ou r obje cti ves a re to obtai n rea son ab le as sur an ce ab ou t whe ther th e n anc ial s tatem ents a s a wh ole a re fre e fro m mate ria l mis st atem ent, whe the r due to fr aud o r er ror , an d to issu e an au ditor s’ repor t that inc lud es o ur op ini on. Re aso na ble a ss ura nce i s a hig h leve l of as su ran ce, but i s not a gu ara ntee th at an au dit c ond uc ted in ac cord an ce w ith ISA s (UK ) will a lways d etect a m ateri al m iss tatem ent w he n it ex ists. Mis state men ts ca n ari se f rom fr aud o r er ror an d are c ons ide red m ateri al if, ind ivi dua ll y or in th e aggr egate, they c oul d reas on ably be expect ed to inue nc e the ec on omi c dec isi ons of u se rs ta ken on th e bas is of the se n an cia l statem ents. Irregularities, including fraud, are instances of non-compliance wi th la ws and r egulations. W e design procedures in line with o ur r e sponsibilities, outl ine d ab ove, to detect m ateri al mi ss tatem ents i n res pe ct of ir reg ula ri tie s, inc lud ing f rau d. The ex tent to whic h our p roc ed u res a re ca pa ble of det ecting irregularit ies, including fraud, is detailed belo w . Bas ed o n our u nde rst and ing of th e grou p an d indu str y , we ide nti ed th at the pr inc ipa l ris ks of no n-c omp lia nce w ith l aws and re g ulations rela ted to breac he s of laws an d reg ulati ons, p rin cip all y thos e deter min ed by th e Prud enti al Re gu lator y Au thor it y (“PR A ” ) and th e Financial Con duc t Auth ori t y (“FCA ”), and we co nsi der ed the ex te nt to whic h non -co mpl ia nce m ight h ave a mater ia l ef fec t on the na nci al st ate ments. We also c onsi de red th ose law s and re gul atio ns that h ave a dire ct im pact o n the n anc ial s tateme nts su ch a s the Co mpa nie s Act 20 06, UK ta x le gi slati on an d the L isti ng Ru les of th e FCA. We eval uated m ana ge men t’ s i nce ntive s an d opp or tu nit ies fo r fr audu le nt ma nip ul ati on of the na nci al st ateme nts (i ncl udi ng the r is k of over rid e of co ntrols), and dete rmi ned th at the p rin cip al ri sks we re rel ated to posti ng manual journal entr ie s to mani pul ate nan cia l pe r for ma nce, ma nag em ent b ias th ro ugh judgements and assumpt ions in signicant accoun ting est imat es an d sig ni ca nt one -of f or unu sua l tra nsa ctio ns. T he gro up en gag em ent te am sh are d this r is k ass es sme nt w ith the c omp one nt au ditor s s o that th ey cou ld in clu de ap pro pri ate audi t proc ed ure s in res po nse to suc h ri sks in th eir wo rk. Au dit p roc edu res p er fo rm ed by th e grou p eng agement team and/ or component audit ors included: • Discussions with manageme nt and those charged with governance including considera tion o f known or suspected instances of non- compliance with laws and regula tion and fraud; • As ses sm ent of m at ters re por ted on the G rou p ’ s w histl eb lowi ng he lpl ine a nd th e resu lts of ma na gem ent ’ s inve sti gatio n of suc h m at ters; • Cha lle ng ing a ssu mptio ns a nd jud ge me nts mad e by man age me nt in th eir s ign ic an t acc ounti ng e stima tes, in pa r tic ula r in rel atio n to th e all owanc e for ECL; • Ide ntif yin g and te stin g jou rn al e ntri es, in p ar ti cu lar a ny ma nua l jou rn al e ntri es p osted by u nex pe cted o r unu sua l us er s, pos t ed with de scr iptio ns in dic atin g a hig he r leve l of ri sk, a nd po sted late w ith a favou ra ble i mpa ct on na nci al pe r fo rm anc e; • Per form ing te stin g over p er io d en d adj ustm en ts; • Inc orp orati ng un pre dic tab ili ty i nto the natu re, timing a nd / or ex tent of o ur testi ng; and • Rev iewi ng key co rre spo nde nc e with th e FCA and PR A . Th ere a re inh ere nt li mit ation s in the a udi t proc ed ure s de scr ib ed a bove. We are le ss l ikel y to beco me awa re of ins tan ce s of non - compliance with laws an d reg ulati ons th at are not c los ely re lated to eve nts and tr ans acti ons re ec ted in the nan cia l statem ents. A lso, the r is k of n ot dete ctin g a mater ia l mis state men t due to fr aud i s hig he r than th e ris k of not d etecti ng on e res ulti ng fr om er ror , as f rau d may invo lve de li berat e concealment by , for exa mpl e, forge r y or i ntenti ona l mis rep res entati ons, o r throu gh c ollu si on. Ou r audi t testi ng mi ght i ncl ude te stin g com ple te popu latio ns of c er t ain tr ans acti ons a nd b ala nc es, po ss ibl y usi ng da ta aud itin g te ch n iq u e s. However , i t ty pi ca lly i nvolve s se le ctin g a lim ited nu mb er of ite ms for te stin g, rathe r than te stin g com pl ete popu lati ons. We wi ll of ten s ee k to targ et pa r tic ula r item s for tes ting ba se d on the ir s ize or r isk c ha rac teris tic s. In othe r ca se s, we wil l use a udi t sa mpl ing to en abl e us to draw a con clu sio n ab out th e pop ulati on f rom wh ich th e sa mpl e is se le cted. A fur ther d es cri ption of o ur re spo nsi bil itie s for the a udi t of the n an cia l statem ents i s loc ated on th e FRC’ s we bsi te at: ww w .frc .org .uk / auditorsresponsibilities . This description f or ms part of our auditors ’ report. Use o f thi s re por t Th is rep or t, inc lud ing th e opi nio ns, ha s be en p repa red fo r and o nl y for the c omp any’ s me mbe rs a s a bod y in ac co rdan ce w ith Ch ap te r 3 of Par t 16 of the Comp ani es Ac t 20 06 a nd for n o othe r pur po se. We do not, in gi vin g the se op ini ons, a cce pt or a ss ume re sp ons ibi lit y fo r any othe r pur pos e or to any othe r pe rs on to who m this re po r t is s hown o r into wh ose h and s it may c om e save wh ere ex pre ss ly ag ree d b y our p ri or con se nt in w rit ing. Book 1.indb 149 27/09/2022 23:48:40 15 0 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Ind epe nd ent Au ditor s’ Repor t to t h e Mem ber s of Close Br oth er s G roup p lc continued Other required repor ting Com pa ni es Ac t 2 00 6 exce pt ion r ep or tin g Und er th e Com pa nie s Act 20 0 6 we are re qui red to rep or t to you i f , in ou r opi nio n: • we have not o btain ed a ll the i nfor matio n and ex pl ana tion s we requ ire for o ur au dit; or • ade qua te acco untin g rec ords h ave not be en ke pt by the co mpa ny , or retu rn s ade quate for o ur au dit h ave not be en re ce ive d fro m branches not vi si ted by us; or • ce r ta in dis clo sure s of di rec tors’ remun er ation s pe ci ed by l aw are not m ade; or • the co mpa ny na nc ial s tateme nts an d the pa r t of the D ire ctors’ Rem une rati on Re por t to be audi ted are not i n agre em ent w ith th e a cco unti ng rec ords a nd retur ns. We have no excepti ons to rep or t a ri sin g from th is re spo nsi bil it y . Appoi ntment Foll owin g the re com me ndati on of the Au dit C om mit tee, we were a pp ointed by th e dire ctor s on 1 7 M ay 201 7 to aud it the na nci al st atem ents for the ye ar e nd ed 31 July 201 8 an d su bse que nt nan ci al pe ri od s. Th e per io d of total un inter r upted e nga ge me nt is 5 ye ar s, cover ing the years en ded 31 Jul y 201 8 to 31 July 2022. Other mat ter In du e cou rse, a s requ ired by th e Fin an cia l Con duc t Auth ori t y Dis clo sure G uid an ce an d T r ans pare nc y Rul e 4. 1 . 1 4R, the se n anc ia l statements wil l form p ar t of th e ESEF-prepa red a nnu al n an cia l repo r t l ed on th e Natio na l Storag e Me cha nis m of the Fi nan cia l Co ndu ct Auth ority in acc orda nc e with th e ESEF Re gul ator y T ec hni ca l Sta nda rd (“ESEF RTS” ). This au ditor s’ repor t p rovi de s no as sur anc e over w heth er t he annual na nci al re por t w ill b e pre pare d usi ng the s ing le el ec troni c form at sp eci e d in the ESEF RTS. Heather V arley ( Senior Statut or y Audit or) for an d on be ha lf of Pri cewater hou se Coo pe rs LL P Chartered Accoun tants and Stat utor y Audit ors Londo n 27 Septem ber 2022 Book 1.indb 150 27/09/2022 23:48:41 Gov ernance Repor t Strategic Repor t Financial Statements 151 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Consolidated Income Statement for t he year ended 3 1 July 2 02 2 Note 2022 £ million 2021 £ million Interest income 4 690.0 656.8 Interest e x pense 4 (112.0) (119.3) Net interest income 578.0 537.5 Fee a nd co mmi ss ion i nco me 4 259.5 246.1 Fee a nd co mm iss io n exp ens e 4 (17.2) (16.1) Gains less losses arisin g from dealing in securities 81.6 165.2 Other income 4 106.1 89.4 De pre ciati on of op erati ng le as e as sets an d othe r dire ct co sts 1 6 (71.9) (69.5) Non-int erest income 358.1 415.1 Operating income 936.1 952.6 Admi nis trative ex pe nse s 4 (598.0) (592.1) Impairment losses on nancial as sets 11 (103.3) (89.8) T ota l op erati ng exp en ses b efore a mo r tisa tion a nd im pai rm ent of in tan gib le as sets o n acq uis itio n, goo dw illi mpa ir me nt an d excepti ona l item (701.3) (681.9) Operating prot before amortisat ion and impai rment of intangible assets on acquisition, goodwill impairment and ex ceptional item 234.8 270.7 Amor tisat ion and impairment o f in tangible assets on acquisition 1 5 (2.0) (14.2) Goodwill impairment 15 – (12.1) E xcepti ona l item: HM RC V A T ref un d 6 – 20.8 Op e ra t i ng p ro t b e for e t a x 232.8 265.2 Ta x 7 (67.6) (63.1) Prot af ter ta x 165.2 202.1 Pro t attributable t o shareholders 165.2 202.1 Ba si c ea r ni n gs p e r sh a re 8 110.4 p 134.8 p Dil uted e ar ni ngs p er s ha re 8 109.9 p 133.6 p Inter im di vi de nd pe r sh are p aid 9 22.0p 18.0 p Final dividend per share 9 44.0 p 42.0 p Book 1.indb 151 27/09/2022 23:48:41 152 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Consolidated Statement of C omprehensiv e Income for t he year ended 3 1 July 2 022 2022 £ million 2021 £ million Prot af ter ta x 165.2 202.1 Items that may be reclassied to income statement Currency translat ion losses (0.5) (1.1) Gains on cash ow hedging 30.6 7.4 (Losses )/ gains on nancial instrument s classied at fair value t hrough o ther comprehensive income: Sovere ig n and c en tral b ank d ebt (1.1) 0.9 T a x re lati ng to items th at may be re cla ssi e d (7.9) (1.2) 21.1 6.0 It em s t ha t wi l l not b e r ec l as si ed t o in c om e st a te me n t Dened benet pension scheme (losses) /gains (0.1) 0.5 T a x re lati ng to items th at will n ot be rec las si ed 0.3 (0.6) 0.2 (0.1) Ot h e r co mp r eh e ns i ve in co m e, ne t of t a x 21.3 5.9 T otal comprehensive income 186.5 208.0 Attributable to Shareholders 186.5 208.0 Book 1.indb 152 27/09/2022 23:48:41 Gov ernance Repor t Strategic Repor t Financial Statements 153 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Consolidated Balance Sheet at 3 1 July 202 2 Note 31 Ju l y 2022 £ million 3 1 July 2021 £ million Assets Cas h and b ala nce s at ce ntral b ank s 1,254.7 1,331.0 Settlement balances 799.3 699.6 Loan s and a dva nce s to bank s 10 165.4 136.3 Loan s and a dva nce s to custom er s 11 8,858.9 8,444.5 Debt securities 12 612.8 477.3 Equity shares 13 28.4 31.9 Loan s to money b roker s aga ins t stock a dva nce d 48.4 51.1 Derivative nancial instruments 14 71.2 18.3 Intangible assets 15 252.0 232.6 Property , plant and equipment 16 322.5 309.9 Cur rent t a x as sets 47.0 36.4 Deferr ed tax assets 7 32.5 56.0 Prepay me nts, ac cr ue d inc ome a nd othe r as sets 17 185.2 209.6 T otal assets 12,678.3 12,034.5 Liabi liti es Settlement balances and shor t positions 18 796.1 690.6 Deposits fr om banks 19 160.5 150.6 Deposits fr om cust ome rs 19 6,770.4 6,634.8 Loans and over drafts from banks 19 622.7 512.7 Debt securities in issue 19 2,060.9 1,865.5 Derivative nancial instruments 14 89.2 21.3 Accruals, deferred income and ot her liabilities 17 334.5 367.0 Subordinat ed loan capital 20 186.5 222.7 T otal liabilities 11,020.8 10,465.2 Equit y Called up share capita l 21 38.0 38.0 Retained earnings 1,628.4 1,555.5 Other reserves (8.9) (23.2) T otal shareholders’ equit y 1,657.5 1,570.3 Non-controlling interests – (1.0) T otal equity 1,657.5 1,569.3 T ot al e q ui t y a n d li a bi li t ie s 12,678.3 12,034.5 Th e con sol idated na nci al st ateme nts were a pprove d an d auth or ise d for is sue by th e boa rd of di rector s on 27 Septe mbe r 2022 an d signed on its b eh al f by: Mi ch a el N . Bi gg s Ad r ia n J. S ai n sb u r y Chairman Chie f Executiv e Register ed number: 520241 Book 1.indb 153 27/09/2022 23:48:41 154 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Other reserves Called up share capital £ million Retained earnings £ million FV OCI reser ve £ million Share- based payments reser ve £ million Ex ch ang e movements reser ve £ million Cash ow hedging reser ve £ million To t a l attributable to eq ui t y holders £ million Non- controlling interests £ million To t a l equity £ million At 1 A ug u st 2 020 38.0 1,435.0 0.2 (15.6) (1.3) (5.7) 1,450.6 (1.0) 1,449.6 Prot for th e yea r – 202.1 – – – – 202.1 – 202.1 Other comprehensiv e (e xpense) / income – (0.1) 0.6 – – 5.4 5.9 – 5.9 T ota l co mpre he ns ive in com e for th e year – 202.0 0.6 – – 5.4 208.0 – 208.0 Di vi de nds p aid (note 9) – (86.6) – – – – (86.6) – (86.6) Shares purchased – – – (12.1) – – (12.1) – (12.1) Sh a re s r e le a s ed – – – 10.0 – – 10.0 – 10.0 O t h e r m o v e m e n t s – 3.7 – (4.7) – – (1.0) – (1.0) In c o m e t a x – 1.4 – – – – 1.4 – 1.4 At 3 1 Jul y 2021 38.0 1,555.5 0.8 (22.4) (1.3) (0.3) 1,570.3 (1.0) 1,569.3 Prot for th e yea r – 165.2 – – – – 165.2 – 165.2 Other comprehensiv e ( expense)/income – 0.2 (0.7) – (0.2) 22.0 21.3 – 21.3 T ota l co mpre he nsi ve inc om e for the ye ar – 165.4 (0.7) – (0.2) 22.0 186.5 – 186.5 Di vi de nds p aid (n ote 9) – (95.5) – – – – (95.5) – (95.5) Sha res p urc has ed – – – (9.5) – – (9.5) – (9.5) S ha r e s re l e a s e d – – – 4.9 – – 4.9 – 4.9 O the r m ove m e nts – 4.1 – (2.2) – – 1.9 1.0 2.9 I n c o m e t a x – (1.1) – – – – (1.1) – (1.1) At 31 Jul y 2 022 38.0 1,628.4 0.1 (29.2) (1.5) 21.7 1,657.5 – 1,657.5 Consolida ted St ateme nt of Chang es in Equ it y for t he year ended 3 1 July 2 022 Book 1.indb 154 27/09/2022 23:48:41 Gov ernance Repor t Strategic Repor t Financial Statements 155 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Consolidated C ash Flo w Statement for t he year ended 3 1 July 2 022 Note 2022 £ million 2021 £ million Net cash inow from operat ing activities 27(a) 158.7 119.1 Net cash (outow)/ino w from in vesting activities Purch ase of: Property , plant and equipment (7.1) (8.9) Inta ngi ble a sse ts – sof t ware (51.3) (47.9) Subsidiaries 27(b) (0.1) (2.9) Sal e of: Subsidiaries 27(c) 0.1 2.3 (58.4) (57.4) Net cash inow bef ore nancing act ivities 100.3 61.7 Fin ancing activ ities Purch as e of own sh are s for e mpl oyee s ha re award sc he me s (9.5) (12.1) Equity dividends paid (95.5) (86.6) Intere st pa id on su bord inate d loa n cap ita l an d debt na nci ng (10.4) (13.6) Paym ent of l ea se li ab ili ties (15.1) (14.7) Net ( redemption )/issuance of subordina ted loan capital (23.4) 40.6 Net decr ease in cash (53.6) (24.7) Cas h and c as h equ iva lents at b eg inn ing of ye ar 1,436.6 1,461.3 Ca sh a n d ca s h eq u iva l en t s at e n d of ye ar 27(d) 1,383.0 1,436.6 Book 1.indb 155 27/09/2022 23:48:41 15 6 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Company Bala nce S heet at 3 1 July 202 2 Note 2022 £ million 2021 £ million Fixed assets Intangible assets 15 – – Property , plant and equipment 16 10 . 2 11. 5 Investment in subsidiar y 30 287 .0 287 .0 297 . 2 298.5 Current assets Am ount s owed by su bsi di ari es d ue w ithi n one ye ar 450. 4 434 .8 Am ounts owe d by su bsi dia ri es du e af ter m ore tha n on e yea r 340.8 363 .4 Cor por ation t a x rec ei vabl e 3.3 4.6 Oth er d ebt ors 13 . 6 8.9 Cash at bank 1. 9 1. 2 810. 0 812.9 Cr e di to r s: A mo un t s fa l li ng d u e wi t hi n o ne ye a r Debt securities in issue 19 1. 8 1. 8 Subordinat ed loan capital 1. 6 0.6 Provisi ons 17 1. 4 1. 2 Deferred tax liabilit y 7 0. 2 0.8 Other credit ors 1. 0 0. 8 Accruals 8.3 9. 5 14 . 3 14 . 7 Net current assets 795.7 79 8 . 2 T otal assets less current liabilit ies 1, 0 9 2 . 9 1, 0 9 6 .7 Cr e di to r s: A mo un t s fa ll i ng d u e af t e r mo re t h a n on e yea r Debt securities in issue 19 249.7 24 9 . 3 Subordinat ed loan capital 19 8 . 5 22 1 .5 Provisi ons 17 2.0 1. 8 Net asse ts 642. 7 624 . 1 Ca pi t al a n d re se r v es Called up share capita l 21 38.0 38.0 Prot an d los s ac cou nt 633.9 608.5 Other reserves (29. 2 ) (2 2.4 ) Shareh olders ’ f unds 64 2. 7 62 4. 1 The company reported a prot f or the nancial year ended 3 1 July 202 2 of £ 1 1 6. 0 million (2 021 : £1 1 6.0 million ) . Th e com pany na nci al st ateme nts we re app roved a nd au thor is ed for i ss ue by the b oar d of dire ctors o n 27 Septem be r 2022 and signed on it s behalf by : Mi ch a el N . Bi gg s Ad r ia n J. S ai n sb u r y Chairman Chie f Executiv e Book 1.indb 156 27/09/2022 23:48:41 Gov ernance Repor t Strategic Repor t Financial Statements 15 7 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Company S tatem ent of Cha nges in Eq uit y for t he year ended 3 1 July 2 02 2 Other reserves Share capital £ million Prot and loss account £ million Share- based payments reser ve £ million Shareholders ’ funds £ million At 1 Au gu st 20 20 38 .0 57 6.8 ( 1 5.6 ) 599.2 Prot for th e yea r – 1 16 . 0 – 1 16 . 0 Other comprehensiv e expense – (0 . 1 ) – (0 . 1 ) T ota l co mpre he nsi ve inc ome fo r the ye ar – 1 1 5.9 – 1 1 5.9 Di vid en ds pa id (note 9) –( 8 6 . 6 ) –( 8 6 . 6 ) Shares purchased – – (12. 1) (12. 1) Shares r eleased – – 10. 0 10 . 0 Oth er m ovem ents –2 . 4 ( 4 . 7 ) ( 2 . 3 ) At 31 Jul y 2021 38. 0 60 8.5 (22 .4 ) 62 4. 1 Prot for th e yea r – 1 16 . 0 – 1 16 . 0 Other comprehensive income – 0 .2 – 0.2 T ota l co mpre he nsi ve inc ome fo r the ye ar – 1 1 6. 2 – 1 1 6.2 Di vid en ds pa id (note 9) – (9 5.5) – (95.5) Shares purchased – – (9 .5) (9.5) Shares r eleased –– 4 . 9 4 . 9 Oth er m ovem ents –4 . 7 ( 2 . 2 ) 2 . 5 At 31 Ju ly 2 0 2 2 38.0 633. 9 (29 .2) 642. 7 Book 1.indb 157 27/09/2022 23:48:41 15 8 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes 1 . Signicant Accounting P olicies (a) Re por tin g ent it y Clo se Broth er s Gro up pl c (“th e co mpa ny”), a publ ic li mited c om pany inc orp orated a nd d omi cil ed in th e UK, tog ethe r with i ts sub sid iar ie s (colle cti vely , “ th e grou p”) , o per ates throu gh ve (2021 : ve) oper ating seg me nts: Comm erc ial, R etai l, Prope r t y , As set Ma na gem ent a nd Sec ur itie s, an d is pr ima ril y lo cated w ithi nthe UK . Th e com pany nan ci al sta teme nts (“ the co mpa ny ac cou nts”) have been prepared in compliance with Unit ed Kingdom Account ing Standards, including Financial Repor ting Standar d 1 02 ‘ ‘The Financial Repor ting Standar d applicable in the United Kingdom and t he Re pub lic of I rel and’’ (‘ ‘FR S 1 02’’) and the C omp an ie s Act 20 0 6, und er the prov isi on of th e La rge a nd Me diu m-si zed Co mpa ni es a nd Gro ups (Accounts and Financial Instruments : Recognition and Measurement Repor ts ) Regulations 2 0 08 (SI 2008/ 4 1 0) . As pe rm it ted by FR S1 02, the com pa ny has c hos en to ado pt IFRS 9 Fin anc ial I nstr ume nts wh ere a ppl ica bl e and ta ken ad vanta ge of the dis clo sure exem ption s avail abl e un der th at sta nda rd in re latio n to the pre sen tatio n of a cas h ow st ateme nt, sha re-b ase d paym ents a nd rela ted par t y tr ans acti ons. W her e requ ired, e qui vale nt dis clo sure s are give n in the c ons oli dated n an cia l statem ents of th e grou p. The com pa ny has a lso t aken a dva ntag e of the exem ptio n in se ctio n 40 8 of the Co mpa ni es Ac t 200 6 not to pre se nt its c om pany i nco me statem ent a nd rel ated notes. Whe re re levan t, the acc ounti ng po lic ies of th e co mpa ny are the s am e as tho se of the g roup s et ou t in thi s note except fo r (l) Le as es. Fo r the com pany , re nta l cos ts und er o per ating l ea ses a re ch arge d to the inc ome s tateme nt in e qu al in stal me nts over th e pe rio d of the le as e. (b) Complia nce with Int er national Financial Reporting Sta ndards The consolidat ed nancial stat emen ts (“ the co nso lidate d acco unts”) have be en p rep are d and a pprove d by the d irec tors i n acc orda nc e with a ll re levant I FRSs a s iss ue d by the Inter nati ona l Acco unti ng Sta nda rds B oard a nd in terp retatio ns is su ed by the I FRS In ter p re ta tio n s C om m it te e. Standards adopted during the year Th e acc ounti ng po lic ie s app lie d thi s na nci al ye ar a re set ou t in thi s note and c ons isten t with th ose of th e prev iou s na nci al ye ar . In the ye ar e nde d 31 July 2021 , the g roup e ar ly ad opted th e IASB’ s Intere st Rate Be nc hma rk Re form Ph ase 2 a me ndm ents, w hic h were ef fe ctive fo r acc oun ting p er iod s be ginn ing o n or af te r 1 Janu ar y 202 1 . Th ese a me nd men ts, whi ch ad dre sse d the i mpa ct on nan cia l repo r tin g dur ing th e refor m of an inte rest r ate ben chm ar k, did not have a mate ria l imp act o n the gro up’ s na nci al re sul ts. Fut ure accounting de velopments Min or am en dme nts to IFRSs e f fec tive for th e grou p fro m 1 Augu st 2022 have be en i ss ued by th e IAS B. Th ese a me ndm en ts are exp ecte d to have no or a n imm ater ia l impa ct on th e gro up. (c) Bas is of p re pa ra tio n Th e con sol idated a nd c omp any ac cou nts have b ee n pre pare d und er the hi stori ca l cos t conve ntio n, except for th e reval uatio n of na nc ial ass ets an d lia bil itie s he ld at fa ir val ue thro ugh p rot or l os s, na nci al assets held at fair value through ot her comprehensive income and all derivat ive nancial instrumen ts (“ derivativ es”) . Th e con soli dated a cco unts have b ee n pre pare d in ac cord an ce wi th int ernational account ing standards in con formity with t he requ ire me nts of the Co mpa ni es Act 20 0 6. Th e na nci al st ateme nts are p rep are d on a go ing c onc er n ba sis a s disclosed in the D irect ors’ Report. (d) Consolidation and in vestment in subsidia r y Subsidiaries Sub sid iar ie s are a ll e ntitie s over w hi ch the g roup h as c ontrol. T he grou p co ntrols a n en tit y wh en it i s exp ose d to, or has ri ghts to, var iab le retu rns f rom its i nvolve me nt wi th the e ntit y an d has th e abi lit y to affe ct th ose retu rns th roug h its powe r over th e enti ty. Such powe r ge ner all y acc om pan ie s a sha reh old ing of m ore tha n on e hal f of the voting r igh ts. Subs idi ar ie s are f ull y con sol idate d from th e date on whi ch the g roup e f fec tive ly obta ins c ontro l. They a re de -co nso lid ated from th e date that c ontrol c ea se s. Th e acq uis itio n metho d of acc ou nting i s use d to acco unt for th e acq uis itio n of sub sid iar ie s. Un der th e acq uis itio n meth od of acc oun ting, wi th som e lim ited exc eptio ns, the a ss ets, lia bil itie s an d con ting ent li ab iliti es of a s ubs idi ar y a re me asu red at th eir f air va lue s at the da te of acquisition. A ny non - contr olling int erest is measured eit her at fai r valu e or at the n on- contro lli ng intere st’s propor tion of the n et ass ets acq uire d. Acqu isi tion re lated c osts a re acc ounte d for as exp ens es w he n incu rre d, unl es s dire ctl y rel ated to the is sue of d ebt or eq ui ty s ec ur itie s. Any exc es s of the co st of ac qui siti on ove r net as sets is c ap ita lis ed as g oo dwi ll. Al l intra- grou p bal an ce s, tran sac tion s, inc ome a nd ex pe nse s are e lim inated. Th e com pany’s investm ent i n its su bsi dia r y is va lu ed at co st le s s any accumulat ed impairment losses. (e ) Foreign currency translation For t he company and t hose subsidiaries whose balance sheet s are de nom inated i n ster lin g, whic h is th e com pany’s func tion al an d presentation cur rency , monetar y asset s and liabilit ies denominated in forei gn cu rre nci es a re tra nslate d into sterl ing at th e clo sin g rates of excha nge at th e bal anc e sh eet d ate. Foreig n cur re ncy tra nsa ctio ns are tra nsl ated into ster lin g at aver age ra tes of excha nge at th e date of the tra nsa ctio n an d excha nge d if fe ren ce s ar isi ng are t aken to the consolidat ed income st at ement . Th e bal anc e sh eets of s ubs idi ar ie s den omi nated i n fore ign c urr enc ie s are tra ns lated into ster li ng at the c los ing ra tes. Th e inc om e statem ents for the se su bsi dia ri es a re tran slated at th e aver age rate s and excha nge dif fere nce s ar is ing a re ta ken to eq uit y . Suc h excha ng e differences are r e classied t o the consolidat ed income stat ement in the period in which the subsidiary is disposed of . (f ) Revenue recognition Interest income Intere st on l oan s and a dva nce s mad e by the gro up, and fe e inc ome and ex pe nse a nd oth er di rec t cos ts rela ting to loa n or igi natio n, restr uc turi ng or c omm itme nts ar e reco gni sed i n the co nso lid ated inc ome st ateme nt usi ng the ef fecti ve intere st rate metho d. Th e ef fec tive in terest r ate method a pp lie s a rate that di sco unts esti mated f uture c as h paym ents o r rece ipts rel atin g to a nanc ial ins trum en t to its net c ar r y ing a mou nt. The c as h ows t ake into acc oun t all c ontr actu al ter ms of th e na nci al in str ume nt in clu din g tran sac tion c osts a nd a ll othe r pre miu ms or d isc ount s but n ot futu re credit losses. Fees and commissions Whe re fe es that h ave not be en in clu ded w ith in the ef fe cti ve intere st rate meth od are e ar ne d on th e execu tion of a s ign ic an t act, suc h as fee s ar isin g fro m neg otiatin g or ar ra ngi ng a tran sac tion fo r a third par ty , they a re rec og nis ed as reve nue w he n that ac t has b ee n com pl eted. Fee s an d cor re spo ndi ng ex pen se s in res pe ct of oth er ser vic es ar e reco gni sed i n the co nso lidate d inco me st ateme nt as the rig ht to con sid erati on or p ayme nt ac cr ue s throu gh pe r for ma nce of ser vic es. T o the ex ten t that fee s an d com mis sio ns a re rec ogn ise d in adva nc e of bill ing th ey are i ncl ude d as a ccr ue d inc om e or exp en se. Divid ends Di vid en d inc ome i s reco gni se d whe n the r ight to re cei ve paym ent i s established. Book 1.indb 158 27/09/2022 23:48:41 Gov ernance Repor t Strategic Repor t Financial Statements 15 9 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Ga ins le ss l os ses a ri sing f rom d eal ing in s ecu ri ties Net re ali sed a nd u nrea lis ed g ains a ri sin g fro m both bu yin g and s ell ing sec ur itie s an d from p osi tion s hel d in se cu riti es, in clu din g rela ted int erest income and dividends . (g) Adju st ed m ea sur e s Adjust ed measures ex clude amor tisat i on and impairment o f intangible assets on acquisition, goodwill im pai rm ent a nd exce ptio na l item s. Am or tis atio n and i mpa ir me nt of inta ngible assets on acquisition and goo dw ill im pai rm ent a re exclud ed to pre se nt the p er fo rma nc e of the group ’ s acquired businesses consist ent with it s ot her businesses. E xcepti ona l ite ms are i nc ome a nd ex pe nse i tems th at are ma teri al by size a nd / o r nature a nd a re non -rec urr in g. The s epa rate rep or tin g of these it ems helps give an indication o f the group ’ s underlying performance. (h) Financial assets and liabilities (ex cluding derivativ es) Classication and measurement Financial asset s are classied at init ial recognition on the basis of the bus ine ss m ode l wi thin w hic h they are m an age d an d thei r cont ractu al cash ow characteristics. The classication categories are amor tised cos t, fair val ue thro ugh oth er c omp reh ens ive in co me (“F VOC I”) a nd fai r valu e throu gh pro t or lo ss (“F V TPL ” ). Fin anc ial a ss ets that a re hel d to coll ect c ontra ctua l ca sh ows w he re thos e cas h ows re pre sen t sol el y paym ents of pr in cipa l an d intere st are m eas ure d at amo r tis ed co st. Ini tial re co gni tion i s at fai r valu e plu s dire ctly at tr ibu tab le tra nsac tion c osts. I nteres t inco me is a cco unted for us ing th e ef fec tive in terest r ate metho d. Fin anc ial a ss ets that a re hel d to coll ect c ontra ctua l ca sh ows a nd fo r sub seq ue nt sal e, whe re the as sets’ ca sh ows re pre sen t sol ely paym ents of p rin cip al a nd intere st, are c la ssi e d at F VOCI. D irec tly attr ibu ta ble tr ans acti on co sts ar e adde d to the ini tia l fair va lu e. Gain s and l os ses a re re cog nis ed in oth er c omp reh en sive i nco me, except fo r imp air me nt ga ins a nd lo sse s, unti l the n anc ial a ss et is e ithe r sol d or mature s, at wh ich ti me the c umu lati ve gai n or los s is re cog nis ed in the in com e state men t. Impai rm ent g ain s and l oss es a re rec og nise d in the in com e stateme nt. Fin anc ial a ss ets are c las si ed at F V TPL w he re they do n ot mee t the cri teri a to be me asu red at a mor tised c ost o r F VOCI or w he re they a re de sign ated at F V TPL to reduc e an acc ou nting mi smatch. Fi nan cia l ass ets at F V TPL are re co gni sed at f air va lue. T ra nsa ctio n cos ts are not add ed to or d edu cted f rom the i niti al fa ir va lue, they a re imm edi ately re co gnis ed in p rot or l oss o n ini tial re co gni tion. G ains and l os ses th at sub seq ue ntly a ri se on c han ge s in fa ir val ue a re recognised in t he income stat ement. Financial liabilities are classied at in it ial recognition at amor tised cost except fo r the fol lowi ng w hic h are c las si ed at F V TPL: d er ivative s; nancial liabilities held for trading; and nancial liabilities designat ed at F V T PL to elimi nate an ac cou nting m ism atch. Fin anc ial l ia bili tie s at am or tis ed c ost a re me asu red at fa ir va lue l es s dire ctly at tr ibu tab le tran sac tion c osts o n initi al re cog niti on. Intere st exp ens e is ac cou nted for u sin g the ef fe cti ve intere st rate me thod. Fin anc ial l ia bili tie s at F V TPL are me as ure d at fair va lu e on in itia l rec ogn itio n. T ra ns acti on co sts ar e not add ed to or de du cted f rom the ini tial f air va lue, they a re imm ed iately re co gni sed i n prot o r los s on initial r e cognition . Subsequent change s in fa ir val ue are re co gn ise d in the in com e statem en t except for na nci al li abi liti es d es ign ated at F V T PL; cha ng es in f air va lue at tr ibu tab le to cha ng es i n cred it r isk a re recognised in other comprehensive income. Th e fai r valu es of q uoted nan ci al as sets o r na nc ial l ia bil itie s in ac tive mar kets are b ase d on b id or of fer pr ice s. If the m ar ket for a n an cia l ass et or nan cia l lia bil it y is not a ctive, or th ey rel ate to unliste d sec ur itie s, the g roup e sta bli sh es fa ir val ue by u sin g valu ation tech niq ue s. The se i ncl ude th e use of re ce nt ar m’ s le ngth tran sac tion s, disc ou nted ca sh ow a na lys is an d other va lu ation techniques commonly used by mark et participants. Derecognition Fin anc ial a ss ets are d ere cog nis ed w hen th e co ntrac tual r ig hts to rec eive c as h ows f rom the nan cia l as sets h ave expi red or w he re the grou p has tr ans fer red the c ontr actu al ri ghts to rec ei ve cas h ows an d tran sfer red s ubs tanti all y al l ris ks an d rewards of ow ne rs hip. If sub sta ntial ly a ll the r isks a nd rewa rds have b ee n ne ithe r reta ine d nor tran sfer red th e as sets co ntinu e to be rec ogn ise d to the ex tent of the group ’ s continuing involv em ent . Financial liabilit ie s are de recognised whe n they a re ex ting uis he d. Modications Th e term s or c ash ows of a n anc ia l as set or l ia bil it y may be mod ie d du e to reneg otiatio n or othe r w ise. If the te rms o r ca sh ows are su bst anti all y dif fere nt to the ori gin al, the n the n an cia l as set or lia bil it y is d ere cog nis ed a nd a ne w na nci al a sse t or li abi lit y i s rec ogn ise d at fa ir va lue. I f the ter ms or c as h ows a re not s ubs tant ial ly dif feren t to the ori gina l, then th e na nc ial a sse t or lia bi lit y ca rr ying valu e is ad juste d to reec t the pre se nt val ue of mo di ed c as h ows dis cou nted at the o rig ina l EIR. T he ad justm ent i s rec ogn ise d with in income on t he income