Regulatory Filings • Nov 8, 2018
Regulatory Filings
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(Incorporated under the Companies Act 2006 and registered in England and Wales with registered number 04503206)
This registration document (Registration Document) (as amended and supplemented from time to time) constitutes a registration document for the purposes of Article 5(3) of Directive 2003/71/EC (as amended, including by Directive 2010/73/EU) (the Prospectus Directive). This Registration Document has been prepared for the purpose of providing information about the Company. This Registration Document may be combined with a securities note and summary to form a prospectus in accordance with the prospectus rules issued by the UK Financial Conduct Authority (the FCA) under Part VI of the Financial Services and Markets Act 2000 (as amended) (the FSMA). A prospectus is required before an issuer can offer transferable securities to the public or request the admission of transferable securities to trading on a regulated market. However, this Registration Document, where it is not combined with a securities note and a summary to form a prospectus, does not constitute an offer or invitation to sell or issue, or a solicitation of an offer or invitation to purchase or subscribe for, any securities in the Company in any jurisdiction, nor shall this Registration Document alone (or any part of it), or the fact of its distribution, form the basis of, or be relied upon in connection with, or act as any inducement to enter into, any contract or commitment whatsoever with respect to any offer or otherwise.
This Registration Document has been filed with, and approved by, the FCA, in its capacity as the United Kingdom competent authority under the FSMA for the purposes of the Prospectus Directive and the relevant implementing measures in the United Kingdom, as a registration document issued in compliance with the Prospectus Directive and the relevant implementing measures in the United Kingdom for the purpose of giving information with regard to the Company.
This Registration Document should be read in its entirety, including the principal risk factors relating to the Company which are set out in the section of this document headed ''Risk Factors'' on pages 4 to 12 (inclusive).
The Directors, whose names appear on page 13 of this Registration Document, and the Company accept responsibility for the information contained in this Registration Document. To the best of the knowledge of the Directors and the Company (who have taken all reasonable care to ensure that such is the case) such information is in accordance with the facts and this Registration Document does not omit anything likely to affect the import of such information.
This Registration Document should not be considered as a recommendation by the Company or any person appointed in relation to any issue of securities by the Company that any recipient of this Registration Document should purchase any securities that may be issued by the Company.
Neither the delivery of this Registration Document or any prospectus which may be published by the Company or any final terms nor the offer, sale or delivery of any securities that may be issued by the Company shall, in any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof, or that the information contained in this Registration Document is correct at any time subsequent to the date hereof or that any other written information delivered in connection herewith or therewith is correct as of any time subsequent to the date indicated in such document. Recipients of this Registration Document should review, inter alia, the financial condition or affairs of the Company or its subsidiary undertakings when evaluating securities that may be issued by the Company or an investment therein.
The distribution of this Registration Document and any offer or sale of securities which may be issued by the Company may be restricted by law in certain jurisdictions. Persons into whose possession this Registration Document or any securities that may be issued by the Company come must inform themselves about, and observe, any such restrictions. A description of certain restrictions on offers, sales and deliveries of securities that may be issued by the Company and on the distribution of this Registration Document will be included in any prospectus that may be published by the Company in connection with the securities proposed to be issued.
The distribution of this Registration Document in certain jurisdictions may be restricted by law. Other than in the UK, no action has been or will be taken by the Company to permit the possession or distribution of this Registration Document (or any publicity materials in connection therewith). Accordingly, neither this Registration Document nor any advertisement or any other offer material which may be issued by the Company may be distributed or published, directly or indirectly in or into the United States or in or, into any other jurisdiction except under circumstances that will result in compliance with all applicable laws and regulations. Persons into whose possession this Registration Document comes should inform themselves about and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction.
Any securities that may be issued by the Company have not been and will not be registered under the U.S. Securities Act of 1933 (the Securities Act), or with any securities regulatory authority of any state or jurisdiction of the United States, and may not be offered, sold or transferred, directly or indirectly, in the United States absent registration under the Securities Act or an available exemption from, or as part of a transaction not subject to, the registration requirements of the Securities Act and in each case, in compliance with any applicable securities laws of any state or other jurisdiction of the United States. No public offer of any securities that may be issued by the Company will be made in the United States.
The date of this document is 8 November 2018.
| RISK FACTORS | 4 |
|---|---|
| DIRECTORS, COMPANY SECRETARY, REGISTERED OFFICE AND ADVISERS | 13 |
| PRESENTATION OF FINANCIAL AND OTHER INFORMATION | 14 |
| PART 1 – MARKET OVERVIEW | 18 |
| PART 2 – INFORMATION ON THE COMPANY | 23 |
| PART 3 – DIRECTORS, SENIOR MANAGERS AND CORPORATE GOVERNANCE | 49 |
| PART 4 – REGULATION | 56 |
| PART 5 – OPERATING AND FINANCIAL REVIEW | 69 |
| PART 6 – HISTORICAL FINANCIAL INFORMATION | 90 |
| PART 7 – ADDITIONAL INFORMATION | 134 |
| DEFINITIONS | 158 |
| GLOSSARY | 161 |
The risks and uncertainties described below comprise those that are known to the Directors and which they consider to be material. However, the risks and uncertainties described below do not comprise an exhaustive list and do not necessarily include or explain all of the risks associated with AJ Bell, its business and the industry within which it operates and should be used as guidance only.
Additional risks and uncertainties relating to AJ Bell that are not currently known to the Directors, or which the Directors currently deem immaterial, may arise or become (individually or collectively) material in the future and may have a material adverse effect on AJ Bell's business, prospects, results of operations and/or financial condition.
AJ Bell's revenue and business performance are directly influenced by net inflows and AUA in AJ Bell's Platform and Products, as well as transactions in securities held on the Platform or in the Products. A general deterioration in the global economy, and the UK economy in particular, including as a result of uncertainty caused by the UK's exit from the EU (see the risk factor headed ''Regulatory and other changes resulting from the UK's exit from the EU could impact AJ Bell's results'' below for further information) may have a negative impact on the disposable income of customers and the amount of individual savings that are likely to be able to be invested, and managed, through the Platform or in the Products. AJ Bell generates a significant portion of its revenues in the form of charges levied on an annual or other recurring basis calculated by reference to the value of AUA on the Platform or in the Products.
Fluctuations in capital markets may adversely affect the value of AJ Bell's AUA from which AJ Bell derives revenues, as well as investor confidence. A dramatic or sustained decline in capital markets may: (i) reduce the value of the AUA; (ii) prompt customers not to allocate further savings to the Platform or the Products or to withdraw money previously invested and (iii) make it more difficult for financial advisers to attract new clients to manage using the Platform, all or any of which could have a material adverse effect on AJ Bell's business, results of operations and/or financial condition.
AJ Bell generates a significant portion of its revenues in the form of recurring ad-valorem charges derived from the AUA held on behalf of its customers. Recurring ad-valorem charges principally comprise custody fees and retained interest income. Custody fees are derived from the market value of retail customers' assets, based on asset mix and portfolio size. Retained interest income is derived from the level of customer cash balances, which are influenced by customers' assets mix, portfolio size and prevailing interest rates. Custody fees and retained interest income are therefore subject to both market and economic risks.
AJ Bell's competitors include global, national and local financial services firms, insurance companies, investment platforms, asset and fund management firms as well as specialist SIPP and SSAS providers.
The market in which AJ Bell operates is characterised by: (i) continued improvements in operational infrastructure resulting from changes in financial adviser and customer requirements and preferences; (ii) frequent product, tax wrapper and functionality introductions which may require the deployment of new technologies and (iii) the emergence of new industry standards and practices.
There is no guarantee that AJ Bell will be able to continue to design, develop, implement or utilise information systems that provide the capabilities necessary for AJ Bell to compete effectively or to anticipate and respond to the demand for new platform functionality, features and technologies, or for new investment products and/or wrappers to be made available on the Platform, in each case in a timely and cost-effective manner or at all.
In addition, the UK platform and pension market remains cost-sensitive and there can be no assurance that AJ Bell's competitors will not reduce their fees, or rebalance their charging structures, in order to seek to win business from AJ Bell or increase market share. Any of these factors may result in financial adviser and customer losses, fund outflows or further downward pressure on the fees that AJ Bell is able to charge.
The UK platform market is becoming increasingly vertically integrated as financial services firms, asset managers and other platform operators seek to consolidate the customer-facing elements of the retail savings and investment process through acquisitions of financial advisory firms (and moving AUA from other platforms onto their own platforms). If this trend continues, then AJ Bell may lose advisory relationships and suffer fund outflows from its Platform or fail to secure fund inflows onto its Platform.
The loss or deterioration of AJ Bell's relationships with its financial advisers, particularly those responsible for placing significant investment business with AJ Bell Investcentre, could have a material adverse effect on AJ Bell's business, results of operations and/or financial condition.
Competition in the UK advised platform market may also intensify further in response to advisory and, to a lesser extent, customer demand. In addition, technological changes and advances (such as the advancement of automated low-cost advice solutions), the impact of further consolidation in the UK platform market and the wider financial services sector, regulatory change aimed at increasing competition in the market, the entry of new players into the market (for example if high street banks decided to invest in further developing existing platform propositions or creating new competing propositions) and the emergence of new tax wrappers and financial products, including as may be encouraged by the UK government, regulatory actions and the introduction of new regulatory requirements, either singly or in aggregate, may increase competitive pressures.
Any failure by AJ Bell to maintain the competitive position of its Platform in the market and to compete effectively in the UK platform market, could lead to a reduction in AJ Bell's margins, a loss of business or a failure to win new business, each of which could have a material adverse effect on AJ Bell's results of operations and financial condition.
The UK platform market is sensitive to changes in the policy of the UK government and EU and UK regulators, such as the FCA. For example, certain policies have been implemented to: (i) provide savers with greater flexibility in accessing their pensions by removing the requirement to purchase an annuity; and (ii) widen ISA applicability, which changes, on the whole, have been positive for the platform industry.
The FCA published the Investment Platform Market Study assessing whether competition between investment platforms works in the interests of consumers.
Whilst the FCA has indicated that many aspects of the investment platform market work well, it is considering remedies for areas where competition does not work as well in the market.
The FCA's consultation on remedies for the market focuses on the following main areas:
The FCA expects to publish its final report and recommendations in the first quarter of 2019, following the end of the consultation on its interim proposals on 21 September 2018.
Any new governmental policies or EU or UK regulatory requirements introduced in relation to the UK platform market (including as a result of the final report of the Investment Platform Market Study), or the introduction of any additional regulation or changes to existing regulation in relation to aspects of AJ Bell's business which are already regulated (or, indeed, the introduction of any new regulation in relation to aspects of AJ Bell's business which are not currently regulated), may, whether inadvertently or by design, have the effect of making the Platform or the Products either more or less attractive and, potentially, either increase or decrease fund inflows and outflows. Any changes which are negative for the Platform and Product markets, or perceived to be negative, could therefore have a material adverse effect on AJ Bell's prospects and growth strategy, as well as its business, results of operations and/ or financial condition.
AJ Bell's operations are subject to authorisation and supervision from the FCA, and supervision from bodies such as HMRC, the Pensions Regulator and the ICO. Changes in the laws and regulations to which AJ Bell's operations are subject could have a material adverse effect on AJ Bell's business. AJ Bell's activities are already subject to supervision by the FCA but any changes in the regulatory requirements may increase AJ Bell's compliance costs and lead to an adverse impact on the financial performance of AJ Bell.
There has been an increased focus in the EU and the UK on the fair treatment of customers and the transparency with which the financial services industry sells and administers its products or services.
The FCA, or other regulators, could conclude that the Regulated Subsidiaries, or their employees, have breached applicable regulations or regulatory principles or have not undertaken corrective action as required, and commence regulatory proceedings which could result in a public reprimand to, or fines, customer redress and compensation or other regulatory sanctions being imposed upon, one or more entities within the Group or any of the Directors or certain of the Regulated Subsidiaries' employees. AJ Bell has not historically been subject to material regulatory proceedings, investigations nor had material fines or sanctions imposed upon it. However, regulatory proceedings could result in adverse publicity or negative perceptions regarding AJ Bell, restrictions on business activities or key personnel and fines and other penalties, any of which could result in a loss of revenues and profits, as well as diverting the attention of the Directors and Senior Managers from the day-to-day management of AJ Bell.
In addition, following Admission, AJ Bell will be subject to new obligations as a result of being listed and the Directors and other Senior Managers will need to devote time to ensure that AJ Bell complies with the new reporting obligations and corporate governance practices to which it will be subject. Such compliance will also incur legal, accounting and other expenses to which AJ Bell was not exposed as a private company. There is a risk that the requirements of being a listed public limited company will impose unexpected challenges for AJ Bell. Moreover, any material breach of the regulatory obligations referred to above following Admission could give rise to sanctions or censure, financial penalties and, potentially, have a material adverse impact on AJ Bell's reputation, which, in turn, could have a material adverse effect on AJ Bell's business, results of operations and/or financial condition.
There is no guarantee that AJ Bell will in the future be able to continue to achieve the growth levels it has enjoyed to date or that it will be able to maintain its financial performance either at historical or anticipated future levels.
There is no guarantee that AJ Bell will be able to implement its strategy for growth successfully. AJ Bell may also incur significant costs attempting to implement its growth strategies and initiatives and the Directors and Senior Managers could be diverted away from existing business functions in attempts to implement these strategies and initiatives. This could lead to AJ Bell suffering reputational damage and a loss of financial advisers and customers and could have a material adverse effect on AJ Bell's business, results of operations and/or financial condition.
AJ Bell is subject to strict data protection and privacy laws in the UK including the Data Protection Legislation. As part of its business AJ Bell processes personal data (including financial adviser and customer data (including name, address and bank details)), and financial transaction and investment holding data. Such laws control AJ Bell's ability to collect and use personal information relating to both financial adviser users and customers of its Platform and Products and potential financial adviser users and customers, including the use of that information for marketing purposes. Other laws and contractual commitments control the protection of non-personal data, such as financial transaction and investment holding data.
AJ Bell's policies and procedures relating to Data Protection Legislation and data risk management, if not fully implemented and followed by personnel, may not be successful in mitigating the risk that data controlled by AJ Bell could be lost, damaged or compromised (either in breach of data protection laws or otherwise) so as to cause loss or market exposure.
If AJ Bell, or any of the third party service providers on which it relies, fails in future, or has historically failed, to process, store or transmit data in a secure manner, or if any loss or damage or compromise to personal data or financial transaction or investment holding data were otherwise to occur, AJ Bell could face liability (including in relation to (i) data protection laws, (ii) financial services regulations, (iii) sanctions and increased supervision by its regulators, and (iv) loss of market share and other financial loss).
AJ Bell could be the target of cybercrime and other fraudulent activity, by cybercriminals and other actors (including state-sponsored groups). Failure or circumvention of AJ Bell's data and cyber security measures could result in loss, including as a result of any of the following: denial-of-service or other interruptions to AJ Bell's business operations; unauthorised access to AJ Bell's systems or data; unauthorised access to, and loss, damage or compromise of, data (including confidential or proprietary information about AJ Bell, third parties with whom AJ Bell does business, financial advisers and customers that use the Platform or Products, AJ Bell's proprietary systems or transaction or investment holding data); or viruses, worms, spyware or other malware being placed in AJ Bell's systems. Techniques used to obtain unauthorised access to, or sabotage, systems and data change frequently, are becoming ever more sophisticated and may not be known until launched against AJ Bell or its third party service providers; therefore AJ Bell may be unable to anticipate these incidents, or otherwise not have in place adequate preventative measures (including those which would enable it to recover from such an incident).
Any actual or perceived incident could significantly disrupt AJ Bell's operations; damage AJ Bell's reputation; expose it to a risk of loss (including loss of market share), fine, sanction or litigation and possible exposure to the liability and loss suffered by financial advisers and/or customers; require AJ Bell to incur significant expenditure and divert the attention of the Directors and Senior Managers from the day-to-day management of AJ Bell in order to seek to resolve problems caused by such incidents; and have a material adverse effect on AJ Bell's business, results of operations and/or financial condition.
AJ Bell could be a target for actual and attempted financial crime and fraud arising from the actions of third parties, customers and staff. Some staff have access to customer accounts and may attempt to misappropriate funds from the Platform and Products. Customers or third parties may attempt to use the Platform and Products to facilitate financial crimes such as money laundering and tax evasion and may fabricate or misrepresent material facts to AJ Bell or fail to provide full disclosure in respect of an application or instruction.
If AJ Bell does not provide effective training to its employees, does not continue to develop counter-financial crime and fraud measures or otherwise fails to implement or maintain effective counter-financial crime and fraud procedures, practices and strategies, the ability of AJ Bell to combat financial crime and fraud could be adversely affected.
There is no guarantee that AJ Bell's proactive measures will be successful in the prevention or detection of financial crime and fraud and any failure to combat these matters effectively could adversely affect the profits of AJ Bell. Further, where AJ Bell's costs increase as a result of financial crime or fraudulent activity, AJ Bell may be required to increase its charges which could result in its pricing becoming uncompetitive, which could have a material adverse effect on AJ Bell's business, results of operations and/or financial condition.
AJ Bell is dependent on the use of third-party IT software and hosting service providers for the provision of material IT services.
The principal information technology systems underpinning the Platform and Products use software designed and written by third party IT companies who license that technology to AJ Bell and also provide AJ Bell with ongoing support and maintenance services. AJ Bell requires these systems in order to be able to continue administering the Platform and Products. As such, AJ Bell is reliant upon these third parties for the maintenance and repair of such systems and also their development, upgrading and scalability in a way which keeps pace with the market generally and the growth of AJ Bell.
Any interruption in the services provided by these third parties, failure due to lack of system capacity or deterioration in their performance could impair the availability and quality of AJ Bell's services to its customers and financial advisers. Furthermore, if the contracts with any of these third party providers were terminated, AJ Bell may not find alternative service providers on a timely basis or on as favourable terms or may suffer disruption as a result of the transition to the new service provider. The occurrence of any of these events could have a material adverse effect on AJ Bell's business, reputation and brand, sales, results of operations and/or financial condition. This reliance means AJ Bell is at risk of substantial business and financial loss if the third parties do not provide an adequate service, fail or decide to end the licence agreements for the technology underpinning the Platform and Products.
The successful operation of AJ Bell's business depends upon maintaining the integrity of AJ Bell's computer, communication and information technology systems. These systems and operations are potentially vulnerable to damage, breakdown or interruption from events, some of which are beyond AJ Bell's control, such as fire, flood and other natural disasters; power loss or telecommunications or data network failures; improper or negligent operation of AJ Bell's systems by employees or service providers, or unauthorised physical or electronic access; and interruptions to network or wider system integrity generally (including as a result of cyber-attacks by computer hackers or viruses and other types of security incident).
Modifications or upgrades to any information technology systems, including those provided by third parties, could result in an interruption to AJ Bell's business. The continued growth of AJ Bell and one off events causing a spike in demand for AJ Bell's services could result in a failure of AJ Bell's systems to cope with the capacity pressures placed on them.
While AJ Bell has capacity planning, ongoing monitoring, security measures and business continuity and disaster recovery plans designed to mitigate the effects of any such events, should they occur, there can be no guarantee that such measures or plans will protect AJ Bell from all potential damage, breakdown or interruption arising from any of the events described above.
The occurrence of any such damage, breakdown or interruption could cause material disruption to the operations of AJ Bell and harm its business, operating results, financial condition and reputation as well as deterring financial advisers and customer from using its services.
AJ Bell's continued success depends on its ability to attract and retain skilled financial services sector employees. If AJ Bell is unable to do so, this could result in a decline in the service levels provided to both the end customers and financial advisers and wealth managers who use the Platform and Products. This could cause a reduction in AUA or revenues and negative market perception. This perception could in turn lead to a failure to attract new customers to the Platform and Products and to retain existing customers.
The loss of a material number of staff and/or the failure to recruit sufficiently skilled staff could have a material adverse effect on AJ Bell's business, results of operations and/or financial condition.
AJ Bell's reputation is one of its most important assets. Its relationships with its customers, financial advisers, financial institutions, investors and other significant market participants are very important to its business, and it operates in an industry where integrity and trust and confidence of customers are paramount. In addition, AJ Bell operates in a heavily regulated sector.
AJ Bell's personnel may make errors or omissions during the course of providing AJ Bell's services, make misrepresentations, breach applicable laws or regulations in the course of their duties or engage in other improper acts.