statemen t. (i) Impairment of nancial assets Expected credit losses In ac cord anc e wi th IFRS 9, exp ecte d cre dit l oss es (“ ECL ” ) are rec ogn ise d for lo an s and a dvan ce s to custom er s and b ank s, other nancial assets held at amortised cost, nancial assets measured a t F VOCI , loan commitment s and nancial guarantee cont racts. T he impa ir me nt cha rge in th e inc om e statem ent in clu de s the ch ang e in expected credit losses and fraud costs . At initi al re co gni tion, nan cia l as sets a re con sid ere d to be in S tag e 1 and a p rovi sio n is re cog nis ed fo r 1 2 m onths of ex pe cted c red it losses. If a signicant increase in cr edit risk since initial recognit ion occ ur s, thes e na nc ial a ss ets are c ons ide re d to be in Sta ge 2 a nd a provi sio n is m ade for th e li fetime ex pe cted c red it lo sse s. As a bac kstop, all n anc ial a ss ets 30 d ays pas t du e are co ns ide red to have exp er ie nc ed a s ign ic an t inc rea se in c red it r isk a nd a re transferred t o Stage 2 . A na nci al a sse t wil l rema in cl as si ed a s Sta ge 2 unti l the cr edi t ris k has i mprove d an d it ca n be retu rn ed to Stag e 1 or u ntil it d eteri orate s suc h that it m ee ts the cr iter ia to move to Sta ge 3. Where a nancial as set no longe r represent s a signicant increase in cre dit r is k sin ce or ig inati on it c an m ove from S tag e 2 bac k to Stag e 1 . As a mi nim um this m ea ns that a ll pay me nts mus t be up -to-date, the qua ntit ative pro bab ili t y of defa ult a sse ss me nt tri gge r is no l ong er m et, and th e acc oun t is not evi de nci ng qu ali tative a sse ss me nt trig ge rs. Whe n ob jec tive ev ide nc e exis ts that a n anc ial a ss et is cre di t imp aire d, suc h as the o cc urr enc e of a cre di t defa ult eve nt or ide nti catio n of an u nli kelin es s to pay indi cator , the nan ci al as set i s con sid ere d to be in S tag e 3. As a ba ckstop, all na nci al as sets 90 d ays or mo re pa st du e are co ns ide red to be c red it im pai red a nd transferred t o Stage 3. Cure d eni tio ns are i n ope ratio n wh ere n an cia l as sets in S tag e 3 ca n move bac k to Stag e 2, subje ct to St age 3 i ndi cator s no lo ng er b ein g in ef fe ct, and m eeti ng the a ppro pr iate cure p er iod. In al l circ ums tan ce s loa ns a nd ad vanc es to cu stome rs a re wr it ten of f aga inst th e rel ated prov isi ons w he n ther e are no re as ona ble exp ect ation s of fu r the r rec over y . Th is is t y pic all y foll owin g rea lis ation of all a sso ci ated col latera l an d avail abl e rec over y ac tio ns aga ins t the cus tomer . Su bse que nt re cover ie s of amo unts prev io usl y wr it ten of f de crea se th e amo unt of im pai rme nt lo sse s rec ord ed in th e inc ome statement . Book 1.indb 159 27/09/2022 23:48:41 The Notes cont inue d 16 0 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Th e ca lcu latio n of exp ec ted cre dit l os ses fo r lo ans a nd ad van ce s to customers , either on a 1 2 -month or lif etime basis, is based on the prob abi lit y of d efau lt (“PD” ) , th e exp osu re at defa ult (“ E AD” ) and th e los s gi ven de fau lt (“LGD”), and in clu de s for wa rd-l ook in g macroeconomic inf ormation where appr opriate. PD, EAD a nd LGD pa ram eter s are p roje cted ove r the re ma inin g li fe of eac h exp osu re. ECL is c alc ulated fo r ea ch fu ture q uar ter by mul tipl yin g the thre e pa ram eters a nd is th en di sco unted ba ck to the repo r tin g date and s um med. T he di sco unt rate us ed in th e ECL cal cul ation i s the ef fe ctive i nteres t rate. IFRS 9 r isk p ara mete rs ar e esti mated u sin g his toric al d ata wh ereve r pos si ble, an d in the a bs enc e of su f c ie nt los s his tor y , a n exp er t judgment approach is considered for some parameters. Probability of Default PD esti mates re pre se nt the li keli hoo d of a bor rower d efau ltin g on its nancial obligat ion. Bespoke model-based approaches t o estimat e PDs ar e emp loye d acro ss C omm erc ial, R etai l an d Prope r t y . T he framework applied t ypically includes an e conomic response model to qua ntif y the imp act of m acro ec ono mic fo rec asts a nd a r isk ra nk ing me cha nis m (e. g. a s cor ec ard) to qu anti f y o bli gor l evel l ikeli hoo d of defa ult. Ri sk ch ara cter istic s that fe ed in to the PD mode l fr amewo rk inc lud e cur ren t and p ast in form atio n relate d to borrowe rs, tr ans acti on and p ayme nt pro le s, and f utu re eco no mic fore ca sts. S tatisti ca l techniques, base d on e v idence observed in hist orical data, and bus ine ss k now le dg e are u sed to de term ine w hi ch ch ara cter isti cs a re predictiv e of default behaviour . Exposure at Default E AD re pre sen ts the am oun ts exp ecte d to be owed at the ti me of defa ult a nd is e stim ated us ing a n am or tis ing s che dul e for th e larg e maj or it y of exp osu res, o r a cre dit c onve rs ion f actor , de pe ndi ng on th e nature of lending. Loss Given Default LGD repre se nts an ex pe ctati on of the ex te nt of los s on a d efau lted expo sure af ter tak ing i nto acco unt c as h recove ri es, in clu din g the valu e of co llater al he ld a nd othe r cre dit r is k miti gan ts. LGD metho do log ie s var y by th e nature of a ss ets n anc ed a nd ca n in clu de esti mates fo r the li kelih ood of c oll atera l rec over y a nd a se pa rate ca lcul atio n for the l ikely l os s on rec over y . Fo r som e bus ine ss es LGDs are e stim ated us ing l iqu idati on cu r ve s bas ed on h istor ic al c ash ows. Re cover ie s are a dju sted to acc oun t for the i mpa ct of di sco unti ng usi ng the ef fecti ve interes t rate. The calculation of e x pected cr edit losses for some loan por t folios, rec eiva ble s rel ating to ope ratin g le ase a ssets a nd se ttl eme nt bal anc es i s bas ed o n a sim pli e d lifeti me on ly ex pe cted c redi t lo ss approach . Under the simplied a pproach, stage classication repr ese nts ma nag em ent ’ s inte rn al as se ss men t of cred it r isk. Expe cted credit losses are assessed against act u al loss e xpe rience via a s er ie s of provi sio n ade qua cy revi ews. Th es e revi ews als o incorporat e management judgement t o ensure t hat our ECL coverage ratios remain appropria te. Dur in g the yea r , a num be r of enh an ce men ts were ma de to the IFR S 9 mod els u se d for the c al cul ation of ex pe cted cr edi t los se s in the Lea sin g bus in es s. The e nh an ce men ts were ma de to add res s kn own model limitat ions and t o ensure modelled provisions better r eect fu ture lo ss e me rge nce. T he im pac t of mod el c ha nge s to the exp ec ted credit loss pr ovision is disclosed in no te 1 1 (d) . ( j) Settlement accounts Set tle me nt ba la nce d ebtor s an d cred itor s are th e amo unts d ue to and f rom c ounte rpa r tie s in re sp ect of th e gro up’ s m ar ket - mak in g acti vi ties a nd a re ca rr ied at a mo r tise d co st. The b al anc es a re sh or t term in n ature, do not e ar n intere st an d are re cord ed at th e amo unt receivable or payable . (k ) Loa ns to a nd f ro m mon ey br oke rs a ga in st s toc k adva nc ed Loan s to money b roker s aga inst s tock ad vanc ed i s the ca sh c oll ateral prov ide d to thes e inst ituti ons fo r stoc k bor rowi ng by the g roup’ s mar ket-maki ng ac tivi tie s and i s ca rr ied at a mo r tise d co st. Interes t is pai d on the s tock bo rrowe d and e ar ne d on the c as h de pos its adva nc ed. Th e stock b or rowin g to whic h the c ash d ep osi ts rel ate is sho r t term i n nature a nd is re co rded at th e am ount re ce ivab le. Loa ns from m oney b roker s aga ins t stock c oll ateral p rovid ed a re rec orde d at the am oun t payabl e. Intere st is pa id on th e loa ns. (l) Leases Lessor A na nce l ea se is a l eas e or hi re purc has e con tract th at tran sfer s sub sta ntia lly a ll the r isk s and rewa rds in cid en tal to own er shi p of an ass et to the le ss ee. Fi nan ce le as es a re rec ogn ise d as lo ans at a n amo unt e qua l to the gros s inve stme nt in th e lea se, wh ich com pr ise s the le as e paym ents re ce iva ble a nd any u ngu ar antee d resi dua l valu e, disc oun ted at its im plic it inte rest r ate. Finan ce cha rge s on n an ce le ase s are t aken to in com e in pro por ti on to the net f un ds inve sted. An o per ating l ea se is a le as e that do es n ot trans fer s ubst anti all y all the ri sks a nd reward s inc id enta l to owne rs hip of a n ass et to the le sse e. Ren tal i nco me fro m op erati ng le as es is re co gni sed i n equ al inst alm en ts over the p er iod of th e le ase s an d inc lud ed i n othe r income in t he consolidated income statement . Lessee A le ase l iab ili ty a nd r igh t of use a sse t are re cog nis ed o n the ba lan ce sheet at the lease commencement date. The lease liability is me asu red at th e pre sen t valu e of fu ture le as e paym ents. T he d isc ou nt rate is the ra te impli ci t in the le as e, or if that c an not be d eter min ed, the gro up’ s inc rem ent al bo rrow ing r ate appro pr iate for the r ig ht of use as set. Th e rig ht of us e as set is m ea sure d at co st, com pri sin g the ini tial l ea se li abi lit y , p ayme nts ma de at or b efore the c om men ce me nt date le ss le as e inc enti ves re ce ive d, initi al di rec t cos ts, and e stim ated cos ts of restor in g the un der ly ing a ss et to the co ndi tion re qui red by the lease . Lea se pay me nts are a llo cate d bet wee n the l iab ili t y and na nce c ost. Th e na nce c ost re latin g to the le ase li ab ilit y i s cha rge d to the con sol idated i nco me st ateme nt over th e le ase te rm. Th e ri ght of us e as set is d ep reci ated ove r the sh or te r of the as set’s usefu l life a nd th e lease t e rm on a straight line basis . (m) Sa le a nd r epu r cha s e agr e em ent s a nd ot he r se cur e d len di ng and b orrow ings Sec ur itie s may be s old s ubj ect to a co mmi tme nt to repu rcha se the m. Suc h sec ur itie s are ret ain ed on th e co nsol idated b ala nc e she et wh en sub sta ntial ly a ll the r isks a nd rewa rds of own er shi p rem ain w ith the grou p. The tra nsa ctio ns are tre ated a s col latera lis ed bo rrow ing a nd the co unter pa r t y lia bil it y is in clu de d with in loa ns a nd overd raf ts f rom ban ks. Sim ila r se cure d bo rrow ing tra ns acti ons, i nclu din g se cur iti es lending transactions and collateralised short -term no tes, ar e tr eated and p res ente d in the s am e way . Th es e sec ure d na nci ng tran sac tion s are in itia lly re co gni sed at f air va lue, a nd sub se que ntly valu ed at a mor ti sed c ost, us ing th e ef fec tive in terest r ate metho d. (n ) Securitis ation transactions Th e grou p se cur itis es i ts own n an cia l as sets v ia the s al e of thes e ass ets to spe ci al pu rpo se e ntitie s, wh ich i n turn i ssu e se cur iti es to inves tors. A ll n an cia l as sets c ontin ue to be he ld o n the gro up’ s con sol idated b ala nc e she et togeth er w ith de bt se cur iti es in i ssu e rec ogn ise d for the f un ding – s ee d ere cog niti on po lic y (h) . (o ) Of fset ting nancial instruments Fin anc ia l ass ets an d na nc ial l ia bili tie s are of fset a nd the n et am oun t pre sen ted on the c ons oli dated ba la nce s he et if, and on ly if, ther e is a le gal ly e nforce ab le r ight to set of f the rec ogn ise d am ount s and th ere is an i ntenti on to set tle o n a net b asi s, or to rea lise a n as set a nd se ttl e the liability simultaneously . 1 . Signicant Accounting P olicies continued Book 1.indb 160 27/09/2022 23:48:42 Gov ernance Repor t Strategic Repor t Financial Statements 16 1 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 (p) Deriv atives and hedge accounting On ad optio n of IFRS 9 F ina nc ial I nstr um ents i n 201 8, th e grou p ele cte d to contin ue a ppl yi ng he dg e acc ounti ng u nde r IAS 39 Financial Instrumen ts : Re c og niti on a nd Me as ure me nt. In ge ne ral, de ri vative s are u sed to mi nim ise th e impa ct of inte rest, cur ren cy rate an d eq uit y p ric e ch ang es to the g roup’ s n anc ia l instrument s. They ar e carried on th e con sol idated ba la nce s hee t at fai r valu e wh ich i s obta ine d fro m qu oted ma rket pr ic es i n acti ve market s, including recent mark et transactions and discounted cash ow mo de ls. On ac qui siti on, ce r ta in de ri vative s are d esi gn ated as a he dg e and th e grou p form all y doc ume nts the re lati ons hip be twe en th ese d er ivati ves and th e he dge d item. T he g roup a lso d ocu me nts its a ss es sme nt, both at he dg e inc eptio n an d on an o ng oin g bas is, of wh ethe r the de rivati ve is hi ghl y ef fe cti ve in of f set ting c ha nge s in fa ir val ue s or ca sh ows of he dg ed i tems. If a h edg e was d ee me d par tiall y in ef fec tive b ut con tinu es to qua li f y for h edg e acc ou nting, the a mo unt of the inef fecti ven es s, tak in g into acc oun t the tim ing of th e expe cte d cas h ows wh ere re leva nt, would b e rec orde d in the c ons oli dated in com e statem ent. If the h ed ge is not, or h as ce as ed to be, hig hly e f fec tive, the gr oup discont inues hedge account ing. For fa ir val ue he dg es, ch an ge s in the fa ir val ue a re rec ogn ise d in the con soli dated in com e statem ent, togeth er wi th cha ng es in th e fair valu e of the he dg ed i tem. For ca sh ow hed ge s, the fa ir val ue ga in or los s as soc iated wi th the ef fe cti ve prop or ti on of the c as h ow he dge i s rec ogn ised i niti all y dire ctly i n equ it y and re cycl ed to the co nso lidated inc ome st ateme nt in the p er iod w hen th e he dge d item af fe cts income. (q ) I nt a n gi b le as s e t s Com pute r sof t ware (acq uire d and c osts a sso ciate d with development ) and intangible asset s on acquisit ion (ex cluding goo dw ill) a re sta ted at cos t le ss ac cum ula ted am or tis atio n and provi sio ns for i mpa ir men t whi ch a re reviewe d at le ast a nn ual ly . Am or tis atio n is ca lcu lated to wr ite of f the ir co st on a s trai ght-line b asi s over th e esti mated u sef ul li ves a s foll ows: Com pu ter sof t wa re 3 to 5 year s Inta ng ibl e as sets o n acq uis itio n 8 to 20 yea rs Goodwill on acquisit ions of subsidiaries is included in in tangible ass ets. Go od wil l is as se sse d an nua lly fo r imp air me nt an d ca rr ied at cos t le ss a ny acc umu lated i mpa ir men t. (r) Pr op er t y , p la nt a nd e qu ipm en t Prope r t y , pl ant a nd eq uip me nt is state d at cost l es s acc umu lated de prec iati on an d provi sio ns for i mpa irm ent w hic h are rev iewed at le ast a nnu all y . De pre ci ation i s cal cul ated to wri te of f thei r cos t on a stra igh t - lin e bas is ove r thei r es timated u sef ul l ive s as fol lows: Long l ea seh old p rop er t y 40 yea rs Short leasehold propert y Over the length o f the lease Fix t ure s, t ting s an d equ ipm en t 3 to 5 year s As sets he ld u nde r op erati ng le as es 1 to 20 year s Mo to r ve h i c le s 1 to 5 y e a rs (s) Sh ar e ca pi t al Share issue costs Inc rem enta l co sts dire ctl y at trib uta ble to the i ssu e of new s hare s or options , including those issued on the acquisition of a business, are show n in e qui t y as a de du ctio n, net of ta x, from th e pro ce eds. Dividends on ordinary shares Di vid en ds on o rdin ar y s ha res a re rec ogn ise d in eq uit y i n the pe ri od in whi ch th ey are pa id o r , i f ea rli er , ap prove d by sha re hol de rs. T reasur y shares Whe re the c om pany o r any me mb er of the g roup p urc has es the com pany’s share c ap ita l, the con sid erati on pa id is d ed ucted f rom sha reh old er s’ equi ty a s trea sur y share s unti l they ar e can ce lle d. Where such shar e s are subsequently sold or reissued, any con sid erati on re cei ved i s incl ude d in sh are ho lde rs’ equ it y . (t) Employee benets The group operat es dened con tribution pension schemes f or eligible em ploye es a s wel l as a de ne d be ne t pe nsi on sc he me w hic h is clo se d to new me mbe rs a nd f ur th er a ccr ua l. Under the dened contributi on scheme t he group pay s xed con trib utio ns in to a fund s epa rate fro m the gro up’ s as sets. Cont rib utio ns are c har ged i n the co nso lidate d inco me st ateme nt when the y become pa yable . Th e exp ecte d cos t of prov idi ng pe ns ion s with in the f un ded d en ed benet scheme , determined on the basis o f annual valuat ions using the pro jec ted un it meth od, is ch arg ed to the co nso lidate d inc ome statem ent. Actua ri al ga ins a nd lo sse s are re co gnis ed in f ull i n the pe rio d in wh ich th ey occ ur a nd rec og nise d in othe r co mpre he nsi ve income. Th e retirem ent b en et ob lig ation re cog nis ed in th e bal anc e sh eet repr ese nts the p res ent va lue of th e de ned b en et o bli gatio n, as adju sted fo r unre co gni sed p ast s er v ic e cos t, and as re duc ed by th e fai r valu e of sch em e ass ets at the ba la nce s he et date. Both the retu rn on inve stm ent ex pe cted i n the p er iod a nd the ex pe cte d na nci ng cos t of the li abi lit y , a s esti mated at th e beg inn ing of th e pe rio d, are rec ogn ise d in the re sul ts for the p er iod. A ny var ian ce s aga inst th es e esti mates i n the ye ar for m pa r t of the ac tua ria l ga in or l oss. T he ass ets of the s che me a re he ld se par ately f rom th ose of th e grou p in an independent ly managed fund. (u) Sha re - ba se d pay me nt s to emp loye es At 3 1 J uly 2022, the grou p op erates th ree (31 July 2021 : thre e) sha re- base d award s che me s: the Defe rre d Sh are Award s (“DSA ” ) sch em e, the Long T er m Inc enti ve Pla n (“L T IP ”), and the HM RC app roved S ave As Y ou E ar n (“SA YE” ) sch em e. Th e cos ts of the award s gra nted u nde r the DS A sch em e are ba se d on the sa la r y of the i ndi vid ua l at the tim e the award i s mad e. The va lu e of the sh are awa rd at the gr ant d ate is cha rge d to the grou p’ s con sol idated i nco me state me nt in the ye ar to whi ch the awa rd rel ates. Th e cos ts of L T IP an d SA YE a re bas ed o n the fa ir val ue of awa rds on the da te of grant. Fai r valu es of s ha re-b ase d award s are d eterm in ed usi ng the B lac k - Sch ol es pr ic ing m ode l, with th e excepti on of fa ir values f or marke t-based per formance conditions, which are deter mi ned u sin g Mon te Carl o sim ula tion. B oth mod els t ake into acc oun t the exerci se pr ic e of the opti on, the cu rre nt sh are p ric e, the ris k -f ree in teres t rate, the expe cte d volati lit y of the c om pany’s share pri ce ove r the li fe of the opti on awa rd and oth er re leva nt fac tors. For non-market -based per formance conditions , vesting condit ions are not ta ken into ac cou nt wh en m ea sur in g fai r valu e, but a re ree cted by adju stin g the nu mbe r of sh are s in e ach awa rd suc h that the a mou nt rec ogn ise d ree cts the n umb er th at are ex pec ted to, and then actu all y do, vest. T he fa ir val ue is ex pe nse d in the c ons oli dated inc ome s tateme nt on a s trai ght-line b asi s over th e vesti ng pe ri od, wi th a cor res po ndin g cre dit to the s har e-ba se d paym ents re se r ve. At the end of th e ves ting p er io d, or upo n exerc ise, la pse o r for fe it i f ea rli er , this c redi t is tra nsfe rre d to retaine d ea rn ings. Fu r the r infor matio n on the gro up’ s sch em es is p rovi ded i n note 26 and in th e Di rec tors’ Remuneration Report. (v) P r ovisions and contingent liabilities Provis ion s are re cog nis ed in re sp ec t of pre sen t obli gati ons a ris ing f rom pas t events w her e it is pr oba ble th at out ow s of reso urc es w ill be requ ired to set tle th e obl igati ons a nd they c an b e reli abl y esti mated. Book 1.indb 161 27/09/2022 23:48:42 The Notes cont inue d 16 2 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Contingent liabilities are pos sible obligat ions whose existence de pends on the o utcom e of unc er tain f utu re events o r those p res ent o bli gatio ns whe re the o ut ows of re so urc es a re unc er tain o r ca nnot b e me asu red reli abl y . Co nting ent li ab iliti es a re not rec og nise d in the na nci al statem ents b ut are d isc los ed un le ss they a re de em ed re mote. (w) T a xes, including def e rred ta xes Cur rent t a x is th e exp ecte d ta x paya ble o n the ta xabl e prot fo r the yea r . T a xa bl e prot d if fe rs f rom n et prot a s rep or ted i n the con sol idated i nc ome st ateme nt be ca use i t exclud es i tems of i nco me and ex pe nse th at are t a xa ble o r de duc tibl e in othe r yea rs a nd i tems that ar e neve r ta xa ble o r de duc tibl e. Th e grou p’ s l iab ili ty fo r cu rre nt ta x is c al cul ated usi ng ta x rates that have b ee n en acted o r sub sta ntive ly e nac ted by the b ala nc e she et d ate. T o e na ble th e ta x ch arg e to be bas ed o n the pro t for the ye ar , defe rre d ta x is p rovi ded i n fu ll on tem por ar y ti min g dif fere nce s, at the rates of t a x exp ec ted to app ly wh en th es e dif fere nce s cr ystal lis e. Defe rre d ta x a ssets a re rec og nis ed on ly to the ex tent th at it is prob abl e that su f c ie nt ta x abl e prots w ill b e avail ab le ag ain st wh ich temp ora r y di f fer enc es c an b e set. Defe rr ed ta x liab ili tie s are of f set aga ins t defe rre d ta x a ssets w he n the re is both a l eg al r ight to set of f and a n inte ntio n to set tle on a n et ba sis. (x) C as h an d ca sh e qu ival en ts For the p ur pos es of the c as h ow st ateme nt, cas h an d cas h equivalents comprises cash and demand deposits with banks, togethe r wi th sho r t- te rm hi ghl y liq uid i nvestm ents th at are re adi ly conve r ti ble to k nown a mo unts of c ash. (y ) Se gm en ta l re po r ti ng Op erati ng se gme nts are re po r ted in a ma nn er co nsi stent wi th the inter na l repo r tin g prov ide d to the E xecu tive C omm it tee, wh ich i s considered t he group ’ s chief operat ing decision mak er . All transactions between business segments are conducted on an arm’ s le ngth ba si s, with i ntra-se gm ent reve nue a nd c osts b ein g eli min ated on co nso lid ation. Inc om e and ex pe nse s dire ctl y ass oci ated wi th eac h segment are included in det ermining business segment per formance. 2. Critical Accounting Estimates and Judgements Th e repo r ted re sul ts of the gro up ar e sen siti ve to the acc oun ting policies, assump tions and estima tes that underlie the preparation o f its n anc ia l statem ents. U K com pany l aw and I FRS req uire th e dire ctor s, in pre pa rin g the gro up’ s na nc ial s tatem ents, to se le ct suitable account ing policies, apply them consist e ntly and mak e judgements , estimat e s and assump tions tha t are reasonable. The grou p’ s e stim ates a nd as sum ption s are b ase d on hi stori ca l exp er ien ce a nd rea so nab le ex pec tatio ns of f uture eve nts an d are reviewe d on a n ong oin g bas is. T her e are no c ri tica l ac cou nting judgements or ke y sources o f estimation unce rtaint y relat ing to the company . Whi le the i mpa ct of cl imate ch ang e rep rese nts a so urce of unc er t ain ty , th e grou p do es not c ons ide r cli mate rela ted ris ks to be a critical a ccounting judgement or estima te. Critical accounting judgements In the a ppl icati on of the g roup’ s ac cou nting p oli cie s, wh ich a re de scr ibe d in n ote 1 , jud ge me nts that a re con sid ere d by the b oard to have the m ost si gni ca nt ef fe ct on th e amo unts in th e na nci al statem ents a re as fo llows. Expected credit losses At 3 1 J uly 2022 th e gro up’ s exp ec ted cre dit los s prov isi on was £285.6 mill ion (31 Jul y 202 1 : £ 280.4 milli on). The ca lcu latio n of the grou p’ s ex pe cted c red it lo ss p rovis ion u nd er IF RS 9 req uire s the grou p to make a nu mbe r of ju dge me nts, as su mptio ns an d esti mate s. Th e mos t sig ni ca nt are s et ou t be low . Signicant increase in credit risk Ass ets are tr ans fer red f rom St age 1 to St age 2 w he n there h as b ee n a signicant incr ease in credit risk since initial r e cognition . The ass es sm ent, wh ich re qu ires j udg em ent, is p roba bil it y wei ghted a nd use s his toric al, cu rre nt an d for wa rd-lo ok ing i nfor matio n. T y pic al ly , th e grou p ass es se s wh ethe r a sig ni ca nt inc rea se in c red it ris k ha s occ ur red ba se d on a qu anti tative a nd qu al itati ve ass es sm ent, with a 3 0 days p ast du e bac kstop. Due to the d ive rse n ature of th e group ’ s lending businesses, the spe cic indicat ors of a signicant inc rea se in c red it r isk va r y by bu si ne ss an d may in clu de s ome o r al l of the fol lowi ng fa ctors. • Qu anti tative a sse ss me nt: the lifeti me PD ha s inc rea sed by m ore than a n agre ed thre sh old re lati ve to the equ ival ent at o rig inati on. Th res hol ds ar e bas ed on a xed nu mb er of r isk g rade m ovem ents whi ch a re be spo ke to the busin es s to ensu re that the i ncr eas ed risk since origina tion is appropria tely capt ured ; • Qualitativ e assessment: e vents or obser ved beha viour indicate cre dit d eteri orati on. Th is inc lud es a w ide r ang e of info rmati on that i s rea son abl y avai lab le in clu din g ind iv idu al cre di t as ses sm ents of th e nancial performance of bor row ers as appropriat e during rout ine review s, plu s forb ea ran ce an d watch list i nfor matio n; or • Bac kstop cr ite ria: th e 30 days p ast d ue ba ckstop i s met. Denition of default Th e de niti on of d efau lt is a n im por tant b uil din g blo ck fo r exp ecte d cre dit l os s mod els a nd i s con sid ere d a key jud ge me nt. A defa ult i s con sid er ed to have oc cu rre d if a ny unl ikel ine ss to pay c ri teri a is me t or whe n a n an cia l as set m eets a 9 0 day s pas t due b acks top. Whil e som e cr iter ia ar e factu al (e.g. admini strati on, ins ol venc y , or ban kr uptcy), others re quire a j udg me ntal a sse ss me nt of whe ther th e bor rower h as nan ci al di f c ult ies w hi ch a re exp ec ted to have a detr ime nta l impa ct on th eir a bi lit y to mee t contr actu al o blig ation s. A cha ng e in the d en itio n of def aul t may have a m ateri al im pac t on the expected credit loss provision . Ke y sources of estimation uncert ainty At the bal an ce sh eet d ate, the dire ctors c on sid er that ex pe cted c red it lo ss prov isi ons a re a key sou rce of e stim ation unc er t ain t y whi ch, de pe ndi ng on a wid e ran ge of fa ctors, c ou ld res ult i n a mater ia l adj ustm ent to the ca rr y in g amo unts of a sse ts and l iab ili tie s in the n ex t na nc ial ye ar . Th e acc ura cy of ex pe cted c red it l oss p rovi sio ns c an b e imp acte d by unpredictable effects or unanticipated change s t o model estimat es. In addi tio n, forec asti ng er ror s cou ld a lso o ccu r due to ma croe co nom ic scenarios or weigh tings differing from act ual out c omes observed. Regular model monit oring, valida tions and provision adequacy review s are key me cha nis ms to man age e stim ation u nce r ta int y across model estimat es. We contin ue to mon itor an d evalu ate the im pact of c lim ate ris k on ou r exp ec ted cre dit l os s prov isi ons. A s at 3 1 Jul y 2022 we do n ot con sid er c lim ate risk to have a m ateri al i mpac t on o ur cre di t los se s. Arepr ese ntati on of the c ore dr ive rs of th e mac roe con omi c sce na rio s that ar e dep loye d in ou r mod els a re ou tlin ed on p age 164. In some ins tan ce s, our u nd er ly ing b usi ne ss ex pe cted c red it lo ss m ode ls u se a ran ge of othe r ma croe co nom ic m etric s an d as sum ption s whi ch a re lin ked to the und er ly ing c har acte ris tics of th e bus in es s. Model estimat es Acros s the B ank in g Di vis ion, ex pe cted c red it lo ss prov is ion s are outp uts of m ode ls w hic h are ba se d on a nu mb er of as su mptio ns. T he ass um ptions a pp lie d invol ve jud ge me nt and a s a res ult a re reg ula rl y assessed. The two assump tions r e quiring the most signicant judgement relat e to case f ail ure rate s and re cove r y ra tes in Nov ita s. Novi ta s provi de s fu ndi ng v ia inte rm ed iar ie s to indi vi du als w ho w ish to pur su e leg al c ase s. O ver the c ou rse of th is n anc ia l yea r , ex pe ri enc e of cre dit p er fo rm anc e ha s req uire d the gro up to upd ate a num be r of as sum ption s in the c alc ulati on of th e expe cte d cred it lo ss p rovis io n for Nov ita s. A si gni c ant p or ti on of the ex pe cted c re dit l oss p rovi sio n reported in Commer cial relat es t o the Novitas loan book. Th e maj or it y of the Nov it as po r t foli o, and the refore p rovi sio n, relate s to civi l liti gatio n ca ses. T o he lp p rotect cu stome rs i n the even t that thei r ca se fa ils, a st and ard l oan c ond itio n is that a n ind iv idu al purchases an insurance policy which cov e rs loan capital and varying leve ls of intere st. Acros s the p or t fol io the re are i nsu ran ce po lic ie s from a num ber of we ll-r ated ins urer s. 1 . Signicant Accounting P olicies continued Book 1.indb 162 27/09/2022 23:48:42 Gov ernance Repor t Strategic Repor t Financial Statements 16 3 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Th e key sourc es of e sti matio n unc er taint y fo r the po r t fol io’ s ex pe cted cre dit l oss p rovi sio n are c as e fail ure r ates an d rec over y r ates. Ca se fai lure r ates rep res ent a fo r wa rd-lo ok ing p roba bil it y as se ss me nt of suc ce ss ful c as e ou tcome s, wh ere a c lai ma nt is awa rde d set tle me nt eith er p ri or to or fol lowi ng a co ur t p roc es s, info rme d by ac tual c as e fai lure r ates, wh ere a c la im is u nsu cc es sfu l an d expe cte d to be repa id with p roc ee ds f rom an i nsu ran ce p oli cy . Fur t her , w he n a cas e fai ls or is pl ace d on ho ld it i s imm ed iately c on sid ere d to be in St age 2. Rec over y rates rep res ent th e leve l of intere st an d ca pit al that i s cove red by an i nsu ra nce p oli cy an d exp ec ted to be rec overa bl e onc e a cas e fai ls. In ad diti on, an a ss es sme nt is a lso u nde r ta ken re ec ting potentia l ins ure r inso lve ncy r isk w ith res ult ant ex pe cted cr edi t los se s hel d for thi s. Al l uni nsu red ca se s an d na nci al as sets w hi ch are d ue for mo re tha n 90 d ays are c las si e d as St age 3. As sum ption s are in for med by ex pe ri en ce of cr edi t pe r for ma nce, w ith management judgement applied to re ect expect ed outcomes and unc er taint ies. I n add itio n, the prov is ion i s infor me d by se nsi tiv it y ana lys is to ree ct the l evel of u nc er t aint y . M ore d etai le d cred it pe r for man ce d ata co ntin ue s to develo p as th e por t fo lio m ature s, whi ch ove r time w ill re duc e the l evel of e stim ation u nce r ta int y . Bas ed o n this me thod olo gy , a nd us ing th e lates t infor matio n avail ab le, the re has b ee n an u pli f t in th e exp ecte d cre dit l os s provi sio n in Novitas , reect ing the lat est assumptions on case failure and r ecovery rates. Fur ther d eta ils o n prov isi on s are in clu de d in note 1 1 . Gi ven the se a ssu mptio ns re pre sen t sou rces of e sti matio n unc er taint y , man ag eme nt h as as se ss ed a nd co mp leted s ens iti vi t y ana lys is w he n com pa red to the ex pe cted c red it lo ss p rovi sio n for Nov it as of £1 1 3.3mil lio n (31 July 2021 : £89.3 mil lio n) . At 31 July 2022, a 5 % abs olu te imp rovem ent in c as e fai lure r ates wou ld de cr eas e the ECL prov isi on by £5.8 mil lio n (31 July 2021 : £8.2 mi lli on), while a 5% abs olu te deter io ratio n woul d inc rea se i t by £4 .7 milli on (31 July 2021 : £8.2 mil lio n) . S epa ratel y , a 1 0% a bso lute de teri orati on or i mprove me nt in re cover y rates wou ld in cre as e or de cre as e the ECL p rovi sio n by £1 3.7milli on (31 July 2021 : £8.4 mil lio n) . Forward-looking information Deter mi nin g expe cted c red it lo ss es un de r IFRS 9 re qui res th e inc orp orati on of for ward-lo ok ing m acro ec ono mic i nfor matio n that is reasonable, suppor table and includes assumpt ions linked t o ec ono mic va ri abl es th at impa ct lo ss es in e ac h por t fo lio. Th e introduct ion of macroeconomic information in troduces a dditional volatility t o provisions. In order t o calculate for ward-looking pr ovisions, e conomic scenarios are s ourc ed f rom Mo od y’ s A na ly ti cs, w hic h are th en u sed to pro je ct potenti al c redi t co ndi tion s for e ach p or t fol io. An ove r vi ew of the se scenarios using k ey macroeconomic indicat ors is pro vided on pag e1 65. Be nc hma rk in g to other e co nom ic prov id er s is ca rr ie d ou tto provi de m ana ge ment c omfo r t on M ood y’ s A na ly t ics s ce nar iopath s. Five different pr oje cted e conomic scenarios are cur rently conside red to cover a ra ng e of pos si ble o utco mes. T he se i ncl ud e a bas eli ne sce na rio, wh ich re ec ts the b est v iew of f uture e co nom ic even ts. In addi tion, o ne up sid e sce na rio a nd thre e dow nsi de sc en ari o paths a re de ned re lati ve to the bas eli ne. Ma nag eme nt as si gns th e sce na rio s a prob abi lit y we ight ing to ree ct th e likel iho od of sp ec ic s ce nar io s and the refore l oss o utcom es m ateri al isin g, usi ng a co mbi natio n of quantitat ive analysis and exper t judgement. Th e impa ct of for ward-lo ok ing i nfor matio n var ie s acro ss the g roup’ s lending businesses because of the dif fering sensitivity of each por tfolio t o specic macroeconomic variables . The modelled impact of mac roe con omi c sce na ri os an d thei r res pe ctive we ig hting s is reviewe d by bu sin es s expe r ts i n relati on to stag e all oc ation a nd cover age r atios at th e ind iv idu al an d por tfo lio l evel, inc or por ating ma nag em ent’s expe rie nc e an d kn owl edg e of cu stome rs, th e se ctors in wh ich th ey ope rate, and the a ss ets na nc ed. The Credit Risk Manageme nt Committee (“CRMC”) including the grou p na nc e dire ctor a nd gro up ch ief r is k of c er me ets m onthl y , to review and, if appr opriate , agree changes to the e conomic scenarios and p roba bi lit y we ighti ngs a ss ign ed th ereto. The d ec isi on is sub seq ue ntly n oted at the G roup R isk a nd C omp lia nce C om mit tee (“GRCC ”), which i ncl ude s the afo rem entio ne d role s in ad diti on to the grou p ch ief exe cuti ve of ce r . Econ omi c fore ca sts have evo lve d over the c ou rse of 2022. At 3 1 Ju ly 202 1 , th e sc ena ri o weig htin gs ree cted th e co ntinu ed e con omi c cha lle ng es a nd un cer taint y a sso ci ated with th e pan de mic, wi th 40% all oc ated to the ba sel ine s ce na rio, 20% to the ups ide s ce nar io a nd 40% acro ss the th ree d owns ide s ce nar io s. The l evel of e co nom ic un ce r ta int y ass oc iated wi th the pa nd emi c redu ce d up to 3 1 J anu ar y 2022 a nd 10 % weig ht was m oved f rom the 3 d owns ide s ce na rio s to the ups ide sce na ri o. In the sec on d hal f of 2022, 7 .5% wei ght ha s moved f rom th e bas eli ne sc en ar io to the 3 dow nsi de sc en ar ios, re sul ting i n na l wei ghts that are c ons id ere d con siste nt with th e ec ono mic u nce r ta int y at 31 July 2022, as follow s: 30% strong u ps ide, 32.5 % ba se lin e, 20% mild downside , 1 0.5 % moderate downside and 7% se vere do wnside. Sce na ri o forec as ts de ploye d in IFR S 9 mac roe co nom ic mo de ls are upd ated on a m onth ly ba sis. A s at 31 July 2022, the latest b ase lin e sce na ri o fore ca sts GD P grow th of 3.4 % in c al en da r yea r 2022 and a n avera ge Ba se R ate of 1 . 