AJ Bell has systems in place designed to mitigate and limit the impact of these risks; however, such systems may fail to detect or prevent such acts. Such acts by AJ Bell's personnel could lead to losses for both financial advisers and customers, litigation, reputational damage, regulatory action or financial costs where such costs are not covered by insurance or to other regulatory censures or restrictions both of AJ Bell and the individual employee concerned, including the suspension or withdrawal of any authorisations that the relevant employee may require in order to perform his or her duties. Similar risks may arise in connection with work undertaken historically by such personnel. Errors or omissions often do not come to light for some time after they occur. Any current or historical errors, omissions, breaches or misconduct by AJ Bell or its personnel in connection with the provision of its services, could have a material adverse effect on AJ Bell's business, results of operations and/or financial condition.
AJ Bell is currently required to comply with the ICAAP regulations under CRD IV and CRR, as well as the FCA's regulatory capital rules and policy statements.
The ICAAP regulations require certain financial institutions, including AJ Bell, and in particular its Regulated Subsidiaries, to undertake an ICAAP assessment in order to demonstrate that they have appropriate systems and processes to ensure they maintain adequate capital resources, considering the risks faced by the business.
A firm's ICAAP assessment is then reviewed by the FCA who may require the firm to take remedial actions if it is not satisfied with the soundness of the assessment. The FCA may also impose a capital add-on, requiring the firm to increase the amount of capital it holds, if it is of the view that the internal assessment does not adequately reflect the prudential risks faced by the firm.
The European Commission has proposed further changes to European capital adequacy requirements to further strengthen the resilience of certain aspects of the financial sector by introducing more risk-sensitive capital requirements in a revised Capital Requirements Directive and Capital Requirements Regulation (''CRD V'' and ''CRR II''). It is however difficult to assess how these proposals may impact AJ Bell as these requirements are unlikely to become effective before the UK's planned exit from the European Union (see risk factor headed ''Regulatory and other changes resulting from the UK's exit from the EU could impact AJ Bell's results'' for further details).
AJ Bell is currently in compliance with its regulatory capital requirements. The FCA carried out a Capital Assessment (SREP review) and wrote to AJ Bell on 17 August 2017 to advise that it planned to carry out its next review within 36 months of the date of its letter although it may undertake further work, or expect AJ Bell to undertake additional work and to inform the FCA of this work if, for example, additional risks are identified or crystallise at any time. If AJ Bell's capital requirements in the longer term were to vary materially from those which the Directors currently anticipate, or if it becomes a requirement to hold regulatory capital in relation to other areas of AJ Bell's activities, AJ Bell might require financing. There can be no guarantee that AJ Bell will be able to raise additional funds, whether in the form of debt or equity, when needed or that such funds will be available on terms favourable to AJ Bell.
A number of factors, including conditions in the credit, debt and equity markets and general economic conditions, may make it difficult for AJ Bell to obtain additional financing or raise regulatory capital on favourable terms or at all. If, in the longer term, AJ Bell fails to raise additional funds when needed or to obtain such funds on favourable terms, it could have a material adverse effect on AJ Bell's business, results of operations and/or financial condition and its ability to make distributions in compliance with its dividend policy.
The ongoing uncertainty relating to the terms on which the UK will exit from the EU is giving rise to some delays or deferrals of investment decisions by businesses and individuals. This uncertainty is likely to continue until further progress is made in the negotiations and more clarity is obtained in relation to the precise terms on which the UK will leave the EU, and the likely form of its trading relationships with the EU and other countries going forward.
In addition, as a significant proportion of the current and anticipated regulatory regime applicable to AJ Bell in the UK is derived from EU Directives and Regulations, the UK exiting the EU could materially change the legal and regulatory framework applicable to AJ Bell's operations because AJ Bell is no longer required to adhere to these Directives and Regulations, including in relation to its regulatory capital requirements, which could result in higher operating costs and could have a material adverse effect on AJ Bell's business, financial condition and results of operations as a result of the changes in regulation.
AJ Bell may be subject to complaints or claims from customers and third parties in the normal course of business.
If a large number of complaints, involving substantial customer and third party losses, were upheld against AJ Bell, because it is found not to have discharged its duties properly, it could have a material adverse effect on AJ Bell's business, financial condition and results of operations.
When FCA regulated financial advisers make recommendations to retail clients on the choice of investment products, the FCA requires those advisers to consider the suitability of the proposed investments for the client in question. AJ Bell is also obliged, in compliance with its obligations under the FCA's Principles for Business and related guidance, to have regard to the assets it permits to be held in its Platform and Products, for its advised and executiononly customers. Over the period between 2009 and 2018, the FCA has clarified its expectations of product providers, in particular the need for SIPP providers to carry out due diligence on non-standard investments before accepting them, with the FCA expectations on what constitutes due diligence being spelt out more clearly.
There is currently a lack of certainty as to precisely what liability attaches to SIPP operators in respect of SIPP investments which they have accepted at different times in the past, which have subsequently performed poorly. This uncertainty may have increased following the dismissal of Berkeley Burke's claim for judicial review of the Financial Ombudsman Service's decision on a complaint involving the loss suffered by a customer arising from an investment which turned out to be fraudulent introduced by an unregulated adviser.
AJ Bell is dependent on a number of data providers and stock exchanges to provide market prices, asset valuations and other information necessary for the operation of its business. In addition, AJ Bell pays fees to data providers in connection with its business. There can be no guarantee that any of these providers will be able to meet AJ Bell's needs or to continue to provide these services in an efficient, cost-effective manner, or at all. In the event that such providers of information fail to provide the information or fulfil their contractual obligations, as a result of events outside their control or otherwise, AJ Bell will not be able to make the relevant information available through its Platform, which could have a material adverse impact on its own service provision and, in turn, a material adverse effect on its business, results of operations and/or financial condition.
AJ Bell also depends on the capacity and reliability of its operational infrastructure, which is, to a certain extent, provided by a range of third party suppliers such as power providers and telecommunications operators that transmit AJ Bell's traffic over local and wide area networks and the internet. If any of these suppliers were unable to fulfil the terms of their contracts for any reason, or if they terminated their contracts with AJ Bell and AJ Bell could not replace them with alternative suppliers in a timely fashion and on favourable commercial terms, it could impair the quality of, or make it impossible for AJ Bell to deliver, its own services. In addition, the networks of public telecommunications operators may experience capacity constraints causing customers and financial advisers that use the Platform difficulty in accessing it. Any material or prolonged access constraints could consequentially have a material adverse effect on AJ Bell's reputation, and, in turn, a material adverse effect on its business, results of operations and/or financial condition.
AJ Bell's operations are dependent upon the experience, skills and knowledge of its Directors, Senior Managers and other key employees who are the architects and implementers of AJ Bell's strategy and are important to its ability to attract and retain its customers, business and staff.
The loss of a significant number of Directors, Senior Managers and/or other key employees, or the inability to recruit suitably experienced, qualified and trained staff, as needed, may cause significant disruption to AJ Bell's business, which could have a material adverse effect on AJ Bell's business, results of operations and/or financial condition.
While it is not AJ Bell's strategy to grow its business by acquiring other businesses and/or assets, AJ Bell may in the future make ad hoc acquisitions. Successful growth through future acquisitions is dependent upon AJ Bell's ability to identify suitable acquisition targets, conduct appropriate due diligence, negotiate transactions on favourable terms and ultimately complete such transactions and integrate customers into the business successfully.
If AJ Bell makes acquisitions, there can be no guarantee that it will be able to generate the expected margins or cash flows, or to realise the anticipated benefits of such acquisitions, including growth or expected synergies. There can be no assurance that AJ Bell's assessments of, and assumptions regarding, acquisition targets will prove to be correct, and actual developments may differ significantly from its expectations. AJ Bell may not be able to integrate acquisitions successfully into its business and integration may require more investment and effort than anticipated and divert resources from other priorities. In addition, AJ Bell could incur or assume unknown or unanticipated liabilities or contingencies with respect to customers, employees, suppliers or to other parties. The occurrence of one or more of these risks in respect of any future acquisitions could have an adverse effect on AJ Bell's business.
Changes in taxation legislation can affect investment behaviour, making investment generally, and specific kinds of investment products and tax wrappers in particular, either more or less appealing. AJ Bell cannot predict the impact of future changes made to taxation legislation on its business nor can it predict the impact of future changes made to tax law on the attractiveness of the tax wrappers and financial products that it makes available. Amendments to existing legislation (such as the withdrawal of tax reliefs, increases in tax rates or the introduction of new taxes) or the introduction of new rules may impact upon the way in which customers' investment portfolios are managed by customers or their advisers. Changes from time to time in the interpretation of existing tax laws, regulation, guidance and practice, amendments to existing tax rates, or the introduction of new tax legislation, regulation, guidance and practice could have a material adverse effect on AJ Bell's business and financial condition.
In addition, all of the tax wrappers offered by AJ Bell are based upon, and subject to, current tax law, which is influenced by UK government. There can be no assurance that tax law and associated government policy will stay the same in the future and material changes in such laws and policies could have an impact on the levels of AUA held in such wrappers. This, in turn, could have a material adverse effect on AJ Bell's business and financial condition.
Furthermore, AJ Bell's activities are conducted within the UK and it is therefore subject to a range of UK corporation taxes at various rates. Future actions by the UK government to increase corporation tax rates or to impose new or additional taxes, would reduce AJ Bell's profitability. Revisions to tax legislation, or to its interpretation, might also affect AJ Bell's financial condition in the future.
In the UK, the FSCS can pay compensation to clients if a PRA or FCA-authorised firm is unable, or likely to be unable, to pay claims against it (for instance, an authorised bank is unable to pay claims by depositors). The FSCS is funded by levies on firms authorised by the PRA or FCA.
AJ Bell pays levies to the FSCS based on its revenue to enable them to meet claims under such schemes.
There can be no assurance that changes will not be made to the current levies made on AJ Bell, nor that new or additional levies will not be introduced. Were this to occur, it could lead to periods of uncertainty until the new arrangements, and levies, were finalised as well as involve AJ Bell in incurring additional costs and liabilities which may adversely affect AJ Bell's operating results, financial condition and prospects.
Although AJ Bell maintains appropriate insurance cover that includes property damage and business interruption, there can be no guarantee that a claim or claims will be covered by insurance or, if covered, will not exceed the limits of available insurance coverage, or that any insurer will remain solvent and will meet its obligations to provide AJ Bell with coverage or that insurance coverage will continue to be available with sufficient limits at a reasonable cost.
Renewals of insurance policies may expose AJ Bell to additional costs through higher premiums or the assumption of higher deductibles or claims thresholds. The future costs of maintaining insurance cover or meeting liabilities not covered by insurance could have a material adverse effect on AJ Bell's business, results of operations and/or financial condition.
| Directors | Leslie Michael Platts | Non-Executive Chairman |
|---|---|---|
| Andrew James Bell | Chief Executive Officer | |
| Michael Thomas Summersgill | Chief Financial Officer | |
| Laura Martine Carstensen | Non-Executive Director and Senior Independent Director |
|
| Eamonn Michael Flanagan | Independent Non-Executive Director |
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| Simon Turner | Independent Non-Executive Director |
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| Company Secretary | Christopher Bruce Robinson | |
| Registered and Head Office |
4 Exchange Quay Salford Quays Manchester M5 3EE |
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| Telephone Number | +44(0) 345 4089 100 | |
| Reporting Accountant | KPMG LLP 15 Canada Square Canary Wharf London E14 5GL |
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| Auditors to the Company | KPMG LLP 1 St Peter's Square Manchester M2 3AE |
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| Solicitors to the Company |
Pinsent Masons LLP 30 Crown Place Earl Street London EC2A 4ES |
No person has been authorised to give any information or to make any representations other than those contained in this Registration Document in connection with the Company and, if given or made, such information or representations must not be relied upon as having been authorised by or on behalf of the Company or the Directors. The Company makes no representation as to the appropriateness, accuracy, completeness or reliability of any information reported by the press or other media, nor the fairness or appropriateness of any forecasts, views or opinions expressed by the press or other media or any other person regarding the Company or the Group.
The contents of this Registration Document are not to be construed as legal, business or tax advice. This Registration Document is not intended to provide the basis of any credit or other evaluation and should not be considered as a recommendation by any of the Company or the Directors or any of the Company's affiliates and representatives that any recipient of this Registration Document should subscribe for or purchase any securities that may be issued by the Company. Information on any such securities will be found in a separate prospectus containing disclosure on such securities (and in the relevant summary note applicable to the relevant securities) which will constitute a prospectus issued in compliance with Article 5.3 of the Prospectus Directive. In the event of any offer of securities by the Company, investors seeking to make an informed assessment of an investment in any such securities that may be issued by the Company are advised to read the whole prospectus (including this Registration Document) and in particular the risk factors included therein and herein.
The delivery of this Registration Document shall not, under any circumstances, create any implication that there has been no change in the business or affairs of the Company or the Group since the date of this Registration Document or that the information contained in this Registration Document is correct as at any time subsequent to its date. As required by the Prospectus Rules, the Company will update the information provided in this Registration Document by means of a supplement to it if a significant new factor that may affect the evaluation by prospective investors of the Group occurs or if this Registration Document contains any material mistake or inaccuracy. Any supplement to this Registration Document will be subject to approval by the FCA and will be made public in accordance with the Prospectus Rules.
The historical financial information in Part 6 (Historical Financial Information) of this Registration Document has been prepared in accordance with the requirements of the Prospectus Directive Regulation, the Listing Rules and in accordance with IFRS. The basis of preparation is explained in more detail in Part 6 (Historical Financial Information) of this Registration Document.
The financial information included in this Registration Document includes some measures that are not recognised under IFRS and are unaudited. The Directors believe that each of these non-IFRS measures provides useful information with respect to the performance of the Group's business and operations. Prospective investors should not consider such non-IFRS measures as an alternative to the IFRS measures included in the Group's historical financial information.
The non-IFRS financial measures and other metrics, each as defined herein, may not be comparable to similarly titled measures presented by other companies as there are no generally accepted principles governing the calculation of these measures and criteria upon which these measures are based can vary form company to company. Even though the non-IFRS financial measures and other metrics are used by management to assess the Group's financial results and these types of measures are commonly used by investors, they have important limitations as analytical tools, and investors should not consider them in isolation or as substitutes for analysis of the Group's position or results as reported under IFRS.
These measures include:
* ''AUA''
is an operating metric that represents the value of assets whereby AJ Bell provides either an administration, custodian or transactional service;
* ''Platform retail customers''
is an operating metric that AJ Bell defines as customers of AJ Bell Youinvest and clients of advisers using AJ Bell Investcentre that have at least one funded account. A funded account is an account with a value of £0.01 or greater;
* ''Non-Platform retail customers''
is an operating metric that is defined as funded customers of AJ Bell Platinum and AJ Bell's white label SIPP administration services;
* ''Total retail customers''
is an operating metric that represents the sum of Platform retail customers and Non-Platform retail customers (non-funded customers, i.e. those with an account balance of zero, are not included in retail customer numbers);
* ''Customer retention rate''
is an operating metric based on the number of platform retail customers that have become unfunded during the year, as a percentage of the average monthly opening customers in the year. The resulting percentage of unfunded customers is deducted from 100% to give the percentage rate of customers that have retained a funded account;
* ''PBT margin''
represents profit before tax after deducting administration expenses, investment income and finance costs as a percentage of revenue;
* ''Revenue per £AUA'' or ''revenue margin''
represents revenue as a percentage of the average AUA in the year. Average AUA is calculated as the average of the opening and closing AUA in each quarter averaged for the year; and
* ''Diluted EPS'' represents profit after tax divided by the weighted average number of shares and unexercised options in issue during the period.
In this Registration Document, the financial years ended 30 September 2016, 30 September 2017 and 30 September 2018 are referred to as FY2016, FY2017 and FY2018, respectively.
AJ Bell presents certain operational and statistical data in this Registration Document. Such data as presented in this Registration Document may not be comparable to similarly titled data presented by other companies operating in the platform industry and the method of calculation may differ across the platform industry. However, the Directors believe that such data is important to understanding AJ Bell's performance from period to period and that it may enable comparison with AJ Bell's competitors. This operational data is not intended to be a substitute for any IFRS measures of performance. The operational data is based on AJ Bell's estimates and is not part of AJ Bell's financial statements and has not been audited or otherwise reviewed by outside auditors, consultants or experts.
Unaudited operational information in relation to AJ Bell is derived from the following sources: (i) management accounts for the relevant accounting periods presented; (ii) internal financial reporting systems supporting the preparation of financial statements; and (iii) AJ Bell's other business operating systems and records. Management accounts are prepared using information derived from the accounting records used in the preparation of AJ Bell's historical financial information contained in Part 6 (Historical Financial Information) of this Registration Document, but may also include certain other assumptions and analyses.
Unless the source is otherwise identified, the market, economic and industry data and statistics in this Registration Document constitute Directors' estimates, using underlying data from third parties. The Company obtained market and economic data and certain industry statistics from internal reports as well as from third party sources as described in the footnotes to such information. The Company confirms that all third party information set out in this Registration Document has been accurately reproduced and that, so far as it is aware and has been able to ascertain from information published by the third party, no facts have been omitted which would render the reproduced information inaccurate or misleading. However, the Company makes no representation or warranty as to the accuracy or completeness of such information as set out in this Registration Document. Such third party information has not been audited or independently verified. Where third-party information has been used in this Registration Document, the source of such information has been identified.
This Registration Document includes statements that are, or may be deemed to be, ''forwardlooking statements''. These forward-looking statements involve known and unknown risks and uncertainties, many of which are beyond the Company's control and all of which are based on the Directors' current beliefs and expectations about future events. Forward-looking statements are sometimes identified by the use of forward-looking terminology such as ''believes'', ''expects'', ''may'', ''will'', ''could'', ''should'', ''shall'', ''risk'', ''intends'', ''estimates'', ''aims'', ''plans'', ''predicts'', ''continues'', ''assumes'', ''positioned'' or ''anticipates'' or the negative of those terms, other variations on those terms or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Registration Document and include statements regarding the intentions, beliefs and current expectations of the Directors or AJ Bell concerning, among other things, the results of operations, financial condition, prospects, growth, strategies and dividend policy of the Company and the industries in which it operates.
In particular, the statements under the following headings, ''Risk Factors'' and Part 2 (Information on the Company) of this Registration Document regarding AJ Bell's strategy and other future events or prospects are forward-looking statements. These forward-looking statements and other statements contained in this Registration Document regarding matters that are not historical facts are not guarantees of future performance and are necessarily based upon a number of estimates and assumptions that, while considered reasonable by the Company and the Directors, are inherently subject to significant business, economic and competitive uncertainties and contingencies. No assurance can be given that such future results will be achieved; actual events or results may differ materially as a result of risks and uncertainties facing AJ Bell. Such risks and uncertainties could cause actual results to vary materially from the future results indicated, expressed or implied in such forward-looking statements. These risks and uncertainties include, but are not limited to, those described in the section of this Registration Document entitled ''Risk Factors'', which should be read in conjunction with the other cautionary statements that are included in this Registration Document.
The forward-looking statements contained in this Registration Document are made only as of the date of this Registration Document. The Company and the Directors expressly disclaim any obligation or undertaking to update these forward-looking statements contained in this Registration Document to reflect any change in their expectations or any change in events, conditions, or circumstances on which such statements are based unless required to do so by applicable law (including but not limited to FSMA and the Market Abuse Regulation), the Prospectus Rules, the Listing Rules or the Disclosure Guidance and Transparency Rules.
No person has been authorised to give any information or to make any representation other than those contained in this Registration Document and, if given or made, such information or representation must not be relied upon as having been so authorised. Neither the delivery of this Registration Document nor any sale or purchase made under any prospectus of which it may form part, under any circumstances, will create any implication that there has been no change in the affairs of the Company or AJ Bell since the date of this Registration Document or that the information in this Registration Document is correct as of any time subsequent to the date of this Registration Document.
The contents of the Company's website, any website mentioned in this Registration Document or any website directly or indirectly linked to these websites have not been verified and do not form part of this Registration Document and investors should not rely on such information.
Certain data contained in this Registration Document, including financial information, have been subject to rounding adjustments. As a result of this rounding, the totals of data presented in this Registration Document may vary slightly from the actual arithmetic totals of such data. In certain statistical and operating tables contained in this Registration Document, the sum of numbers in a column or a row may not conform to the total figure given for that column or row. Percentages in tables and elsewhere in this Registration Document may have been rounded and accordingly may not add up to 100%.