1 % ac ros s cal en da r yea r 2022 . CPI is fore c ast to be 1 0. 7% in c ale nd ar ye ar 2022 in th e bas el ine s ce nar io, wi th 1 7 . 1 % forec as t in the p rotracte d down sid e sce na rio ove r the s am e per io d. Gi ven the c ur rent e co no mic u nce r ta int y , we h ave und er t aken f ur ther ana lys is to ass es s the a ppro pri atene ss of th e ve sc en ar ios u sed. This included benchmarking these scenarios t o consensus economic view s, as wel l as co nsi de ration of a n add itio na l forec ast re lated to stag ati on, whi ch c oul d be co nsi de red a s an al tern ative dow nsi de scenario . When comp ared t o the three down side scenarios, the stag ati on sc en ari o inc lud ed a s mal le r ini tial re du ctio n in GD P , cou pl ed wi th hig he r intere st ra tes an d ec ono mic c ontr acti on over a more s ust ain ed p er iod. G ive n the sh or t te nor of o ur cre di t por tfol io, usi ng thi s forec as t inste ad of the mo de rate or protr acted d owns ide scenario would r e sult in lo wer expected credit losses. The nal scenarios deplo yed reect the UK economic outlook deteriorating following Russia ’ s invasion of Uk raine and the resulting inc rea se in e ne rgy a nd foo d co mmo dit y pr ic es, a s well a s the exacerbation of global supply -chain disruptions after t he pandemic. Th e forec as ts inc lud e a sub du ed rate of grow th for the re mai nde r of the ye ar . Und er th e bas eli ne sc en ar io, UK he adli ne CPI in atio n conti nue s to inc rea se in 2022 ow ing to hi ghe r en erg y , foo d an d man ufa ctu red go od s pri ce s. Hig he r wage s an d stron g de man d for ser vic es c ontinu e to add to the pr ice p res sure s, en sur ing i natio n rema ins we ll a bove the B ank of E ngl and t arg et throu gho ut 2022. T o preve nt inati on pr ess ure s be com ing e mbe dd ed in th e ec ono my , the Ban k of Eng lan d conti nue s to tighte n mon eta r y po licy . Th e forec ast s repre se nt an e co nom ic vi ew as at 31 July 2022, after whi ch the e co nom ic u nce r ta int y ha s con tinu ed. Th es e trend s, inc lud ing th e ris k of fu r the r intere st ra te rise s, an d thei r imp act o n scenarios and weigh tings ar e subject t o ongoing monit oring by management . Th e tab le on p age 164 shows e co nom ic as su mptio ns wi thin e ac h sce na ri o, and the we ight ing a ppl ied to e ach at 31 July 2022. The metrics belo w are ke y UK economic indica tors , chosen to de scribe the e con omi c sce na rio s. Th es e are the m ai n metr ics u se d to set sce na rio p aths w hic h then i nu enc e a wi de ra nge of a ddi tion al metr ic s that are u se d in exp ec ted cre dit l os s mod els. T he rst t abl es show th e fore cas ts of the key metr ic s for the s ce nar io s util ise d for ca le nda r yea rs 2022 a nd 2023. Th e sub se que nt ta bl es s how avera ge s and p ea k to trough r an ges fo r the s am e key metri cs ove r the ve -yea r pe rio d fro m 2022 to 2026. Th ese p er iod s have b ee n inc lud ed as th ey de mon strate the s hor t, medium and long- term outlook for t he k ey macr oeconomic indicat ors whi ch for m the b asi s of the sc en ar io fore ca sts. T he po r t foli o has a n avera ge re sid ual m atur it y of 1 7 m onth s, with c.98% of loa n val ue havi ng a ma turi t y of ve ye ars o r le ss. Book 1.indb 163 27/09/2022 23:48:42 The Notes cont inue d 16 4 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracte d) 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 At 31 Ju ly 2 0 2 2 U K G D P G r o w t h 3. 4% 0. 8% 4 . 1 % 2. 9% 2.7% (1 .8 %) 2. 4% (4. 4% ) 2. 1 % ( 5. 9%) UK Un e m p lo ym e n t 3.8% 4. 1 % 3 .6% 3.6% 4.0% 4.6% 4. 1 % 6. 2% 4.2% 7 .4% U K H PI G r o w t h 4 . 3% 2 .6 % 10. 9% 12.7% 1 . 1 % (3 . 1 %) ( 0 . 5%) (9. 1%) ( 2. 4%) (1 5 . 9 %) B o E B a s e R a t e 1. 1% 1. 8 % 1.1 % 1. 7 % 1. 3 % 1. 0 % 1. 4% 1. 1% 1. 5% 1. 2 % Consumer Price Index 1 0. 7% 2.8 % 1 0.3 % 2 .8% 1 2.3 % 0. 4 % 1 4.2 % 0.2 % 1 7 . 1 % (2 .2% ) Weighting 32 .5% 30% 2 0% 1 0.5% 7% Baseline Upside ( strong) Downside ( mild) Do wn si de (m od er ate) Downside (pro tract e d) 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 At 31 Jul y 2 0 21 UK GD P Grow th 1 6. 1 % 6 .3% 7 . 3% 8 .7% 5. 2% 4.0% 4.5% 2.0 % 4. 1 % 0.8% UK Un e mp l oy me n t 5.6% 6.3% 5. 5% 5.4% 5. 8% 7 .3% 5.8% 8.0% 5.9% 8 .9% UK HPI G row th 1 (1 .4%) 3 . 1 % 3 . 8% 10. 2% ( 2. 5%) (1.6 %) ( 5 . 3%) ( 9. 0 %) ( 8 . 2 %) (1 4 . 2 %) Bo E B a se Ra te 0. 1 % 0.2% 0. 1 % 0.3% 0. 1 % 0. 1 % 0. 1 % 0. 1 % 0.0% ( 0. 1 %) C o n s u m e r P r i c e I n d ex 2.7% 2. 9% 2. 8% 3. 0% 2.6 % 1 . 1 % 2. 5% 0.0 % 2. 4% ( 0 . 5%) Weighting 40% 20% 1 5 % 1 5% 10% Notes : UK G DP G row t h: Nati on al A cc ou nts A nn ua l Re a l Gro ss D o me sti c Pro du ct, S ea so na ll y Ad jus ted - Yo Y ch an ge (%) UK U ne mp loy me nt: O NS L a bo ur Fo rc e Su r vey, Sea so na ll y Ad jus ted - Av er ag e (%) UK H PI Gr ow th: Ave ra ge n om in al h ou se pr i ce, L an d Re gi st r y , Se as on al ly A dj uste d - Q4 to Q 4 ch an ge (%) Bo E Ba se R ate: Ba nk o f Eng la nd B as e Ra te - Ave rag e (%) Co ns um er Pr ic e In de x: ON S, EU H ar mo ni se d, An nu al I n ati on - Q 4 to Q4 c ha ng e (%) . Fi ve -ye a r ave r ag e (c a le n da r ye a r 2 02 2 – 2 0 2 6) Baseline Upside (strong) Downside (mild) Downside (moderate ) Downside (protracted) At 31 Ju ly 2 0 2 2 U K G D P G r o w t h 1. 2 % 1.7 % 0 . 8 % 0 . 2 % ( 0 . 1%) UK Unemplo yment 4. 4 % 3.8 % 4. 6% 6. 4 % 7 .2% U K H PI G r o w t h 0. 1% 1.8 % (1 . 3%) (2 . 5%) ( 4. 6 %) BoE Base Ra te 2 .0% 2 .0 % 1 .5 % 0. 9% 0 .6% Con sum er Pr ic e Ind ex 3.8% 3.8% 3. 7% 3.6% 3.4 % Weighting 32 .5% 30% 20% 1 0. 5 % 7% Fi ve-ye a r aver ag e (ca le nd ar ye ar 20 21 – 2025) Baseline Upside (st rong) Downside (mild) Do wns id e (m od er ate) D ow ns id e ( pro tra cte d) At 31 Jul y 2 0 21 UK GD P Grow th 1 3.2% 3.6% 3.0% 2.8 % 2.4 % UK Unemplo yment 5.5 % 4. 8 % 6 .3% 7 . 1 % 7 . 7% UK HPI G row th 1 1 .6% 3.0% 0.8% ( 1 . 2%) (2.6% ) Bo E B a se Ra te 0.6% 0.8% 0.2% 0. 1 % 0.0% C o n s u m e r P r i c e I n d e x 2. 6 % 3 . 2 % 1. 9 % 1. 3 % 0 . 8 % Weighting 40% 20% 1 5 % 1 5% 1 0% Notes : UK G DP G row th: N ati on al A cc ou nts A nn ua l Re al G ro ss D om es tic P rod uc t, Se as on al ly A dj uste d - CAGR (%) UK U ne mp loy me nt: O NS L a bo ur Fo rc e Su r vey, Sea so na ll y Ad jus ted - Av er ag e (%) UK H PI Gr ow th: Ave ra ge n omi na l ho us e pr ic e, L an d Re gi str y , Se a so na ll y Adj us ted - CAG R (%) Bo E Ba se R ate: Ba nk o f Eng la nd B as e Ra te - Ave rag e (%) Co nsu me r Pr ic e In dex: O NS , EU Ha rm on is ed, A nn ua l In ati on - CAG R (%) F Y22 an d F Y21 sc ena r io fo re ca st s a nd wei gh ts 2 . C ri t ic al A cc ou n ti n g Es t im a te s an d J ud g em en t s continued Book 1.indb 164 27/09/2022 23:48:42 Gov ernance Repor t Strategic Repor t Financial Statements 16 5 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Th e tab le s be low prov id e a sum mar y for the ve-yea r pe ri od (cal en da r yea r 2022 – 2026) of the pe ak to troug h ra nge of va lue s of the key U K ec ono mic va ri abl es u sed w ith in the e co nom ic sc ena ri os at 31 July 2022 a nd 31 July 2021 : Fi ve -ye a r pe r io d (c a le n da r ye a r 2 02 2 -2 0 26 ) Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted) Peak T ro ugh Pe ak Trough Pe ak T rou gh Peak Trough Peak Trough At 31 Ju ly 2 0 2 2 UK GD P G ro w t h 6.3% 0.4 % 9.0% 0.4 % 4. 1 % (2.6%) 1 .0% (5. 1 %) 0.8% (6.9%) U K U n e m p l o y m e n t 4 . 8 % 3 .7% 4 . 2 % 3 . 5% 4 . 8 % 3 .7% 7 . 4% 3 .7 % 8 .4% 3 .7% U K H PI G r o w t h 2. 0% ( 5. 0 %) 16 .7% (1 . 1%) 2. 0 % (1 1.7%) 2 .0 % (1 7 . 9 %) 2 .0 % ( 2 6 . 0 %) B o E B a s e R at e 2. 5% 0 . 5% 2 . 5% 0 .5% 2. 5% 0 . 1 % 2.4% 0. 1 % 2. 6 % 0 . 1% Consumer Price Index 1 0. 7% 2. 0% 1 0.3 % 2 .0% 1 2.3 % 0. 4 % 1 4.2 % 0. 1 % 1 7 . 1 % (2 .2% ) Weighting 32 .5% 30% 2 0% 1 0.5% 7% Five- year period (calendar year 20 21 -2 025) Baseline Upside ( strong) Downside ( mild) Do wn si de (m od er ate) Downside (pro tract e d) Peak T rough Peak T rough Peak T rough Peak T rough Peak T rough At 31 Jul y 2 0 21 UK GD P Grow th 1 1 7 .0% (1 .6%) 19.4 % (1 .6%) 1 5. 7% (1 .6%) 1 4.7% (1 .6%) 1 2.4 % (1 .6%) UK Unemplo yment 1 6.6% 4.8% 6 .3% 4.2% 7 .5% 4. 8% 8 . 2% 4. 8% 9. 1 % 4.8% UK HPI G row th 1 8 . 0 % ( 4 .1% ) 1 5 . 7 % 0 . 5 % 4 .1% ( 6 . 9 % ) 1. 9 % ( 1 5 . 3 % ) 1 . 9 % ( 2 2 .1 % ) BoE Base Ra te 1 1 .6% 0. 1 % 1 .9% 0. 1 % 0.5% 0. 1 % 0. 1 % 0. 1 % 0. 1 % (0. 1 %) Co n su m e r Pr i c e In d ex 3.2% 0.6% 3.9% 0.6% 2.6% 0.6% 2.5% 0.0% 2.4 % ( 0.9%) Weighting 40% 20% 1 5 % 1 5% 10% Notes : UK G DP G row t h: Ma x imu m a nd mi ni mu m qu ar te r ly G DP a s a pe rc ent ag e ch an ge f ro m sta r t of p er i od (%) UK Unemployment : Maximum and minimum unemployment ra te (% ) UK H PI Gr ow th: Ma xim um a nd m in im um ave ra ge n om in al h ou se p ri ce a s a pe rc ent ag e ch an ge f ro m sta r t of p er io d (%) Bo E Ba se R ate: Ma x im um a nd m in im um B oE b as e rate (%) Co ns um er Pr ic e In dex I n ati on: M a xi mu m an d mi nim um o ver t he 5 -yea r pe r iod (%) 1 No te tha t the p re se nt ati on of t he ma cr oe co no mi c ou tlo ok a bo ve ha s be en a me n de d fro m th e F Y21 AR A, w it h the F Y22 gu re s pre se n te d on t he s am e ba si s. T his h as b e en u nd er t ake n to e nhance presenta tion t o the users of the nancial statements by ensuring the macroeconomic variables are displayed in line w ith common practice . This amendment has no impact on EC L. T he se c ha ng es i mp ac t the w ay GD P an d HPI a re p re se nte d for t he a nn ua l for ec as t, the ve -ye ar fo re ca st a nd th e p ea k to t ro ug h val ue s. T he a nn ua l for ec as t wa s pre vi ou sl y pre se nte d a s the av er ag e of th e grow th in e ac h of th e la st fo ur q ua r ter s a nd is n ow p re se nte d as th e gr ow th i n the c al e nd ar ye ar. The v e-ye a r for ec as t is n ow pr es en ted a s the co mp ou nd a nn ua l grow th rate i ns tead o f the a ver ag e an nu al g row th r ate u se d pre vi ou sl y. Last ly, the pr es en tat io n of th e pe ak to t rou gh v al ue s now u se s th e sta r t of t he m acr oe co no mi c for ec as t as a r efe re nc e po int, r ath e r tha n pe a ks an d tro ug hs i n an nu al g row t h rate s ove r th e pe ri od. I n ad di tio n, we h ave a lso m ad e a pre se nt ati on al c ha ng e for u ne m plo ym en t an d bas e rate p ea ks a nd t rou gh s fro m th e F Y21 AR A, w hi ch a re n ow ba se d on q ua r ter ly f ore c as ts ove r ca le nd ar y ea rs 20 21 -2025, ra the r th an m ont hl y for ec as ts ove r n an ci al ye ar s 2021 -2025. Th e exp ecte d cre dit l oss p rovis io n is se nsi tive to jud ge me nt an d esti matio ns ma de w ith reg ard to the s ele cti on a nd wei ghti ng of multiple ec ono mic s ce nar io s. As a re sul t, mana ge men t has a ss es sed a nd c ons ide re d the se nsi tiv it y of the p rovi sio n as fol lows: • For the m ajo ri t y of our p or t fol ios, th e mod ell ed ex pe cted cr edi t los s prov isi on ha s be en re ca lcu lated un de r the up sid e stron g an d down sid e protra cted sc en ar ios d es cr ibe d ab ove, appl yi ng a 1 0 0% we ighti ng to eac h sc en ar io in tu rn. Th e ch ang e in p rovis ion re qu ire men t i s dr ive n by the move me nt in r isk m etri cs un de r eac h sc ena ri o and re su ltin g impa ct on s tag e all oca tion. • E xp ec ted cre dit l os se s bas ed on a s imp li ed a pp roac h, whi ch do n ot util ise a m acro ec on omi c mod el a nd re qui re exp er t j udg em ent , ar e ex cluded from the sensitivit y analysis . In add itio n to the ab ove, key consi de ratio ns for th e se nsi tiv it y an aly sis a re set o ut be low, by segme nt: • In Co mm erci al, the s en siti vi ty a na lys is exclu de s Nov ita s, whi ch i s subj ec t to a sepa rate ap proa ch, as i t is de em ed m ore se ns i tive to cre di t factors than macroeconomic fact ors. • In Reta il: – T he s ens iti vi t y an al ysi s exclud es exp ecte d cre di t los s prov is ion s on l oan s an d adva nc es to cu stom er s in St age 3, b ec au se the measurement of exp ecte d cre dit l oss es i s con sid ere d mo re sen sit ive to cred it fa ctors s pe ci c to the bo rrowe r than m acro ec on omi c sce na ri os. – For so me lo an s, a spe ci c se ns itiv it y a ppro ach h as be e n ado pted to asse s s sho r t teno r loa ns’ res pon se to mod ell ed e co nom ic fo re ca sts. For the se s hor t -teno r loa ns, PD ha s be en ex tra po lated f rom e merg ing d efau lt ra tes an d then p ropo r tio na lly s cal ed to ree ct a s h arp rec over y i n the up sid e sce na ri o and a s lowe r recove r y in a d owns id e sce na rio. • In Prop er t y , th e se nsi tiv it y an al ysi s exclud es i ndi vi dua lly a ss es se d provi sio ns, an d ce r ta in su b por tfo lio s whi ch a re de em ed more sensitive to credit fact ors than t he macroeconomic scenarios. Bas ed o n the ab ove ana ly sis, at 31 July 2022, appl ic ation of 100% weighti ng to the up sid e stron g sce na ri o woul d de cre ase th e ex pected credit los s by £1 5.4 mill ion w hil st ap pli cati on to the dow nsi de protr acte d sce na rio wo uld i nc rea se the ex pe cted c red it lo ss by £31 .8 m illion driven by the afore me ntio ned c ha nge s in r isk m etri cs an d sta ge al loc atio n of the po r t foli os. Wh en pe r fo rmi ng se ns itiv it y a nal ysi s the re is a hi gh de gre e of es timati on u nce r ta int y . O n this b as is, 1 0 0% wei ghted ex pe cted c r edit loss provi sio ns pr ese nted fo r the up sid e an d down sid e sce na ri os sh oul d not be t aken to rep res ent th e lowe r or up pe r ran ge of po ss ibl e and a ctua l exp ecte d cre dit l oss o utco mes. T he re ca lcu lated ex pe cted c red it lo ss pr ovis ion fo r ea ch of the s ce nar io s sho uld b e read i n the c ontex t of the sen sit ivi t y ana ly sis a s a who le a nd in c onj unc tion w ith the n ar rative d isc los ure s provi de d in note 1 1 . T he m ode ll ed im pac t pre s e nted is ba se d on gros s loa ns a nd ad vanc es to cu stome rs at 31 July 2022; it doe s not in cor po rate futu re ch ang es re lati ng to per forma nc e, grow th o r c red it r isk. In add itio n, give n the c han ge in th e mac roe co nom ic co ndi tion s, und er ly ing m ode lle d prov isi ons a nd me thod olo gy , a nd re ned a pp ro ach to adju stm ents, c omp ar iso n bet wee n the s ens iti vit y re sul ts at 31 July 2022 an d 3 1 Jul y 2021 is not appro pr iate. Th e ec ono mic e nviro nm ent re ma ins u nce r ta in an d fu ture im pai rm ent c har ge s may be s ubje ct to fu r the r vol atili t y , inc lud ing f rom c hanges to macroeconomic v ariable forecast s impact ed by geopolitical tensions and rising in ation . Book 1.indb 165 27/09/2022 23:48:43 The Notes cont inue d 16 6 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Banking Asset Management £ million Commercial £ million Retail £ million Propert y £ million Securities £ million Group £ million To t a l £ million Summar y income statement fo r th e ye ar e n de d 31 Ju l y 2 0 2 2 Net int erest income/ (expense) 257 . 1 21 0.8 1 1 2 . 1 (0. 7) ( 1 . 1 ) (0.2) 578. 0 Non-int erest income 86.3 2 6.2 0.6 1 4 8. 7 9 6.3 – 3 58. 1 Operating income/ (e xpe nse) 343.4 23 7 .0 1 1 2.7 1 48.0 95.2 (0.2) 936. 1 Admi nis trative ex pe nse s (158 . 3 ) (131. 3 ) (2 7 . 0 ) (12 0 .7 ) ( 77 . 2 ) (2 5 . 8 ) ( 5 4 0 . 3 ) Depreciation and amor tisat ion ( 21 .7) (20.3 ) (4. 0) (5.6 ) (3.9) (2. 2) (57 .7) Impairment losses on nancial as sets ( 72. 4) (24.4) ( 6.5 ) – – – (1 03 .3) T ota l op erati ng exp en ses b efore a mor tisatio n an d impairment of intangible assets on acquisition, goo dw ill i mpa ir me nt an d excepti ona l item (252 .4) (1 76.0) (37 .5) (1 2 6.3) (81 . 1) (28.0) (7 01 . 3) Adjusted operating prot/ (loss) 1 91 .0 61 .0 7 5. 2 21 .7 1 4 . 1 (2 8. 2 ) 23 4.8 Amor tisation and impair ment of intangible assets on acquisition (0. 1 ) – – ( 1.9) – – (2.0) Goodwill impairment ––– –––– E xcepti ona l item: HM RC V A T ref un d ––– –––– Operating prot/(l oss) before tax 90.9 61 .0 75.2 1 9.8 1 4. 1 (28.2) 232 .8 Ex ternal opera ting income/ (expense ) 391 .7 26 8.3 1 29.4 1 4 8. 1 95. 2 (96.6) 93 6. 1 Int er segment operating (expense )/income (4 8 . 3 ) (31.3 ) (1 6.7 ) ( 0 . 1) – 9 6 .4 – Segment operating income/( expense) 343.4 237 .0 1 1 2.7 1 48.0 95.2 (0.2) 936. 1 1 Adjust ed operating pr ot/(loss ) is stat e d bef ore amortisation a nd i mp ai rm en t of in ta ngi bl e as se ts on acquisition, goodwill im pairment , excep tional item and ta x. Th e Com me rcia l ope rati ng se gme nt a bove inc lud es th e grou p’ s N ovit as bu sin es s. Novi tas c ea sed l en din g to new custom er s in Ju ly 2 021 foll owin g a strateg ic revi ew . In th e yea r end ed 31 July 2022, Novit as rec ord ed im pai rme nt lo sse s of £60. 7 mill ion (2021 : £73.2 million ). Banking Asset Management £ million Commercial £ million Retail £ million Propert y £ million Securities £ million Group 2 £ million To t a l £ million Summar y balance sheet information at 3 1 July 2022 To t a l a s s e t s 1 4,5 61 . 4 3,0 6 4.0 1,4 73. 5 1 72 . 8 972.3 2 ,4 34 .3 1 2 ,678. 3 T otal liabilities – – – 70.5 8 8 0.6 1 0,06 9.7 1 1 ,0 20. 8 1 T otal assets for the Banking operating segments comprise the loan book and operating lease assets only . The Commer cial operat ing segment includes the net loan book of No vitas of £ 1 59.4 million. 2 Balance sheet includes £2 ,4 25 .0 million asse ts and £ 10 , 1 81 .9 mi llion liabilit ie s attributable to the Banking division primari ly comprising the t reasury balances described in the second paragraph of t his not e. Equi t y is all oc ated acro ss th e grou p as set o ut b elow. Bank ing di vi sio n equ it y , wh ich i s ma nage d as a w hol e rathe r tha n on a se gmental bas is, ree cts l oan b ook a nd o per ating l ea se as sets of £9,098.9 mi lli on, in add itio n to ass ets and l ia bili tie s of £2,4 25. 0 mil l ion and £1 0, 1 8 1 .9mi lli on res pe cti vely p rim ar ily c om pri sin g trea sur y bala nce s wh ich a re in clu ded w ith in the G roup c olu mn a bove. Banking £ million Asset Management £ million Securities £ million Group £ million To t a l £ million Equity 1, 3 4 2 .0 10 2 . 3 9 1. 7 12 1. 5 1, 6 57.5 3. Segmental Analysis Th e dire ctors m an age th e grou p by cla ss of b usi ne ss a nd pre se nt the se gm ent al a nal ysi s on that b asi s. The g rou p ’ s ac tiv itie s ar e p res ente d in ve (202 1 : ve) op erati ng se gm ents: Co mme rcia l, Reta il, Prope r t y , As set M an age me nt and S ec uri tie s. In the s egm ent al re por ting info rm ation th at foll ows, Gro up co nsi sts of ce ntra l fu ncti ons a s well a s var iou s non-tra ding h ea d of ce companies and c ons oli datio n adju stme nts a nd is pre se nted in o rde r that the i nfor matio n pres ente d reco nci le s to the cons oli dated in co me st atement. Th e Gro up ba lan ce s he et pr ima ril y in clu de s treas ur y a ss ets an d lia bil itie s co mp ris ing c as h and b ala nc es at c entr al ba nks, d ebt s ecu rities, customer de pos its an d othe r bor rowi ngs. Di vis ion s con tinu e to char ge ma rket p ric es fo r the li mited s er vic es re nde red to othe r pa r ts of the g roup. Fund ing c harg es b et we en segment s take into ac cou nt co mme rci al de ma nds. M ore th an 9 0% of the grou p’ s a ctiv iti es, reve nue a nd as sets a re lo cated i n the UK . Book 1.indb 166 27/09/2022 23:48:43 Gov ernance Repor t Strategic Repor t Financial Statements 16 7 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Banking Securities Commercial Retail Propert y Asset Management Group T otal Other segmental information for t h e ye ar e n de d 31 Ju l y 2 02 2 Employees ( average number) 1 1, 3 4 8 1,15 3 19 0 72 2 318 79 3 , 8 10 1 Banking segment s are inclusive of a central function headcount alloca tion. Banking Asset Management £ million Commercial £ million Retail £ million Proper t y £ million Securities £ million Group £ million To t a l £ million Summar y income sta tement for the ye ar e nd ed 31 July 2021 Net int erest income/ (expense) 2 1 8. 1 1 98.8 1 22. 6 (0. 1 ) ( 1 .4 ) (0. 5) 537 .5 Non-int erest income 7 0.8 2 1 .0 0 .4 1 39.5 1 83.4 – 4 1 5. 1 Operating income/ (e x pense) 288 .9 21 9. 8 1 23. 0 1 39. 4 1 82 .0 (0.5 ) 952 .6 A d m i n i s t r a t i v e e x p e n s e s ( 1 3 9 .1 ) ( 11 8 . 6 ) ( 2 9 .1 ) ( 11 0 . 8 ) ( 11 8 .1) ( 2 4 .1 ) ( 5 3 9 . 8 ) Depreciation and amor tisat ion ( 1 9. 1 ) ( 1 9. 4) (3.8 ) (5 . 1 ) (3 . 1 ) ( 1 .8) (5 2. 3) Impairment (losses)/ gains on nancial asset s (77 .9) (9. 9) (2 .3) 0 .2 0. 1 – (89 .8) T ota l op erati ng exp en ses b efore a mor tisatio n an d impairment of intangible assets on acquisition, goo dw ill i mpa ir me nt an d excepti on al ite m (236. 1 ) (1 47 .9) (35.2) (1 1 5. 7 ) ( 1 21 . 1 ) (25. 9) (681 .9) Adjusted operating prot/ (loss) 1 52 .8 7 1 .9 87 .8 23.7 60.9 (26.4 ) 2 70. 7 Amor tisation and impair ment of intangible assets on acquisition ( 1 2 .2) (0. 7) – ( 1 .3) – – (1 4.2 ) G o o d w i l l i m p a i r m e n t ( 1 2 . 1 ) –– ––– ( 1 2 . 1 ) E xcepti ona l item: HM RC V A T ref un d 7 .4 1 2.3 – – – 1 . 1 20.8 Operating prot/(l oss) bef ore tax 3 5.9 83. 5 87 .8 22.4 6 0.9 (25.3) 26 5.2 Ex ternal opera ting income/ (expense ) 343. 1 258 . 7 1 42 .3 1 39. 4 1 82 .0 (1 1 2 .9) 952 .6 Int er segment operating (expense )/income (54 .2) (38.9 ) ( 1 9.3) – – 1 1 2. 4 – Segment operating income/ (expense ) 288. 9 21 9.8 1 23 .0 1 39. 4 1 82. 0 (0 .5) 952 .6 1 Adjust ed operating pr ot/(loss ) is stat e d bef ore amortisation a nd i mp ai rm en t of in ta ngi bl e as se ts on acquisition, goodwill im pairment , excep tional item and ta x. Banking Asset Management £ million Commercial £ million Retail £ million Proper t y £ million Securities £ million Group 2 £ million To t a l £ million Sum mar y bala nc e she et in form ation at 31 Jul y 202 1 To t a l a s s e t s 1 4, 1 91 .0 2 ,97 4.3 1 ,502. 1 1 39. 7 897 .9 2 ,329.5 1 2, 0 34.5 T otal liabilities – – – 78. 1 806.5 9, 580.6 1 0, 465.2 1 T otal assets for the Banking operating segments comprise the loan book and operating lease assets only . The Commer cial operat ing segment includes the net loan book of No vitas of £ 1 81 .5 million . 2 Balance shee t includes £2 ,299. 0 million assets and £9,6 77 .8 mi llion liabilities attributable t o the Bank ing division primaril y comprising the treasury balances described in the second paragraph of t his not e. Equi t y is all oc ated acro ss th e grou p as set o ut b elow. Bank ing di vi sio n equ it y , wh ich i s ma nage d as a w hol e rathe r tha n on a se gmental bas is, ree cts l oan b ook a nd o per ating l ea se as sets of £8,667 .4 millio n, in add itio n to ass ets and l iab ili tie s of £2,299.0 mill ion and £9,6 77 .8mil lio n res pe ctive ly p rim ar ily c omp ris ing tre as ur y ba la nce s wh ich a re inc lud ed w ithi n the G roup c olu mn ab ove. Banking £ million Asset Management £ million Securities £ million Group £ million To t a l £ million Equity 1, 2 8 8 . 6 6 1. 6 9 1. 4 12 7 . 7 1, 5 6 9 . 3 Banking Securities Commercial Retail Property Asset Management Group T otal Oth er se gm ent al info rm ation for the ye ar e nd ed 31July 2021 Employees ( average number) 1 1, 2 7 6 1, 1 6 3 18 7 7 0 6 3 0 0 7 7 3 , 7 0 9 1 Banking segment s are inclusive of a central function headcount alloca tion. Book 1.indb 167 27/09/2022 23:48:43 16 8 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d 4. O p er a t in g Pr o t be fo re Tax 2022 £ million 2021 £ million Interest income 1 Cas h and b ala nce s at ce ntral b ank s 5.9 1. 6 Loan s and a dva nce s to bank s 0.3 – Loan s and a dva nce s to custom er s 680. 4 652 .9 Other int erest income 3.4 2.3 690.0 656.8 Interest e xpense Deposits b y banks (0. 1 ) – Deposits b y customers (64. 1) (6 6.3) Borrowings (33. 2) (38.7) Oth er i nte res t exp ense (14. 6 ) (1 4 . 3 ) (1 12 . 0 ) (1 19 . 3 ) Net interest income 578. 0 537 .5 1 Inte re st i nc om e ca lc ul ate d us in g the e f fe cti ve i nte res t me tho d. 2022 £ million 2021 £ million Fee and commission income Banking 98. 1 88.2 Asset Managemen t 1 48.8 141. 2 Securities 12 . 6 16 .7 259.5 24 6 . 1 Fee and commission expense (1 7 . 2) (16. 1) Ne t fe e an d c om mi s si on i n co me 242.3 23 0.0 Fee in com e an d expe ns e (other tha n amo unts c alc ulated u sin g the ef fe cti ve intere st rate me thod ) on n anc ial i nstr ume nts that a r e not at f air value thr ough prot or loss were £98 . 1 million ( 202 1 : £88. 2 million ) and £ 1 4. 7 million ( 202 1 : £1 3.5 million) respe ctively . Fee income and e xpe nse arising from t r ust and ot he r duciary activities amounted t o £1 48.8 million (2 021 : £1 4 1 .2 million) and £ 1 .8million (202 1 : £ 1 .9 million ) respectively . 2022 £ million 2021 £ million Other incom e Ope ratin g le ase a ssets re ntal i nco me 85.4 75. 4 Oth er 20. 7 14 . 0 10 6 .1 89. 4 2022 £ million 2021 £ million Administrative e xpenses Staff costs: Wag e s a n d s a l a ri e s 283.9 297 .0 Social security costs 38.8 44. 7 Share-based awards 4.9 5.7 Pension costs 1 6.9 15 . 8 344.5 363.2 Depreciation and amor tisat ion 57 .7 52.3 Othe r a dmin istra tive expen ses 19 5 . 8 17 6 . 6 598.0 592. 1 Book 1.indb 168 27/09/2022 23:48:43 Gov ernance Repor t Strategic Repor t Financial Statements 16 9 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 5. Inf ormation Regarding t he A uditor 2022 1 £ million 2021 £ million Fees payable Audi t of the co mpa ny’ s a nnu al ac cou nts 0.6 0.4 Audi t of the co mpa ny’ s su bsi dia ri es pu rs uant to le gis latio n 2.3 2. 2 Audit rela ted ser vices 0.5 0.5 Other ser vices 0.3 0.2 3. 7 3.3 1 Du ri ng t he ye ar, an add it io na l au di t fee o f £0.2 m il lio n wa s pa id to th e au di tor s in r el ati on to s co pe c ha ng es i n th e 2021 au d it, w hi ch i s not i nc lud e d ab ove. Th e audi tor of the gro up was Pr icewate rho use Co ope rs LL P (202 1 : Pri cewater hous eC oop er s LLP). 6. Ex ceptional Item In the p rio r yea r en ded 31 July 2021 , th e grou p rec orde d an exc eptio na l gai n of £20.8 mil lio n, ree ctin g a V A T ref und f rom H MRC in relation t o hire p urch ase a gre eme nts in th e Motor Fi na nce a nd As set F ina nc e bus ine ss es. T his fo llowe d HM RC’ s po lic y in Reve nu e and C ustoms Brief 8 (2020) publ ish ed i n Jun e 2020. The B ri ef ad vis ed b usi ne sse s wh o sup pl y goo ds by way of h ire pu rcha se ag ree me nts of HM RC’ s su gg e sted meth od for a ppo r tio nm ent of VA T inc ur red o n over hea ds (and s o the re cla ima bl e por tion of su ch VA T ). This fo llowe d the C our t of Justi ce of the Europ ea n Uni on’ s ju dge me nt reg ard ing Volkswag en F ina nci al Se r v ic es (U K ) Ltd. Th e grou p sub mit ted re fun d cl aim s in res pe ct of the p er io d from 20 0 9 to 2020. HMRC ag ree d the cl aim s and re pay me nt was m ade to the grou p in Ju ne 2021 . In li ne w ith the g roup’ s ac cou ntin g pol icy se t out i n Note 1 , th is was p res ente d as an exc eptio na l item as i t was m ater ia l by size and nature and non-r e curring. 7. Ta x a t i o n 2022 £ million 2021 £ million T ax charged/( credited) to t he income st atement Cur re nt ta x: UK corporat ion tax 53. 7 75 . 1 Forei gn ta x 1. 9 1. 5 Adju stme nts in re sp ect of p revio us ye ar s (2 .8 ) (3.4 ) 52. 8 73. 2 Deferr ed tax: Defe rre d ta x c har ge/(credit) fo r the cu rre nt yea r 11. 8 (13.6 ) Adju stme nts in re sp ect of p revio us ye ar s 3. 0 3.5 67 .6 63. 1 T a x on i t em s no t ch a rg e d/(c re d it ed ) to t h e i nc om e s ta t em en t Defe rre d ta x rel ating to: Cas h ow he dg ing 8.6 2.0 Dened benet pension scheme (0.3) 0.6 Financial instrumen ts class ied as fair v alue through o ther comprehensive income (0.4) 0.3 Share-based payments 1. 1 (1.4) Currency translat ion losses (0.3) (1. 1) Acquisitions – 1. 0 8. 7 1. 4 Re co nc il i at i on t o ta x ex p en s e UK co rp oratio n ta x fo r the ye ar at 1 9.0% (2 02 1 : 1 9.0 %) on ope ratin g prot b efore t a x 44 . 2 50.4 Ef fec t of di f fere nt ta x rates in oth er j uri sdi ctio ns (0.3) (0.3) Dis al lowab le i tems a nd othe r pe rm an ent d if fe re nce s 0.9 2. 9 Banking surcharge 1 4.9 19 . 8 Defe rre d ta x im pac t of dec rea se d/(inc rea sed ) ta x ra tes 7. 7 (9.8) Prio r yea r ta x p rovi sio n 0.2 0. 1 67 .6 63. 