All references in this Registration Document to ''Pounds Sterling'', ''£'' or ''pence'' are to the lawful currency of the UK and references to ''Euro'' or ''EUR'' are to the lawful currency of the member states of the European Union that adopt the single currency in accordance with the EC Treaty. Unless otherwise indicated, the financial information contained in this Registration Document has been expressed in Pounds Sterling.
Prospective investors should not treat the contents of this Registration Document as advice relating to legal, taxation, investment or any other matters. Prospective investors should inform themselves as to: (a) the legal requirements within their own countries for the purchase, holding, transfer or other disposal of shares; (b) any foreign exchange restrictions applicable to the purchase, holding, transfer or other disposal of shares which they might encounter; and (c) the income and other tax consequences which may apply in their own countries as a result of the purchase, holding, transfer or other disposal of shares. Prospective investors must rely upon their own representatives, including their own legal or financial advisers and accountants, as to legal, taxation, investment or any other related matters concerning the Company and an investment therein. Statements made in this Registration Document are based on the law and practice currently in force in England and Wales and are subject to changes therein.
All Shareholders are entitled to the benefit of, and from the date of their adoption will be bound by, and are deemed to have notice of, the provisions of the Articles.
Certain terms used in this Registration Document, including capitalised terms and certain technical and other items, are defined in the sections entitled ''Definitions'' and ''Glossary''.
References to the singular in this Registration Document shall include the plural and vice versa where the context requires. Any references to time in this Registration Document are to London times unless otherwise stated.
The UK savings and investment market is complex and made up of many different overlapping components. In 2016, the ONS estimated the value of private wealth in the UK to be about £7 trillion, including pension wealth but excluding property and other physical assets.
The components making up the savings and investment market include private and public pension arrangements; savings and deposit accounts; listed securities; funds and other collective investment schemes; and other investment products, held directly with investment providers, insurance companies, wealth management firms or on investment platforms. Individual investments may be held by an investor within a ''tax wrapper'', such as a pension or Individual Savings Accounts, or via a general investment account through a stockbroker.
The ONS estimated total UK pension wealth at over £5 trillion in 2016. Much of this is within public sector pension schemes. An estimated £1.32 trillion2 was held under private sector defined benefit, or final salary, schemes and £376 billion in private sector defined contribution schemes. For some time, the trend has been away from provision under employer sponsored defined benefit schemes to defined contribution arrangements, including the Government's auto-enrolment arrangements. Individuals are now expected to take more responsibility for their own retirement provision, both in terms of ensuring sufficient pension savings are made and that they are invested appropriately to provide for their needs in later life. For those reaching retirement age, there is now greater choice over how they withdraw money from their pension arrangements or how they can pass them on to the next generation.
In addition to UK pension schemes, there are substantial sums saved, or invested, with banks, building societies, investment managers and insurance companies. This includes both investments held on investment platforms and the significant sums not yet administered on platforms, for example individual shares; ISAs and life insurance policies and bonds run directly by the insurance company or asset manager; and deposit accounts with banks or building societies.
Platforum3 estimated the overall D2C investment market to be worth £559.6 billion, as at 30 September 2017, up 19.1% year on year. Of this, £205 billion was held on investment platforms, with the remainder held directly with pension and insurance providers, wealth management firms, asset managers and retail banks offering limited propositions. Platforum4 also estimated total AUA on investment platforms used by advisers, for their clients' assets, of £490 billion, as at 31 March 2018. Although the total advised investment market is worth considerably more than this, an equivalent figure to that provided for the overall size of D2C investment market is not provided because of the wide variety of different assets held by advised clients and the difficulty of defining which should be treated as ''advised''.
Overall, the size of the UK savings and investment market is complex to quantify. That said, it is a substantial market and, for the reasons described below, its growth is expected to significantly outpace ONS estimates for growth in UK GDP in the coming years.
* Demographics: the UK has an ageing population which is living and working longer.
The ONS estimates that on average approximately 32% of individuals born in the UK in 2016 will live to the age of 100, being a marked increase from an average of approximately 9% of those currently aged 50 who are expected to reach the same milestone. In addition, the Tax Incentivised Savings Association predicts that the ratio of working to retirement years is forecast to drop from 3 times to 2 times. This is coupled with employers shifting towards offering DC schemes instead of DB pension arrangements, resulting in a growing need for individuals to make more self-provision for their retirement, whether through savings and investments, or through other means (e.g. property).
The change in demographics outlined above is putting a strain on the state pension. When first introduced in 1948 it was expected a 65 year old would spend 13.5 years in receipt of the state pension. However in 2017 a 65 year old is expected to receive the state pension for 22.8 years. This has led the UK government to raise the state pension
2 Source: Spence Johnson: UK private DB, Number 39, October 2016.
3 Source: Platforum, UK D2C Market Size and Structure report, February 2018.
4 Source: Platforum, UK Adviser Platform Guide, May 2018.
age and consider how to reduce the increased government spending in the future. Consequently people will become increasingly more reliant on their private pensions and savings if they wish to retire prior to the state pension age and to maintain their standard of living in retirement.
This combination of factors will require people to be more actively engaged in savings and investment from an earlier age.
* Government and regulatory: there is a greater impetus for personal responsibility for long term saving and self-provision as evidenced by the UK government's changes in relation to pension freedoms, auto-enrolment, LISA and ISA subscriptions.
The changes to the pensions regime in the UK have made pensions more flexible and transferable, allowing consumers greater freedom to invest their pension savings in line with their own retirement plans and much more flexibility over how they draw benefits to meet their specific needs. The World Economic Forum has praised the UK government for its decision to ensure that 8% of earnings will automatically be saved in a pension for all individuals after 2019, noting that auto-enrolment had already boosted saving for 22-29 year olds and low income workers by £1.9 billion a year.
* Technology: development of technology through various distribution channels continues to improve accessibility and drive both customer growth and asset flows.
The emergence of a digitally dependent generation who are increasingly managing their finances through mobile applications and more 'challenger' offerings has increased awareness of financial planning and the need for people to save for themselves.
Mobile technology, in particular, is driving people's awareness of saving, but also revolutionising the way people manage and access their money. In 2016 there were 19.6 million users of mobile banking applications across the UK with 159 logins to banking applications occurring every second. This is driving access to a broader range of services with a 30% increase in access to saving products from 2015 to 2016 alone.
This trend of digitisation means more people have access to information and support in relation to financial planning and investing, making it easier for people to self-manage their investments.
* Financial: there is a growing awareness of the UK savings gap, that is the gap between the level of current savings and that necessary to provide a reasonable standard of living in retirement and the impact of the shift away from DB to DC pension schemes.
The World Economic Forum flagged the UK as one of several countries facing a pension dilemma, with analysis that estimates the UK pension savings gap increasing from £6 trillion in 2017 to £25 trillion by 2050 if action is not taken.
The platform market is a fast growing retail market, within the UK savings and investment market, with attractive structural growth drivers and a number of barriers to entry. The growth in the UK platform market continues to outpace the wider UK savings and investment market.
An investment platform is a service that allows investors, or advisers acting on the investor's behalf, to buy, sell, hold and manage investments. Essentially, it sits between an investor and his or her investments. The investment platform provides the administrative support necessary to maintain portfolios of investments, both inside and outside tax wrappers (such as SIPPs and ISAs), allowing the investor or his or her adviser to focus on investment strategy, choice of individual investments and broader financial planning. The investment platform will, typically, provide access to a wide range of investments, including mainstream funds and collective investment schemes, and equities and bonds listed on the major world stockmarkets. In recent years platforms have become an increasingly popular way to manage investments across a portfolio whether held in SIPPs, ISAs or outside of a tax wrapper.
In the UK, investment platforms began as a distribution channel for the investment products of fund managers (''fund supermarkets''), with fund managers paying platforms and financial advisers for distribution of their investment products. This resulted in a model that allowed investment platforms to influence the direction of fund flows in return for a greater commission from fund managers, a model that the RDR brought to an end.
For investors and advisers who wanted access to more than just funds, new platforms emerged which allowed access to other forms of investment, such as quoted securities, together with a wider range of tax wrappers and additional functionality to support the management of these products and investments. These platforms used technology to enable customers and advisers to review, analyse, manage and administer their investment portfolios more easily and efficiently, taking much of the pain out of what was previously a paper-based and time-consuming administrative headache. A platform provides customers and advisers with up-to-date and instant access to data on their investments, across all applicable accounts and underlying securities, in one place.
Following implementation of the RDR, platforms can now only be remunerated through charges paid by the investor, with much greater transparency over the services provided by the adviser, the fund manager and the investment platform and what each party receives for its services.
The FCA's Investment Platform Market Study reported that the platform service provider market doubled from £250 billion AUA at the end of 2013 to £500 billion AUA at the end of June 2017. This growth in AUA being driven by rising markets and increasing levels of investment. The FCA also noted that more consumers are using platforms, with an increase of around 2.2 million retail customer accounts between 2013 and 2017. Platform revenue from retail consumers reached £1.3 billion in 2017, up from £750m in 2013.
The FCA definition of a platform service is a service which: (a) involves arranging and safeguarding and administering investments; and (b) distributes retail investment products which are offered to clients by more than one product provider; but is neither (c) solely paid for by adviser charges; nor (d) ancillary to the activity of managing investments for the retail clients. Some asset managers provide their own online portals but they do not meet the FCA's definition because they do not give customers access to other providers' products.
There are two main types of investment platform. D2C platforms, designed for and marketed to investors who want to make their own investment choices, and advised platforms, which provide services to help financial advisers manage and administer their clients' investments. Both the advised and the D2C platform market segments continue to see significant growth with Platforum estimating growth of c. 22% and c. 21% respectively for these market segments in 2017. This rate of growth is expected to continue to outpace the growth of the wider savings and investment market, driven in particular by increasing demand for online access to investments from customers and advisers and the pension freedoms described above.
The charts below, from the FCA's Investment Platform Market Study, shows AUA (left panel) and customer numbers (right panel) on platforms from 2013 to 2017 and the relative size and growth of the advised and D2C investment platform market segments.
Source: FCA calculations based on firm data.