1 Book 1.indb 169 27/09/2022 23:48:43 17 0 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d Th e sta nda rd UK co rp orati on ta x r ate for the n an cia l yea r is 1 9.0% (2 021 : 1 9.0% ). However , an ad diti ona l 8% surch arg e app lie s to b a n k i ng com pany p rots a s den ed i n leg isl atio n. The ef fecti ve ta x ra te of 29 .0% (2 02 1 : 23.8% ) is a bove the U K co rpo ratio n ta x ra te pri marily due to the surc harg e ap ply ing to mo st of the g roup’ s pro ts and to a wr ite- down i n defe rre d ta x as sets re ec ting a re du ctio n in the b ank in g surc harg e app ly ing f rom A pr il 2023 fro m 8% t o 3% pass ed in to law in the ye ar . On 23Se ptemb er 2022, the Cha nce ll or of the E xch eq uer a nn oun ced a s pa r t of his G row th Pla n that the c or por ation t a x rate inc rea se from 1 9% to 2 5% from A pr il 2023 wil l be ca nc ell ed, an d that the b ank in g surc ha rge rate wi ll rem ain at 8%. Th e rele vant le gi slati on is ex pected t o be en acted i n the yea r en din g 3 1 Jul y 2023 and i s a non -adju stin g pos t bal an ce sh eet eve nt. Had th is ch an ge be en e na cted be fore 31 July 2022, the gro up’ s defe rre d ta x a ss et bal an ce at 31July 2022 wou ld have d ec rea se d by app roxim ately £1 .5 m ill ion, wi th a co rre spo nd ing ta x charge rec ogn ise d in the i nco me st ateme nt, net of a sm all er c red it to other c omp reh ens ive i nco me. Movem ents i n defe rre d ta x a sse ts and l iab ili tie s were as fo llow s: Capital allowances Pens io n scheme Share-based payments and def erred compensation Impairment losses Cash ow hedging Intangible assets Other T otal £ million £ million £ million £ million £ million £ million £ million £ million Group At 1 August 2020 31 .5 ( 1 . 7) 8.9 9.5 2 . 1 (3.2 ) 0 .2 4 7 .3 Cre dit /(charg e) to the inco me st ateme nt 3.5 0. 1 5.2 (0. 7 ) – 2.5 (0.5) 1 0. 1 Cre dit /(charg e) to other co mpre he nsi ve in com e 1 . 1 (0.6) – – ( 2. 0) – (0.3) (1 .8) Credit t o equity – – 1 .4 –––– 1 . 4 A c q u i s i t i o n s – – – – – (1.0 ) – (1.0 ) At 31 Jul y 2021 36. 1 (2 . 2) 15.5 8.8 0. 1 (1 .7) (0.6) 56.0 (Cha rge)/ c red it to the in com e statem ent ( 1 0.9) – ( 1 .5) (3.0) – 0.4 0.2 (1 4.8) Cre dit /(charg e) t o othe r com pre hen sive i nco me 0. 3 0. 3 – – (8. 6) – 0 .4 (7 .6 ) Charge t o equity – – (1 . 1 ) –––– ( 1 . 1 ) A c q u i s i t i o n s –– ––––– – At 31 July 2 022 25.5 ( 1 .9) 1 2 .9 5.8 (8.5) ( 1 .3) – 32.5 Capital allowances Pens io n scheme Share-based payments and def erred compensation T otal £ million £ million £ million £ million Company At 1 Au gu st 20 20 – ( 1. 7 ) 1. 8 0 . 1 (Charg e)/ c redi t to the inco me st ateme nt (0.6) 0 . 1 0.2 (0.3) Charge t o other comprehensive income – (0 .6) – (0. 6) At 31 Jul y 2021 ( 0. 6 ) (2. 2) 2.0 (0 . 8) Cred it /( cha rge) to the inc ome st ateme nt 0.3 – – 0.3 Credit t o other comprehe nsive income – 0.3 – 0.3 At 31 Ju ly 2 0 2 2 (0.3) (1 .9) 2.0 (0.2) As the g roup h as b ee n and i s exp ecte d to contin ue to be co nsi stentl y prot ab le, the fu ll de fer red ta x ass ets have be en re co gni s ed. 7. Ta x a t i o n continued Book 1.indb 170 27/09/2022 23:48:43 Gov ernance Repor t Strategic Repor t Financial Statements 17 1 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 8. Earnings per Share Th e cal cul ation of b asi c ea rn ing s per s ha re is ba sed o n the pr ot at trib uta bl e to share ho lde rs a nd the n umb er of b asi c weig hted ave rag e sha res. W he n ca lcu latin g the di lute d ea rni ngs p er s ha re, the weig hted ave rag e num ber of s ha res i n iss ue is a dju sted for th e ef f e cts of a ll dil uti ve sha re opti ons a nd awar ds. 2022 2021 Basic 11 0 . 4 p 13 4 . 8 p Dilut ed 10 9 . 9 p 13 3 . 6 p Adjust ed basic 1 111 . 5 p 14 0 . 4 p Adju sted dil uted 1 111 . 0 p 13 9 .1p 1 Excludes amortisation and impairment of intangible assets on acquisition, goodwill impairment, e xcept ional it em and their tax effects. 2022 £ million 2021 £ million Prot at tributable to shareholders 16 5 . 2 20 2. 1 Adjus tments: Amor tisati on of intangible assets on acquisition 2. 0 14 . 2 Goodwill impairment – 12 .1 E xcepti ona l item: HM RC V A T ref un d – (20. 8) T a x e f fec t of adj ustm en ts and exc eptio na l item (0. 4) 2. 9 Adjusted prot attribut able t o shareholders 1 6 6.8 210. 5 2022 million 2021 million Aver ag e n um b er o f sh a re s Basic w eighted 14 9 . 6 14 9 . 9 Ef fec t of dil uti ve sha re opti ons a nd awa rds 0.7 1. 4 Diluted w eighted 15 0 . 3 151. 3 9. Divi den ds 2022 £ million 2021 £ million For each ordinary share Fin al di vi de nd for p revi ous na nci al ye ar p aid i n Nove mbe r 2021 : 42.0p (Nove mbe r 2020: 40.0p) 62.7 59.8 Inter im di vi de nd for c ur rent na nci al ye ar pa id in A pr il 2022: 22 .0 p (A pr il 2021 : 18. 0 p) 32.8 26.8 95.5 86. 6 A na l div id en d rela ting to the ye ar e nde d 31 July 2022 of 44.0p, amou nting to a n esti mated £6 5.6 millio n, is pro pos ed. T his n al dividend , whi ch is d ue to be pa id on 22 N ovem be r 2022 to share ho lde rs o n the reg iste r at 1 4 O ctobe r 2022, is not ree cted in th es e na nci al sta tements . 10. Loa n s an d A dva n ce s to B an ks On demand £ million Withi n three months £ million Between three months and one year £ million Between one and two years £ million Between tw o an d ve years £ million To t a l £ million At 31 Ju ly 2 0 2 2 1 47 .0 1.9 10. 0 2. 4 4. 1 165 .4 At 31 Jul y 2021 1 21 .9 1 .0 2.2 1 0.5 0. 7 136.3 Book 1.indb 171 27/09/2022 23:48:44 17 2 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d 1 1. Lo an s a nd A dv an ce s to C u st om er s (a) Ma tur it y a na ly sis o f loa ns a nd a dva nc es to cu sto me r s Th e foll owin g tab le s ets out a m atur it y a nal ysi s of loa ns a nd ad vanc es to cu stome rs. At 31 July 2022 l oan s and a dva nce s to cust o me rs wi th a matu rit y of t wo ye ar s or le ss wa s £6, 733.0 mill io n (3 1 J ul y 202 1 : £6,326.6 mill ion) re pre se nting 73.6% (3 1 Jul y 2021 : 72 .5% ) of total gro ss l oan s and a dva nce s to cus tomer s: On demand £ million Withi n three months £ million Between three months and one year £ million Between one and two years £ million Between two and ve years £ million After more t han vey ea rs £ million To t a l g r o s s loans and advances to customers £ million Impairment provisions £ million To t a l n e t loans and advances to customers £ million A t 3 1 J uly 202 2 1 4 1 .3 2,3 54.2 2,3 69. 0 1 ,868 .5 2,235. 0 1 76 .5 9, 1 44.5 (2 85. 6) 8,8 58.9 At 3 1 July 202 1 7 1 .8 2,2 76 .6 2 ,289 . 1 1 ,689. 1 2 ,2 42 .8 1 55.5 8, 72 4. 9 (280 .4 ) 8,444 .5 (b) Lo an s an d adv anc es to c us tom er s a nd im pa ir me nt p rov isi on s by st age Gro ss lo ans a nd ad van ce s to custom er s by stag e an d the c orre sp on din g impa ir me nt prov isi ons a nd prov is ion c overa ge ra tios a re se t o ut below : Stage 2 To t a l £ million Stag e 1 £ million Less than 3 0 days past due £ million Greater than or equal to 30 days past due £ million To t a l £ million Stage 3 £ million At 31 Ju ly 2 0 2 2 Gr os s l oa ns a n d ad va nc e s to cu s to me r s Commercial 3,4 3 3. 1 778 .8 1 19.4 8 9 8. 2 169. 1 4, 50 0. 4 Of wh ich : No vitas 1 01 .3 2 .2 93 .8 96. 0 7 5. 4 2 72 . 7 Retail 2,9 37 . 6 1 21 .4 9 .4 1 30. 8 65 .5 3, 1 33. 9 Prope r t y 1, 2 5 6 . 3 8 3 . 8 4 6 . 1 12 9. 9 12 4 . 0 1, 510 . 2 7, 6 2 7. 0 9 8 4 . 0 17 4 . 9 1, 1 5 8 . 9 3 5 8 . 6 9 ,1 4 4 . 5 Impairment provisions Commercial 25.6 1 4.3 52 .0 66 .3 87 . 1 1 79.0 O f w hi c h: N ov i t a s 8. 8 1 .0 4 9.5 50 .5 5 4.0 1 1 3. 3 Retail 22 . 1 4.9 1 . 7 6. 6 4 1.2 69. 9 Property 2 . 6 4 . 2 1. 2 5 . 4 2 8 .7 3 6 .7 50.3 23.4 54.9 78.3 1 57 .0 285.6 Provision coverage ratio Commercial 0.7% 1.8% 4 3. 6% 7 . 4% 51.5% 4. 0% O f w h i ch: N ov i ta s 8.7% 45. 5% 52.8% 52.6% 71 .6% 4 1 . 5% Retail 0.8% 4 .0% 18. 1 % 5.0% 62 . 9% 2 . 2% Prope r t y 0. 2% 5. 0% 2 .6% 4 . 2% 2 3 . 1 % 2 .4% 0.7 % 2 .4% 31 .4% 6.8% 4 3.8% 3 . 1 % Book 1.indb 172 27/09/2022 23:48:44 Gov ernance Repor t Strategic Repor t Financial Statements 17 3 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Stage 2 To t a l £ million Stage 1 £ million Less than 30 day s past due £ million Great er than or e qu al to 30 day s past due £ million To t a l £ million Stage 3 £ million At 31 Jul y 2021 Gr os s l oa ns a n d ad va nc e s to cu s to me r s Commercial 3, 4 1 7 .2 549 .4 7 4. 0 623. 4 99 .9 4 , 1 40. 5 Of wh ich: N ovi tas 1 8 5.8 3.6 55.8 59.4 25. 6 27 0.8 Retail 2 ,8 1 7 .0 1 75 .3 6. 4 1 81 . 7 43.2 3, 04 1 .9 Proper t y 1 ,20 0. 1 1 0 0.5 54.6 1 55. 1 1 87 .3 1 ,542 .5 7 ,434. 3 82 5.2 1 35.0 9 60.2 330.4 8, 72 4.9 Impairment pro visions Commercial 55. 6 30. 3 33.6 63. 9 52 .9 1 7 2. 4 Of wh ich : No vitas 3 1 . 4 2 . 1 30 .6 32 . 7 2 5 .2 89. 3 Retail 22 . 1 1 3.3 1 .9 1 5.2 30.3 67 .6 Pro p e r t y 2.3 5.0 0. 1 5. 1 3 3.0 40.4 80 .0 4 8.6 35.6 8 4. 2 1 16.2 28 0.4 Provision coverage rat io Commercial 1 .6 % 5.5 % 45. 4 % 1 0.3 % 53.0 % 4.2 % Of whi ch: Nov ita s 1 6.9% 58.3% 54.8% 55. 1 % 9 8.4 % 33.0% Retail 0.8 % 7 .6% 29 .7 % 8. 4 % 7 0. 1 % 2 .2% Pro p e r t y 0.2% 5.0% 0. 2% 3. 3% 1 7 .6% 2.6% 1 . 1 % 5 .9% 26.4% 8.8% 35 .2% 3 .2% Sta ge al loc atio n of loa ns a nd ad vanc es to cu stome rs h as be en a pp lie d in li ne wi th the de ni tio ns set o ut on p age 1 59. Dur in g the ye ar the s tagi ng pr ole of l oan s and a dva nce s to custom er s ha s rema in ed bro adl y sta ble. At 31 July 2022, 83.4 % (31 J uly 2021 : 85.2% ) of gros s lo ans a nd ad van ce s to custome rs we re St age 1 . S tag e 2 loa ns an d adva nc es to cu stome rs in cre as ed sl ightl y to 1 2. 7% (3 1 July 202 1 : 1 1 .0% ) a s fal lin g Covi d- 1 9 fo rb or ne exp osu re has b ee n mo re than of fset by m igr ation s into Sta ge 2 as so ciated w ith a s ign ic ant increase in credit ris k. T he re mai nin g 3.9% (3 1 Ju ly 2021 : 3.8% ) of l oan s and a dva nce s to cus tome rs was d ee me d to be cre di t imp air ed a nd cl as si ed a s Sta ge 3. Ove ral l imp air me nt prov is ion s inc rea sed to £ 285.6 millio n (31 July 2021 : £280.4 mill ion), follow ing re gu lar rev iew s of stag ing and provision cove rage fo r ind iv idu al l oan s an d por tfol ios. T he m ovem ent i n imp air me nt prov is ion s is dr ive n by Nov ita s, whi ch re ec ts the c as e f ail ure an d rec over y r ate assu mptio ns us ed. T he in cre ase wa s par tiall y of fs et by red uci ng im pai rm ent prov is ion s acros s the re ma ind er of the Bank, foll owin g a red ucti on in a dju stme nts dr ive n by the e nco ura gin g pe r for ma nce of o ur for bo rn e boo k. As a re sul t, there h as b ee n a ma rgin al de cr eas e in p rovis io n cover age to 3. 1 % (31 July 2021 : 3.2% ). Prov ision Cov erage Analysis by Business In Co mme rci al, the i mpa ir men t cove rage r atio d ec rea sed to 4.0% (3 1 Jul y 2021 : 4.2% ) ree cti ng stro ng new b us ine ss vo lum es a nd p ositive pe r for ma nce of th e Cov id- 19 forbor ne l oan b ook . E xclud ing N ovi tas, th e Com me rcia l im pair me nt cove rag e rati o dec re ase d to 1 .6% ( 31 J u l y 202 1 : 2. 1 %) follow ing th e rele as e of Cov id- 19 related ad justm en ts. Th e sig ni ca nt inc rea se in c red it prov is ion s aga inst th e Nov itas loan book ree cts the l atest a ss umpti ons on c as e fai lure a nd re cover y rates. In Ret ail, the i mpa ir me nt cover age r atio wa s unc han ge d at 2.2 % (31 July 2021 : 2.2% ) ree cti ng the p er forma nc e of the for bo rn e l oa n bo ok an d strong new business volumes. In Prop er t y th e imp air me nt cove rag e ratio re du ce d to 2 .4 % (31 July 2021 : 2. 6%) reecti ng the w ri te of f of a well p rovi de d ind iv idually asses sed ca se, par tiall y of fs et by de teri oratin g mac roe co nom ic fore ca sts. (c) Ad j us t me n ts By the ir na ture, limi tati ons in th e grou p’ s ex pe cted c redi t los s mo del s or in put d ata may b e ide nti ed th roug h ong oin g mod el mo nitoring and vali datio n of mo del s. In ce r ta in ci rcum sta nc es, ma nag em ent m ake ap pro pri ate adju stme nts to mod el- ca lcu lated ex pe cted cr edi t los ses. These adj ustm ents a re ba sed o n ma nag em ent j udg em ents o r qua ntit ative b ack- te stin g to ensu re exp ec ted cre dit l os s provi si ons ad eq uatel y ree ct a ll k now n in for matio n. The se a dju stme nts are g en era ll y deter min ed by c ons ide ri ng the at tr ibu tes or r isk s of a na nci al a sse t whi ch a re not c aptur ed by exis ting ex pe cted c redi t los s mo del o utp uts. Ma nag em ent a dju stme nts are a ctive ly m oni tored, revi ewed, an d inc or por ated into fu t ure model development s where applicable. As the U K ec ono my has e me rge d fro m pan de mic re lated re str icti ons, a nd the g over nm ent su pp or t me as ure s be ing u nwoun d, the use of adju stme nts ha s als o evolve d. In pa r ticu la r , p revio us ad justm ents to ree ct th e gua ran tee und er g over nme nt le ndi ng sc hem es h ave now b ee n inc orp orate d into mod ell ed LGD es timate s. Th e rema ini ng ad just men ts ree ct the a ppl ic ation of ex pe r t ma nag em ent ju dg eme nt to in corporate man age me nt’s exper ie nce a nd k nowl ed ge of cu stome rs, th e se ctors i n whi ch they o pe rate, and the a ss ets na nc ed. Book 1.indb 173 27/09/2022 23:48:44 17 4 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d We will c ontin ue to mon itor the n ee d for ad jus tme nts as n ew infor mati on e mer ge s whi ch mi ght n ot be rec og nis ed in o ur ex istin g m odels. At 3 1 J uly 2022, £(2 .8) m illi on of the ex pe cted c red it lo ss p rovis ion wa s at trib uta bl e to adjus tme nts (3 1 Jul y 2021 : £3 8.9 mill ion). The red ucti on in th is valu e is dr ive n by in cor po ratio n of a num be r of adju stme nts i nto mode l ca lc ulati ons, a s well a s the lowe r vol ume of C ovi d- 1 9 fo rborne e xposures and re du ce d mac roec on omi c unc er taint y re lated to the p and em ic. Th e rem ain ing va lue i s dri ven by a s ma ll nu mbe r of adj ustm ents p rimarily ma de to ensu re mod el s are re ect ive of ec on omi c con diti ons. (d) Reconciliation of loans and advances t o customers and impairment provisions Rec on cil iatio ns of gro ss lo an s and ad van ce s to custom er s and a ss oci ated imp air me nt prov isi ons a re set o ut be low. New n an cia l ass ets or igi nate in St age 1 o nly , a nd the a mo unt pre se nted rep res ents th e valu e at or igi natio n. Sub seq ue ntly , a l oan m ay tran sfe r bet wee n sta ge s, and th e pre se ntati on of su ch tra nsfe rs i s bas ed on a c omp ar iso n of the lo an a t the be gin ning of th e yea r (or at or igin atio n if thi s occ urr ed du ri ng the ye ar) a nd the e nd of th e yea r (or just p rio r to nal re pay ment or write off ). Rep ayme nts re latin g to loans w hi ch tra nsfe rre d bet wee n st age s dur ing th e yea r are p rese nted w ithi n the tra nsfe rs b etwe en s tag es lines. Such tran sfer s do not re pre se nt over ni ght rec la ssi c ation f rom on e sta ge to anoth er . Al l othe r repay me nts are p res ented i n a sep arat e li ne. ECL mo del m etho dol og ies m ay be up dated o r en ha nce d fro m time to tim e and th e imp acts of s uch c ha nge s are p res ente d on a se par at e line. Enh anc em ents to ou r mod el s uite du rin g the c our se of the na nci al ye ar ar e a con trib utor y f actor to ECL move me nts an d suc h fac t ors ha ve been take n into con sid erati on w hen a ss es sin g any re quire d ad justm ent s to mode lle d ou tput a nd e nsur in g app ropr iate prov isi on cove rag e levels. A loa n is wr it ten of f w he n the re is no re as ona ble ex pe ctati on of f ur th er re cove r y fol lowi ng rea lis atio n of all a sso ci ated col la te ral a nd ava ila bl e recovery actions against the customer . Stage 1 £ million Stage 2 £ million Stage 3 £ million To t a l £ million Gr os s l oa ns a n d ad va nc e s to cu s to me r s At 1 August 2021 7 ,434.3 960.2 330.4 8, 72 4.9 New nancial as sets originated 6,537 .4 – – 6,537 .4 T ransfers to Stage 1 19 6 . 2 ( 2 7 8 . 6 ) ( 5 . 3 ) ( 8 7 .7 ) T ransfers to Stage 2 (1 ,05 6. 3) 95 9.9 (21.4) (1 1 7 . 8) T ransfers to Stage 3 (206.9) (1 37 .5) 278.6 (65. 8) Net tra nsfe rs b et wee n stag es a nd rep ayme nts 1 (1 ,0 67 .0) 54 3. 8 2 5 1 . 9 (271 .3 ) Rep ayme nts wh ile s tag e rema ine d un cha nge d an d na l repay me nts (5,24 1 . 7) (354. 2) ( 1 57 .8) (5,7 53.7) Changes t o model methodologies (33. 3) 31 .6 1.8 0. 1 Wri te of fs ( 2.7) (22.5) (67 . 7 ) (92 .9) At 31 Ju ly 2 0 2 2 7, 6 2 7. 0 1 ,1 5 8 . 9 3 5 8 . 6 9 ,1 4 4 . 5 Stage 1 £ million Stage 2 £ million Stage 3 £ million To t a l £ million Gr os s l oa ns a n d ad va nc e s to cu s to me r s At 1 August 2020 5,90 6.6 1 ,57 4.2 37 4.6 7 ,8 55.4 New nancial as sets originated 6,980.2 – – 6, 980.2 T ransfers to Stage 1 640.0 (639 .6 ) ( 1 1 .2) ( 1 0.8) T ransfers to Stage 2 ( 1 ,054 .5) 91 2. 4 (1 5. 0) ( 1 57 . 1 ) T ransfers to Stage 3 ( 1 33.3) ( 1 1 3. 4) 1 78. 6 (68. 1 ) Net tra nsfe rs b et wee n stag es a nd rep ayme nts 1 (547 .8) 159 .4 1 52.4 (23 6.0) Re paym ents w hi le st age re ma ine d un ch ang ed a nd nal re pay me nts (4 ,9 07 .6) (78 1 .4) (1 0 6.5) (5,7 9 5.5) Changes t o model methodologies 6.3 9.8 ( 1 6.0 ) 0 . 1 Wri te of fs (3. 4) ( 1 .8) (7 4. 1 ) (79 .3) At 31 Jul y 2021 7, 4 3 4 . 3 9 6 0 . 2 3 3 0 . 4 8 , 7 2 4 . 9 1 Re pay me nt s rel ate o nl y to n an ci al a ss ets w hi ch t ra ns fer re d be tw ee n st ag es d ur in g th e yea r . O th er r ep ay me nts a re s how n in t he line below . Th e gros s ca rr ying a mo unt be fore mo di cati on of lo ans a nd ad van ce s to custome rs w hic h were m odi e d dur ing th e yea r wh ile i n Sta ge 2 or 3 was £ 288.3 mill ion (2021 : £ 293.9 mil lio n) . No g ai n or los s (202 1 : £0.8 mil lion l os s) was reco gn ise d as a res ult of th es e mod ic ation s. Th e gros s ca rr y in g amo unt at 31 July 2022 of m odi ed l oa ns an d adva nc es to cus tomer s wh ich tr ans fer red f rom S tage 2 o r 3 to Stag e 1 dur in g the yea r was £1 1 0.2mil lio n (31 July 2021 : £237 .9 mill ion). 1 1. Lo an s a nd A dv an ce s to C u st om er s continued Book 1.indb 174 27/09/2022 23:48:44 Gov ernance Repor t Strategic Repor t Financial Statements 17 5 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Stage 1 £ million Stage 2 £ million Stage 3 £ million To t a l £ million Im pa i rm e nt p rov i si on s o n loa n s an d a dva n ce s to c u st om er s At 1 August 2021 80. 0 84.2 1 1 6.2 280.4 New nancial as sets originated 37 .7 – – 37 .7 T ransfers to Stage 1 1. 3 (12 . 2 ) ( 1.7 ) (12 . 6 ) T ransfers to Stage 2 (1 7 .1 ) 5 9. 4 ( 9. 9) 3 2 . 4 T ransfers to Stage 3 (9 .0) (28.8) 1 23. 2 85.4 Net re me asu rem ent of ex pe cted c red it lo ss es a ris ing f rom tr ans fer s bet we en st age s an d repay ments 1 ( 2 4 . 8 ) 18 . 4 111 . 6 1 0 5 . 2 Rep ayme nts a nd ECL m oveme nts wh ile s tag e rema ine d un cha ng ed an d na l rep ayme nts (37 .6) (0.7) (9.8) (48. 1 ) Changes t o model methodologies ( 2 . 2 ) ( 1. 1) 1. 9 (1. 4 ) Cha rge to the in co me state me nt (26.9) 16. 6 1 03 . 7 93.4 Wri te of fs (2 .8 ) (22 . 5) (62 . 9) (8 8. 2 ) At 31 Ju ly 2 0 2 2 50.3 78.3 15 7 .0 28 5.6 Stage 1 £ million Stage 2 £ million Stage 3 £ million To t a l £ million Im pa i rm e nt p rov i si on s o n loa n s an d a dva n ce s to c u st om er s At 1 Au gu st 20 20 57 . 6 87 .3 9 3. 8 2 3 8.7 New nancial as sets originated 45. 0 – – 45. 0 T ransfers to Stage 1 4.0 (1 5.7) (1 .0 ) ( 1 2.7) T ransfers to Stage 2 ( 1 5. 7) 63. 4 (2 .4 ) 45.3 T ransfers to Stage 3 (2.2) ( 1 3. 3) 67 .6 52. 1 Net re me asu rem ent of ex pe cted c red it lo ss es a ris ing f rom tr ans fer s bet we en st age s an d repay ments 1 (13. 9 ) 3 4 . 4 6 4. 2 8 4 .7 Rep ayme nts a nd ECL m oveme nts wh ile s tag e rema ine d un cha ng ed an d na l rep ayme nts (9.0) (35.9) (5.0) (49 .9) Changes t o model methodologies 0.9 (0 .2 ) (2 .8) (2 . 1 ) Cha rge to the i nco me st ateme nt 23. 0 ( 1 .7) 56.4 77 .7 Wri te of fs (0.6) ( 1 .4) (34.0) (36.0) At 31 Jul y 2021 80 .0 84.2 1 1 6.2 280. 4 1 Re pay me nt s rel ate o nl y to n an ci al a ss ets w hi ch t ra ns fer re d be tw ee n st ag es d ur in g th e yea r . O th er r ep ay me nts a re s how n in t he line below . 2022 £ million 2021 £ million Impa ir me nt los se s rela ting to loa ns a nd ad vanc es to cus tome rs: Charge t o income stat ement arising fr om movement in impairment provisions 93.4 77.7 Am ount s wri t ten of f di rec tly to inc ome s tatem ent, ne t of recove ri es a nd oth er co sts 8.5 10 . 2 101. 9 87 . 9 Impairment losses relat ing t o other nancial assets 1.4 1. 9 Impairment losses on nancial asse ts recognised in income statement 103.3 89. 8 Impa ir me nt los se s on n anc ia l ass ets of £1 03.3 mi llio n (202 1 : £89.8 mil lio n) inclu de £6 0. 7 mi llio n in rel atio n to Novit as (202 1 : £73.2 mil lio n) . Th e cont ractu al a mou nt ou tsta ndi ng at 31 July 2022 on nan cia l as sets th at were w rit ten of f duri ng the p er io d and a re stil l sub ject t o reco very activity is £ 1 7 .3 million (3 1 July 2 021 : £1 9. 0 million) . (e) Fina nc e lea s e and h ir e pu rc ha se ag re em en t re ce iva ble s 31 Ju l y 2 02 2 £ million 31 J u l y 20 21 £ million Loa n s an d a dv an ce s to c u st om e rs c om p ri s e Hire pu rch ase ag ree men t rece iva ble s 3, 725. 1 3,554.6 Finance lease r eceivables 694 .4 567 . 1 Oth er l oan s and a dva nce s 4,439.4 4, 32 2.8 At 31 Ju ly 8 ,858.9 8,444.5 Book 1.indb 175 27/09/2022 23:48:44 17 6 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d Th e foll owin g tab le sh ows a re con cil iatio n bet we en gr oss i nvestm ent i n na nc e le ase a nd hi re purc ha se agre em en t rece iva bl es in c luded in the tab le a bove to pres en t valu e of min imu m le ase a nd hi re purc ha se pay me nts: 31 Ju l y 2 02 2 £ million 31 J u l y 20 21 £ million Gros s inve stme nt in nan ce l eas es a nd hi re purc ha se agre em ent re ce iva ble s du e: On e yea r or wi thin o ne ye ar 1,74 0 . 2 1, 6 3 2 . 6 >On e to two ye ar s 1 ,927 . 1 1,7 7 2 . 0 >Tw o t o t h r e e y e a r s 943.9 865.8 > Th ree to fou r yea rs 475 . 1 427 . 2 >Four to ve ye ar s 12 3 .7 17 5 . 9 More th an ve yea rs 36 . 2 48.9 5,24 6.2 4,9 2 2.4 Unearned nance income (73 1 .4) (6 82. 6) Prese nt va lue of m inim um l eas e an d hire pu rch ase ag ree me nt paym en ts 4,5 1 4. 8 4, 23 9.8 Of w hic h du e: On e yea r or wi thin o ne ye ar 1 ,496.9 1, 4 0 5 . 5 >On e to two ye ar s 1, 6 5 4 . 4 1, 5 2 7 . 3 >Tw o t o t h r e e y e a r s 815.7 74 7. 2 > Th ree to fou r yea rs 410 . 0 368. 1 >Four to ve ye ar s 10 6 . 6 14 9 . 7 More th an ve yea rs 31. 2 42.0 4,5 1 4. 8 4, 23 9.8 Th e agg regate c ost of a ssets a cqu ire d for the p urp ose of l et ting u nde r n anc e le ase s an d hire p urch ase a gre eme nts was £7 ,443.8 million (202 1 : £6, 775 .3 m ill ion). The aver age ef fecti ve intere st rate on na nce l ea ses a pprox imate s to 9 .9% (202 1 : 9.8% ). Th e pre sen t v alue of minimum le ase a nd hi re purc has e agre em ent p ayme nts ree cts th e fai r valu e of na nc e lea se a nd hire p urc has e agre em ent re ce ivab le s befo r e de duc tio n of impairment pr ovisions. 1 2 . Debt Securities Fair value through prot or loss £ million Fair value through other comprehensive income £ million Amortised cost £ million To t a l £ million Long t rading posit ions in deb t securities 12 . 4 – – 12 . 4 Cer ticat es of deposit –– 1 8 5 . 0 1 8 5 . 0 Sovere ig n and c en tral b ank d ebt – 415 . 4 – 415 . 4 At 31 Ju ly 2 0 2 2 1 2 . 4 41 5 .4 18 5 .0 612 . 8 Fair v alue through prot or loss £ million Fair v alue through other compre hensive income £ million Amortise d co st £ million To t a l £ million Long t rading posit ions in deb t securities 20. 1 – – 20 . 1 Cer ticat es of deposit – – 264. 7 264 . 7 Sovere ig n and c en tral b an k debt – 1 92.5 – 192 .5 At 3 1 Ju ly 2021 20. 1 1 92.5 264. 7 4 77 . 3 Movem en ts on the b ook va lu e of sovere ig n and c en tral b ank d ebt c omp ri se: 2022 £ million 2021 £ million Sovere ig n and c entr al ba nk de bt at 1 Aug ust 19 2 . 5 72. 2 Addi tions 335.3 313.7 Redemptions (8 0.0) (191 . 0 ) Currency transla tion differences (1. 2 ) (5. 2) Mov ement in v alue (31 . 2) 2. 8 Sovere ig n and c ent ral ba nk d ebt at 31 July 415 . 4 19 2 . 5 1 1. Lo an s a nd A dv an ce s to C u st om er s continued Book 1.indb 176 27/09/2022 23:48:44 Gov ernance Repor t Strategic Repor t Financial Statements 17 7 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 13. Eq u it y S h a re s 31 Ju l y 2022 £ million 31 J u l y 2021 £ million Long tr ading positions 27 . 1 30.8 Other equity shares 1. 3 1.1 28.4 31.9 1 4. Derivativ e Financial Instruments Th e grou p ente rs into de ri vative c ontra cts w ith a nu mbe r of n anc ial i nsti tuti ons to min imi se the i mpa ct of inte rest a nd cu rre n cy rate change s to its n anc ia l instr um ents. T he g roup’ s total d eri vative a ss et and l iab ili t y pos itio n as rep or te d on the c ons olid ated ba lan ce s he et is as fo llow s: 31 Ju l y 2 02 2 31 J u l y 20 21 Notional value £ million Assets £ million Liabilities £ million Notional value £ million Assets £ million Liabilities £ million Exchan ge rate c ontracts 10 9 . 8 0 .7 0 . 3 10 4 . 5 0 . 2 0 . 2 Interest rat e contracts 4,408. 7 70.5 88.9 3,267 . 8 18. 1 2 1 . 1 4,5 18.5 71 . 2 89. 2 3,37 2.3 1 8.3 21 .3 Notio nal a mo unts of intere st r ate contra cts totall ing £3,828.8 mil lio n (3 1 J uly 2021 : £ 2,849 .6 mill ion) have a re sid ual m atur it y of mo re tha n one ye ar . Inc lud ed in th e de ri vative s above a re the fo llow ing c as h ow an d fai r valu e he dge s: 31 Ju l y 2 02 2 31 J u l y 20 21 Notional value £ million Assets £ million Liabilities £ million Notional value £ million Assets £ million Liabilities £ million Cash ow hedges Interest rat e contracts 1, 5 5 2 . 0 3 3 . 2 1. 6 78 0 .7 2. 2 1 . 2 Fair value hedges Interest rat e contracts 1, 475 . 4 2 8 . 3 8 2 . 3 1, 4 8 3 . 5 14 .7 17 . 8 Th e grou p ge ner all y ente rs in to fair val ue he dg es a nd c ash ow hed ge s with c ha nge s in th e rele vant be nc hma rk i ntere st rate ri sk being the predominant hedged risk. Th e fai r valu e he dge s se ek to he dge th e exp osu re to chan ge s in the f air va lue of re co gni sed a ss ets an d lia bil itie s or rm co mm i tme nts attr ibu ta ble to intere st rate r isk. C han ge s in intere st ra te risk a re co nsid ere d the l arge st c omp one nt of the ove ral l cha ng e in fair value . Other risks suc h as cr edi t ris k are m ana ge d but excl ude d fro m the he dg e acc oun ting re latio nsh ip. The i ntere st rate ri sk co mpo ne nt is the c h ange in fair valu e of the xed rate he dgi ng item s ar isi ng so le ly fro m ch ang es i n the be nc hma rk i nteres t rate. Cas h ow he dge s se ek to he dge th e exp osu re to varia bi lit y in f utu re cas h ows d ue to movem ents i n the rel evan t ben chm ar k intere st rate with intere st rate swaps. T he se f uture c as h ows rel ate to future in teres t payme nts or re ce ipts on re cog nis ed n an cia l instr um ents a nd on for ecast tran sac tion s for p er iod s of up to six (2021 : ve) yea rs. T he gro up a ppl ie s por tfol io c ash ow he dgi ng for i nteres t rate ri sk ex posures on a por tfol io of ac tual a nd fo rec ast va ri abl e intere st rate c ash ows ar isi ng fr om var ia ble r ate bor rowin gs. Ce r ta in item s wh ich a re ec on omi cal ly h edg ed m ay be in eli gib le fo r hed ge ac co untin g in ac co rdan ce w ith IAS 3 9. The refore, a po r t fol io of oati ng rate li abi liti es h ave bee n de si gnated a s el igib le h edg ed i tems in th e ca sh ow h edg e po r t foli o. The am ou nts and ti min g of fu ture c ash ows ar e proj ecte d on the b asi s of thei r co ntrac tual a nd fo rec ast ter ms a nd othe r rel evant f actor s. Th e expo sure f rom th is po r t foli o fre que ntly cha ng es du e to new fac iliti es b ein g or igi nated, co ntractu al re paym ents a nd ne w intere st rate swap s adde d to the por tfo lio. T o a sse ss h ed ge ef fe cti ven es s the ch an ge in fa ir va lue o r cas h ows of th e he dgi ng ins tru men ts is co mpa red w ith the c ha nge i n f ai r valu e or c as h ows of the h ed ged i tem at trib uta ble to the h edg ed r isk. A h ed ge is c ons ide red h igh ly ef fe cti ve if the re sul ts are w ithi n a rat io of 80% - 1 25 %. Th e mai n sou rce s of he dge i nef fecti vene s s ca n inc lud e, but a re not lim ited to, cas h ow tim ing d if fe ren ce s bet we en th e hed ge d i te m a n d th e hedging instrumen t. Th e matur it y pro le for th e notio na l amo unts of th e grou p’ s fa ir va lue h edg es i s set ou t be low . On demand £ million Within three months £ million Between three and six months £ million Between six months and one y ear £ million Between one and ve year s £ million After more than ve year s £ million To t a l £ million Fair value hedges In te re st ra te r is k 3 1 J uly 2022 – 0. 7 0.4 1 4 1 .3 680.3 652 . 7 1 ,4 75.4 3 1 July 202 1 – 70 .8 4 1 .3 1 .0 482 .9 88 7 .5 1 ,483.5 Book 1.indb 177 27/09/2022 23:48:44 17 8 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d Fair va lue h ed ge s have a n avera ge xed rate of 1 .9% (3 1 J uly 2021 : 1 .9% ). Det ails of th e he dgi ng in stru me nts for th e grou p’ s h ed ge in ef fe ctive ne ss a ss es sme nt ar e set ou t be low . Changes in fair value of hedging instrument used for calculating hedge ineffect iveness 2022 £ million Hedge ineffect iveness recognised in income statement 2022 £ million Changes in fair value o f hedging instrument used f o r calculating hedge ineffectiveness 2021 £ million Hedge ineffectiveness recognised in income stat ement 2021 £ million Cash ow hedges In te re st ra te r is k 29. 6 0. 1 8.9 0. 1 Fair value hedges In te re st ra te r is k (50.4) (0. 1) (29.0) (0. 1 ) Th e car r y ing a mou nt of he dgi ng inte rest r ate swaps is h eld w ith in de ri vative n anc ia l instr um ents a nd the h ed ge in ef fe ctive ne ss is held within other income. Det ail s of the he dg ed ex pos ures c overe d by the g roup’ s he dgi ng str ategi es a re set o ut b elow. Carr ying amount of hedged item £ million Accumulated amount of fair v alue adjustment on the hedged item £ million Changes in fair v alue of hedged item used for calculating hedge ineffect iveness £ million At 31 Ju ly 2 0 2 2 Fair value hedges Assets Debt securities 211.1 (24.0) (28.5) Loan s and a dva nce s to custom er s and u ndr awn co mm itme nts 107.4 (4. 8 ) (6 .7 ) 318.5 (28.8) (35.2) Liabi liti es Deposits b y customers –– ( 0 . 1 ) Debt securities in issue 823.3 (7 2 .2) (71 .6) Subordinat ed loan capital 18 6 . 5 ( 13 . 0 ) (13 . 8 ) 1 ,009 .8 (85.2) (85.5) Carrying amount of hedged it em £ million Accumulated amount of fair value adjustment on the hedged item £ million Changes in fair valu e of hedge d item used for calculating hedge ineffectiveness £ million At 31 Jul y 2021 Fair value hedges Assets Debt securities 192.5 4.5 1.2 Loan s and a dva nce s to custom er s and u ndr awn co mm itme nts 88.5 1 .8 (2.5) 281.0 6.3 ( 1 .3) Liabi liti es Deposits b y customers 2 1 .2 0 . 1 1 .5 De bt sec ur itie s in i ssu e 842 .6 (0.5) 27 .6 Subordinat ed loan capital 222 . 7 0. 8 1 . 1 1 ,0 86.5 0. 4 3 0.2 1 4. Derivativ e Financial Instruments continued Book 1.indb 178 27/09/2022 23:48:44 Gov ernance Repor t Strategic Repor t Financial Statements 17 9 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Deta ils of th e imp act of h edg ing re lati ons hip s on the i nco me state me nt and oth er c omp reh ens ive in co me are s et ou t bel ow . Ch an ge s in f ai r val ue of hedged it em used for calculating hedge ineffectiveness £ million Losse s on discontinued hedges reco gnise d in other comprehensive income £ million Gains from ch an ge s in va lu e of hedging instrument reco gnise d in other comprehensive income £ million Amounts reclassied from r eser ves t o income statement 1 £ million Cash ow hedges In te re st ra te r is k 31 July 202 2 (29. 5) (0.4) 29.6 (1 .0) 3 1 Ju ly 2021 (8.8) (1 .5) 8.9 (0.3) 1 Am ou nts h ave b ee n re cl as si e d to oth e r inc om e si nc e he dg e d ca sh ows w il l no l ong e r oc cu r . 1 5. Intangible Assets Goodwill £ million Software £ million Intangible assets on acquisition £ million Group total £ million Company software £ million Co st At 1 Au gu st 20 20 1 53.0 233.3 67 .5 453.8 0.5 Addi tions 2.0 4 6. 2 4. 2 52.4 – Disposals ( 1 2. 1 ) (6.7) (20. 7 ) (39.5) (0. 1 ) At 31 July 20 21 1 42.9 272 .8 5 1 .0 46 6. 7 0.4 Addi tions –5 6 . 0 –5 6 . 0 – Disposals (0.3) (29 .3) – (29.6) – At 3 1 Ju ly 2022 1 42.6 299.5 5 1 .0 493. 1 0 .4 Amort isation and impairment At 1 Au gu s t 2020 4 7 .9 1 1 5.5 50. 3 21 3. 7 0.4 Am or tis atio n ch arg e for the ye ar – 29.4 3.0 32.4 – Imp air me nt ch arg e for the ye ar 1 2. 1 – 1 1 .2 23.3 – Disposals (1 2. 1 ) (2.5) (20.7) ( 35.3) – At 3 1 July 20 2 1 4 7 .9 1 42 .4 43. 8 234 . 1 0. 4 Am or tis atio n cha rge fo r the ye ar – 34.6 2. 0 3 6.6 – Impa ir me nt ch arge fo r the ye ar – – – – – Disposals – (29.6) – (29 .6) – At 31 Ju ly 2 0 2 2 47 . 9 14 7 . 4 4 5 . 8 241 . 1 0 .4 Ne t bo ok va lu e a t 31 Ju l y 2 02 2 9 4.7 152 . 1 5 . 2 25 2 .0 – Net b ook va lue at 31 Jul y 202 1 95.0 1 30.4 7 .2 232 .6 – Net b ook va lu e at 1 Augu st 2020 1 0 5. 1 1 1 7 .8 1 7 .2 2 4 0. 1 0. 1 Sof t ware i nc lud es a sse ts und er d evel opm en t of £7 1 . 1 mi lli on (31 July 2021 : £60. 1 mi lli on) . Inta ngi ble a ss ets on ac qu isi tion re late to broke r and c ustom er re lati ons hips a nd a re am or ti sed ove r a pe ri od of ei ght to 20 yea rs. In the 2022 nan cia l yea r , £ 2. 0 mil lio n (202 1 : £3.0 milli on) of the am or ti sati on ch arg e is in clu ded i n amo r tis atio n of inta ngi b le assets on acquisition and £ 34.6 million (20 21 : £29. 4 million) of t he amortisation charge is included in administra tive expenses shown in th e cons olid ated inc ome s tatem ent. In th e pri or n an cia l yea r , a n im pai rme nt c harg e of £1 1 .2 mi lli on rel atin g to intan gib le as sets o n acq uis iti o n was exc lud ed f rom adm inis trati ve expe ns es sh own i n the co nso lid ated inc om e statem ent. Imp ai rm ent te st s for g oo dwi ll At 3 1 J ul y 2022 , goo dw ill h as b ee n all oc ated to eig ht (31 July 2021 : ei ght) in di vid ua l CGUs. S ix (31 July 2021 : s ix) a re wi thin th e Ban ki ng di vis ion, one i s the As set M an age me nt div is ion a nd the re ma ini ng on e is the S ecu ri tie s div isi on. Th e num be r of CGUs w ith g ood wil l de cre as ed by one in the pr io r year e nd ed 31 July 2021 follow ing f ull i mpa ir men t of the go odw ill a llo cate d to the Novi tas C GU (fu r the r det ail at th e end of th is note) . Go odw ill im pa irm ent rev iews a re ca rr ie d out a nnu al ly by as se ssi ng the re cove ra ble a mou nt of the g roup’ s CGU s, whi ch is th e hig h er of f air valu e le ss c osts to se ll an d valu e in us e. Th e recove ra ble a mou nts for a ll CGU s were m eas ure d bas ed on va lu e in us e. A valu e in us e ca lcul atio n use s dis cou nted ca sh ow p roje cti ons ba se d on the m ost re ce nt thre e yea r pla ns to deter min e the rec o ver ab le amo unt of e ach C GU. The se th ree ye ar p lan s inc lud e the ex pe cted im pac t of Covi d- 1 9. The key as su mptio ns un de rly in g man age me nt’s three yea r pla ns, wh ic h are ba se d on pa st exp er ie nc e and fo rec ast m ar ket con di tion s, are ex pe cted lo an b ook g row th rate s and n et retu rn on loan boo k in the B an ki ng CGU s, expe cte d total cli en t ass et grow th r ate and reve nu e marg in in th e As set M ana ge men t CGU a nd exp ec ted m arket - mak in g con diti ons i n the Se cur iti es CG U. Book 1.indb 179 27/09/2022 23:48:44 18 0 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d For ca sh ows beyo nd the g roup’ s thre e yea r pla nn ing h ori zon, a term ina l valu e was c al cul ated usi ng a pr ud ent a nnu al g row th rat e of 0% (202 1 : 0% ). The c as h ows ar e disc ou nted us ing a p re-ta x e stim ated wei ghted ave rag e co st of ca pit al that re e cts cu rre nt ma rket rates app ropr iate to the CGU a s set o ut in th e foll owin g tab le. At 3 1 J uly 2022, the res ults of th e revi ew ind icate the re is n o goo dwi ll im pai rme nt. Th e inp uts us ed in th e val ue in u se ca lcu l ations are se nsitive pri ma ril y to cha nge s in th e ass umpti ons fo r fu ture c ash ows, dis cou nt rates a nd l ong-ter m grow th r ates. Hav ing p er fo rm ed stre s s tested va lue in us e cal cul ation s, the gro up be li eves that a ny rea son ab ly po ssi ble c ha nge i n the key as sum ptions w hi ch have b ee n use d woul d n ot l ead to the ca rr y in g valu e of any C GU to excee d its re cove rab le a mou nt. Deta ils of th e CGU s in wh ich th e goo dw ill c ar r yi ng am oun t is sig ni ca nt in c ompa ri son w ith total g ood wil l, togethe r wi th the pr e-tax disc ount rate use d in d eter min ing va lue i n us e, are dis cl ose d se par ately i n the ta bl e bel ow: 31 Ju l y 2 02 2 31 J u l y 2 0 21 Cash generat ing unit Goodwill £ million Pre-ta x discount rate % Goodwill £ million Pre-ta x discount rat e % Close Bro thers Asset Management 39.9 1 0.4 40.2 7 . 1 Wint er ood Securities 23.3 16. 7 23.3 1 2.0 Oth er 31. 5 15 .4 - 17 . 1 31.5 9. 8 - 10. 9 94. 7 95 .0 Imp ai rm en t of go odw ill a nd i nt an gib le a ss et s on ac qu isi tio n In the p rio r yea r end ed 31 July 2021 , th e grou p rec orde d an im pa irm ent c har ge of £1 2. 1 mi llio n rel ating to the f ull i mpa irm en t of goo dw ill all oc ated to Novi tas, a C GU wi thin th e grou p’ s C omm erc ia l seg me nt. In add itio n, a total imp air me nt ch arg e of £1 1 . 2 mil lio n was rec orde d rela ting to inta ng ibl e ass ets on a cqu isi tion, of w hic h £1 0. 1 mil lio n rela ted to Novit as. Th ese i mpa ir men ts ree cted th e valu e in us e of the Nov ita s CGU a nd in tan gib le as sets o n acq uis itio n fal lin g bel ow ca rr y in g valu e, d ri ve n by lo we r ex pe cted f uture c as h ows fo llow ing st rategi c de cis ion s mad e by man age me nt. At 3 1 Ju ly 2021 , the va lu e in us e of the CG U and int angible as sets on a cqu isi tion wa s £1 92.4 milli on an d £3. 1 m ill ion re sp ecti vel y , an d the pre -ta x di sco unt r ate used i n the im pai rm ent c a lculations was 9 %. 1 6. Propert y , Plant and Equipment Leasehol d propert y £ million Fixtures, ttings and equipment £ million Assets held under operating leases £ million Mot or vehicles £ million Right o f use assets 1 £ million To t a l £ million Group Cost A t 1 A u g u s t 2 0 2 0 2 5 . 5 6 0 .1 3 4 1 . 4 0 .1 6 0 . 4 4 8 7. 5 Addi tion s 1 . 1 1 7 .2 6 0.6 0. 1 1 7 .6 9 6.6 Di sp os al s (1 .4) (2.5) (4 1 .3) – ( 6.3) (5 1 .5) At 3 1 July 202 1 25 .2 7 4. 8 360. 7 0.2 7 1 . 7 532 .6 Ad di t io n s 0.6 4.3 67 .8 – 13.6 8 6. 3 Di sp osa ls (4.9) (1 6.5) (30.3) – (6.8) (58.5) At 3 1 Ju ly 2022 20.9 62.6 398. 2 0.2 78.5 560.4 Depreciation A t 1 A u g u s t 2 0 2 0 14 . 8 4 2 . 9 11 9 . 5 0 .1 1 3 . 0 1 9 0 . 3 De pre ciati on a nd im pai rm ent c ha rge s for the ye ar 2.3 6.8 4 4.8 – 1 3.8 67 .7 Di sp os al s (1 .4) (2.2) (26.5) – (5.2) (3 5.3) At 3 1 J ul y 202 1 1 5. 7 4 7 .5 1 37 .8 0. 1 21 .6 222. 7 De pre cia tion a nd im pa irm en t cha rge s for th e yea r 2 .2 7 .6 4 0.6 0. 1 1 3.2 63.7 Di s po s a ls (4.9) (1 8. 2) (20. 2) – (5.2) (48. 5) At 3 1 J u l y 2 0 2 2 13 . 0 3 6 . 9 15 8 . 2 0 . 2 2 9 . 6 2 37.9 Ne t bo ok va lu e a t 31 Ju l y 2 02 2 7 . 9 25 .7 2 40 .0 – 4 8 .9 32 2 . 5 Net b ook va lue at 31 Jul y 202 1 9.5 27 .3 222 .9 0. 1 50. 1 30 9.9 Net b ook va lue at 1 Au gu st 2020 1 0. 7 1 7 . 2 221 .9 – 4 7 .4 297 .2 1 Right of use asset s primarily relate to the group’ s leasehold properties. 15. In t an gi b le A s se ts continued Book 1.indb 180 27/09/2022 23:48:45 Gov ernance Repor t Strategic Repor t Financial Statements 18 1 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Th ere wa s a gai n of £3.2 mi llio n fro m the s ale of a ss ets he ld un der o pe ratin g le ase s for th e yea r end ed 31 July 2022 (2021 : £ 2. 6 milli on) . 31 Ju l y 2022 £ million 31 J u l y 2021 £ million Future minimum lease rent als receiv able under non-cancellable operating leases On e yea r or wi thin o ne ye ar 49.2 44 .3 >On e to two ye ar s 28.2 28 .5 >Tw o t o t h r e e y e a r s 1 3.5 14 . 6 > Th ree to fou r yea rs 5.6 4.0 >Four to ve ye ar s 2.9 1. 9 More th an ve yea rs 0.6 1. 2 10 0 . 0 94. 5 Leasehol d propert y £ million Fixtures, ttings and equipment £ million To t a l £ million Company Cost At 1 Au gu st 20 20 1. 1 5 . 5 6 . 6 Addi tions –6 . 76 . 7 Disposals (0.8) (0.4) ( 1 . 2) At 31 Jul y 2021 0.3 1 1 .8 1 2. 1 Addi tions ––– Disposals ––– At 31 Ju ly 2 0 2 2 0.3 1 1.8 12. 1 Depreciation At 1 Au gu st 20 20 0.8 0.4 1 .2 Cha rge fo r the ye ar –0 . 60 . 6 Disposals (0.8) (0.4) ( 1 . 2) At 31 Jul y 2021 –0 . 60 . 6 Cha rge fo r the ye ar 0. 1 1 . 2 1 .3 Disposals ––– At 31 Ju ly 2 0 2 2 0. 1 1.8 1 . 9 Ne t bo ok va lu e a t 31 Ju l y 2 02 2 0.2 10.0 10.2 Net b ook va lue at 31 Jul y 202 1 0 . 3 1 1. 2 1 1. 5 Net b ook va lue at 1 Au gu st 2020 0.3 5. 1 5.4 Th e net b ook va lue of l ea se hol d prop er ty c omp ri se s: Group Compan y 31 Ju l y 2022 £ million 31 J u l y 2021 £ million 31 Ju l y 2022 £ million 31 J u l y 2021 £ million Long leasehold proper ty 1.3 1. 5 0. 2 0.3 Sho r t le as eh old p rope r t y 6.6 8.0 – – 7. 9 9.5 0. 2 0.3 Book 1.indb 181 27/09/2022 23:48:45 18 2 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d 1 7 . O t he r A ss et s a nd O t h er L ia b il it i e s 31 Ju l y 2022 £ million 31 J u l y 2021 £ million Prepayments, a ccrued income and other assets Prepaym ents 11 5 . 6 13 4 . 6 Accrued income 1 4.9 15 .7 T r ade a nd othe r rec eiva bl es 54. 7 59.3 18 5 . 2 209.6 Acc r ua l s, d e fe rr e d in co m e an d ot h er l i ab i li t ie s Accruals 14 9 . 0 18 2. 8 Deferr ed income 5. 7 4. 1 T r ade a nd othe r payab le s 15 5 . 9 1 58.3 Provisi ons 23.9 21.8 334.5 367 .0 Provis io ns move me nt in the ye ar: Claims £ million Proper t y £ million Other £ million To t a l £ million Group At 1 Au gu st 20 20 –6 . 19 . 7 1 5 . 8 Addi tions 6.2 0.8 5.9 1 2.9 Utilised (0.4 ) (0. 1 ) (2. 9) (3.4 ) Released – – (3.5) (3.5) At 31 Jul y 2021 5.8 6. 8 9.2 21 . 8 Addi tions 5 . 8 1 .1 2 . 2 9 .1 Utilised (1.4 ) ( 0 .6 ) (1 . 9 ) ( 3 . 9 ) Released (1 . 3 ) ( 0. 6 ) (1.2 ) ( 3 . 1) At 31 Ju ly 2 0 2 2 8.9 6. 7 8.3 23.9 Proper t y £ million Other £ million To t a l £ million Company At 1 Au gu st 20 20 0.4 2.9 3.3 Addi tions –0 . 70 . 7 Utilised –( 1 . 0 ) ( 1 . 0 ) Released ––– At 31 Jul y 2021 0.4 2.6 3.0 Addi tions –1 . 01 . 0 Utilised –( 0 . 4 ) ( 0 . 4 ) Released –( 0 . 2 ) ( 0 . 2 ) At 31 Ju ly 2 0 2 2 0.4 3.0 3.4 Provis ion s are m ade fo r cla ims a nd oth er ite ms wh ich a ri se in th e nor ma l cou rs e of bus ine ss. C lai ms re late to leg al a nd reg ula t or y ca se s, wh ile oth er item s larg el y rel ate to prope r t y dil api dati ons a nd e mpl oyee b ene ts. For s uc h mat ters, a p rovi sio n is re cog nis ed w her e it is d e term ine d that the re is a pre sen t obl igati on ar is ing f rom a pa st event, pay me nt is pro bab le, an d the am oun t can b e es timate d reli abl y . T he tim ing a nd / o r ou tcome of th es e cla ims a nd oth er i tems a re unc er tain. Book 1.indb 182 27/09/2022 23:48:45 Gov ernance Repor t Strategic Repor t Financial Statements 18 3 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 1 8 . Settlement Balances and S hort Positions 31 Ju l y 2022 £ million 31 J u l y 2021 £ million Settlement balances 780 .7 67 4.2 Shor t positions in: Debt securities 7. 5 7. 0 Equity shares 7. 9 9.4 15 . 4 16 . 4 796 . 1 690. 6 19. Fin a nc ia l Li a bi l it i es On demand £ million Within three months £ million Between three months and one y ear £ million Between one and t wo year s £ million Between two and v e year s £ million After more than ve years £ million To t a l £ million Deposits b y banks 6 . 1 5 2 . 0 1 0 2 . 4––– 1 6 0 . 5 Deposits b y customers 120.9 1,645 .2 3 ,61 5.6 1 ,0 58 .8 32 9.9 – 6 , 770.4 Loans and over drafts from banks 12 .1 10 .7 – 2 2 8 . 0 3 7 1. 9 – 6 2 2 .7 Debt securities in issue –2 6 . 7 8 5 5 . 3 2 4 9 . 4 5 6 7 . 0 3 6 2 . 5 2 , 0 6 0 . 9 At 3 1 Jul y 2022 1 39. 1 1 ,7 34.6 4,5 73.3 1 ,536.2 1,268.8 362.5 9,6 1 4.5 On demand £ million Withi n three months £ million Between three months and one year £ million Between on e an d tw o years £ million Between tw o an d ve years £ million After more t han ve years £ million To t a l £ million Deposits b y banks 2 . 1 37 . 7 1 1 0.8 – – – 1 50. 6 Deposits by customers 57 6.3 1 ,54 7 .9 3,343. 6 72 9.8 437 .2 – 6,634 .8 Loans and over drafts from banks 22 . 7 – – – 490. 0 – 5 1 2. 7 Debt securities in issue 1 (0.6) 57 .0 16 1 . 2 65 5.2 327 .5 66 5.2 1 ,8 65. 5 At 3 1 July 202 1 600.5 1 ,64 2. 6 3, 61 5. 6 1 ,385 .0 1 ,254 . 7 665.2 9 , 1 63.6 1 De bt s ec ur iti e s in is su e of £( 0.6) mi ll io n du e on d em an d in cl ud es a n ad ju stm en t re lat ing to t he g rou p’ s fa ir va lu e he dg es . S e e note 14 for fu r the r in for m ati on. At 3 1 J uly 2022, the pa rent c om pany h eld £ 25 1 .5 mi lli on (31 July 2021 : £25 1 . 1 m illi on) de bt se cur iti es in i ssu e. As di scu ss ed in n ote 28( c) at 3 1 J uly 2022 th e grou p ac ce sse d £60 0.0 mill ion c as h un der th e Ba nk of En gla nd’s T e rm Fun din g Sc he me with Addi tion al In ce ntive s for SM Es (31 July 2021 : £49 0.0 millio n) . C ash f rom th e sch eme s an d rep urch ase a gre eme nts is i ncl ude d wi th in loans and overdr af ts fro m ban ks. Re sid ua l matur iti es of the s che me s an d repu rch ase ag ree me nts are a s foll ows: On demand £ million Within three months £ million Between three months and one year £ million Between one and two years £ million Between two and ve years £ million After more t han ve years £ million To t a l £ million At 31 Jul y 2 0 22 – 0 .6 – 2 2 8 .0 372 .0 – 60 0 .6 At 3 1 Ju ly 2 02 1 – – – – 490 .0 – 490 .0 2 0. S u bo rd i na te d Lo a n Ca pi t al Prepayme nt date Initial interest rate 31 Ju l y 2022 £ million 31 J u l y 2021 £ million Final maturity date 2027 2022 4.25% – 23. 5 2031 2026 2.00% 18 6 . 5 19 9 . 2 18 6 . 5 222 . 7 At 3 1 J uly 2022, the pa rent c om pany h el d £ni l mil lio n (3 1 J ul y 202 1 : £ 23.5 mil lio n) and £1 86.5 mi lli on (31 July 2021 : £1 9 9.2 mi llion) of sub ordi nated lo an c api ta l with nal m atur it y date s of 2027 and 2031 respe cti vel y . Book 1.indb 183 27/09/2022 23:48:45 18 4 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d 21 . C alled Up S hare C a pital and Dist ributable Reserves 31 Ju l y 2 02 2 31 Ju l y 2 021 million £ million million £ million Group and company Ord ina r y s hare s of 25p eac h (all otte d, iss ued a nd f ull y pa id) 15 2 . 1 3 8 . 0 15 2 .1 3 8 . 0 At 3 1 J uly 2022, the co mpa ny’ s re se r ves ava ila bl e for di stri buti on un de r se ctio n 830 (2) and 831 (2) of the Co mpa nie s Act 20 0 6 we re £436.2 mil lio n (202 1 : £4 1 7 .5 m ill ion). The di rector s have a ppl ied th e gu ida nce p rovi ded by I CAE W TEC H 02/1 7 in de term ini ng thi s . 2 2 . Ca p it a l - un au d it ed Th e grou p’ s p oli cy is to be we ll ca pi tal ise d an d its a ppro ach to ca pi tal m an age me nt is dr ive n by str ategi c and o rga nis atio nal r equirements, while als o tak ing i nto acco unt the re gu lator y a nd co mme rci al env iron me nts in wh ich i t ope rates. Th e Prud enti al Re gu latio n Autho rit y (“ PR A ” ) sup er vise s the gro up on a c ons oli dated ba sis a nd rec ei ves in form ation o n the c api ta l ade qu acy of, and s ets ca pi tal re qui reme nts fo r , the g rou p as a wh ole. In a ddi tion, a nu mbe r of su bsi dia ri es a re regu lated fo r pr ude ntia l pur po ses by e ithe r the PR A or the F ina nci al C ond uct Au thor it y (“FCA ” ) . Th e aim of th e ca pit al ade qu acy re gim e is to promote s afet y and s oun dne ss i n th e n an cia l system. It is s truc ture d arou nd thre e “pi lla rs” : Pi lla r 1 on mi nimu m ca pit al req uire me nts; Pilla r 2 on the s upe r v iso r y revi ew p ro ce ss; and Pi lla r 3 on ma rket di sci pli ne. Th e grou p’ s Pil la r 1 infor matio n is pr ese nted b elow. Under Pi lla r 2, the group c omp letes a n an nua l se lf-a ssessment o f risks kn own as th e Inter na l Cap ita l Adeq uac y Ass es sm ent Pro ces s (“ICA AP ”). The ICA A P is rev iewe d by the PR A wh ich c ulm inate s in the P RA set ting a T ota l Cap ita l Re quir eme nt (“ TCR”) that the g roup a nd i ts regu lated su bsi dia ri es a re requ ire d to hold at al l time s. Th e TCR is cur re ntly set at 9.0%, of which 5. 1 % ne ed s to be met wi th co mmo n equ it y tie r 1 (“CE T1 ”) c ap ita l. Thi s inc lud es the Pi lla r 1 req uire me nts (4 .5% and 8% res pe ctive ly fo r CE T1 and total ca pit al) a nd a Pi lla r 2A c omp one nt of 1 .0%, of whic h 0.6 % ne eds to be m et wi th CE T1 capi tal. Pi l lar 3 re quire s rm s to publ ish a s et of dis clo sure s wh ic h all ow mar ket par ticip ants to as se ss in form atio n on that g roup’ s ca pi tal, ri sk ex pos u re s and r is k ass es sm ent p roce s s. The g rou p ’ s Pil lar 3 d isc los ure s, whi ch a re una udi ted, ca n be fou nd on th e grou p’ s we bsi te w w w .clo se brothe r s.com / invest or -relations/inv e st or -informat ion / results-r epor ts-and- presentations . Th e grou p mai nta ins a stro ng c api ta l bas e to suppo r t the d evel opm ent of th e bus in es s and to en sure th e grou p me ets the TCR an d additional regu lator y b uf fe rs at a ll tim es. As a re su lt, the grou p ma inta ins c api tal a deq uacy r atios a bove mi nim um reg ulator y requi rem ents , w hic h are cur ren tly se t at a min imu m CE T1 ca pit al rati o of 7 .6% and a mi nim um total c ap ita l ratio of 1 1 .5%. The mi nim um ca pi tal re qui rem e nts are inc lus ive of the c ap ita l co nse r vatio n buf fer (cur rentl y 2.5 % for both C E T 1 c ap ita l and tota l ca pit al) a nd the c ou ntercycl ic al b uf fer ( currently 0% ef fe ctive r ate for the g roup, for both CE T 1 ca pi tal a nd total c ap ita l) a nd exclu si ve of any ap pli ca bl e PR A buf fer . A ful l ana lys is of the c om pos itio n of regu lator y c ap ita l and Pi lla r 1 ris k weig hted as sets (“ RWAs”) , a re co ncil iatio n bet we en e quity and CET 1 ca pit al af ter a dju stme nts a nd a ta ble s how ing th e movem ent i n CE T1 capi tal d ur ing th e yea r are s hown o n the fol lowi ng pa ge s. At 3 1 J uly 2022 , the gro up’ s CE T1 capi ta l ratio wa s 1 4.6% (3 1 Ju ly 2021 : 1 5.8% ). CE T 1 c ap ita l de cre as ed to £1 ,39 6. 7 m ill ion (31 July 2 02 1 : £1 ,439.3milli on) pr ima ril y du e to regul ator y c han ge s to the treatm ent of s of twa re as sets, w hic h are n ow ful ly d edu cted f rom c a pital, and a decrease in IFRS 9 transitional arrangem ents. RWAs, calc ul ated usi ng th e sta nda rdis ed a ppro ach es, i ncre as ed to £9,59 1 . 3 mill ion (31 Jul y 202 1 : £ 9, 1 0 5.3 milli on) dr ive n by gr ow th in th e Com me rcia l di vis ion l oa n boo k, and i n de ri vative ex pos ures, i ncr eas ing c ou nterp ar t y c red it ri sk an d cre dit va lu ation ad jus tme nt s. Book 1.indb 184 27/09/2022 23:48:45 Gov ernance Repor t Strategic Repor t Financial Statements 18 5 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 31 Ju l y 2022 £ million 31 J u l y 2021 £ million CET1 capita l Called up share capita l 38.0 38.0 Retained earnings 1, 6 2 8 . 4 1 ,555.5 Oth er re se r ves re co gnis ed fo r CE T 1 ca pita l 10 .0 13 . 1 Adjustments t o CET 1 capital Inta ngi ble a ss ets, net of a sso ciate d defe rre d ta x li abi liti es 1 (25 0.7) (18 0 .7 ) Foreseeable dividend 2 (65.6) (62. 7) Inves tme nt in ow n sh are s (4 0. 6 ) (36.0) Pens io n ass et, net of as so ciate d defe rre d ta x li ab ili tie s (5.3) (5.4) Prud ent va luatio n adjus tment (0.5) (0.3) Insuf cient co verage for non-per forming exposures 3 – – IFRS 9 transitional arrangement s 4 83.0 117. 8 CET1 capita l 5 1, 3 9 6 . 7 1, 4 3 9 . 3 Tier 2 capital 6 – su b or di n at ed d e bt 200. 0 223.4 T ot al r e gu l ato r y ca pi t al 5 1, 5 9 6 . 7 1, 6 6 2 . 7 RWAs (not io na l) 7 Cre dit a nd c ounte rpa r t y c redi t ri sk 8,389.0 7 ,945. 8 Operat ional risk 7 1, 0 8 5 . 8 1, 0 3 8 . 5 Marke t risk 7 11 6 . 5 12 1. 0 9,5 91 .3 9, 105. 3 CET1 capital ratio 5 14 . 6 % 15. 8 % T otal capital ratio 5 16 . 6% 18.3 % 1 In l ine w it h CR R, ef f ec ti ve on 1 J an ua r y 2022, th e CE T1 ca pi tal r ati o no l on ge r in cl ud es t he b en et r el ate d to sof t wa re a ss et s w hi ch we re p rev io us ly e xem pt fr om th e de du ct io n requirement f or intangible assets from CET1 . 2 Und e r the R eg ul ator y T ec hn ic al S ta nd ard o n ow n fu nd s, a de du ct ion h as b e en re co gn is ed a t 31 Jul y 2022 a nd 31 Jul y 2021 for a f ore se e ab le d iv id en d, be in g th e pro po se d n al di vi de nd a s set o ut i n no te 9. 3 In line with CRR, effective on 1 Januar y 20 22, t he CET1 capital includes a regulat or y deduction wher e there is insuf cient co v erage for non-per forming e xposures, amount ing to £0.03m il li on at 31 Ju ly 202 2. 4 Th e gr ou p has e l ec ted to a pp ly I FRS 9 t ra nsi ti on al a rr an ge me nt s for 31 Ju ly 202 2, whi ch a ll ow th e ca pi ta l im pac t of ex pe cte d cr ed it l os se s to be p ha se d in ov er t he tr an si tio na l pe r io d. 5 Sh own a f ter a pp ly in g IF RS 9 tr an si tio na l ar ra ng em e nts a nd C RR tr an si tio na l an d qu al if yin g own f u nds a r ra ng em en ts in fo rc e at th e tim e. Wi th ou t the ir a pp li cat io n, at 31 Jul y 2022 th e CE T1 ca pi tal r ati o wo ul d be 13.8% and tot al c ap it al r ati o 15.9% (3 1 J ul y 2021 : CE T1 ca pi ta l ra tio 14. 7% an d tota l ca pi ta l ra tio 17 .2%, w hi ch i nc lu de s th e be ne t re la ted to th e pr ev io us tre atm en t of so f t war e as set s). 6 Ti er 2 c a pi tal d e cre as e re pr es en ts th e red em pti on o n ca ll d ate of a p ri or T ie r 2 s ec ur it y, most of w hi ch h ad p rev io us ly b ee n re de e me d as p ar t of a te n de r of fe r . 7 Op er ati on al a nd m ar ket r is k in cl ud e an a dj us tme nt a t 8% in or de r to de ter mi ne n otio na l RWAs . Th e foll owin g tab le sh ows a rec on cili atio n bet we en e qui ty a nd CE T1 cap ita l af ter ad jus tme nts: 31 Ju l y 2022 £ million 31 J u l y 2021 £ million Equity 1, 6 5 7.5 1, 5 6 9 . 3 Regulatory adjustment s to equity: Inta ngi ble a ss ets, net of a sso ciate d defe rre d ta x li abi liti es (250.7) (18 0 .7 ) Foreseeable dividend 1 (65.6) (62. 7) IFRS 9 transitional arrangement s 2 83.0 117. 8 Pens io n ass et, net of as so ciate d defe rre d ta x li ab ili tie s (5.3) (5.4) Prud ent va luatio n adjus tment (0.5) (0.3) Insuf cient co verage for non-per forming exposures 3 – – Oth er re se r ves n ot reco gn ise d for CE T1 capi tal: Cash ow he dging reserve (21 .7) 0.3 Non-contr olling int erests – 1. 0 CET1 capita l 1, 3 9 6 . 7 1, 4 3 9 . 3 1 Un de r the R e gul ato r y T e ch ni ca l St an da rd on o wn f un ds, a d ed uc tio n ha s be e n rec og ni se d at 31 Jul y 2022 a nd 31 Ju ly 20 21 for a fo res e ea bl e di vi de nd, b ei ng t he p rop os ed na l di vi de nd a s set o ut i n no te 9. 2 Th e gr ou p has e l ec ted to a pp ly I FRS 9 t ra nsi ti on al a rr an ge me nt s for 31 Ju ly 202 2, whi ch a ll ow th e ca pi ta l im pac t of ex pe cte d cre di t lo ss e s to be p ha se d in ove r th e tra ns it io na l pe ri od. 3 In line with CRR, effective on 1 Januar y 20 22, t he CET1 capital includes a regulat or y deduction wher e there is insuf cient co v erage for non-per forming e xposures, amount ing to £0.03m il li on at 31 Ju ly 202 2. Book 1.indb 185 27/09/2022 23:48:45 18 6 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d Th e foll owin g tab le s hows th e movem ent i n CE T1 capi tal d ur ing th e yea r: 2022 £ million 2021 £ million CET1 capital at 1 August 1, 4 3 9 . 3 1, 2 5 4 . 0 Prot in th e per iod at tr ibu tab le to sha reho lde rs 16 5 . 2 202. 1 Dividends paid and f oreseen (98.4) (89.5) Cha nge i n sof t ware a sse ts treatm ent 1 (50. 2) 50.2 IFRS 9 transitional arrangement s (34. 8) 17. 5 (Inc reas e)/ de cre ase i n inta ngi ble a sse ts, net of as so ciated d efer red t a x lia bil itie s (19 .7 ) 6.0 Oth er move me nts in re ser ves rec ogn ise d for CE T1 capi tal 0. 1 0.9 Oth er m oveme nts in ad justm ents to CE T1 capi tal (4 . 8 ) (1.9 ) CE T1 ca p it a l at 31 Ju l y 1, 3 9 6 . 7 1, 4 3 9 . 3 1 In l ine w it h CR R, ef f ec ti ve on 1 J an ua r y 2022, th e CE T1 ca pi tal r ati o no l on ge r in cl ud es t he b en et r el ate d to sof t wa re a ss et s w hi ch we re p rev io us ly e xem pt fr om th e de du ct io n requirement f or intangible assets from CET1 . 23. Guarantees and Commitmen ts Guarantees Group Compan y 31 Ju l y 2022 £ million 31 J u l y 2021 £ million 31 Ju l y 2022 £ million 31 J u l y 2021 £ million Ea rli es t per io d in wh ic h gua ra ntee co uld b e ca lle d With in on e yea r 10 9. 3 11 2 . 5 10 6 . 0 10 7 . 0 More th an o ne yea r 3.3 – – – 11 2 . 6 11 2 . 5 10 6 . 0 10 7 . 0 Wh ere the g rou p und er t akes to ma ke a paym ent o n be hal f of its s ubs idi ar ies fo r gu ara ntee s iss ue d, such a s ba nk fac ili tie s or pr oper t y leases or as ir revoc abl e let ter s of cre dit fo r whi ch a n obl igati on to make a pay me nt to a third pa r t y has n ot ar ise n at the re por ting dat e, they a re inc lud ed in these consolidated nancial statement s as contingent liabilities. Commitments Und rawn f acil itie s, c red it lin es a nd oth er c omm itme nt s to len d 31 Ju l y 2022 £ million 31 J u l y 2021 £ million With in on e yea r 1 1, 2 2 3 . 4 1, 3 1 0 . 3 1 Includes bo th revocable and irrevocable commitments. Other commitments Sub sid iar ie s had c ontr acted c ap ita l an d other na nci al c omm itme nts of £1 1 9. 7 mil lio n (202 1 : £88.4 mil lio n) . 24. Re lated P a rt y T ransactions T ra nsactions with k ey management Deta ils of d irec tors’ remu ne ratio n and i nteres ts in sh are s are di scl ose d in the D ire ctors’ Re mun erati on Re po r t on pa ge s 1 23 to 14 0 . Key man age me nt pe rso nne l are th ose p er son s havi ng au thor it y an d res pon sib ilit y fo r pla nni ng, dire cti ng an d con troll ing the a cti vities of an enti t y; the gro up’ s key m ana ge me nt are th e mem be rs of th e grou p’ s E xec uti ve Com mi tte e, whic h inc lud es a ll exec uti ve dire ctors, tog ethe r with its no n-exe cut ive di rec tors. Th e tab le be low d eta ils, on a n ag greg ated basis, k ey management personnel emoluments: 2022 £ million 2021 £ million Emoluments Salaries an d f ees 5.8 4.6 Benets and allowances 0.5 0.4 Per fo rm anc e rel ated awar ds in re sp ect of th e cu rre nt yea r: Cash 3. 1 5.3 Deferr ed 0.8 2. 5 10 . 2 12 . 8 Share-based awards 2. 3 2.6 12 . 5 15 . 4 2 2 . Ca p it a l - un au d it e d continued Book 1.indb 186 27/09/2022 23:48:45 Gov ernance Repor t Strategic Repor t Financial Statements 18 7 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Ga ins u pon exe rcis e of optio ns by key ma nag em ent p er son ne l, expe nse d to the in com e state me nt in prev io us ye ar s, totalle d £1 . 1 m illion (2 021 : £3. 5 million) . Key man age me nt have ba nk ing a nd as set m an age me nt rela tion shi ps wi th grou p enti ties w hi ch are e ntere d into in the n or mal c our se of bus ine ss. A mo unts in clu de d in de po sits by c ustom ers at 31 Jul y 2022 attr ibu ta ble, in ag gre gate, to key manag em ent we re £0.2mil lio n (31 July 202 1 : £0.2 million ). 25. Pensions Th e grou p ope rates d en ed c ontr ibu tio n pen sio n sc he mes fo r el igi ble e mp loyee s as we ll a s a den ed b en et p ens io n sch em e whi ch i s c los ed to new me mbe rs a nd f ur th er ac cr ua l. Ass ets of all s ch eme s ar e hel d se par ately f rom tho se of the g rou p. Dened contribution schemes Dur in g the yea r the c har ge to the co nso lidate d inc ome s tatem ent fo r the gro up’ s d en ed c ontr ibu tion p ens io n sch em es was £1 6.9m illion (20 2 1 : £1 5.5 mil lio n) , re pre sen ting c ontr ibu tion s payab le by the g roup a nd i s inc lud ed in a dmi nist rative ex pe nse s. Dened benet pension scheme Th e grou p’ s on ly d en ed be ne t pe nsi on sc he me (“ the s che me”) i s a na l sa lar y sche me w hic h op erate s und er tr ust l aw . T he sc he me is man age d an d adm ini stere d in acc ord anc e wi th the sc he me’ s T ru st De ed a nd Ru le s and a ll re levan t le gis latio n by a trus tee bo ard m ade up of tru stee s nom inated by b oth the c ompa ny an d the me mb er s. Th e sch em e was cl ose d to new en tran ts in Aug ust 1 9 9 6 and c los ed to fu r the r ac cru al d ur ing 201 2. At 3 1 Ju ly 2022 th is sc hem e had 26 (31 Jul y 202 1 : 28) defe rr ed me mb er s an d 54 (31 July 2021 : 53) pe nsi on er s and d ep en da nts. Funding position Th e sch eme’ s m ost re ce nt trie nn ial a ctua ri al val uatio n at 31 July 2021 showed that th e sch em e was fu ll y fun de d. As suc h, no fu r the r contribut ions are scheduled. IAS 19 valua tio n Th e foll owin g dis clo sure s are re por ted in ac cord anc e wi th IAS 1 9. Si gni ca nt ac tua ria l as sum ption s are a s follow s: 2022 % 2021 % Inati on rate (Re tail Pr ic e Ind ex) 3.5 3.6 Ination rate ( C onsumer Price Inde x) 3. 1 3. 2 Discount rat e for scheme liabilit ie s 1 3.4 1. 6 E xpe cted i nteres t / ex pec ted lo ng-term retu rn on p lan a sse ts 3.4 1. 6 Mort ality assumptions 2 : E xis ting p en sio ne rs f rom ag e 65, life ex pe cta ncy ( ye ars): Men 23.5 24 . 0 Wom e n 25.3 25.7 Non -retire d mem be rs cu rre ntly a ged 50, li fe expe ct ancy f rom ag e 65 ( yea rs): Men 24.3 24. 9 Wom e n 26.6 27 . 0 1 Based on market yields at 3 1 July 2 022 and 202 1 on high qu alit y st erling-denominated corporate bonds, adjusted t o be consiste nt with the esti mated term of the post-emplo yment benet obligation , using the Willis T owers W atson model “Global R A TE:Link” . 2 Based on standard table s SAPS S2 Light ( 202 1 : SAPS S2 Light) produced by the CMI Bureau of t he Instit ute and Fa culty of A ctua r ie s wi th a dj uste d mo r ta li t y mu lti pl ie rs f or p en si on er s an d no n-p en si on er s, tog et he r wi th pro je cte d f utu re i mpr ove me nts i n lin e wi th th e CM I 2020 (2021 : C MI 201 7 ) co re pr oje ct io n mo de l wi th a lo ng -ter m tre n d of 1 .5% pe r a nnu m. Th e sch em e has b ee n acc ou nted for i n the co mpa ny and th e su rpl us ha s be en re co gni sed a s an a sse t on the c omp any a nd gro up’ s bal ance she et wi thin “ T rade a nd oth er re cei vab les” . Th e grou p has th e unc on diti ona l ri ght to any su rp lus es that a ri se wi thin th e sch em e onc e al l ben ets h ave be en s ecu red in f ul l. As su ch no a ss et ce ilin g has b ee n app lie d, and a cco rdin gly th e sch em e sur plu s is re cog nis ed on th e con sol idated b ala nc e she et. 2022 £ million 2021 £ million 2020 £ million 201 9 £ million 201 8 £ million Fair va lue of s che me a sse ts 1 : Equities 0.0 9.4 1 4.0 1 3. 1 12 .7 Bonds 30. 3 33.6 32 .3 29. 9 28. 7 Cash 3.5 0. 2 0.3 0. 2 0. 1 Insured annuities 1. 0 To t a l A s s e t s 34.8 43.2 46. 6 43.2 4 1 .5 Fair va lue of l iab ili tie s (27 .6) (3 5.6) (3 9.2) (36.5) (3 6.4) Surplus 7. 2 7. 6 7. 4 6 . 7 5 . 1 1 Th er e ar e no a mo unt s in clu de d w ith in t he fa ir v al ue of s ch em e as se ts re la tin g to th e n an ci al i nst ru me nts o f Cl os e Brot he rs G roup pl c. Book 1.indb 187 27/09/2022 23:48:46 18 8 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d Movem en t in the p rese nt va lue of s che me l iab ili tie s dur ing th e yea r: 2022 £ million 2021 £ million Carr ying amount (3 5.6) (39.2) Interest e x pense (0.6) (0.5) Past service cost – (0. 1 ) Benets paid 1. 0 5.6 Actuarial gain/ (losses) 8.6 (1 .4 ) Oth er (1.0 ) – T ota l ca rr yin g valu e as on 31 July (27 .6) (3 5.6) Movem ent i n the fa ir val ue of sc he me as sets d ur ing th e year: 2022 £ million 2021 £ million Carr ying value 43.2 46.6 Interest income 0.7 0.6 Benets paid (1.0 ) (5.6 ) Admi nistr ative c osts (0.4) (0.3) Return on asset s excluding in terest income (8 . 7) 1. 9 Oth er 1. 0 – T ota l ca rr ying va lu e 34.8 43.2 Historical experience of actuarial gains/ (losses) ar e shown be low : 2022 £ million 2021 £ million 2020 £ million 201 9 £ million 201 8 £ million Expe rience gains/ (losse s ) on scheme assets (8. 7 ) 1. 9 4 .1 3 . 3 1. 3 Experience gains on scheme liabilit ies 0.4 –– 1 . 3– Imp act of c han ge s in as su mptio ns 8.2 (1.4) ( 3 . 2) (2 .7 ) 0 . 4 T ota l actu ar ia l cha nge s in l iab ili tie s 8.6 (1.4 ) ( 3 . 2) (1.4) 0. 4 T ot al a c tu a ri a l ga in /(l os s es) (0 . 1) 0. 5 0.9 1 .9 1 . 