Notes: Figures from 2013 to 2016 refer to year-end stocks. Figures for 2017 refer to the stock at end of June. Totals obtained aggregating platforms' responses to RFI. Figures should be considered indicative. In detail: total does not include HSBC data (underestimation), ii) some smaller platforms could not provide complete time series (composition effect), iii) customer figures suffer from double counting due to prevalence of multi-homing. According to NMG research (Annex 2) 37% consumers use at least 2 platforms (multi-home) and, in particular, 14% of consumers multi-channel (that is, they use at least 1 direct and 1 adviser platform).
The FCA Investment Platform Market Study noted that there were 43 platform service providers, of whom 21 providers offered advised platform services, 18 D2C platforms and 4 provided both types of service.
The advised platform market segment is significantly larger than the D2C market segment by AUA. The largest advised platform is Aegon, following their acquisition of Cofunds which completed at the end of 2016, but the FCA noted that none of the top 4 platforms in the advised platform market segment achieved a 20% market share. The D2C market is dominated by Hargreaves Lansdown with approximately 39% of the market by AUA and over one million accounts.
The advised platform market segment is seeing an increase in the size of average portfolios as existing investors place new found wealth and other off platform assets on to advised platforms.
Following completion of the RDR in December 2012 the advised market showed an initial drop in the number of FCA adviser firms and individual advisers, but this number has since started to recover. There were 25,951 advisers as at November 2017, up from 22,168 in 2013.5
The increased regulatory cost of providing advice to consumers has led to a number of retail banks withdrawing from the advised space, and to banks traditionally targeting more affluent investors, such as JP Morgan, Coutts and Barclays, increasing their minimum investible assets advice thresholds for individuals. The RDR changes have allowed space for smaller independent financial advisers to take on those consumers that might previously have been eligible for advice from such larger firms.
The changes introduced by the RDR have also increased the potential market for D2C investment with increased numbers of consumers not being able to access, or able to afford, financial advice. The characteristics of these new customers may differ from the more established D2C platform customers, having less knowledge and experience of investing for themselves, and some D2C platforms now offer an increased range of investment solutions to support these less experienced investors.
As the platform market has matured more businesses have sought to enter the market to try and capitalise on its growth. However, there remain a number of barriers to entry:
5 &#Lyons | 57 | Managing Director, AJ Bell
x27;'FCA reports increase in advice firm numbers'' article on moneymarketing.co.uk
6s Petherick | 43 | Chief Risk officer | 19 September 2016 |
| Roger Stott | 53 | Group Finance Director | 1 September 2008 |
| Christopher Bruce Robinson | 61 | Group Legal Services
Platforum, UK Adviser Platform Guide issue 33 March.
7stopher Bruce Robinson | 61 | Group Legal Services
Platforum, Consumer Insights, January 2018.
8e management expertise and experience of each of the Senior Managers listed above is set out below:
Fergus worked at a major bank for over 20 years before joining AJ Bell in September 2000. Since then he has worked in many areas of the business, and is currently Managing Director of AJ Bell Investcentre. Fergus is also responsible for AJ Bell's investment and Platinum SIPP and SSAS products.
Charles became Managing Director of Lawshare (now AJ Bell Securities) in 2006 and joined AJ Bell's senior management team on its acquisition of Lawshare in 2007. He has worked in a number of stockbroking firms over the past 20 years, concentrating on both private and institutional clients. Previously he was Managing Director of a well-known stockbroker, and was also responsible for the stocks and shares ISA business of a major high street bank. Charles has overall responsibility for AJ Bell Youinvest and AJ Bell's institutional stockbroking business.
Louis joined AJ Bell in September 2016 as AJ Bell's Risk and Compliance Director before taking on the role of Chief Risk Officer in July 2017. Louis has worked for a number of financial services firms over the past 20 years, holding various senior risk, compliance and conduct roles across the insurance, wealth management and banking sector. He is responsible for the risk, compliance and counter-financial crime functions within AJ Bell.
Roger qualified as a Chartered Accountant in 1990 and has worked in retail stockbroking since 1999. He spent seven years as Finance Director at a well-known stockbroker, joining that company at start-up and seeing it through an MBO and sale. With AJ Bell since 2008, Roger is responsible for overseeing the finance department, treasury function, the commercial management of supplier relationships and AJ Bell's third party products.
Bruce joined AJ Bell in October 2012, having previously acted as one of AJ Bell's external legal advisers. Before joining AJ Bell, Bruce spent 20 years in private practice as a corporate and commercial lawyer.
The Board is committed to the highest standards of corporate governance and to maintaining a sound framework for the control and management of AJ Bell.
In the event of Admission, the Company intends to comply with the UK Corporate Governance Code and will report to Shareholders on such compliance in accordance with the Listing Rules. It is the Company's current intention that each of the Directors will stand for reelection on an annual basis.
The Board is responsible for leading and controlling AJ Bell and has overall authority for the management and conduct of AJ Bell's business, strategy and development. The Board is also responsible for ensuring the maintenance of a sound system of internal controls and risk management (including financial, operational and compliance controls) and for reviewing the overall effectiveness of systems in place as well as for the approval of any changes to the capital, corporate and/or management structure of AJ Bell.
The UK Corporate Governance Code recommends that at least half the board of directors of a UK listed company, excluding the chairman, should comprise nonexecutive directors determined by the Board to be independent in character and judgment and free from relationships or circumstances which may affect, or could appear to affect, this judgment. The Board has determined that all of the Non-Executive Directors are free from any business or other relationship that could materially interfere with the exercise of their independent judgment and are therefore ''independent nonexecutive directors'' within the meaning of the UK Corporate Governance Code. On Admission, the Company will have two Executive Directors and three independent Non-Executive Directors plus the Chairman and therefore will comply with the UK Corporate Governance Code in this respect.
* Chairman
The UK Corporate Governance Code recommends that a chairman should meet the independence criteria set out in the UK Corporate Governance Code on appointment. The Board has concluded that Les Platts was independent at the date of his appointment as chairman. The Board are aware that under the provisions of the new version of the UK Corporate Governance Code, which will apply to AJ Bell's accounting period starting on 1 October 2019, the chair should not remain in post beyond nine years from the date of their first appointment to the board. Les Platts was appointed to the Board as a non-executive director on 15 September 2008 and assumed the role of chair on 1 January 2014.
The new version of the UK Corporate Governance Code also confirms that that where the chair was an existing non-executive director on appointment, which is the case for Les, this period can be extended for a limited time to facilitate effective succession and the development of a diverse Board. A succession plan for Les will be considered in 2019.
The UK Corporate Governance Code also recommends that the board of directors of a company should appoint one of the independent non-executive directors to be the senior independent director to provide a sounding board for the chairman and to serve as an intermediary for the other directors when necessary. The senior independent director has an important role on the Board in leading on corporate governance issues and being available to Shareholders if they have concerns which contact through the normal channels of the Chairman, Chief Executive Officer or other Executive Directors has failed to resolve or for which such contact is inappropriate. Laura Carstensen has been appointed as the senior independent director of the Board.
As envisaged by the UK Corporate Governance Code, the Board has established four committees: Audit, Risk; and Compliance; Remuneration; and Nomination, each with written terms of reference. The Board has also established a Disclosure Committee in anticipation of Admission. If the need should arise, the Board may set up additional committees as appropriate.
The Audit Committee has responsibility for, among other things, the monitoring of the financial integrity of the financial statements of AJ Bell and the involvement of AJ Bell's auditors in that process. It focuses in particular on compliance with accounting policies and ensuring that an effective system of internal and external audit and financial control is maintained, including considering the scope of the annual audit and the extent of the non-audit work undertaken by external auditors and advising on the appointment of external auditors. The ultimate responsibility for reviewing and approving the annual report and accounts and the half-yearly reports remains with the Board. The Audit Committee will meet at least four times a year at the appropriate times in the financial reporting and audit cycle.
The terms of reference of the Audit Committee cover such issues as membership and the frequency of meetings, as mentioned above, together with requirements of any quorum for and the right to attend meetings. The responsibilities of the Audit Committee covered in its terms of reference include the following: external audit, financial reporting and internal financial controls. Other internal controls and risk management falls within the express responsibilities of the Risk and Compliance Committee. In addition the internal audit function has a direct reporting line to the Audit Committee. The terms of reference also set out the authority of the committee to carry out its responsibilities.
The UK Corporate Governance Code recommends that the Audit Committee comprises at least three members who are all independent non-executive directors and includes one member with recent and relevant financial experience, be independent in character and judgment and free from any relationship or circumstance which may, could or would be likely to, or appear to, affect their judgment. The Chairman is a member of the Audit Committee but does not act as chair which is compliant with the UK Corporate Governance Code as long as AJ Bell remains outside of the FTSE 350. The Board considers it appropriate for Les Platts to be a member of the Audit Committee in order to support succession, as two of the other members of the Audit Committee, including the chair, have only recently been appointed. This is especially considered to be the case in the light of Les' previous experience of listed company audit work. The Board will review the position as and when it becomes necessary to do so under the UK Corporate Governance Code following Admission. The Audit Committee also comprises all of the independent Non-Executive Directors: Simon Turner, Laura Carstensen and Eamonn Flanagan. The committee is chaired by Eamonn Flanagan.
The Risk and Compliance Committee has responsibility for, among other things, the monitoring of the appropriateness and effectiveness of AJ Bell's internal controls; compliance and risk management systems; oversight of the Group's anti-money laundering and financial crime prevention systems and controls; and ICAAP. It focuses in particular on reviewing the annual risk and compliance plans, reviewing all risk and compliance related reports from AJ Bell's Executive Management Assurance Committee and reviewing the management team's responsiveness to recommendations of AJ Bell's risk management and compliance functions. The Risk and Compliance Committee will meet at least four times year.
The terms of reference of the Risk and Compliance Committee cover such issues as membership and the frequency of meetings, as mentioned above, together with requirements of any quorum for and the right to attend meetings. The responsibilities of the Risk and Compliance Committee covered in its terms of reference include the following: risk reporting, internal compliance procedures and monitoring and risk management. The terms of reference also set out the authority of the committee to carry out its responsibilities.
The Risk and Compliance Committee comprises all of the independent Non-Executive Directors: Simon Turner, Laura Carstensen and Eamonn Flanagan and the Chairman, Les Platts. The committee is chaired by Simon Turner.