7 T ota l actu ar ial g ain s have be en re co gni sed i n other c om preh en sive i nco me. Inc ome of £0. 1 mil lio n (202 1 : £0. 1 mi llio n) from the interest on the sch em e sur plu s has b ee n rec ogn ise d wi thin ad min istra tive exp en se s in the c onso lid ated inc om e statem ent. Th e grou p’ s p oli cy is n ot to al lo cate the net d en ed b ene t co st bet we en g roup e ntiti es pa r tic ipati ng in th e sch eme. Th e valu ation of th e sch em e’ s l iab ili tie s is se nsi tive to the key as sum ption s use d in the va luati on. Th e ef fe ct of a ch an ge in tho se as sum ption s in 2022 and 2021 is set o ut be low. Th e ana ly sis re ec ts the var iati on of the i ndi vid ua l ass um ptions. T he va ri ation i n pri ce in ati on includes all ina tion- linke d pe nsi on in cre ase s in d efer me nt an d in paym ent. Impact on dened benet obliga tion increase/ (decrease) 2022 2021 Key assumption Sensitivity % £ million % £ million Discount rat e 0.2 5 % increase (3. 2) (0.9) (4 .4) (1.6) Pric e ina tion 0.25 % inc reas e 1.6 0 . 4 1. 8 0 . 6 Mor tali t y Incre ase i n life ex pe ct anc y at age 6 5 by one ye ar 3.0 0 .8 4.0 1 .4 Cha nge s in th e as sum ptions u se d in the va luati on du e to exter na l fac tors wou ld af fe ct the c ar r y ing va lue of th e sch em e. The m os t signicant risks are : • Ma rket fa ctors (move me nts in e qui t y an d bon d mar kets): The sc hem e’ s as sets a re inve sted 0% in gl oba l qu oted eq uiti es, 87% in quot ed bon ds, 1 0% i n cas h an d 3% in insu red a nnu itie s (202 1 : 22% glo bal q uoted e qui tie s and 78% quoted bo nds) an d the sc he me’ s li abi li ti es a re me asu red w ith refe renc e to cor por ate bond y ie lds. T he p er fo rma nc e of the se as set c las se s ca n be vol atile. U nde rp er forma nc e of e ither of the se ma rkets wo uld h ave an ad ver se im pact o n the c ar r yi ng val ue of th e sch em e. • Ina tion: Defe rre d pe nsi ons a nd pe ns ion s in pay men t inc rea se at sp ec ie d pe rio ds in l ine w ith in atio n, subj ec t to cer t ain c a p s an d oo rs i n place. Changes in ina tion ma y impact scheme liabilities. • Li fe exp ect anc y: Cha ng e in the l ife exp ec tan cy of the s ch eme’ s m em ber s may i mpac t sc hem e lia bi liti es. Th e weig hted ave rage d urati on of th e ben et p ayme nts re ec ted in the s che me l iab ili tie s is 1 4 ye ar s (202 1 : 1 7 ye ar s) . 25. Pensions continued Book 1.indb 188 27/09/2022 23:48:46 Gov ernance Repor t Strategic Repor t Financial Statements 18 9 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 26. Share-based A wards Th e Save As Y ou E ar n (“SA YE”), Long T er m Inc ent ive Pla n (“L TIP ”) a nd De fer red Sh are Award s (“DSA ”) sh are -ba sed awa rds have b ee n granted und er th e grou p’ s s hare s ch eme s. T he ge ne ral te rms a nd c ond itio ns for th es e sha re- base d award s are d es cri be d in the D ire ctors’ Remuneration Repor t on pages 1 26 t o 1 28. In ord er to sati sf y a nu mb er of the awa rds b el ow the co mpa ny has p urc has ed co mpa ny sh are s into T re as ur y a nd th e Clo se Broth er s Grou p Employee Share T r ust has pur c hased company shares . At 3 1 July 20 22, 1 .6 million (3 1 July 202 1 : 1 .3 million ) and 1 .4 million ( 31 July 202 1 : 1 .5m illi on) of the se sh are s were h eld re sp ec tivel y an d in total £40.6 millio n (202 1 : £36.0 mil lio n) was reco gn ise d with in the share-based paym ents re se r ve. Dur in g the yea r £4 .9 m illi on (202 1 : £1 0.0 milli on) of the se sh are s were re lea se d to satisf y shar e-ba se d award s to e mpl oyee s. Th e sha re- base d pay men ts rese r ve a s show n in the c ons oli dated st ateme nt of ch ang es i n equ it y al so inc lud es th e cum ulati ve po sit ion in relation to unveste d sha re- bas ed awa rds ch arg ed to the c ons olid ated in com e sta teme nt of £1 1 .4 milli on (202 1 : £1 3.6 mill ion). The s hare -b a se d award s cha rge of £4.9 millio n (202 1 : £5. 7 m illi on) is in clu de d in adm ini strati ve exp ens es s hown i n the c ons olid ated in com e state me nt. Movem en ts in the n umb er of s ha re-b ase d award s outs ta ndin g an d thei r wei ghted ave rag e sh are pr ic es a re as fo llows: SA YE LT I P DSA Number Wei gh te d average exerci se price Number Wei gh te d average exerci se price Number Wei gh te d average exerci se price A t 1 A u g u s t 2 0 2 0 1, 9 2 1,10 6 – 1, 3 7 3 , 119 – 8 3 6 , 8 19 – Gra nted 1 ,385,8 04 829.5p 502,283 – 1 46,223 – E xerc is ed (20 8,01 3) 1 1 7 4.2p (1 4 7 ,807) – (423,9 1 5) – For fe ite d (801 , 71 6) 923.9p (2 1 3, 1 0 0) – (4, 6 97) – Laps ed (6 1 , 1 7 6) 1 208 .5 p (2 60 , 72 1 ) – (6 ,9 32 ) – At 31 Jul y 2021 2,2 36, 005 – 1 ,253, 77 4 – 54 7 ,4 98 – Grant ed 42 0,8 63 1,042 .6p 326, 54 0 – 196,576 – Ex er ci sed (71 ,4 78) 1 , 180 .6p ( 19 ,549) – (267 ,05 1 ) – For fe ited (288, 729 ) 969.8p ( 1 3,27 4) – ( 10 ,21 1 ) – Laps ed (26,29 0) 1 , 1 5 8.8 p ( 189, 633) – 8 , 1 91 – At 3 1 Ju ly 2022 2,270 ,37 1 – 1 ,35 7 ,858 – 4 75 ,003 – Ex er ci sab le at : 3 1 Ju ly 2022 48,9 78 1 , 184 .4p 202,528 – 7 4,008 – 3 1 July 202 1 1 1 ,336 1 , 1 4 1 .0p 73, 936 – 9, 645 – Th e tab le be low s hows th e weig hted aver age m ar ket pri ce at the d ate of exerci se: 2022 2021 SA YE 1, 31 9 . 2 p 1, 4 51. 2 p LT I P 1, 4 6 0 . 4 p 1, 2 8 6 . 9 p DSA 1, 4 0 2 . 9 p 1, 2 9 1. 3 p Book 1.indb 189 27/09/2022 23:48:46 19 0 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d Th e ran ge of exerc ise p ri ce s and we ig hted aver age re ma ini ng co ntra ctua l life of awa rds a nd o ptions o uts tan din g are a s foll ows: 2022 Options o utstanding 2021 Options out standing Number outstanding Weighted avera ge remaining contractual life Ye a r s Number outstanding Wei gh te d average remaining contract ual life Y ears SA YE Bet wee n £7 and £8 1, 13 1, 6 01 2 . 6 1, 24 4 , 5 71 3 . 5 Bet we en £8 a nd £9 525,8 18 1. 7 610,912 2.7 Bet we en £9 a nd £1 0 282,400 3. 7 11 4 ,1 5 5 2 . 3 Bet we en £1 0 an d £1 1 102,7 9 0 1 .3 —— Bet we en £1 1 a nd £1 2 70,0 81 0. 9 107 , 2 1 1 1. 5 Bet we en £1 2 a nd £1 3 94, 729 2.9 68, 999 1 . 1 Bet we en £1 3 an d £1 4 62 ,952 2 . 7 90 , 1 57 3. 7 LT I P Nil 1 ,35 7 ,858 3. 4 1, 2 5 3 ,7 74 3 .7 DSA Nil 475 , 0 0 3 1.6 54 7 ,498 1 . 7 To t a l 4, 103,232 2 .6 4,0 37 , 277 3. 1 For the s ha re-b ase d award s gra nted du ri ng the ye ar , the we igh ted avera ge fa ir val ue of th ose o ptions at 31 Jul y 2022 was 928.8p (31 July 202 1 :4 53.3p). Th e mai n as sum ption s for the va luati on of th ese s ha re-b ase d award s com pr ise d: Ex er cise per iod Share price at issue Ex er cise price Expe cte d volatility Expe cte d option life in years Dividend yield Risk free inte re st r ate SA YE 1 De c 202 4 to 31 May 2025 1 ,5 5 1 .3 p 1 , 2 4 1 .0p 32.0 % 3 4. 1 % 0.6% 1 De c 2026 to 3 1 May 2027 1 ,55 1 .3 p 1 , 2 4 1 .0p 28. 0% 5 4. 1 % 0. 7% 1 Jun 2025 to 30 Nov 2025 1 , 1 95.0p 956.0p 34.0 % 3 5. 1 % 1 .8% 1 Jun 2027 to 30 Nov 2027 1 , 1 95.0p 956.0p 3 0.0% 5 5. 1 % 1 .8% LT I P 5 Oct 2024 to 1 Oct 2027 1 ,5 45.8p – 32 .0% 3 4. 1 % 0.6% DSA 5 Oct 2022 to 5 O ct 202 4 1 ,54 5.8p – – – – – 5 Oct 2024 to 5 Oct 2025 1 ,5 45.8p – – – – – 22 Ma r 202 4 to 21 Mar 2025 1 , 192 .0p – – – – – 1 Ma r 2025 t o 28 Feb 2026 1 ,297 .0p – – – – – E xp ecte d volati lit y wa s deter min ed m ain ly by rev iewi ng sh are p ri ce vol atili t y for the ex pe cted l ife of ea ch opti on up to the d a te ofgra nt. 26. Share-based Awards continued Book 1.indb 190 27/09/2022 23:48:46 Gov ernance Repor t Strategic Repor t Financial Statements 19 1 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 27 . Co ns ol i da te d Ca s h Fl ow St a te me nt R ec o nc il ia t io n 2022 £ million 2021 1 £ million (a) Re co nc i li at i on o f op e ra t in g p ro t b ef or e t a x to n et c a sh i n ow f ro m op e ra t in g ac t i vi t ie s Op erati ng pro t before t a x 232.8 26 5. 2 Ta x p a i d (63.4) (69. 7) De prec iatio n, amo r tisa tion a nd imp air me nt 10 0 . 3 12 3 . 4 Impairment losses on nancial as sets 10 3 . 3 89.8 Decrease/ (increase) in: Intere st rec ei vab le an d pre pai d exp ens es 19. 8 4. 6 Net s ettl em ent b ala nc es a nd trad ing p osi tion s 17 . 2 8.5 Net l oan s fro m mon ey bro kers a gai nst sto ck ad vanc ed 2. 7 (23.2) (De cre ase)/ inc rea se in in teres t payabl e an d acc ru ed ex pen se s (32. 2) 27 . 2 Ne t ca s h in ow f r om t r ad i ng a ct i vi t ie s 380. 5 425. 8 Decrease/ (increase) in: Loan s and a dva nce s to bank s not rep ayabl e on de ma nd (5.3) 9.6 Loan s and a dva nce s to custom er s (5 1 5 .0) (95 1 . 2) Assets let under operating leases (54.5) (4 3. 9 ) Cer ticat es of deposit 79.7 21.2 Sovere ig n and c en tral b ank d ebt (2 55 .3) (126 . 6 ) Other asset s less other liabilities (6.4) 29. 6 Increase/ (decr ease) in : Deposits b y banks 11. 8 3.9 Deposits b y customers 14 2 . 7 74 5 .1 Loans and over drafts from banks 11 0 . 0 14 . 8 Net is su anc e/(redem ption) of de bt se cur itie s 270.5 (9.2) Net cash inow from operat ing activities 15 8 .7 11 9 .1 (b) An al y si s of n et c a sh o u t ow i n r es pe c t of t h e pu r ch a se o f su bs i di a ri es a n d non-controlling interests Cas h con sid erati on pa id (0. 1 ) (2.9) (c) An a ly s is o f ne t ca s h in ow i n r es p ec t of t h e s al e of s u bs i di ar i es Cash cons ideration received 0. 1 2. 3 (d) Analysis of cash and cash equivalents 2 Cas h and b ala nce s at ce ntral b ank s 1, 2 3 6 . 0 1, 3 14 .7 Loan s and a dva nce s to bank s 14 7.0 121. 9 At 31 Ju ly 1, 3 8 3 .0 1, 4 3 6 . 6 1 Co mp ar ati ve s have b e en u pd ate d to pre se nt i mp ai rm en t lo ss es o n n an ci al a ss ets i n a se pa ra te li ne w ith n o im pa ct o n the n et c as h in ow f rom o pe rat in g act iv iti e s gu re. 2 E xcl ud es £37 . 1 m il li on (2021 : £ 30.7 mil li on) of B an k of En gl an d an d oth er c as h re se r ve a cc ou nts. Du rin g the ye ar e nde d 31 July 2022, the non- ca sh c ha nge s on d ebt nan cin g am ounte d to £9. 6 m ill ion (31 Jul y 202 1 : £1 8.2 m illi on ) ari sin g larg el y fro m intere st ac creti ons a nd fa ir val ue he dg ing m oveme nts. Book 1.indb 191 27/09/2022 23:48:46 19 2 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d 2 8 . Fi na nc i al R is k M an ag e me nt As a n anc ia l ser vic es g roup, nan ci al ins tru me nts are c entr al to the gro up’ s acti viti es. T he r isk a ss oci ated wi th na nci al in s trument s repr esents a sig ni ca nt co mpo ne nt of thos e fac ed by th e grou p and i s an aly sed i n more d eta il be low . The group ’ s nancial risk management object iv e s are summarised within the Risk Repor t on pages 7 4 to 92. Details of the signic ant acc oun ting po lic ie s and m etho ds ad opted, inc lud ing th e cr iter ia for re co gni tion, th e bas is of me asu rem ent a nd th e bas is on w hic h inc om e and exp ens es a re rec og nis ed, in re spe ct of e ac h cla ss of nan ci al as set, n anc ia l lia bil it y an d eq uit y in str ume nt ar e dis clo sed i n note 1 . (a) Cla ssication Th e foll owin g tab le s ana lys e the g roup’ s as sets a nd li abi liti es i n acc orda nc e with th e cate gor ie s of na nci al i nstr ume nts in I F RS 9. Derivatives designated as hedging instruments £ million Fair value through prot and lo ss £ million Fair value through other comprehensive income £ million Amortised cost £ million To t a l £ million At 31 Ju ly 2 0 2 2 Assets Cas h and b ala nce s at ce ntral b ank s ––– 1 , 2 5 4 . 7 1 , 2 5 4 . 7 Settlement balances ––– 7 9 9 . 3 7 9 9 . 3 Loan s and a dva nce s to bank s ––– 1 6 5 . 4 1 6 5 . 4 Loan s and a dva nce s to custom er s – – – 8,858.9 8,858.9 Debt securities –1 2 . 4 4 1 5 . 4 1 8 5 . 0 6 1 2 . 8 Equity shares –2 8 . 4 – –2 8 . 4 Loan s to money b roker s aga ins t stock a dva nce d – – – 48.4 48.4 Derivative nancial instruments 61 . 5 9.7 – – 71. 2 Other nancial asset s –1 . 7 – 8 2 . 6 8 4 . 3 61. 5 5 2 . 2 415 . 4 1 1, 3 9 4 . 3 1 1, 9 2 3 . 4 Liabi liti es Settlement balances and shor t positions –1 5 . 4 – 7 8 0 . 7 7 9 6 . 1 Deposits b y banks ––– 1 6 0 . 5 1 6 0 . 5 Deposits b y customers ––– 6 , 7 7 0 . 4 6 , 7 7 0 . 4 Loans and over drafts from banks ––– 6 2 2 . 7 6 2 2 . 7 Debt securities in issue ––– 2 , 0 6 0 . 9 2 , 0 6 0 . 9 Loan s fro m mon ey broke rs ag ain st stoc k adva nc ed ––––– Subordinat ed loan capital ––– 1 8 6 . 5 1 8 6 . 5 Derivative nancial instruments 83.9 5.3 – – 89.2 Other nancial liabilit ie s ––– 1 8 4 . 2 1 8 4 . 2 83 .9 2 0.7 – 10, 765. 9 10,870.5 Book 1.indb 192 27/09/2022 23:48:46 Gov ernance Repor t Strategic Repor t Financial Statements 19 3 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Derivat ives designated as hedging instruments £ million Fair v a lue thr ough prot and loss £ million Fair v alue through other comprehensive income £ million Amortise d co st £ million To t a l £ million At 31 Jul y 2021 Assets Cas h and b ala nc es at ce ntra l ban ks – – – 1 ,3 3 1 .0 1 ,331 .0 S e t t l e m e n t b a l a n c e s ––– 6 9 9 . 6 6 9 9 . 6 Loan s and a dva nce s to ban ks – – – 1 3 6.3 136.3 Loan s an d adva nce s to cus tomer s – – – 8,444.5 8,444.5 Debt securities – 20 . 1 1 92 .5 264 . 7 4 77 .3 Equity shares – 3 1 .9 – – 31 .9 Loan s to money b roker s aga ins t stock a dva nce d – – – 5 1 . 1 5 1 . 1 De rivati ve n anc ial i nstr ume nts 1 6.9 1 .4 – – 1 8.3 Other nancial asset s – 0 . 1 – 62 .4 62 .5 16.9 5 3 . 5 192. 5 10, 9 8 9 .6 1 1,25 2.5 Liabi liti es Settlement balances and shor t positions – 1 6. 4 – 67 4.2 69 0. 6 Deposits b y banks – – – 1 50. 6 1 50. 6 Deposits b y cust ome rs – – – 6,634 .8 6, 634.8 Loans and over drafts from banks – – – 5 1 2. 7 5 1 2. 7 De bt se cur iti es in i ss ue – – – 1 ,8 65.5 1 ,86 5.5 L o a n s f r o m m o n e y b r o k e r s a g a i n s t s t o c k a d v a n c e d ––––– Subordinat ed loan capital – – – 222 . 7 222 . 7 Derivative nancial instruments 1 9. 0 2.3 – – 21 .3 Other nancial liabilit ie s – – – 1 94. 8 1 94.8 1 9.0 18. 7 – 10,255.3 10,293 .0 (b) V aluation Th e fai r valu es of th e grou p’ s nan cia l as sets a nd li abi liti es a re not m ateri all y di f fere nt f rom the ir c ar r yi ng val ue s. Th e mai n dif fere nce s ar e as foll ows: 31 Ju l y 2 02 2 31 Ju l y 2 021 Fair value £ million Carr yin g value £ million Fair value £ million Carr ying value £ million Subordinat ed loan capital 18 0 . 0 18 6 . 5 226.5 222. 7 Debt securities in issue 2, 0 71 .4 2,060 .9 1 ,9 08.9 1 ,8 65.5 V a luation hierarchy Th e grou p hol ds n anc ia l instr um ents th at are m ea sure d at fai r valu e su bse que nt to ini tial re co gni tio n. Each i nstr um ent h as be e n cat egorised with in on e of thre e level s usi ng a fa ir val ue hi era rchy th at ree cts the s ign ic an ce of the i npu ts use d in ma k ing the m ea sure me nts. The se levels are ba se d on the d eg ree to wh ich th e fai r valu e is ob se r vab le a nd are d en ed a s foll ows: • Level 1 f air va lu e mea su rem ents a re thos e de ri ved f rom qu oted pr ic es (una dju sted) i n acti ve ma rkets fo r ide ntic al a sse ts or l iabilities where pri ce s are re adi ly avai lab le a nd rep res ent a ctua l and re gu lar ly o ccu rr ing m ar ket trans ac tion s on an a rm’ s le ng th bas is. An a cti ve market is one in wh ich tr ans ac tion s occ ur w ith su f c ie nt fre qu enc y to provid e ong oi ng pr ici ng in form ation; • Level 2 f air va lu e mea su rem ents a re thos e de ri ved f rom qu oted pr ic es in l es s acti ve ma rkets fo r ide ntic al a sse ts or li abi liti es or thos e deriv ed from i npu ts othe r than q uoted p ric es th at are ob se r vab le for th e as set or l iab ili ty , e ith er di rec tly as p ri ces o r ind ire ctly d e rived from prices; an d • Level 3 f air va lue m ea sure me nts ar e those d er ive d fro m valu ation te chn iqu es th at inc lud e inp uts for th e as set or l iab ili t y th at a re not ba sed o n obser vable mark et data (“ unobse rvable inputs”) . Instr um ent s cla ss ie d as Leve l 1 pre do min antl y com pr ise s overe ign a nd c entr al ba nk d ebt a nd liq uid l iste d equ it y sh are s. Th e fa i r valu e of the se ins tru men ts is de ri ved f rom q uoted p ri ce s in ac tive ma rkets. Instruments classied as L evel 2 predominan tly comprise le ss liqui d listed equit y shares, investment grade corporate bonds and over -the - cou nter d er ivative s. T he fa ir val ue of e qui t y sha re s and b ond s are d er ive d fro m quoted p ri ce s in le ss a cti ve mar kets in c omp ar i so n to level 1 . Ove r -the- co unter d er ivative s la rge ly re late to interes t rate and exch an ge rate co ntrac ts (see note 1 4 for f ur th er in form ation). The va luati on of su ch de rivati ves i ncl ude s the u se of di sco unted f uture c as h ow mo del s, with th e mos t sig ni ca nt inp ut in to these m ode ls b ein g inter e st ra te yie ld cur ves de velo pe d fro m qu oted rates. Instr um ents c las si ed a s Leve l 3 pred omi na ntly co mp ris e con ting ent c ons ide ratio n payab le an d rec ei vabl e in re latio n to the acq u is itio ns an d the disposal of subsidiar ies. Book 1.indb 193 27/09/2022 23:48:46 19 4 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d Th e fai r valu e of con ting ent c ons id erati on is d eter min ed on a d isc oun ted exp ec ted ca sh ow b asi s. Th e grou p be lieve s that the re is no rea son abl y pos si ble c han ge to the in puts u se d in the va luati on of the se po si tions w hi ch wou ld have a m ateri al ef fe ct o n the gro up ’ s consolidat ed income st at ement . Th ere we re no si gni c ant tra nsfe rs b et wee n Leve l 1 , 2 a nd 3 in 2022 a nd 2021 . Th e tab le s bel ow show th e cl ass ic atio n of na nci al i nstr ume nts he ld at fa ir va lue i nto the valu ation h ie rarc hy . Level 1 £ million Level 2 £ million Level 3 £ million To t a l £ million At 31 Ju ly 2 0 2 2 Assets Debt securities : Long t rading posit ions in deb t securities 11 . 0 1. 4 – 1 2 . 4 Sovere ig n and c en tral b ank d ebt 41 5 . 4 – – 41 5 . 4 Equity shares 4. 1 24.0 0.3 28 .4 Derivative nancial instruments –7 1 . 2 –7 1 . 2 Contingen t considera tion –– 1 . 7 1 . 7 430.5 96.6 2 .0 5 29. 1 Liabi liti es Shor t positions : Debt securities 5.8 1 .7 – 7 .5 Equity shares 2.2 5 .6 0. 1 7 .9 Derivative nancial instruments –8 9 . 2 –8 9 . 2 Contingen t considera tion –– 3 . 0 3 . 0 8.0 96.5 3. 1 10 7 .6 Level 1 £ million Level 2 £ million Level 3 £ million To t a l £ million At 31 Jul y 2021 Assets Debt securities : Long t rading posit ions in deb t securities 1 9. 0 1 . 1 – 20. 1 Sovere ig n and c en tral b ank d ebt 1 92.5 – – 1 92.5 Equity shares 6.2 25.4 0.3 31 .9 De rivati ve na nc ial i nstr ume nts – 1 8.3 – 1 8.3 Contingen t considera tion –– 0 . 1 0 . 1 21 7 .7 4 4. 8 0 .4 2 6 2.9 Liabi liti es Shor t positions : Debt securities 5. 7 1 .3 – 7 .0 Equity shares 3.2 6.2 – 9.4 Derivative nancial instruments – 2 1 .3 – 2 1 .3 Contingen t considera tion –– 3 . 0 3 . 0 8.9 28.8 3.0 40. 7 2 8 . Fi na nc i al R is k M an ag e me nt continued Book 1.indb 194 27/09/2022 23:48:47 Gov ernance Repor t Strategic Repor t Financial Statements 19 5 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Movem en ts in n anc ia l inst rum en ts categ or ise d as Leve l 3 were: Equity shares £ million Continge nt consideration £ million At 1 Au gu st 20 20 0.3 (0.8) T otal gains recognised in t he consolidated income stat ement – 2 .6 Purchases and is sues –( 2 . 4 ) Sales and se ttlements –( 2 . 3 ) At 31 Jul y 2021 0.3 (2.9) T otal losses recognised in the consolidated income stat eme nt – (0 .2) Purchases and is sues –1 . 8 Sales and se ttlements (0. 1 ) – At 31 Ju ly 2 0 2 2 0.2 ( 1.3) The losses recognised in the consolidat ed income statement relat ing to instruments held at the year end amount e d t o £0.2 millio n ( 202 1 : £0. 1million) . (c) C re d it r is k Cre dit r isk i s the ri sk of a re duc tion i n ea rni ngs a nd / o r val ue, as a res ult of th e fai lure of a c ou nterp ar t y o r ass oci ated pa r t y , wi th who m the gro up has c ontr acted, to me et its ob lig ation s as they f all d ue. Cre dit r is k acros s the g roup m ain ly a ris es th roug h the le ndi ng an d tr ea sur y a cti viti es of the Ba nk ing d iv isio n. Th e Ban ki ng di vi sio n app lie s co nsi stent a nd pr ud ent l en din g cr iter ia to miti gate cre dit r is k. Its le ndi ng ac tiv itie s are p red om ina ntly secur ed acro ss a di ver se r ang e of as set c las se s. Det ail s of aver age ten or a nd lo an si ze by bus in es s ca n be fou nd on p age 4 of th e stra t egic re por t. T his ens ure s con ce ntratio n ris k is co ntroll ed in b oth the lo an bo ok an d as soc iated co llate ral. Cur ren tly cre di t ris k app etites a re s et arou nd unse cure d len din g to ensu re the se cu red le ndi ng po siti on is u nde r reg ula r revi ew . As at 31 July 2022, sec ured l en din g acc ounts fo r 89.6% of the loan boo k, in l ine w ith the p ri or ye ar (31 July 2021 : 89.2% ). Th e grou p has e sta bl ish ed li mits fo r all c ou nterp ar ti es w ith wh om i t plac es d ep osi ts, ente rs into de ri vative c ontr acts o r who se debt securit ies are h eld, a nd the c redi t qua li ty of th e cou nter par ties is m oni tored. Wh ile th es e amo unts m ay be mate ria l, the co unter par ties a r e all re gu lated insti tuti ons w ith inve stm ent g rade c red it rati ngs a ss ign ed by in tern ation al c redi t ratin g age nc ies a nd fa ll w ithi n the la rge ex posure limits set by regulat or y requirements. Maximum e xposure t o credit risk Th e tab le be low p res ents th e grou p’ s ma xim um exp osu re to cred it ri sk, b efore ta ki ng ac co unt of a ny col latera l an d cred it r isk m itigation , arising fro m its on b ala nc e sh eet a nd of f b ala nc e she et nan cia l in stru me nts. For of f bala nc e she et i nstr ume nts, th e ma x imu m exp osu re t o cred it ri sk represents the cont ractual nominal amounts . 31 Ju l y 2022 £ million 31 J u l y 2021 £ million On ba lance shee t Cas h and b ala nce s at ce ntral b ank s 1, 2 5 4 .7 1, 3 31. 0 Settlement balances 799. 3 699 .6 Loan s and a dva nce s to bank s 16 5 . 4 13 6 . 3 Loan s and a dva nce s to custom er s 8,858.9 8,44 4.5 Debt securities 61 2 . 8 47 7 . 3 Loan s to money b roker s aga ins t stock a dva nce d 48.4 51.1 Derivative nancial instruments 71 . 2 1 8.3 Other nancial asset s 84.3 62.5 1 1 ,895.0 11 , 2 2 0 . 6 O f f ba l an c e sh e et Irrevocable undrawn commitments 277 . 8 23 9.6 T ot al m a x im um ex p os ur e t o cr e di t ri s k 12 , 172 . 8 11 , 4 6 0 . 2 Assets pledged and received as collateral Th e grou p ple dg es as sets fo r rep urch ase a gre eme nts a nd se cur iti es bo rrow ing a gree me nts wh ic h are ge ne ral ly c ond ucted u nd er ter m s that are c ustom ar y to sta nd ard b orrow in g con tract s. Th e grou p is a pa r tic ipa nt of the B ank of E ngl and’s T er m Fund ing Sc he me w ith Add itio na l Inc enti ves fo r SMEs (“ TFSM E”). Und er th es e sch em es, a sse t na nc e loa n rec ei vabl es of £626. 1 mi lli on (31 July 2021 : £57 1 .3 m ill ion), UK gilts w ith a m ar ket val ue of £ 72 .6 million (3 1 J ul y 202 1 : £ 90.2 m illi on), UK T -B ill s with a m ar ket valu e of £1 44.3 mil lio n (31 July 2021 : £ nil ) an d retai ne d notes re latin g to Motor Fin an ce lo an rec ei vabl es of £ 2 4.3 mil lio n (3 1 Jul y 2021 : £72 . 1 mi llio n) were po siti one d as c oll atera l with th e Ba nk of Eng la nd, aga ins t whi c h £6 00.0 mil lio n (3 1 Jul y 2021 : £49 0.0 milli on) of ca sh was d raw n. Book 1.indb 195 27/09/2022 23:48:47 19 6 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d Th e term of th es e trans ac tion s is fou r year s fro m the d ate of eac h drawdow n bu t the gro up may c hoo se to repay e ar li er at its d i scretion . The ris ks an d rewards of th e loa n rec ei vabl es re mai n wi th the gro up an d conti nue to be re co gnis ed i n loa ns an d adva nce s to custom er s on the con soli dated ba la nce s hee t. Th e grou p has s ec ur itis ed wi thou t rec ou rse a nd re str icti ons £1 ,626.8 mil lio n (3 1 J ul y 202 1 : £1 ,3 86.0 mil lio n) of its insu ra nce p rem ium a nd motor loa n rec ei vabl es i n retur n for c ash a nd a sse t -bac ked se cu riti es i n iss ue of £1 ,022. 4 mil lio n (3 1 J ul y 202 1 : £91 5. 7 mi lli on) . Th is includes the £24 .3 m illi on (31 July 2021 : £72 . 1 mil lio n) retain ed n otes pos itio ne d as c oll ateral w ith th e Ban k of Eng la nd. Asthe g roup h as ret ain ed exp osu re to sub sta ntial ly a ll the c redi t ris k an d rewards of th e res idu al be ne t of the u nde rl yin g as sets it c onti nue s to reco gni se the se a sse ts in lo ans a nd adva nc es to cus tomer s in its c ons oli dated b ala nc e she et. Th e maj ori t y of loa ns an d adva nc es to cus tome rs ar e sec ure d aga inst s pe ci c as sets. For m ore in form atio n on co llater al h eld s ee page2 00. Con sis tent an d pr ude nt le nd ing c rite ria a re ap pli ed a cros s the w hol e loa n boo k wi th emp ha sis o n the qu ali t y of the se cu rit yp ro vided . Fi na nc i al a s se ts : Lo an s a nd a dv an c es to c u st om e rs Credit risk manage ment and monitoring Ove ral l cre dit r isk a pp etite is se t by the gro up bo ard. T he mo nitor ing of c red it po lic y is the re spo nsi bil it y of the B ank in g di vision’ s Risk and Compliance committees. L arge loans ar e subject to approval b y a credit committ e e. Cred it un de r wr itin g and i n-li fe mon itori ng is u nde r ta ken ei the r ce ntral ly or th roug h regi on al of c e net wor ks, ap prop riate to th e d ive rse a nd spe ci ali sed n ature of th e bus ine ss es an d the s ize an d com plex it y of the tra ns acti on. Und er writi ng au thor it y is u ltim ately d el eg ated f rom the Boa rd Ri sk Co mm it tee an d ca sca de d acc ordi ngl y , wi th le ndi ng bu sin es se s app rovi ng lowe r ri sk ex pos ures l oc all y su bje ct to com pli ance with cre dit p oli cy an d ris k app etite. Th is mo de l is su ppo r ted by c entr al ove rsi ght a nd c ontro l. An in de pe nde nt ce ntra l cre di t ris k fu nc tion p rovi de s ong oin g mon itor i ng of material cre dit r isks th roug h reg ula r revi ew of app etites a nd p olic y . Th is tea m repo r ts thro ugh th e chi ef cre di t ris k of c er to the gro u p ch ief r is k of c er and p rovi de s mont hly re po r tin g to the CRM C and G RCC. Th e Ba nk ing d iv isi on ha s a dua l ap proa ch to miti gati ng cre di t ris k by: • Len din g on a pre do mina ntl y sec ured b asi s wi th emp has is on b oth the cu stome r’ s a bil it y to repay an d the qu ali t y of the un de rl y in g se cur it y to min imi se any l oss s hou ld the c ustom er not b e ab le to repay; a nd • Ap ply in g gre ater sc ru tiny wh ere th e ass et se cu rin g a loa n is le ss t ang ibl e, or in c ase s of hi ghe r lo an to valu e (“L T V ” ) . Col le ctio ns an d rec over ies p roc es se s are de si gne d to provi de a fa ir , con sis tent an d ef fe ctive o pe ratio n for ar rea rs m an age me nt wi th a focu s on goo d cus tomer o utco me s. We seek to e ngag e in e ar ly co mm uni catio n wi th bor rower s exp er ie nci ng di f cu lt y in m eeti ng the ir re paym e nts and provi de fo rbe ar anc e wh ere a ppro pr iate. Capa cit y in c oll ec tion s and re cove ri es tea ms is c los el y mon itore d with c le ar pl ans i n pl ace to de al wi th increases in arr ears. Government lending sche mes In add itio n to the Covi d- 1 9 s pe ci c for be ara nce m ea sure s cove red b elow, followi ng ac cred itati on, cu stome rs fac ili tie s were of fe red u nde r the UK go vernment -int roduced Cor onavirus Business Int erruption L oan Scheme (“CBI LS”) , the Corona virus Large Business Int erruption L oan Sch em e (“CLB ILS”) a nd the B ou nce B ack Lo an Sc he me (“B BLS” ) , th ere by en abl ing u s to ma xi mis e our su pp or t to sma ll bu sin es se s. As at 3 1 Jul y 2022, 5 ,445 f aci liti es we re draw n, with a re si dua l ba lan ce of £7 4 7 .5 m illi on (31 July 2021 : £9 83.9 mil lio n) follow ing c ommencement of repayments across our Propert y , Asset Financ e & Lea si ng an d Invoi ce F ina nc e bus ine ss es. We have also re ce ive d acc red itati on to of fer p rodu cts un de r the Re cove r y Loa n Sch em e, and sc he me s in the R epu bli c of Irel an d. A s at 3 1 Jul y2022, there are 6 33 li ve an d app roved l oan s, with l imi ts of £1 81 .6 mil lio n. Forb ea ra nce Forb ea ra nce o cc urs w he n a cus tomer i s exp er ie nci ng di f cu lt y in m eeti ng the ir nan cia l co mmi tme nts and a c on ce ssi on is g ran ted, by cha ng ing th e term s of the n anc ia l ar ran gem en t, whic h woul d not othe r wi se b e con sid ere d. Thi s ar ran ge me nt ca n be tem por ar y o r p ermanent depending on the customer’ s circumstances . The Banking division r epor ts on forborne exposures as either performing or non-performing in line with regulat or y requirements. A fo rb ea ran ce pol icy is m ain tai ned to en sure th e ne ce ssa r y p roce ss es a re in pl ace to en ab le co nsi stently f air tre atme nt of e ach cu stome r an d that they a re man age d ba sed o n thei r ind iv idu al ci rcum sta nce s. Th e ar ran ge me nts agre ed w ith cu stome rs w ill a im to create a su sta ina ble a nd af fordab le na nci al po si tion, the reby re duc ing th e like liho od of su f fe rin g a cre dit l oss. T he fo rb ea ran ce po lic y is pe rio dic al ly rev iewed to ensure i t rem ains ef fecti ve. Covid- 1 9 approach As the g lob al pa nde mi c has evo lve d, the imp act on c ustom er s and th eir o ng oin g per form anc e an d requ irem ent s have be en m oni tored, inc lud ing th e upta ke of conc es si ons, p ayme nt pe r fo rma nc e, the resu mpti on of no rma l paym en t term s and th e requ ire me nt for f ur th e r con ce ss ions. A pp ropr iate cu re pe rio ds as so ciate d with th es e con ce ssi ons h ave be en de term ine d bas ed o n in-d epth k now led ge of p or tfol ios and sub-portfolios. Th e Cen tral C redi t Ris k fu ncti on co ntinu es to rep or t o n Covi d- 1 9 re lated c on ces si ons to the CR MC. Addi tion al re por ti ng tra cks t he traject or y of Covid- 1 9 relat e d concessions across the businesses and examines sect or and asset concent rations. 2 8 . Fi na nc i al R is k M an ag e me nt continued Book 1.indb 196 27/09/2022 23:48:47 Gov ernance Repor t Strategic Repor t Financial Statements 19 7 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Th e num be r of cus tomer s su ppo r ted v ia co nc es sio ns of fe red h as fa lle n to 77 0 fro m 1 7 ,67 4 at the e nd of the p ri or n anc ia l yea r . A loa n wil l be tre ated as fo rbo rn e until a c ure p er iod h as be en m et. Th e cure p er iod s of Covi d- 1 9 rel ated for bor ne ex pos ure s ar e s ubj ec t to exp er t j udg em ent a nd ar e und er pin ne d by care ful ly c ons ide red a ss umpti ons. T he se a re sub jec t to regu lar rev iew a nd var ie s pe r bu sine ss and ran ge s fro m inst ant c ure wh en c onc es si on e nds (sub je ct to con rm ation of n o adve rs e pe r for ma nce) to a cure p er iod of b et wee n 3 and 1 2 mont hs, com me nci ng up on re sum ption of f ull re paym ents i n ins tan ces w he re pa r tia l repay me nts had b ee n agre ed fo r a per io d of tim e. BAU forbea rance Th e Ban ki ng di vi sio n has h istor ica ll y of fere d a ra nge of c onc es si ons to sup por t custom er s whi ch va r y de pe ndi ng on th e pro duc t a nd the cus tomer’s status. Su ch c onc es si ons i ncl ude a n ex tens ion o uts ide te rms (fo r exa mpl e a hig he r loa n to valu e or over pay me nts) and ren anc ing, whi ch m ay inco rp orate an ex te nsi on of the l oan te nor a nd c api tal is ation of a rre ar s. Fur the rm ore, othe r for ms of for be ara nc e suc h as mor atoriu m, coven ant wa ive rs, a nd rate co nc es sio ns ar e als o of fere d. Loan s are c las si ed a s forb or ne at the ti me a cu stome r in n anc ia l dif cul t y is gra nted a c onc es sio n and th e loa n wi ll rem ain t re ated and rec orde d as for bo rn e until th e foll owin g exi t con diti ons a re met: 1. Th e loa n is co nsi de red a s per form ing a nd the re is n o past-du e amo unt a cco rdin g to the am end ed c ontra ctu al ter ms; 2. A mi nim um t wo-yea r prob ation p er io d has p ass ed f rom the d ate the for bo rne ex po sure wa s co nsid ere d as p er formi ng, du rin g wh ich t ime regu la r and ti mel y pay men ts have be en m ade; 3. Non e of the cu stome r’ s ex pos ures w ith C lose B rothe rs a re more th an 3 0 days pa st du e at the e nd of the p robati on pe ri od. Forb ea ra nce a na lys is At 3 1 J uly 2022 th e gro ss c arr yin g amo unt of ex pos ure s with fo rb ea ran ce m ea sure s was £ 208.9 mi lli on (31 July 2021 : £61 5.0 mill i on). The key dri ver of th is de cre as e has b ee n rep ayme nt an d cur in g of Covi d- 1 9 re late d forb ea ra nce, the tota l of whi ch a mou nts to £40 .8 mil l io n at 3 1 J uly 2022 (3 1 Jul y 2021 : £454.8 mi lli on). An a na lys is of for bo rne l oa ns is s hown i n the ta bl e be low: Gross loans and adv ances to cu sto me rs £ million Forborne loans £ million Forborne loans as a p er ce nta ge of gr os s lo ans a n d advances to customers % Provisio n on forborne loans £ million Number of cust omers supported 31 J ul y 2 0 2 2 9, 1 4 4 .5 Covid- 19 forbearance 40.8 0.4% 1.4 770 Non-Covid- 19 forbear ance 168.1 1.8% 42.9 10,273 9, 1 4 4 . 5 208.9 2.3% 44.3 11,043 31 J u l y 2 0 21 8, 72 4.9 Covid- 1 9 forbearance 454.8 5.2% 47.3 17,674 Non-Covid- 1 9 forbearance 160.2 1.8% 35.5 12,679 8, 72 4.9 615.0 7.0% 82.8 30,353 Th e foll owin g is a bre akd own of for bo rne l oa ns by se gm ent s pli t by thos e dr ive n by Covi d- 1 9 com pa red to co nce ss io ns that h ave a r ise n in the normal course o f business: 31 Ju l y 2 02 2 31 J u l y 20 21 Covid- 19 £ million Non-Covid- 19 £ million To t a l forbor ne loans £ million Covid- 1 9 £ million Non-Covid- 19 £ million To t a l forborne loans £ million Commercial 34.2 28. 1 62.3 287 .4 1 9.8 3 07 . 2 Retail 1. 8 2 1. 2 2 3 . 0 49.2 9.2 58.4 Prope r t y 4.8 1 1 8.8 1 23.6 11 8 . 2 1 3 1 . 2 2 4 9 . 4 40.8 1 68. 1 208.9 454. 8 1 6 0.2 61 5.0 Book 1.indb 197 27/09/2022 23:48:47 19 8 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d Th e foll owin g is a br ea kdown of the n um ber of c ustom er s su ppo r ted by se gm en t: 31 Ju l y 2 02 2 31 J u l y 20 21 Covid- 19 Non-Covid- 19 T otal number of customers supported Covid- 19 Non -Covid- 19 T otal number of cust omers supported Commercial 404 1 1 4 5 1 8 2, 2 91 136 2, 427 Retail 365 10, 102 10,467 1 5,333 1 2, 485 27 ,8 1 8 Prope r t y 15 75 8 50 58 1 08 770 10,273 1 1,043 1 7 ,67 4 1 2,679 3 0,3 5 3 Th e foll owin g is a bre akd own of for bo rn e loa ns by co nc es sio n t yp e spl it by tho se dr ive n by Cov id- 1 9 co mpa re d to conc es si ons th a t have ar ise n in the n or mal c our se of b usi ne ss: 31 Ju l y 2 02 2 31 J u l y 20 21 Covid- 19 £ million Non-Covid- 19 £ million For bor ne loans £ million Covid- 1 9 £ million Non-Covid- 19 £ million Forborne loans £ million Ex tension outside terms 5.4 10 7 .6 1 13. 0 12 3 . 5 12 1. 9 24 5 . 4 Renancing –3 . 03 . 0 1 .2 5.3 6.5 Morat orium 35.4 34.5 69.9 329. 7 1 6. 1 3 45.8 Other modications – 23.0 23.0 0.4 16.9 1 7 . 3 40.8 168. 1 208.9 454. 8 1 6 0.2 61 5.0 Segmental credit risk Com me rcia l is a co mb inati on of seve ral s pe ci ali st, pred omi nan tly se cu red, le ndi ng bu sin es se s. The n ature of a sse ts na nc ed var i es acro ss t he bus ine ss es. T he m ajo ri ty of th e loa n bo ok is c omp ris ed of l oan s le ss tha n £ 2 .5 mil lio n. Cred it qu ali t y is pre do min antl y as ses se d on a n ind ivi du al loa n-by-lo an ba sis. D ur ing a nd po st the p and em ic, Co mme rci al ha s prov ide d add iti ona l sup por t to custome rs u sin g the CB ILS, CL BI LS an d RLS p rodu cts wh ic h be net f rom B ri tish B us ine ss B ank g ua ran tee sup po r t. Col lec tio n and re cove r y ac tiv it y is exec uted p romptl y b y exp er ts with ex pe ri enc e in the s pe cia lis ed a sse ts. Thi s app roac h all ows rem edi al ac tion to be i mpl em ented at th e app rop riate tim e to mi nimise pot entialloss . Reta il is p red omi nan tly hi gh vol um e sec ure d, refun da ble o r stru ctu ral ly prote cted l end ing. T he m ajo rit y of th e loa n bo ok is c om prised of loans less than £20 ,000 and includes bot h regulat ed and unregulat ed agreements. Credit issues are ident ied via largely aut omated mon itoring and trac kin g pro ce sse s. Co lle cti ons p roc es ses a nd ac tio ns (foc use d on go od a nd fa ir cu stome r outco me s) are de si gne d an d imp lem en ted to suppor t and r e stor e customers t o a performing status, with recov er y methods applied to minimise potential loss. Prope r t y is a l ow volu me, sp ec ial ise d le ndi ng po r t fol io wi th cre dit q ua lit y a sse ss ed o n an in di vid ua l loa n by loa n ba sis. T he m ajo rit y of th e loa n boo k is co mpr ise d of Re sid ent ial D evel opm ent l oan s of le ss tha n £1 0 m ill ion. A ll lo ans a re reg ula rl y reviewe d to ens ure that th ey are p er formi ng sati sfac toril y , wi th Re sid enti al D evel opm ent f acil itie s mo nitore d, broa dly , o n a mon thly b asi s by ind ep en den t Clo se Broth er s ap pointed Pr oject Mon itori ng Su r veyor s (“PMS” ) to cer ti f y bu ild pay me nts an d the res idu al c ost-t o -co mp lete. Thi s ens ure s the tho roug h sup er v isi on of a ll li ve deve lop me nts and f aci lita tes the mo nthl y ch ec kin g of on-s ite prog res s aga ins t or igin al b uild p la n. In Co mme rci al an d Prop er t y , p er fo rm ing l oan s with e levated l evel s of cred it r isk m ay be pl ace d on watch li sts de pe ndi ng on th e perceived seve rit y of th e cre dit r isk . Credit risk repor ting Th e foll owin g tab le se ts out l oa ns an d adva nc es to cus tomer s, trad e rec ei vab les a nd u ndr awn fa cili tie s by the g roup’ s inte rna l credit risk grading and i llu strate s the al loc atio n of the se pe r IFRS 9 s tag ing c atego r y for c omp arati ve pu rpo se s. The a na lys is of le nd ing h as be en prepared based on the fo llow ing r is k categ or ies: Low ris k: Th e cre di t ris k prol e of the bo rrowe r is c ons ide red a cce pta ble w ith th e bor rower c ons ide re d likel y to meet o bli gati o ns as th ey fal l due. Standard monit oring in place . Me diu m ris k: Evi den ce of d eteri orati on in th e cre dit r isk p rol e of the bo rrowe r exis ts whi ch re qui res in cre ase d mo nitor ing. Po tenti al c onc er ns o n abi lit y to me et obl igati ons a s they fa ll du e may ex ist. Hig h ris k: Evi de nce of s ign ic an t deter ior ation i n the cr edi t ris k pro le of the b orrowe r exi sts wh ic h requ ire s en han ce d man age ment . F ull repay me nt may not b e ach ieve d with p otentia l for lo ss id en tie d. 2 8 . Fi na nc i al R is k M an ag e me nt continued Book 1.indb 198 27/09/2022 23:48:47 Gov ernance Repor t Strategic Repor t Financial Statements 19 9 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Stage 1 £ million Stage 2 £ million Stage 3 £ million To t a l £ million At 31 Ju ly 2 0 2 2 Gr os s l oa ns a n d ad va nc e s to cu s to me r s Low ris k 7 ,356.7 706.9 21 .4 8,085.0 Medium risk 259.3 401 .9 4 7 .3 7 0 8.5 High risk 1 1 .0 50. 1 289 .9 35 1. 0 Ungraded –––– 7, 6 2 7. 0 1 ,1 5 8 . 9 3 5 8 . 6 9 ,1 4 4 . 5 Undrawn commitments Low ris k 1, 2 0 5 . 9 10 .7 – 1, 2 16 . 6 Medium risk 0.4 3.8 – 4. 2 High risk –2 . 40 . 22 . 6 1 , 206.3 16.9 0. 2 1 , 223.4 T rade receivables 1 Low ris k 8.6 – – 8. 6 Medium risk –0 . 4 –0 . 4 High risk –– 0 . 8 0 . 8 8.6 0.4 0.8 9.8 Stage 1 £ million Stage 2 £ million Stage 3 £ million To t a l £ million At 31 Jul y 2021 Gr os s l oa ns a n d ad va nc e s to cu s to me r s Low ris k 7, 2 1 7. 8 3 2 8 . 4 1 0 . 8 7, 5 5 7. 0 Medium risk 21 0.5 61 6.5 31 .5 858.5 High risk 0. 5 1 3 .6 28 3.0 297 . 1 Ungraded 5.5 1. 7 5. 1 12 .3 7, 4 3 4 . 3 9 6 0 . 2 3 3 0 . 4 8 , 7 2 4 . 9 Undrawn commitments Low ris k 1, 2 4 9 . 2 5 . 6 – 1, 2 5 4 . 8 Medium risk 5 1 .1 3 . 0 – 5 4 .1 High risk –– 1 . 4 1 . 4 1, 3 0 0 . 3 8 . 6 1. 4 1, 3 1 0 . 3 T rade receivables 1 Low ris k 8. 1 – – 8. 1 Medium risk – 1 .0 – 1 .0 High risk –– 0 . 5 0 . 5 8. 1 1 .0 0.5 9.6 1 Li fet im e exp ec ted c re di t lo ss es a re re c og nis e d for a ll tr ad e re ce iva bl e s un de r the I FRS 9 sim pl i ed a pp ro ach . Th e g ure s pr es en ted a re o n a net b as is a f ter d ed uc ti ng fo r exp e cte d cre di t lo ss es o f £3.2 m il li on (31 Ju ly 2021 : £ 3.4 mil li on) r el ati ng to p red om in an tly S ta ge 3 re c ei vab le s. Low ris k loa ns a nd ad van ce s to custome rs re pre se nt 88% of the ove ral l por tfo lio (31 July 2021 : 87 % ), ree cti ve of our p rud en t a nd consistent app roa ch to cre dit r is k man ag eme nt. 80% (31 July 2021 : 83% ) of total ad van ce s are c las si e d as low r is k Sta ge 1 , dr ive n by the strong quality of the po r t foli o. Low risk S tag e 2 rep res ents 8% (3 1 Jul y 2021 : 4% ) of loa ns an d ad vanc es to cu stome rs, l arge ly c omp ri sin g ea rl y a rrears cases , or agre em ents w hic h have tr igg ere d a sig ni ca nt inc rea se in c red it ri sk in dic ator , o r the 30 d ays pa st du e back stop. The in cre ase is primar ily driven by deter io rating m acro ec ono mic fo rec as ts. Low ris k Sta ge 3 lo ans a nd ad van ce s to custome rs p rim ar ily re late to agre em ents w hic h have trig ge red th e 90 d ays pas t due b acks top but w he re fu ll rep ayme nt is ex pe cted. Me diu m ris k lo ans a cco unt fo r 8% (3 1 Ju ly 2021 : 1 0%) of t ot al l oan s and a dva nce s to cus tome rs, of wh ic h the ma jor it y i s in St ag e 2. Med ium ris k St age 1 h as in cre ase d to 3% (3 1 Ju ly 2021 : 2% ) as c er tain p ar ts of th e Nov ita s loa n bo ok have b ee n move d to medi um r isk, r eecting the lates t cas e fai lure r ates. Me di um ri sk St age 2 re pre se nts 4 % (31 July 2021 : 7% ), reec ting th e redu cti on in C ovid - 1 9 for be ar anc e. Loans and adva nce s to custom er s ree cted as m ed ium r isk S tag e 3 pri mar il y rela te t o agre em ents th at have tri gge red th e 90 d ays pas t due b ackstop in addition t o other signicant increase in credit risk triggers. Hig h ri sk lo ans a cco unt fo r 4 % (31 July 2021 : 3% ) of total l oa ns an d adva nc es to cus tome rs w ith the m ajo ri t y cor re spo ndi ng to S tage 3. Book 1.indb 199 27/09/2022 23:48:47 20 0 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d Collateral held Th e grou p miti gates c red it r isk th roug h hol din g col latera l ag ain st loa ns a nd ad vanc es to cu stome rs. T he g roup h as inte rna l po li cies on the acc epta bil it y of sp ec ic c oll ateral t y pe s, the req uire me nts for e nsur in g ef fec tive e nforc eab ili t y and m oni torin g of col latera l in-life. Internal policies de ne, amo ngs t other th ing s, le gal d ocu me ntatio n req uire me nts, the na ture of as sets ac ce pted, loa n to value a nd ag e at or igi nat ion, and expo sure m atur it y an d in-l ife in spe cti on req uire me nts. A n ass et val uatio n is un der taken a s par t of the loa n or igin atio n proc es s . Th e pri nci pal t y pe s of col later al he ld by the g rou p aga inst l oa ns an d adva nc es to cus tomer s in the Pro pe r t y an d Com me rcia l bu si nesse s inc lud e res ide ntia l an d com me rci al pro pe r t y an d cha rge s over b usi ne ss a sse ts suc h as eq uip me nt, inventor y and ac co unts re ce iva b le. Wit hin Reta il the g roup h old s co llater al pr ima ri ly in th e form of ve hi cle s in M otor Fina nc e and ref un dab le in sur anc e pre miu ms in Pre mi um Finance , whe re a n addi tion al l ayer of prote ctio n may exi st thro ugh b roker re co ur se. Th e Ban ki ng di vis io n’ s c ollate ral p oli cie s have not m ater ial ly ch an ged d ur ing th e repo r tin g pe rio d and th ere h as be e n no si gni cant change in the over all q ua lit y of the c oll atera l hel d by the gr oup s inc e the pr ior p er io d. An al ysis of g ros s loa ns a nd ad vanc es to cu stome rs by L T V ratio is p rovi ded b el ow . T he va lue of c oll atera l use d in d eter min ing t h e L T V ratio is bas ed up on da ta ca pture d at loa n or igin atio n, or wh ere ava ila ble, a mo re rec ent u pdate d valu ation. Commercial £ million Retail £ million Propert y £ million To t a l £ million LT V 1 60% or l ower 1,238.2 179.5 1,011.4 2,429.1 >60% to 7 0% 471.6 179.5 367.3 1,018.4 >7 0 % t o 8 0 % 375.5 374.9 49.8 800.2 >80% to 9 0% 692.7 1,108.0 4.5 1,805.2 >90% to 1 0 0% 1,052.6 477.6 – 1,530.2 Gre ater tha n 1 0 0% 213.3 318.9 77.2 609.4 Structurally pr otect ed 2 291.7 452.8 – 744.5 Unsecured 164.8 42.7 – 207.5 At 31 Ju ly 2 0 2 2 4,500.4 3,133.9 1,510.2 9,144.5 1 Gov er nm en t le nd in g sc he me f ac ili ti es tot al li ng £913.5 mil li on (31 Ju ly 2021 : £ 98 3.9 mi ll io n), are a llo c ated to a l ow L T V c ate g or y re ec tin g th e nat ure o f the g ove rn me nt g ua ra nte e an d re sul ta nt l eve l of le nd in g ri sk . 2 Exposures are considered structurally protected whe n, in manage ment’ s judgement, they have characteristics which mit igate the c re di t ri sk of t he ex po su re to a s ig ni c an t ex ten t, in spite of no t representing tangible se curity . Commercial £ million Retail £ million Proper t y 3 £ million To t a l £ million LT V 1 60% or l ower 1,301.7 171.5 1,082.1 2,555.3 >60% to 7 0% 203.9 172.3 323.8 700.0 >7 0 % t o 8 0 % 333.5 363.3 35.2 732.0 >80% to 9 0% 494.2 1,154.9 6.0 1,655.1 >90% to 1 0 0% 1,103.4 461.7 7.3 1,572.4 Gre ater tha n 1 0 0% 237.2 240.4 88.1 565.7 Structurally pr otect ed 2 330.5 437.5 – 768.0 Unsecured 136.1 40.3 – 176.4 At 31 Jul y 2021 4,140.5 3,041.9 1,542.5 8,724.9 1 Gov er nm en t le nd in g sc he me f ac ili ti es tot al li ng £9 83 .9 mil li on (31 Ju ly 20 20: £1 9 3.8 m ill io n), are a ll oc ate d to a low LTV c ate go r y re e cti ng t he n atu re of th e gov er nm en t gu ar an tee a nd re sul ta nt l eve l of le nd in g ri sk . 2 Exposures are considered structurally protected whe n, in manage ment’ s judgement, they have characteristics which mit igate the c re di t ri sk of t he ex po su re to a s ig ni c an t ex ten t, in spite of no t representing tangible se curity . 3 Gr os s lo an s an d adv an ce s to cu sto me rs b y L T V r ati o in P rop er ty h as b ee n up da ted, w it h no i mp act o n th e tota l ba la nc e, to en su re th e ba si s of pr es en tat io n is c on sis ten t wi th th e current year . 2 8 . Fi na nc i al R is k M an ag e me nt continued Book 1.indb 200 27/09/2022 23:48:47 Gov ernance Repor t Strategic Repor t Financial Statements 20 1 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gro ss lo ans a nd ad van ce s to custom er s whi ch a re cre dit-impa ire d spl it by L T V r atio: Commercial £ million Retail £ million Propert y £ million To t a l £ million LT V 60% or l ower 42 .5 1. 7 9.2 53 .4 >60% to 7 0% 0.7 2.4 1 4. 2 1 7 .3 >7 0 % t o 8 0 % 2. 7 7 .0 1 9. 1 28.8 >80% to 9 0% 16 . 4 17 . 9 4 . 4 3 8 .7 >90% to 1 0 0% 1 0 .1 1 9 .1 – 2 9 . 2 Gre ater tha n 1 0 0% 4. 8 1 1 .9 77 . 1 9 3.8 Structurally pr otect ed 56.5 4. 1 – 60.6 Unsecured 35. 4 1 .4 – 36.8 At 31 Ju ly 2 0 2 2 16 9 . 1 6 5 . 5 12 4 . 0 3 5 8 . 6 Commercial £ million Retail £ million Proper t y 1 £ million To t a l £ million LT V 60% or l ower 19 . 8 2 . 8 10 . 1 3 2.7 >60% to 7 0% 2.0 2. 8 57 . 6 6 2.4 >7 0 % t o 8 0 % 6.4 6.3 1 8.2 3 0.9 >80% to 9 0% 12. 8 12 . 9 6 . 0 3 1. 7 >90% to 1 0 0% 15 . 2 9 . 0 7 . 3 3 1. 5 Gre ater tha n 1 0 0% 14 . 0 5 .1 8 8 .1 10 7 . 2 Structurally pr otect ed 13.0 3 .0 – 1 6 .0 Unsecured 16 .7 1. 3 – 18 . 0 At 31 Jul y 2021 99 .9 43.2 1 87 .3 330. 4 1 Cre d it-im pa ir ed g ros s lo an s an d ad va nc es to c us tom er s by L T V rati o in P rop e r t y ha s be en u pd ate d, wi th no i mp ac t on t he tot al b al an ce, to e ns ure t he b as is of p re se nt ati on i s co ns iste nt w it h the c ur re nt ye a r . Financial assets: T reasur y assets Th e cre dit r isk p res ente d by the gro up’ s trea sur y ass ets is low. Immater ial i mpa ir me nt provi sio ns a re rec ogn ise d for c ash a nd b alances at ce ntra l ban ks, ce r ti cate s of de pos it a nd sove reig n an d ce ntra l ban k de bt. The se nan cia l as sets a re inve stme nt g rade a nd i n St a ge1 . Fi na nc i al a s se ts : S et t l em e nt b al an c es a n d loa n s to m on ey b ro ker s ag a in s t st oc k ad va nc ed Th e cre dit r isk p res ente d by set tle me nt ba lan ce s in the S ec ur itie s di vis ion i s lim ited, as s uc h bal anc es re pre se nt de live r y ve r sus payment tran sac tion s whe re de li ver y of s ec uri tie s oc cur s sim ult ane ou sly w ith pay me nt. The c red it r isk i s there fore li mited to the c ha ng e i n ma rket pr ic e of a sec ur it y bet we en tra de da te and set tl em ent d ate and not th e abs olu te valu e of the trad e. Win ter o od is a m ar ket make r and tr a de s on a pri nci pal- on ly ba sis w ith re gul ated cou nter par ties in clu din g stock bro kers, we alth m an age rs, in stitu tio ns an d hed ge f und s who a r e ei the r auth ori se d and re gul ated by the PR A a nd / o r FCA or eq uiva le nt reg ula tor in the re spe cti ve cou ntr y . Cou nter par ty ex pos ure a nd set tl em ent f ail ure mo ni torin g co ntrols a re in p lac e as pa r t of a n overa ll r isk m an age me nt fr amewo rk a nd settlement bal an ces past d ue a re acti vel y ma nag ed. Loan s to money b roker s ag ain st stoc k adva nc ed of £48.4 milli on (31 July 2021 : £5 1 . 1 m ill ion) is th e cas h co llater al p rovid ed to the se in stitu tion s. Book 1.indb 201 27/09/2022 23:48:47 202 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d for stoc k bor rowi ng by Wi nter ood. T he stoc k bor rowi ng to whi ch the c as h de pos its re late is sh or t te rm in n ature a nd is re cord e d at th e am ount payab le. Th e cre dit r is k of this n an cia l as set is th ere fore li mited. Th e foll owin g tab le s hows th e age ing of s et tle me nt bal an ce s: Stage 1 £ million Stage 2 £ million Stage 3 £ million Impairment provisions £ million To t a l £ million At 31 Ju ly 2 0 2 2 Not past du e 726 .0 – – – 726. 0 Less than 30 days past due 70 .6 – – – 70.6 More t han 30 days but less than 90 da ys past due –1 . 4 – –1 . 4 More th an 9 0 days pa st du e – – 1. 5 ( 0 . 2 ) 1. 3 796 .6 1.4 1 .5 (0. 2) 79 9.3 Stage 1 £ million Stage 2 £ million Stage 3 £ million Impairment provisions £ million To t a l £ million At 31 Jul y 2021 Not past du e 6 1 5.2 – – – 61 5.2 Less than 30 days past due 8 1 .6 – – – 81 .6 More t han 30 days but less t han 90 da ys past due – 1 .2 – – 1 .2 More th an 9 0 days pa st du e – – 1 .8 (0 . 2) 1 .6 696.8 1 .2 1 .8 (0.2 ) 699.6 Company nancial assets: Amounts owed by subsidiaries Am ounts owe d by su bsi dia ri es o n the co mpa ny bal an ce sh eet l arg el y rela te t o Clo se Broth er s Li mited a nd C los e Brothe rs H old ing s Limit ed, and th e cre dit r is k pre sen ted by the se n anc ia l ass ets is im mate ria l. (d) Mar ket risk Interest rate risk Th e grou p ’ s ex pos ure to intere st rate ri sk ar ise s in th e Ban ki ng di vis ion a nd, ac cord ing ly , the re ma ind er of thi s se ctio n rela tes to the Ban ki ng div isi on. Inte rest r ate risk i n the gro up’ s othe r div isi ons i s con sid ere d to be imm ater ial. Th e grou p has a s imp le a nd tra nspa ren t bal anc e sh eet a nd a low a pp etite for inte rest r ate ris k whi ch is l imi ted to that requ ire d to operate ef c ie ntly . Th e grou p’ s p oli cy is to match re pr ici ng ch ara cter isti cs of a ss ets an d lia bil itie s natu ral ly w he re pos si ble o r by u si ng intere st rate swap s to secu re the ma rgi n on its l oan s and a dvan ce s to custom ers. T he se i nteres t rate swaps a re di scl ose d in note 1 4. Th e Ass et an d Li abi lit y C omm it tee (“ ALCO”) m oni tors th e intere st rate ri sk ex pos ure ac ross th e Ba nk’s bal an ce sh eet. T he re are thre e mai n sou rce s of intere st rate r isk re co gni sed, w hic h cou ld ad ver sel y im pact f utu re inc ome o r the va lue of th e bal anc e sh eet: • rep ric ing r isk o ccu rs w he n ass ets an d lia bili tie s rep ric e at dif feren t time s; • em bed de d optio nal it y ri sk oc cu rs as a re su lt of sp ec ial c ond iti ons at tac he d to contra ct ter ms e mbe dd ed in s ome a ss ets and l ia bilities ; and • bas is ri sk oc cur s wh ere th ere is a m ism atch in the in teres t rate refere nce r ate for ass ets an d lia bili tie s. Intere st rate ri sk w ithin th e ba nki ng bo ok (“I RRB B”) i s ass es se d by app ly ing key be hav iou ral a nd mo de llin g as sum ption s inc ludi n g bu t not lim ited to xed r ate loa ns su bje ct to pre paym ent r is k, be havi ou r of non- matu rit y a sse ts, treatm ent of ow n eq uit y a nd the ex pe ct atio n of interes t rate optio ns. T his is p er form ed ac ros s a ran ge of re gul ator y pre sc rib ed a nd in tern al in teres t rate sho cks a pprove d by ALCO. T wo m eas ure s are u sed fo r me asu ri ng IR RBB, n ame ly E ar nin gs at R isk (“ EaR ”) an d Eco nom ic Value (“ E V” ): • Ea R me asu res o ne ye ar im pac ts to ear ni ngs, i ncl udi ng ba sis r is k, hig hli ghti ng a ny ear ni ngs s en siti vi t y sho uld r ates c han ge u n exp ec tedl y; an d • E V m eas ure s lo nge r term e ar ni ngs c ap aci ty d ue to rate ch ang es, i t hig hli ghts p otentia l fu ture se ns itiv it y of e ar nin gs, an d ul ti matel y ri sk to cap ita l Th e tab le be low s ets out th e as se sse d im pact o n our E aR d ue to a par all el s hif t i n intere st ra tes at 31 July: 2022 £ million 2021 £ million 0.5% in cr e as e 2. 1 (1 1.6 ) 0.5% de c re a se (1.9 ) 8.3 Th e tab le be low s ets out th e as se sse d im pact o n our b ase c as e E V due to a sh if t i n intere st rate s at 3 1 J ul y: 2022 £ million 2021 £ million 0.5% in cr e as e 1.1 (4. 2) 0.5% de c re a se (0.8) 4. 3 Th e imp act a bove is o n a co mpa rab le 0.5% incre ase a nd d ec rea se ba sis. T he B an k of Engl an d Bas e Rate ha d inc rea se d bas e rate to 1. 2 5 % b y 3 1 J ul y 2022 , fro m 0. 1 % at 31 July 2021 . T his ha s res ulte d in a red ucti on in e mb ed ded o ption al it y ri sk as oor s em be dde d in so m e va ri abl e rate 2 8 . Fi na nc i al R is k M an ag e me nt continued Book 1.indb 202 27/09/2022 23:48:47 Gov ernance Repor t Strategic Repor t Financial Statements 20 3 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 loa ns are n o lon ge r ge ner ating a ddi tion al e ar nin gs. Th e red ucti on in e mb edd ed o ption ali ty r is k is res po nsib le fo r most of th e m ove me nt in the EaR a nd E V m etri cs in th e yea r . Th e maj or dr ive r for E aR an d E V is now R ep ric ing R isk w ith i ncre as ing r ates dr iv ing p osi tive E a R a nd E V a nd mod est r ate redu ctio ns res ulti ng in n ega tive E V an d Ea R. Interest rate benchmark r eform Dur in g the yea r , the gro up co mp leted th e tran siti on away fro m the u se of LIB OR to alte rnati ve be nch ma rk rate s in lo an do cum ent a tio n, treasu r y tran sac tio ns an d other fo rm s of co ntrac t. At 3 1 Ju ly 2021 , lo ans a nd ad van ce s to custome rs a mo unti ng to £995.5 m illi on a nd de ri vative s with a notio nal va lue of £8 4. 7 mi llio n were yet to tra nsi tion to an a lter nati ve ben ch mar k rate. Th e tran siti on was s ubs eq uen tly co mp le te d by 3 1 D ec em ber 2021 in com pli anc e wi th the req uire me nts set by th e Prud enti al Re gu latio n Autho rit y a nd Fi nan cia l Con duc t Autho ri ty . There a re no si gni c ant c han ge s to the nature of th e ri sks ar is ing f rom n an cia l ins tru men ts to whic h the gro up is ex po sed a s a res ult of the transit ion. Foreign ex change risk A cha ng e in the e uro exch ang e rate wou ld de cre as e the gro up’ s eq uit y by th e foll owin g am ounts: 2022 £ million 2021 £ million 20% stren gthe ni ng of ster lin g aga ins t the eu ro (1.7 ) (0.9) Th e grou p has a ddi tion al mate ria l cu rre ncy a ssets a nd l iab ili tie s pri mar il y as a re sul t of treas ur y o pe ratio ns in the B an kin g d i vis io n. The se as sets and l ia bili tie s are m atche d by cur re ncy , u sin g excha nge r ate der ivati ve co ntrac ts wh ere n ece s sar y . Det ail s of the se co ntrac ts a re disclosed in note 1 4. Oth er p otentia l grou p exp osu res a ris e fro m sha re trad ing s et tled i n fore ign c urre nc y in the Se cu ri ties d iv isi on, an d f oreign curr e ncy equ it y inve stm ents. T he g roup h as p oli cie s an d pro ce sse s in p lac e to mana ge fore ig n cur re ncy r isk, a nd a s suc h the im pac t of an y re ason ab ly exp ec ted excha ng e rate uc tuati ons wo ul d not be m ater ial. Marke t price risk T r adin g n anc ia l instr um ent s: Equit y s hare s an d de bt se cur iti es Th e grou p’ s tra din g acti viti es re late to Winte r o od. Th e foll owin g tab le s hows th e grou p ’ s tra din g boo k exp osu re to market p ric e ri sk: Highest exposure £ million Lowest exposure £ million Aver ag e exposure £ million Exposure at 3 1 July £ million For t h e yea r e nd e d 31 Ju l y 2 02 2 Equity shares Long 54 .0 25 .3 3 2 .6 27 . 1 Shor t 28.9 5.3 1 0. 0 7 .9 22.6 1 9.2 Debt securities Long 23.8 1 4.2 1 9.5 1 2.4 Shor t 16 . 1 7 . 2 11.5 7.5 8.0 4.9 Highest exposure £ million Lowest exposure £ million Average exposure £ million Exposure at 3 1 Jul y £ million For the ye ar e nd ed 31 July 2021 Equity shares Long 49 .0 2 4. 8 30.9 30 .8 Shor t 22 .8 5.8 1 1 .0 9.4 19 . 9 21. 4 Debt securities Long 2 8 . 6 1 9 .1 2 2 . 7 2 0 .1 Shor t 12 . 9 4 . 5 8 . 6 7 . 0 1 4 .1 1 3 .1 With re sp ec t to the lon g and s hor t posi tion s on de bt se cur itie s £8.0 mill ion a nd £1 .7 millio n (202 1 : £9. 1 m illi on an d £0. 1 mi ll i on) were du e to mature w ithi n one ye ar re sp ec tivel y . Th e avera ge ex pos ure ha s be en c alc ulate d on a da il y bas is. Th e hi ghe st a nd lowe st exp osu res o cc urr ed on d if fe re nt dates a nd th e refore a n et pos itio n of the se exp osu res d oe s not ree ct a s prea d of the trad ing b ook. Bas ed u pon th e tradi ng bo ok ex pos ure gi ven a bove, a hyp otheti ca l fal l of 1 0% in ma rket p ric es wo uld re su lt in a £1 .9 m illi on d e crease ( 202 1 : £2. 1 mi llio n de cre ase) in th e grou p’ s in co me an d net a ssets o n the e qui t y tradi ng bo ok an d a £0.5 mill ion d ecr eas e (202 1 : £1 .3 million decrease ) on the d ebt s ecu ri tie s tradi ng bo ok. Howeve r , th e gro up’ s tr adin g acti vi ty i s mai nl y mar ket-maki ng wh ere p osi tion s are m ana ged throughout the day on a c ontin uou s bas is. Acc ordi ngl y , the s ens itiv it y refe rre d to above is p urel y hyp otheti cal. Book 1.indb 203 27/09/2022 23:48:47 20 4 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d Non- trading nancial instruments Net gains and losses on non- trading nancial inst ruments are disclose d in no tes 1 2 and 1 3. (e) Liqu idi t y r isk Liq uid it y ri sk is th e ris k that li ab ili ties c an not be m et wh en th ey fal l due o r ca n onl y be me t at an un ec ono mic p ri ce an d ar is es mainly in t he Banking division. Th e grou p ha s a pru de nt li qui dit y p osi tion w ith total ava il abl e fu ndi ng at 31 July 2022 of £1 1 .6 bil lio n (31 July 2021 : £1 1 . 1 b illi on). This f un din g is sig ni ca ntly i n exce ss of it s loa ns an d ad vanc es to cu stome rs at 31 Jul y 2022 of £8.9 bill ion (31 July 2021 : £8.4 bil lio n) . T he gro up ha s a larg e por tfo lio of hi gh q ual it y li qui d ass ets pr inc ipa lly i ncl ud ing c ash p lac ed o n de pos it wi th the B ank of E ngl and. T he g roup m ea sur es liquidi ty risk with a va ri et y of me asu res i ncl udi ng reg ula r stre ss tes ting a nd c ash ow mon itori ng, an d rep or tin g to both the gro up a nd di vis i onal boards. Th e foll owin g tab le a nal yse s the c ontra ctua l matu ri tie s of the gro up’ s o n ba lan ce sh ee t na nci al li ab ili ties o n an u ndi sco unted c as h ow ba sis. On demand £ million In less than three months £ million In more than three months but not more than six months £ million In more than six months but not more than one y ear £ million In more than on e ye a r bu t not more than ve year s £ million In more than ve year s £ million To t a l £ million At 31 Ju ly 2 0 2 2 Settlement balances – 7 8 0 . 7–––– 7 8 0 . 7 Deposits b y banks 6.0 5 1 .9 9 8.9 4. 1 – – 1 60.9 Deposits b y customers 120.9 1 ,6 45 . 1 2 ,0 46. 5 1,60 0. 1 1,427 .2 – 6 ,8 39.8 Loans and over drafts from banks 12 . 0 12 . 0 1. 9 3 .7 610 . 5 – 6 4 0 . 1 Debt securities in issue – 30. 3 25 6. 2 61 9. 5 89 0.7 44 4. 2 2 , 240.9 Loan s fro m mon ey broke rs ag ain st stoc k adva nc ed ––––––– Subordinat ed loan capital – 2 .0 – 2 .0 15.0 21 8 .0 237 .0 Derivative nancial instruments – 6.4 9.0 16.0 8 9.0 5 5.6 1 76.0 Lease liabilities 0.2 4.2 3.6 7 .3 33 .9 1 1.8 61 .0 Other nancial liabilit ie s 16. 1 1 24.6 5.3 6.8 3 4.4 7 .0 1 94. 2 To t a l 1 55. 2 2,657 .2 2 ,42 1 .4 2,259.5 3, 100. 7 736. 6 1 1 ,33 0.6 On demand £ million In less than three months £ million In more than three months but not more than six months £ million In more than six months but not more than one year £ million In more than on e yea r bu t not m or e tha n ve years £ million In more than ve years £ million To t a l £ million At 31 Jul y 2021 S et tl e m e nt b a l a nc e s – 67 4. 2 – – – – 67 4. 2 Deposits b y banks 2 . 1 37 . 7 1 05. 8 5.0 – – 1 50. 6 Deposits b y cust ome rs 57 6. 1 1 ,549 .4 1 ,985. 0 1 ,37 2 .0 1 ,202 .0 – 6,684 .5 Loans and over drafts from banks 22 . 7 0. 1 0. 1 0.2 49 1 . 1 – 5 1 4. 2 De bt sec ur itie s in i ssu e – 58.3 75 .5 1 0 6.6 1 ,048. 7 705.0 1 ,99 4. 1 Loan s fro m mon ey broke rs ag ain st stoc k adva nc ed – – – – – – – Subordinat ed loan capital – 1 .0 1 .0 2 .0 2 1 .0 2 43.9 268. 9 De rivati ve n anc ia l instr um ents – 5.3 3.7 8. 7 67 .8 43.5 1 29.0 Lease liabilities 0 .2 3.8 3.2 6.8 35.0 1 3.5 62. 5 Other nancial liabilit ie s 1 8.2 1 58. 4 6. 7 8. 1 4 7 .5 1 .3 2 40.2 To t a l 6 1 9 . 3 2 , 4 8 8 . 2 2 ,1 8 1 . 0 1 , 5 0 9 . 4 2 , 9 1 3 .1 1 , 0 0 7 . 2 1 0 , 7 1 8 . 2 2 8 . Fi na nc i al R is k M an ag e me nt continued Book 1.indb 204 27/09/2022 23:48:48 Gov ernance Repor t Strategic Repor t Financial Statements 20 5 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 De ri vative n anc ia l inst rum ent s in the ta bl e above i ncl ud es ne t cur ren cy swap s. Th e foll owin g tab le s hows the c ur ren cy swap s on a gro ss ba sis: On demand £ million In less than three months £ million In more than three months but not more than six months £ million In more than six months but not more than one year £ million In more than on e yea r bu t not m or e tha n ve y ears £ million In more than ve years £ million To t a l £ million At 31 Ju ly 2 0 2 2 1. 7 6 9 . 8 9 .0 16. 0 8 8 . 9 5 5 .6 241 .0 At 31 Jul y 2021 – 6 8.0 4.0 9.0 67 .8 43.5 192 .3 (f ) Of fset ting Th e foll owin g tab le s hows the i mpa ct on d er ivati ve na nci al a sse ts and l iab ili tie s whi ch h ave not be en of f set b ut fo r whi ch the group has enfo rce abl e mas ter net ti ng ar ra nge me nts in pl ace w ith c ounte rpa r tie s. Th e net a mou nts sh ow the exp osu re to coun terpa r t y cre di t risk a fter of fs et ting b ene ts a nd co llater al, an d are not i ntend ed to rep rese nt th e grou p ’ s ac tua l expo sure to cre di t ris k. Mas ter net ti ng ar ran ge me nts all ow outs tan din g tran sac tio ns wi th the sa me c ounte rpa r t y to be of f set an d set tle d net, e ithe r unc o nditionally or foll owin g a defa ult o r othe r pre deter min ed eve nt. Fin anc ia l col latera l on d er ivative na nci al in stru me nts co nsi sts of ca sh se tt led, typically daily , to mitigat e the mark to mark et exposures . Gross amounts recog nised £ million Master netting arrangement s £ million Financial collater al £ million Net amount s after of fset ting £ million At 31 Ju ly 2 0 2 2 Derivativ e nancial assets 7 1 .2 (69. 1 ) (0.5) 1.5 Derivativ e nancial liabilities 89.2 (6 9. 1) (26.9) (6.8) At 31 Jul y 2021 Derivativ e nancial assets 1 8.3 (1 6. 0) (2 .0 ) 0.3 Derivativ e nancial liabilities 21 .2 ( 1 6.0) ( 1 6.9 ) ( 1 1 . 