The Remuneration Committee has responsibility for the determination of specific remuneration packages for each of the Executive Directors, the Chairman and certain senior executives of AJ Bell, including pension rights and any compensation payments, and recommending and monitoring the level and structure of remuneration for senior management, and the implementation of share option, or other performance related schemes. It will meet at least twice a year. The Remuneration Committee will also generate an annual remuneration report to be approved by the Shareholders of the Company at the annual general meeting.
The responsibilities of the Remuneration Committee covered in its terms of reference include the following: determining and monitoring policy on and setting levels of remuneration, termination, performance-related pay, pension arrangements, reporting and disclosure, share incentive plans and remuneration consultants. The terms of reference also set out the reporting responsibilities and the authority of the committee to carry out its responsibilities.
The UK Corporate Governance Code recommends that the Remuneration Committee comprises at least three members who are all independent non-executive directors, be independent in character and judgment and free from any relationship or circumstance which may, could or would be likely to, or appear to, affect their judgment. The Board considers that the Company complies with the requirement of the UK Corporate Governance Code in that regard.
The Remuneration Committee comprises all of the independent Non-Executive Directors: Simon Turner, Laura Carstensen and Eamonn Flanagan and the Chairman, Les Platts. The committee is chaired by Laura Carstensen.
The Nomination Committee is responsible for considering and making recommendations to the Board in respect of appointments to the Board, the Board committees and the chairmanship of the Board committees. It is also responsible for keeping the structure, size and composition of the Board under regular review, and for making recommendations to the Board with regard to any changes necessary, taking into account the skills and expertise that will be needed on the Board in the future. The Nomination Committee's terms of reference deal with such things as membership, quorum and reporting responsibilities. The Nomination Committee will meet at least once a year.
The UK Corporate Governance Code recommends that a majority of the members of the Nomination Committee should be independent non-executive directors, be independent in character and judgment and free from any relationship or circumstance which may, could or would be likely to, or appear to, affect their judgment. The Board considers that the Company complies with the requirement of the UK Corporate Governance Code in that regard.
The Nomination Committee comprises all of the independent Non-Executive Directors: Simon Tuner, Laura Carstensen and Eamonn Flanagan and the Chairman, Les Platts. The Committee is chaired by Les Platts, except when dealing with the appointment of a successor to the chairmanship.
The Disclosure Committee is responsible for the review and implementation, on an ongoing basis, of AJ Bell's disclosure policy to ensure that it addresses AJ Bell's ongoing compliance with the Disclosure Guidance and Transparency Rules, Listing Rules and Prospectus Rules and the Market Abuse Regulation. The Disclosure Committee shall have the responsibility for ensuring that this disclosure policy is properly communicated across AJ Bell, that AJ Bell's directors, officers, employees and contractors are educated with respect to this policy and the related controls and procedures, that AJ Bell's disclosure policy remains effective in design and in operation, and that any violation of the policy is properly addressed and remedial action is taken as appropriate.
The Disclosure Committee shall submit the results of its annual review of its operation, the adequacy and effectiveness of the disclosure policy and procedures and its own procedures to the Board. The Board or the Chairman will, wherever practicable be consulted in relation to the disclosure (or delayed disclosure) of major announcements and asked to approve such announcements (or delays).
The Disclosure Committee comprises four members: Eamonn Flanagan, Andy Bell, Michael Summersgill and Bruce Robinson. The committee is chaired by Eamonn Flanagan.
AJ Bell's approach to remuneration reflects its culture and supports delivery of its strategy. The aim is to attract, retain and motivate talented people to help ensure continued growth and success.
Remuneration levels for the Executive Directors and Senior Managers have been set at a level that is considered by the Remuneration Committee to be appropriate for the size and nature of the business.
AJ Bell is subject to CRD IV requirements and therefore the FCA Remuneration Code. AJ Bell's remuneration practices accord with the applicable principles of the FCA Remuneration Code, which are overseen by the Remuneration Committee. Material decisions in relation to the remuneration of staff whose actions have a material impact on the risk profile of AJ Bell and in relation to individuals in control functions are overseen by the Remuneration Committee.
The approach to Executive Directors' remuneration aims to align their interests with the longterm interests of Shareholders. Furthermore, it aims to promote a high performance culture with appropriate reward for superior performance, without creating incentives that will encourage excessive risk-taking or unsustainable performance.
The Company intends to deliver these outcomes via a remuneration framework which combines annual salary, benefits, pension, an annual bonus plan and share-based awards.
Further details of each Executive Director's remuneration are set out in paragraph 9 of Part 7 (Additional Information) of this Registration Document. The Company will submit its remuneration policy (as it relates to the Executive Directors) to a binding vote of Shareholders at the annual general meeting of the Company held in the first financial year which begins on or which follows any Admission. Accordingly, the Company will outline the detail of its future policy relating to the Executive Directors' remuneration in its annual report and accounts in due course.
The Company will adopt, with effect from the intended date of Admission, a code on dealings in relation to the shares and other securities. The code adopted will apply to the Directors and Senior Managers. The Directors will take all reasonable steps to secure compliance.
The landlord of the Group's head office at 4 Exchange Quay, Salford Quays, Manchester M5 3EE (Property), Exchange Quay Property Services Limited (EQPSL), is a company controlled by a number of members of the senior management team. The shareholders and directors of EQPSL are Andrew James Bell, Bestfield Investments (an unlimited company of which Fergus John Lyons and other family members are the shareholders and directors), Michael Thomas Summersgill, Charles William Galbraith and Roger John Stott. AJ Bell Limited, as tenant, and the Company, as guarantor, entered into the two leases of the Property on 17 August 2016. The leases were entered into on arms' length terms, the parties had separate legal advisers and the Board obtained advice on the lease terms from an independent surveyor. The reason for this structure being adopted was because the Board did not consider the purchase of business premises to be an appropriate use of the Company's capital. Shareholder approval was obtained before the parties entered into the leases. The parties entered into a supplemental lease of additional parts of the Property and a licence for alterations on 24 October 2018.
The Group made donations during FY2016 (£85,279), FY2017 (£109,125) and FY2018 (£139,675) to the AJ Bell Trust, a registered charity of which Andy Bell is a director of the trustee company.
For FY2016, FY2017 and FY2018, AJ Bell had an average of 607, 656, and 758 employees respectively, analysed by operational area as follows:
| FY2016 | FY2017 | FY2018 | |
|---|---|---|---|
| Technology | 74 | 95 | 116 |
| Distribution | 55 | 58 | 64 |
| Operations and Support | 478 | 503 | 578 |
| 607 | 656 | 758 |
As at 31 October 2018 AJ Bell had 776 employees.
AJ Bell has three regulated operating subsidiaries, AJBSL, AJBML and AJBAML.
AJBSL (number 155593), AJBML (number 211468) and AJBAML (number 774048) are authorised and regulated by the FCA. AJBSL is also a member of the London Stock Exchange.
AJ Bell also has two FCA authorised Open Ended Investment Companies: VT AJ BELL ICVC, which is operated as a UCITS Scheme, and VT Allium Portfolio Funds, a Non-UCITS Retail Scheme. Valu-Trac Investment Management Limited has been appointed as the external authorised corporate director and operator of each of the funds by the funds' sponsor, AJBAML.
There are currently three financial services regulators in the UK:
The FPC was established in 2013 as part of the new system of regulation brought in to improve financial stability after the 2008 financial crisis. The FPC sits within the Bank of England and is responsible for the macro prudential regulation of the entire financial services sector. Its role is to identify and monitor risks in the financial system, and to take action to reduce or remove such risks where necessary.
The FCA is the key regulator of the Regulated Subsidiaries, and as such the majority of this Part 4 (Regulation) of this Registration Document focuses on FCA authorisation and regulation. The FCA aims to make financial markets work well for individuals, businesses, and for the economy as a whole. The FCA is responsible for the conduct of business regulation of all authorised firms and the prudential regulation of firms not authorised and regulated by the PRA. It is the conduct regulator for more than 58,000 businesses and the prudential regulator for more than 18,000 of these businesses.
The FCA has powers to allow it to achieve its objectives. These enable it to intervene directly in the market and make product intervention rules with the aim of preventing harm to consumers. The FCA discharges its general functions by rule-making, preparing and issuing codes under FSMA, giving general guidance and determining general policy and principles.
The FCA's strategic objective is to ensure that the relevant markets function well. Its operational objectives are to:
The FCA must act in a way which is compatible with its strategic objective (so far as is reasonably possible) when discharging its general functions.
The FCA is bound by FSMA to regulate certain financial activities in the UK.
Under section 19 of FSMA, it is an offence for any person to carry on ''regulated activities'' in the UK unless they are an authorised person or exempt from the requirement to be authorised. An authorised person may only carry out regulated activities for which they have been given specific permission by the relevant regulator.
The various ''regulated activities'' are set out in the FSMA (Regulated Activities) Order 2001 (as amended). The activities most relevant for the Regulated Subsidiaries are the following:
The FCA may also grant authorised persons permission to hold or control client money. ABSL may hold client money and is required to protect the money it holds and/or controls on behalf of customers. It cannot lend this money or use it to finance its own business. AJBML is permitted to control client money only in respect of the personal pension scheme(s) that it operates and must not hold client money. AJBAML may control but must not hold client money.
As part of the firm authorisation process, the FCA may, at its discretion, determine the scope of, and include such restrictions on, the grant of regulatory permissions as appropriate.
The FCA must ensure that the authorised person/applicant meets certain threshold conditions (see below) whenever it grants or agrees to vary the terms of an authorised person's permissions.
Further, the FCA may impose such ''Requirements'' on an authorised person as it considers appropriate to require that person to take, or refrain from taking, specified action under FSMA.
These requirements apply to all of the financial services activities that the authorised person can operate and may relate to a range of matters, these include amongst others, the scope of the firm's business, the types of customer to whom the firm may provide services, how the firm may treat client money, capital adequacy and/or liquidity requirements.
Authorised firms are required to maintain a specified set of minimum standards set out in FSMA in order to become and remain authorised (the ''threshold conditions''). The threshold conditions cover matters including the location of offices, effective supervision, appropriate resources, the suitability of the authorised person and its business model.
The Regulated Subsidiaries must comply with, among other things, FSMA (and secondary legislation made under it), the FCA Rules and other relevant UK and directly applicable EU legislation.
The FCA Rules are divided into various blocks and sourcebooks containing rules and guidance.