7) 2 9. I nt er es t i n Un co n so li d ated Structured Ent ities Str uctu red e ntiti es a re thos e enti ties th at have be en d es ign ed so th at voting o r sim ila r rig hts are n ot the do min ant f actor in deciding who has con trol, suc h as wh en a ny voting r igh ts rela te to adm inis trati ve tas ks onl y , or w he n the rel evant a ctiv iti es ar e dire cted by m e ans of contractual arrangement s. Th e grou p has i ntere sts in str uc ture d enti tie s as a re sul t of contr actu al a rra ng eme nts a ris ing f rom th e man age me nt of as sets o n behalf of its cli ents a s par t of its As set M ana ge men t div is ion. T he se str uct ured e ntiti es c ons ist of u niti se d vehi cle s su ch as Au tho ris ed U ni t T r usts (“ AUT s”) and O pe n End ed I nvestm ent C om pan ie s (“OEICs” ) whi ch e ntitl e inves tors to a pe rce ntag e of the veh ic le’ s net a ss et valu e. Th e str uctured enti tie s are n an ce d by the pu rcha se of u nits o r sh are s by inves tors. T he gr oup d oe s not ho ld di rect i nves tmen ts in its s tru ctu re d enti tie s. As f und m ana ge r , the g rou p doe s not gu ar antee retu rn s on its f un ds or c omm it to na nci al ly su ppo r t its f un ds. Th e bus in es s acti vity of all stru ctu red e ntiti es is th e ma nag eme nt of as sets i n orde r to ma x imi se inve stme nt retu rns fo r inves tors f rom ca pi tal a ppr eci atio n and/ or inves tme nt inc om e. The g roup e ar ns a m ana ge men t fee f rom its s tru ctur ed e ntitie s, bas ed o n a pe rce ntag e of the en tit y’ s n et as s et value. Th e mai n ris k the g roup f ace s fro m its in teres t in as sets u nde r ma nag em ent o n be hal f of ex tern al i nvestor s is the l oss of fe e i n com e as a re sul t of the wi thd rawal of f und s by cli en ts. Ou t ows fro m fu nds a re de pe nd ent o n mar ket se ntim ent, as set p er form anc e an d inves tor co n siderations. Th e ass ets un de r man age me nt of un co nso lid ated str uctu red e ntiti es m an age d by the gro up we re £5,09 1mil lio n at 3 1 J ul y 2022 (3 1 July 202 1 : £5 ,46 7 million) . Included in rev e nue on t he consolidat ed income stat e ment is management fee income of £ 36. 7million ( 202 1 : £35 . 4 million ) from unconsolidat ed struct ured entities managed by the group. Book 1.indb 205 27/09/2022 23:48:48 20 6 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 The Notes cont inue d Registered o f ce addresses: 1 1 0 Crown Place , London E C2A 4 FT , United K ingdom. 2 Wimbledon Bridge House, Harteld Road, Wimbledon, London SW1 9 3RU , United Kingdom . 3 The Atrium Building Cannon Bridge, 25 Dow gate Hill, London EC4R 2GA, United Kingdom. 4 Roman House, Roman Road , Doncaster , South Y orkshire DN4 5EZ, United Kingdom. 5 Unit 1 , Kingsher Park, He adlands Business Park, Ringwood , Hampshire BH2 4 3NX, Unit ed Kingdom. 6 1 01 Wigmore Street, London W 1 U 1 QU, Unit ed Kingdom. 7 4 th Floor , The Athenaeum Building, 8 Nelson Mandela Place , Glasgow G2 1B T , United K ingdom. 8 Wi lmi ng ton H ou se, H ig h Str eet, E as t Gr in ste ad, We st S us sex R H1 9 3AU, U nite d K in gd om. 9 1 0th Floor , 5 Churchill Place, London E1 4 5HU , United Kingdom. 1 0 1 Bartholomew Lane, London EC2 N 2AX, United Kingdom . 1 1 Ol ym pi c Co ur t T h ird Av en ue, Traf for d Par k V il la ge, M an ch es ter M1 7 1AP , U ni ted K in gd om. 1 2 Lows Lane , Stant on-By-Dale, Ilkeston, Derbyshire DE7 4 Q U , Unit ed Kingdom. 1 3 Gr os se B le ic he 3 5-3 9, 551 16, Ma inz, G e rm any. 1 4 Co nwa y Hou se, C on way St re et, St H el ie r JE4 5S R, J er se y . 1 5 1209 Or an ge S tre et, W ilm in gto n 19801 , N ew Ca st le, D el awa re, US A. 1 6 S wi f t Sq ua re, Bu il di ng 1, Sant r y De me s ne, No r th woo d, Du bl in, D O9 AO E4, Irel an d. 1 7 PO B ox 186, Royal C ha mb er s, S t Jul ia n’ s Aven ue, S t Pete r Por t GY1 4HP , Gu er ns ey. Subsidiaries b y virtue o f contr ol: 1 8 The relat ed undertakings are included in the consolidat ed nancial statements as the y are controlled by the group . 30. In vestments in Subsidiaries In ac cord an ce wi th se ctio n 409 of th e Co mpa nie s Act 20 0 6, the fol lowi ng is a l ist of th e grou p’ s su bsi dia ri es at 31 July 2022, whi ch a re all w ho lly owne d an d inc orp orated i n the UK u nle ss oth er wise st ated. Th e inves tme nt in s ubs idi ar y of £ 287 .0 mil lio n (3 1 J ul y 202 1 : £ 287 .0 mill ion) in th e co mpa ny bal an ce sh ee t rela tes to an inve st me nt in the c ap ital redu ctio n res er ve of C los e Broth ers H old ing s Lim ited. T her e were no i ndi cator s of impa ir ment d ur ing th e year re lati ng to this i nve stm ent (2021 : n one). Group Close Bro thers Holdings Limited 1 Banking Ai r and G en er al Fi na nce L im ited 2 Armed Ser vices Finance Limit ed 4 Arrow A udit Ser vices Limited 1 Bro ok Fund ing ( No. 1 ) L imi ted 10, 18 Capital Lease Solut ions Limited 1 CBM Holdings Limit ed 1 Close Asset Finance Limited 2 Close Brew er y Rentals Limited 5 Close Bro thers Asset Finance GmbH 13 (German y) Close Bro thers DA C 16 (Irela nd) Close Bro thers Fact oring GmbH 13 (German y) Close Bro thers Finance plc 1 Close Bro thers Limited 1 Close Bro thers Militar y Serv ices Limited 4 Close Bro thers Premium D AC 16 (Irela nd) Close Bro thers T echnology Ser vices Limited 1 Close Bro thers V e hicle Hire L imited 12 Close Business Finance Limit ed 2 Close Credit Management (Holdings ) Limited 1 Close Finance ( CI) Limited 14 (J e r s e y ) Close Inv oice Finance Limited 1 Close Leasing Limit ed 11 Close Mot or Finance Limit e d 4 Close PF Funding I Limit ed 9, 18 Commercial A cceptances Limit ed 6 Commercial Finance Credit Limited 2 Corporat e Asset Solutions Limited 1 Finance for Industr y Limited 1 Finance for Industr y Ser vices Limited 1 Kingston Asse t Finance Limit ed 2 Kingston Asse t Leasing Limited 2 Metr opolitan F actors Limited 1 Micgat e Holdings (UK) Limited 1 Novi tas Lo ans L imi ted 2 Novitas ( Salisbur y) Limit ed 2 Orbita Funding 2 01 7 - 1 plc 10, 18 Orbita Funding 2 020- 1 plc 10, 18 Or bit a Fund ing 2022- 1 plc 9, 18 Orbita Holdings Limit ed 10, 18 Orbita Holdings no .2 Limited 9, 18 Surrey Asse t Finance Limit ed 2 Securities W .S. (Nominees ) Limited 3 Wint er ood Client Nominees Limit ed 3 Wint er ood Gilts L imit ed 3 Wint er ood Securities Holdings L imited 3 Wint er ood Securities Limit ed 3 Wint er ood Securities US Corporation 15 (Delaware, USA) Asset Management Cavanagh Financial Management Limited 7 CBF W ealth Management Limit ed 1 (80 % shareholding ) CFSL Management Limited 1 Close Asset Management Holdings Limited 1 Close Asset Management L imited 1 Close Asset Management (UK ) Limited 1 Clo se Broth er s As set Ma na gem ent (G uer ns ey) Lim ited 17 (Gu e rn s ey) Close Inv e stments Limit ed 1 Close P or tfolio Management Limit e d 1 EOS Wealt h Management Limit ed 1 Lion Nominees Limit ed 1 Plac e Cam pbe ll Cl ose B rothe rs L imi ted 8 (50 % shareholding) PMN Financial Manageme nt LLP 1 Book 1.indb 206 27/09/2022 23:48:48 20 7 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial St atements Strategic Repor t Gloss ar y an d Denit ion of K ey T erms Adjuste d Adjus ted me asu res a re pre se nted on a b as is co nsi stent w ith pr ior p er io ds an d exclud e am or ti satio n of inta ngi ble a ss ets on ac qu isi tion, to pre sen t the pe r fo rma nc e of the gro up’ s acq uire d bu sin es ses con sis tent wi th its oth er b usi ne sse s; and a ny excepti on al an d othe r adj usti ng item s wh ich d o not ree ct un der ly ing tr adin g per form anc e Assets under administration T ota l as sets fo r whi ch W inter ood B us ine ss S er vic es prov id e cus tody a nd ad min istra tive se r v ice s Bad debt rat io I mpa irm en t los se s in the ye ar a s a pe rce ntag e of aver age n et loa ns a nd ad vanc es to cu stome rs a nd ope ratin g lea se a ssets Bargains per day Average d ail y nu mbe r of Wi nter o od’ s tr ade s wi th third pa r ti es Bounce Back Loan Scheme (“BBLS”) UK gov ernment business lending scheme that help s sma ll an d me diu m-si zed bu sin es se s to borr ow bet we en £ 2, 0 0 0 an d £50,000 (up to a ma ximu m of 25 % of the ir tu rnove r) Business as usual (“BA U”) costs O pe ratin g exp ens es excl udi ng d epre ci atio n and oth er c osts re lated to inve stm ents Bu y A s Y ou E a rn ( “B A Y E” ) The HM Rev e nue & Cust oms-appro ved Share Incent ive P lan that giv es all employ ee s the oppor tunity to bec ome s har eho lde rs i n the gro up Capital R equirements Directive V (“CRD V”) Europ ea n Uni on re gul ation i mpl em enti ng the B ase l III re qui reme nts in Eu rop e, alon gsi de CR R II Capit al Require ments Regul ation (“CRR”) Cap ita l Re qui rem ents R egu lati on as i mpl em ente d in the PR A R ule bo ok CR R Instr um ent a nd th e PR A Rul eb ook C RR F irm s: Levera ge In str ume nt (col le cti vel y kn own as “C RR ”) CDP Former ly the “Carbon Disclosure Pr oje ct” , a leading, internationally r ecognised independent rating agency and assessor of cor porat e carbon emissions disclosures and actions CET1 capital ratio Mea su re of the gro up’ s CE T1 capi tal a s a perc en tag e of ris k weig hted a ssets, a s req uire d by CRR Common equity tier 1 (“ CET1 ”) capital Me asu re of ca pit al a s de ned by th e CRR . CE T1 capi tal c ons ists of th e hig he st qu ali t y ca pit al inc lud ing o rdin ar y s har es, sh are p rem ium ac co unt, retai ne d ea rni ngs a nd oth er re ser ves, le ss goo dw ill an d ce r ta in int ang ibl e as sets an d othe r regu lator y a dju stme nts Com pensati on rati o T otal staf f costs as a percentage of adjust e d operating income Coronavir us Busi ness Interruption Loan Scheme (“CBILS”) UK gov ernment business lending scheme that he lps sm al l and m ed ium-s ized b us ine ss es ac ce ss loa ns an d othe r ki nds of nan ce u p to £5 milli on Coronavirus Large Business Interruption Loan Scheme (“CLBILS”) UK gov ernment business lending scheme that he lps medium and large- sized businesses access loa ns a nd othe r ki nds of na nce u p to £200 m ill ion Cost of funds Intere st ex pe nse i ncu rre d to supp or t th e len din g acti vi tie s div id ed by the ave rag e net l oa ns an d adva nce s to custom er s and o pe rating l ea se as sets Credit impaired Whe re on e or mo re events th at have a de trim ent al im pact o n the e stim ated fu ture ca sh ows of a loa n have oc cur red. C redi t imp aire d even ts are mo re seve re than S ICR tr igg er s. Acco unts w hic h are credit impair ed will be allocat ed to Stage 3 Customer satisfaction score (“CSA T” ) A me asu re of cus tomer s atis facti on ex pre sse d as a p erc ent age of p osi tive re spo nse s fro m the total of those surveyed Discounting The p roce ss of d eter min ing th e pre sen t valu e of fu ture pay me nts Dividend per share (“DPS”) Co mpr ise s the nal d ivi de nd pro pos ed for th e res pe ctive ye ar , toge ther w ith the i nter im di vid end de cla red a nd pa id in th e yea r Earnings per share (“EPS”) Prot at trib uta bl e to share ho lde rs d ivi de d by num be r of basi c sh are s Effec tive interest rate (“EIR”) T he in teres t rate at whi ch reve nue is re co gni se d on lo ans a nd di sco unted to the ir ca rr yin g valu e over the li fe of the n anc ial a ss et Ef f ec t i ve t ax r a te ( “E TR ” ) T a x on o pe ratin g prot /(los s) as a pe rce ntag e of ope ratin g prot /(lo ss) on ord ina r y ac tiv itie s befo re ta x Expected credit loss ( “ ECL ”) T he u nb ias ed p roba bil it y-weig hted ave rag e cre dit l oss d eter min ed by eva lua ting a r ang e of pos si ble outcomes and future e conomic conditions Expense/income ratio T ota l adj usted o pe ratin g exp ens es d ivi de d by ope rati ng inc om e Exposure at default (“EAD”) T he c ap ita l outs tan din g at the po int of d efau lt Fi na nc i al C on d uc t Au t ho r it y (“FC A ”) A na nci al re gul ator y bo dy in th e UK , regu latin g na nc ial rms a nd ma int ain ing in tegr it y of the U K’ s nancial mark et Book 1.indb 207 27/09/2022 23:48:48 20 8 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Glos sar y an d Denit ion of K ey T erms cont inue d Financial Reporting Council (“FRC”) An independent regulat or y body responsible f or promoting high quality corporate go vernance and reporting amongst UK companies For b ea r an ce For be ara nc e oc cur s wh en a cu stome r is ex pe rie nc ing na nci al di f c ult y i n mee ting th ei r na nci al com mi tmen ts and a c on ce ssi on is g ra nted, by cha ng ing th e term s of the n an cia l ar ran ge me nt, which would not otherwise be considered Funding allocated to loan book T otal funding ex cluding equit y and funding held for liquidity purposes Fun di n g as % l oa n bo ok T otal f un din g div id ed by n et loa ns a nd ad vanc es to cu stome rs a nd op er ating l ea se as sets General Data Protection Regulation (“GDP R”) Reg ulati on in tende d to stren gthe n an d uni f y dat a protec tion fo r all i ndi vid ua ls wi thin th e Europ ea n Union Gross carr ying amount Loa n boo k befo re exp ec ted cre di t los s prov isi on High quality liquid asset s (“HQL As”) Assets which qualif y for regulat or y liquidity purposes, including Bank of England deposits and sovere ig n and c en tral b ank d ebt HM Re ven ue & C u st om s (“HMRC”) Th e UK’ s t a x, pay men ts and c ustom s auth ori t y Independent nancial adviser (“IF A ”) Profes sio na l of fer ing i nde pe nd ent, wh ole of m ar ket adv ic e to clie nts in clu din g inves tme nts, pe ns ion s, prot ection and mortgages Internal C apital Adequacy Assessment Process (“ICA AP”) An a nnu al se lf-as se ss men t of a ban k’ s m ateri al r isk s and th e as soc iated l evel of c api tal n ee de d to be hel d, and u nde r ta ki ng ap pro pri ate stres s testin g of ca pit al ad equ acy Internal L iquidity Adequacy Assessment Process (“IL A AP ”) The processes for the identication , measurement, management and monitoring o f liquidit y Internal ratings based (“IRB”) approach A sup er v is or -a pprove d meth od us ing i ntern al mo de ls, rath er tha n sta nda rdis ed r isk we ig hting s, to calculat e regulat or y capital r equirements f or credit risk International Accounting Standards ( “IAS”) Old er s et of sta nd ards i ssu ed by th e Inter natio na l Acco untin g Sta nd ards C oun cil, se tti ng up acc oun ting pr in cip les a nd r ule s for p repa rati on of n anc ial s tatem ents. IA S are b ein g sup er sed ed byIFRS International Financial Repor ting Standards ( “IFRS ”) Glo bal ly ac ce pted ac cou nting s tan dard s is sue d by the IFR S Foun dati on an d the Inte rnati ona l Accounti ng Standards Board Inv est ment co sts Inc lud es d epr eci atio n and oth er c osts re late d to investm ent i n mul ti-yea r proj ects, n ew bu sin es s ini tiati ves a nd pil ots and c yb er re sil ien ce. E xclu de s IFRS 1 6 de pre ciati on Lev erage ratio Ti er 1 c api ta l as a pe rce nta ge of total ba la nc e she et as sets, a dju sted fo r ce r tai n ca pi tal d edu cti ons, including intangible assets, and off-balance sheet exposures Li fe ti m e exp e ct ed c r ed i t lo ss pr ov is io n (“ Li fe t im e EC L ”) Loss es that re su lt fro m defa ult eve nts oc cur ri ng wi thin the l ifetim e of the lo an Li qu i di t y c over ag e r at i o (“ LCR ”) Me as ure of the g roup’ s H QL A s as a p erc ent age of ex pe cted n et ca sh o ut ows ove r the n ex t 30 days in a stre ss ed sc en ari o Loa n t o val u e (“ L T V ”) r a t io For a se cure d or s tru ctur all y protec ted loa n, the lo an ba la nce a s a pe rce ntag e of the total va lue of th e asset Loss day W her e aggr egate gro ss tra din g boo k revenu es a re ne gati ve at the e nd of a trad ing d ay Loss giv en default (“L GD”) T he a mou nt lo st on a l oan i f a cus tomer d efa ults Managed assets or assets under management (“ AUM”) T ota l ma rket va lue of a ss ets wh ich a re ma nag ed by C los e Brothe rs A ss et Ma nag em ent in o ne of o ur investmen t solutions Market abuse regulation (“MAR”) Euro pe an re gul atio n aim ed at i ncre as ing m ar ket integr it y a nd inve stor protec tio n MiFID II T he Ma rkets i n Fin anc ial I nstr um ents D ire ctive i s the EU le gis latio n that re gul ates r ms w ho prov ide ser vic es to cli en ts linke d to nan cia l ins tru me nts, an d the ven ue s whe re tho se in stru me nts are tr ade d Modelled e xpected credit loss provision ECL = PD x LGD x E AD Modication losses M odi cati on l oss es a ris e wh en the c ontr actu al ter ms of a nan cia l as set a re mo di ed. An a dju stme nt is req uire d to the ca rr y ing va lue of th e na nc ial a sse t to reec t the pre se nt valu e of mod ie d fu ture cas h ows di sco unted at th e ori gin al ef fe cti ve intere st rate Net carrying amount Loan boo k val ue af ter ex pe cted c red it lo ss prov is ion Net o ws Net ow s as a pe rce ntag e of op eni ng ma na ged a ss ets ca lcu lated o n an an nua lis ed ba sis Book 1.indb 208 27/09/2022 23:48:48 20 9 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial St atements Strategic Repor t Net interest margin (“NIM”) Operating income generat ed by lending act ivities, including in terest income net of int erest expense, fee s and c om mis sio ns in co me net of fe e s and c omm is sio ns exp en se, and o pe ratin g le ase i nco me net of o per ating l ea se ex pe nse, le ss d ep rec iatio n on o pe rating l ea se a sse ts, div id ed by ave rage n et loa ns an d adva nc es to cus tomer s an d ope ratin g le ase a ss ets Ne t pr o mot e r sc or e (“ N PS ”) A me asu re of cu stome r sati sfa ctio n by whi ch u nfavou rab le rati ng s are de du cted f rom favo ura bl e ratin gs; he nce a s cor e above 0 i s go od, an d above 50 i s excel le nt Ne t st a b le f u nd in g r at i o (“ N SF R” ) Re gul ator y me as ure of the g roup’ s wei ghted f un din g as a pe rce ntag e of wei ghted a ssets Net z ero T arget o f complet ely negating t he amount of greenhouse gases pr oduced by reducing emissions or implementing met hods for their removal Operating margin Ad jus ted ope ratin g pro t div ide d by op erati ng in com e Paris Agreement I ntern ation al tre at y on cl imate c han ge, ado pted in 201 5, w ith a go al to limi t glo ba l warm ing to we ll be low 2 º C, and pre fera bl y to 1 .5º C, com pare d to pre -ind ust ria l leve ls Personal Contr act Plan (“PCP”) PCP is a fo rm of ve hic le n anc e wh ere th e cus tome r defe rs a si gni c ant p or ti on of cre di t to the na l repay me nt at the e nd of the ag ree me nt, there by lower ing th e month ly re paym ents c omp are d to a sta nda rd hire -pu rcha se ar ra nge me nt. At the na l repay me nt date, the cu stome r has th e optio n to : (a) pay the na l paym en t and t ake the ow ner sh ip of the ve hic le; (b) retur n the veh icl e an d not pay the n al re paym ent; or (c) par t-excha nge th e veh icl e with a ny eq uit y b ein g put toward s the co st of a new vehicle Probability of default (“PD”) Prob abi lit y that a c ustom er wi ll def aul t on the ir lo an Prudential Regulation Authorit y (“PRA ”) A nancial r e gulat or y body , responsible f or regulating and super v ising banks and other nancial institutions in the UK Recovery Loan Scheme La unc he d in Ap ri l 202 1 as a re pla cem en t to CBILS. Un de r the ter ms of the s ch eme, bu sin es se s of any si ze that have b ee n ad ver sel y imp acte d by the Cov id- 1 9 pa nde mi c ca n app ly to bo rrow u p to £1 0m ill ion, wi th acc red ited l end er s rec ei vin g a gover nm ent-bac ked gua ra ntee of 80% o n los se s that may arise Return on assets Adju sted op erati ng pro t at trib uta ble to sh are hol de rs di vi ded by tota l clo sing a ss ets at the ba la nce sheet da te Return on avera ge tangible equity Adju sted op er ating p rot at trib uta bl e to share ho lde rs d iv ide d by aver age total s ha reh old er s’ equit y , ex cluding intangible assets Ret u r n on n et l oa n bo ok (“RoN LB”) Adju sted op er ating p rot fr om le ndi ng ac tiv itie s di vid ed by ave rag e net l oan s and a dva nce s to cus tomer s an d ope ratin g lea se a ssets Return on opening equity (“Ro E”) Adjus ted op erati ng pro t at trib uta ble to sh are hol de rs di vi de d by ope ni ng eq uit y , excl udi ng no n- controlling interests Rev enue margin Inc ome f rom a dv ice, inve stm ent m an age me nt an d rel ated se r v ice s di vi de d by avera ge total c lie nt as sets. Avera ge total c lie nt as sets c alc ulate d as a t wo-p oint ave rag e Risk w eighted assets (“R WAs”) A mea sure of th e am ount of a b an k’ s a sse ts, adju sted fo r ris k in li ne w ith the C RR. It i s use d in det ermining the capital requirement for a nancial institution Sc op e 1, 2 an d 3 em i ss io n s Catego ris atio n of gre en hou se ga s em iss io ns, as d en ed by the G re enh ou se Ga s (GHG) Protoc ol, into dire ct e mis sio ns f rom own ed o r contro ll ed so urce s (Sc ope 1 ), ind irec t em iss ion s from th e ge ne ratio n of purc has ed e le ctr ici ty , he ating a nd co ol ing c ons ume d by the re por ting co mpa ny (Sc ope 2), and all othe r ind irec t em iss ion s that o ccu r in a co mpa ny’ s va lue c ha in (Sc op e 3) Secured debt D ebt ba cked o r sec ure d by col latera l Senior debt Re pre se nts the t y pe of de bt that ta kes p rio ri ty ove r othe r uns ec ured o r mo re jun ior d ebt owe d by the iss ue r . S en ior d ebt i s rs t to be repa id a he ad of othe r le nde rs o r cre ditor s Signicant increase in credit risk (“SICR”) An a sse s sme nt of wh ethe r cre di t ris k ha s inc rea se d sig ni ca ntly s inc e ini tia l rec ogn iti on of a lo an usi ng a ra nge of tr ig ge rs. Acc ou nts wh ich h ave exp er ien ce d a sig ni ca nt in cre ase i n cre dit r isk w ill b e allocat e d t o Stage 2 Standardised appro ach Generic term f or regulato r -dened approaches for calculati ng credit , operational and market risk ca pita l req uire me nts as s et out i n the CR R Subordinated debt Repre se nts de bt that ra nks b el ow , an d is re pai d af ter cl aim s of, other se cure d or se ni or de bt owed by the is sue r T ask Force on Climate-related Financial Disclosures (“T CFD”) Regulatory framew ork t o improve and increase reporting of clima te-relat ed nancial inf ormation, including more ef fective and consistent disclosure of climat e-related risks and oppor tunities T erm funding Fu ndin g wi th a rema ini ng matu ri ty g reate r than 1 2 m onths Book 1.indb 209 27/09/2022 23:48:48 21 0 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Glos sar y an d Denit ion of K ey T erms cont inue d T erm F unding Scheme (“T FS”) T he Ba nk of E ngl an d’ s T er m Fund in g Sch em e T erm F u nding Scheme for Small and Medium- sized Enterprises (“TFSME”) Th e Ban k of Eng la nd’ s T e rm Fun din g Sc hem e wi th add itio na l inc enti ves fo r SM Es Tier 2 capital Additional regulat or y capital t hat along with Tier 1 capital makes up a bank’ s to tal regulat or y capital . Includes qualifying subordinated de bt T otal client assets (“TC A ”) T otal m ar ket valu e of all c li ent a sse ts inc lud ing b oth man age d as sets a nd as sets u nde r ad vic e an d/or administrat ion in the As set Managemen t division T otal shareh older re turn (“ TSR”) Measure of shar e holder re turn including share price appr eciation and dividends , which ar e assumed to be re-i nveste d in the c omp any’ s s ha res Wat c h l i s t Inte rn al ri sk m ana ge men t proc es s for h eig htene d mo nitor ing of ex po sure s that a re show in g increased cr edit risk Book 1.indb 210 27/09/2022 23:48:48 21 1 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Gov ernance Repor t Financial St atements Strategic Repor t Financial Calendar (pro visional) Event Date Fir st qu ar te r tradi ng up date Nov ember 20 22 Annual General Meeting 17 N o v e m b e r 2 0 2 2 Final dividend payment 22 Novem be r 2022 Pre-close trading update Januar y 2023 Half y ear end 3 1 Jan ua r y 2023 Interim results March 202 3 Th ird qu ar ter tr adin g up date May 2 023 Pre-close trading update July 202 3 Financial year e nd 31 J u l y 2 0 2 3 Preliminary results September 2 023 Th e na nci al c ale nd ar is u pdate d on a reg ula r ba sis th roug hou t the ye ar . Ple ase refe r to our we bsi te ww w .clos ebroth er s.com for up-t o-dat e details. Caut i ona r y S ta tem ent Cer tain s tateme nts inc lud ed or i nco rpo rated by refe renc e with in thi s repo r t may co nstitu te “fo r ward- loo kin g statem ents” in re sp e ct of th e grou p’ s ope rati ons, pe r fo rma nc e, pros pec ts an d/or na nci al c ond itio n. For wa rd-lo ok ing s tatem ents a re som etim es, b ut not a lways, i den ti ed by their use of a d ate in the f uture o r suc h word s as “anti cip ates” , “aim s” , “due” , “co uld ” , “m ay” , “ wil l” , “s hou ld” , “expe cts” , “ bel iev e s ”, “ i n t e n d s ”, “ p l a n s ”, “potenti al” , “ tar gets” , “go al” o r “estim ates” . By th ei r nature, for ward-l ook in g statem ents i nvolve a n umb er of r isks, u nc er t ain ties and assumpt ions and a ctua l res ults o r events m ay dif f er mate ria ll y from th ose ex pre sse d or i mpl ied by th ose s tateme nts. Acc ordi ngl y , no a ssu ran ce c an b e give n that any p ar ti cul ar ex pe ctati on wi ll be m et an d reli anc e sh oul d not be p lac ed on a ny for wa rd-l ook in g statem ent. Add itio na lly , f orward-looking statem ents re gard ing p ast tre nds or a ctiv itie s sh oul d not be ta ken as a re pre sent ation th at suc h trend s or acti vi tie s will c ont inue in the future . E xcept a s may be re qui red by l aw or reg ul ation, no re sp ons ibi lit y or o bli gatio n is ac ce pted to upda te or revis e any for ward-lo o k ing stat e ment resu ltin g fro m new in form ation, f uture eve nts or oth er w ise. N othing i n this re por t shou ld be c ons tru ed as a p rot fore ca st. Pas t pe r for ma nce i s no gui de to fu ture pe r fo rma nc e and p er so ns ne ed ing ad vi ce s hou ld co nsu lt an i nd epe nd ent na nci al (or othe r profe ss ion al) a dv ise r . Th is rep or t d oe s not co nstitu te or for m par t of any of fer o r invi tati on to sel l, or any so lic itati on of any of fer to subs cr ibe fo r or pu rcha se a ny sha res o r othe r sec ur itie s in th e com pany o r any of i ts grou p me mbe rs, n or sh all i t or a ny par t of it or the f act of i ts dis trib utio n for m the ba sis of, or be re lie d on in c onn ec tion w ith, any c ontra ct or c omm itme nt or i nvestm ent d ec isi ons re latin g the reto , nor d oe s it co nstitu te a reco mm end a tio n rega rdin g the sha res o r othe r sec ur itie s of the c omp any or a ny of its gro up m emb er s. State men ts in this re po r t ree ct th e kn owle dg e and i nfor mation available at the tim e of its pre pa ratio n. Lia bil it y ar isi ng fro m any th ing i n this re por t shal l be gove rn ed by En gli sh law. Nothing in th i s re por t sha ll exclu de any liability under applicable la ws tha t cannot be ex cluded in accordance wit h such la ws. Inv estor Relations Book 1.indb 211 27/09/2022 23:48:49 21 2 Cl os e B ro t he r s G ro u p pl c Annu al Repo r t 2 022 Independent A uditor Pricewa terhouseCoopers LLP Solicitor Slaught er and Ma y Corporate Bro kers J.P . Mo r ga n C a z e nov e UBS AG Lond on B ran ch Registr ar Link Group 1 0th Floor Central Square 29 Wellin gton Stre et Leed s LS 1 4DL Cus tomer s upp or t c ent re: 03 7 1 66 4 03 00 (ca lls a re ch arg ed at th e sta nda rd ge ogr ap hic ra te and w ill va r y by prov ide r) From over se as: +44 (0)37 1 66 4 030 0 (ca lls w ill be c ha rge d at the ap pli ca ble i nter natio nal r ate) Li nes a re op en f rom 9.00 a m to 5.30 pm Mo nd ay to Friday , exc lud ing p ubl ic ho lid ays in E ngl and a nd Wal es Email : enquiries@link group. co. uk Websit e: ww w .link group. eu Online pro x y vot ing: ww w .signalshares. com Registered Of ce Close Bro thers Group plc 10 C r o w n P l a c e Lond on EC2 A 4FT T e le pho ne: +44 (0)3 33 321 6 100 Email: e nquiries@closebro thers. com Websit e: www .closebr others .com Company No. 5 202 4 1 Shareh older Warn ing Fraud ster s use p er sua si ve and h igh -pre ssu re tac tic s to lure inve stors i nto sca ms. T hey may of fer to sell s ha res th at prove to b e wor thle ss o r non -exi stent, or th ey ca n of fer to bu y sha re s at an in ated pr ic e in retur n for yo u payi ng upf ront. Th ey pro mis e hig h prots. H owever , i f you bu y or se ll s har es in th is way , yo u wil l prob abl y lo se you r mon ey . How t o Avoi d S ha r e Fra u d • Re mem be r that FCA-auth or ise d rm s are u nli kely to co ntact yo u unex pe cted ly of fe ri ng to buy o r sel l sha re s. • Do not c onve rse w ith th em. Note the n ame of th e pe rs on an d rm c ont acti ng you, the n en d the c all. • T o s ee i f the pe rs on an d rm c ont actin g you a re auth ori se d by the FCA, c he ck the F ina nci al S er v ic es Re gi ster at ht tps:/ /regis ter .fca .org.u k / s/ • Bewa re of fra ud sters c la imi ng to be f rom an a utho ri sed rm; co pyin g its we bsi te; or giv ing yo u fal se co nta ct det ail s. • If you wa nt to phon e the c all er ba ck, us e the r m’ s co ntac t deta ils l isted o n the Fi nan cia l Se r v ice s Re gis ter at ht tps:/ /reg i ster .fca. org. uk /s/ • If the r m do es n ot have co ntact d eta ils o n the Re gis ter or they te ll you th e deta ils a re ou t of date, cal l the FCA on 0 80 0 1 11 6 7 6 8 . • Se arch th e list of u nau thor ise d r ms to avoid at: http s:/ /w w w. fc a.org.uk / c ons ume rs /unauth or ise d-rms- indi vi dua ls • Re mem be r that if yo u bu y or se ll sh are s fro m an u nau thor ise d r m, you ca nn ot acc es s the Fi nan ci al O mbu dsm an S er v ic e or Fi nan c ial Ser vices Compensat ion Scheme . • Get i nde pe nd ent nan ci al an d profe ss ion al ad vi ce be fore ha nd ing ove r any mo ney . • If it so un ds too go od to be tru e, it pro bab ly is. Report a Scam If fra uds ters a ppro ach you, tel l the FCA usi ng the s ha re fra ud rep or ti ng for m at ht tps:/ /w w w .fca.org.uk / c ons ume rs /repor t -s cam -u s. Y ou ca n als o nd o ut mo re ab out i nvestm ent s ca ms at ht tps:/ /w w w. fc a.org.uk /scam sm ar t / how-avoi d-inve stm ent-sca ms. Y ou c an c all th e F CA Con sum er H el plin e on 0 80 0 1 1 1 6768. If you have a lrea dy pa id mo ney to sh are f rau dster s, ca ll Acti on Frau d on 0 30 0 1 23 2040. Compan y Informat ion Book 1.indb 212 27/09/2022 23:48:49 Pri nte d by Pa rk C om mu ni cat io ns o n FSC® c er ti ed pa p er. Par k wo rk s to the E MAS sta nd ar d an d it s Env iro nm en ta l Ma na ge me nt S ys tem i s ce r ti e d to ISO 1 40 01 . Th is p ub lic at io n ha s be en m an uf ac tur ed u si ng 100% of f sh or e wi nd e le ct ri ci ty s ou rc ed f rom UK wind . 100% of th e ink s us ed a re ve ge ta bl e oi l ba se d, 95% of pre s s ch em ic al s ar e rec ycl e d for f ur t he r us e an d, on ave ra ge 9 9% of a ny wa ste as so ci ate d wi th th is p rod uc ti on w ill b e re cyc le d an d the r em ai ni ng 1 % u se d to g en er ate e ne rg y . Th is d oc um en t is pr i nted o n Cl ar o Bu lk, a p ap er s ou rc ed f ro m wel l ma na ge d re sp on si bl e, FSC® c e r ti ed f ore st s an d oth er c on tro lle d so ur ce s. T he p ulp u se d in t hi s pro du ct i s bl ea ch ed us in g an e le me nt al c hl or in e fre e (E CF ) p roc es s. Th is i s a ce r ti e d cl im ate ne ut ra l pr int p ro du ct fo r wh ic h ca rb on e m is si ons h ave b ee n calculated and offset by suppor ting recognised carbon offset projects. The carbon offset pro je ct s are a ud ite d a nd c er t i ed ac c ord in g to inte r nat io na l st an da rds a nd d e mo nst ra bl y red uc e e mi ss io ns. T he c li ma te ne utr al l ab el i nc lu de s a un iq ue I D nu mb er s pe c ic to t hi s pro du ct w hi ch c an b e tr acke d at w w w.cli ma tep ar t ne r .c om, gi v ing d et ai ls of t he c ar bo n of f set ti ng p ro ce ss i nc lu di ng i nfo rm ati on o n th e em is si on s vol um e a nd th e ca r bo n of fs et p roj e ct being supported. Designed by Emperor Design Consultan ts Limit ed. T y pe se t by Do nn el le y Fin a nci a l Sol ut io ns. Bo ard o f Di re ctor s a nd E xe cu tiv e Co mm it te e pho tog ra phy by R ic ha rd D avi es . 01A_IFC_IBC_SPREAD.indd 1 28/09/2022 00:04:56 Close Brothers Gr oup plc 10 Crown Place London EC2A 4FT T el: +44 (0)333 321 6100 www .closebrothers.com 01_Cover-OBC_SPREAD.indd 1 28/09/2022 00:03:30