The sections of most relevance for AJ Bell's day-to-day business are the Principles for Business and the COBS and CASS. Other important sections include those governing prudential standards and regulatory capital, senior management arrangements, systems and controls. The FSMA change of control regime for authorised persons is also relevant.
The FCA's principles (the Principles) form part of the FCA's High Level Standards set out in the FCA Rules; they are a general statement of the fundamental obligations of firms under the regulatory system. They derive their authority from the FCA's rulemaking powers as set out in FSMA and reflect the FCA's statutory objectives.
The Principles form the foundation of authorised firms' responsibilities to their clients. They are binding on firms and underpin the FCA Rules. The Principles provide authorised persons with a clear and concise statement of their fundamental obligations under the FSMA regulatory regime and the standards that the FCA expects authorised persons to meet in the day-to-day conduct of their business. They also provide a basis for supervisory activity and enforcement action by the FCA. Breaching a Principle makes a firm liable to disciplinary sanctions from the FCA (as further detailed in the Supervision and Enforcement section below).
The Principles set high standards for firms to comply with but allow firms to determine how they achieve those standards. The measures taken and the resources required by firms to comply with the Principles should depend on the nature and risks of the relevant firm's business. The Principles acknowledge that the measures taken should be proportionate to those risks.
The COBS rules set out a wide range of day-to-day business standards that authorised persons must comply with in various aspects of their relationships with clients.
The application of the COBS rules vary according to the scope of the firm's business and its activities and the types of client it deals with.
The application of the COBS rules will generally include: the need to provide retail clients with information about the firm; the need to categorise clients appropriately; the need to meet certain standards of disclosure about the firm's products and services including the related costs and charges; the firm ensuring that communications with clients are clear, fair and not misleading; the need to assess suitability when advising on certain products; ensuring it has appropriate agreements in place with clients; the need to manage conflicts of interest; and to report appropriately to clients.
The FCA requires firms to arrange adequate protection for clients' assets when such firm is responsible for them. Firms with permission to safeguard and administer custody assets and/or with permission to hold client money must comply with the Custody Rules and the Client Money Rules (respectively) in the CASS Rules. The CASS Rules require firms to clearly identify client assets, to hold client money separately from the firm's own money, to keep accurate records and carry on internal and external reconciliations, to make good any client money shortfalls, and to appoint an individual responsible for CASS compliance.
Authorised firms carrying on regulated activities must, at all times, comply with the prudential standards and capital adequacy requirements imposed by (in the case of the Regulated Subsidiaries) the EU Capital Requirements Directive and the FCA.
The capital adequacy rules applicable to the Regulated Subsidiaries are currently contained in the Prudential Standards Section of the FCA Rules and the CRD IV.
The FCA discharges its prudential supervision role, in part, through the regulatory capital requirements.
The regulatory capital rules require firms, at all times, to maintain a specified level of regulatory capital (based on the prudential risk the firm poses in conducting its particular business activities).
The rules are designed to ensure that firms can meet all liabilities as they fall due and to safeguard their financial stability and that of their clients and counterparties.
The FCA expects firms to be proactive in monitoring and managing financial risks, in accordance with its requirement for firms to maintain adequate financial resources.
The FCA's regulatory capital requirements apply both to individual authorised entities and at a consolidated level across groups of which an authorised firm or firms are members. The FCA may exercise consolidated supervision up to the top EEA parent in a firm's group. AJ Bell is subject to consolidated supervision.
Firms may apply to the FCA for a waiver from consolidated supervision however AJ Bell does not have such a waiver and AJ Bell does not intend to apply for such waiver in the foreseeable future.
There are certain ''controlled functions'' that are undertaken by individuals for (or on behalf of) an authorised firm and who usually have significant influence over the firm's regulatory conduct. As a result the persons who perform these functions must be approved by the FCA as fit and proper. These are known as ''approved persons''. An approved person must abide by the rules and principles set out in the APER. The rules and principles in the APER sourcebook apply to FCA approved persons.
The rules in the APER sourcebook include acting with integrity, acting with due skill, care and diligence, observing proper standards of market conduct and dealing with regulators in an open and co-operative way. If an approved person breaches the rules or principles the FCA may take enforcement action against the individual, including public censure, fines and/or the removal of approved status. A firm may also face enforcement action for breaches by its approved persons.
The SMCR, which currently applies to banks and very large investment firms, is set to be extended to include all authorised firms, including the Regulated Subsidiaries. The FCA has consulted on the rules to implement the SMCR and intends to replace the approved persons regime with the SMCR for almost all financial services firms.
As such a wide range of firms will be within the scope of the new SMCR requirements the FCA is not proposing to mirror the approach it took for banking firms. Instead it intends to apply consistent principles across the sector in a regime that is ''proportionate and flexible enough to accommodate the different business models and governance structures of firms''. The FCA is proposing:
The regime is expected to commence in relation to solo-authorised firms from 9 December 2019. AJBSL will be required to comply with an enhanced firm regime, whereas AJBML and AJBAML will be required to comply with the baseline core requirements.
Under the FSMA change of control regime, a person who is intending to acquire or increase ''control'' over a UK firm authorised and regulated by the FCA is required to seek the FCA's consent before doing so and submit certain specified information and documentation. An FCA-authorised firm must also notify the FCA when there is a transaction which results in that acquisition taking place. A disposal of a controlling interest in an FCA authorised firm must be notified to the FCA before the disposal takes place. Any acquisition of control over the Company or any of the Regulated Subsidiaries individually would be subject to the FCA change of control regime.
A proposed ''controller'' for the purposes of the change in control regime is any natural or legal person (or such persons ''acting in concert'') who decides to acquire, directly or indirectly, or increase control over an FCA-authorised firm. ''Control'' over the Regulated Subsidiaries would be acquired if the acquirer:
The FCA has up to 60 working days from the date of submission of a completed notification to approve or object to any such change in control. If the FCA does serve such a notice, it is required to specify its reasons for its objections in such notice. In the case of persons acting in concert, individual acquisitions will be amalgamated and treated as single holding for the purposes of the regime.
A person who ceases to be a 10% controller is required only to provide written notice to the FCA. In other words, FCA approval is not required for cessation of control.
Breach of the notification and approval regime imposed by FSMA on controllers is a criminal offence.
The FCA's priority in supervising firms is to ensure consumers are at the centre of a firm's business.
The FCA's main approaches to conduct supervision are split into three pillars:
AJ Bell is classified as a Pillar 1 entity.
The FCA allocates all authorised firms into one of two conduct categories either (i) fixed portfolio firms; or (ii) flexible portfolio firms.
Fixed portfolio firms are given a specific supervisor. The FCA proactively supervises such firms using firm-specific continuous assessment.
Flexible portfolio firms are supervised through thematic and market-based work, along with programmes of communication, engagement and education aligned to the key risks the FCA has identified in the relevant sector.
The FCA has recently confirmed that AJ Bell and the Regulated Subsidiaries will no longer be allocated a dedicated supervisory team and instead will be part of the ''Platform Portfolio''.
The FCA has a range of supervisory powers which allow it to intervene in a firm's affairs. The FCA can, for instance, require firms to provide particular information or documents to it, require the production of a report by a ''skilled person'' appointed by the FCA or formally investigate a firm.
In its prudential supervisory role, the FCA considers the systems and controls, governance arrangements, and risk management capabilities including the risk of misconduct. The FCA will seek to assess how well a firm understands the risks it is running, how well placed it is to manage those risks, and how well it can avoid large, unexpected costs.
Firms solely regulated by the FCA are allocated one of four prudential categories depending on the relative perceived risk their failure would pose to markets. AJ Bell is classified as a P2 entity, which applies to firms and groups whose failure would have less impact than P1 firms, but would nevertheless damage markets or consumers and client assets.
The FCA uses a wide range of enforcement powers, criminal, civil and regulatory, to protect consumers and to take action against firms and individuals that do not meet its standards. These include:
* withdrawing a firm's authorisation;
The FOS has compulsory jurisdiction over all FCA-regulated firms including the Regulated Subsidiaries. However, customer complaints relating to the administration of pensions are referred to the Pensions Ombudsman, not FOS, in accordance with the Memorandum of Understanding between FOS and the Pensions Ombudsman.
All FCA-regulated firms must have a procedure in place for resolving disputes with their customers and must respond to customer complaints within set deadlines. If a firm's complaints procedure fails to resolve a complaint, the FOS and Pensions Ombudsman provides a dispute resolution procedure for certain categories of customer complaints brought against applicable firms by individuals and small business customers.
The FOS and Pensions Ombudsman provide a more informal alternative to customers bringing complaints in the courts. They provide independent investigators who review and seek to resolve complaints between customers and firms.
If the FOS resolves a complaint in favour of a customer, it has the power to order a firm to pay fair compensation for any loss or damage it caused to the customer, or to direct a firm to take such steps in relation to the customer as the FOS considers just and appropriate, and irrespective of whether a similar award could be made by a court. Authorised firms fund the FOS through levies and case fees.
The FSCS was established under FSMA, it is a statutory compensation scheme of last resort for certain categories of customers of authorised firms. It provides compensation to eligible customers who suffer losses as a consequence of an authorised firm's inability to meet its liabilities arising from claims made in connection with its regulated activities. The FSCS is funded by levies on authorised firms and is independent of the FCA, the PRA and the UK government, although it is ultimately accountable to them.
The powers of the FSCS to raise funds from authorised firms are set out in the FEES sourcebook of the FCA Rules. In general terms, fees are levied on participant firms and the FSCS may impose three types of levy the 'management expenses levy' (comprising the 'bases costs levy' and the 'specific costs levy'), the 'compensation costs levy' (relating to compensation costs), and the 'MERS levy' which relates to management expenses in respect of 'relevant schemes'.
Participant firms are allocated to a funding class (or classes) on the basis of their regulated activities. The specific costs and compensation costs levies payable by the participating firms are calculated by reference to their funding class or classes. The main principle behind the calculation of these levies is that the levy should represent the amount of claims made or likely to be made against that type of firm. The Regulated Subsidiaries will fall into the ''Investments'' levy class. It should however be noted, that contributions are not restricted to failures in the sub-classes to which a particular firm belongs as there is the possibility that cross-subsidy between levy classes may be required.
The MLRs require relevant persons to apply risk-based customer due diligence measures and take other steps to prevent their services from being used for money laundering or terrorist financing. They also require relevant persons to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk.
SYSC contains financial crime rules that complement the MLRs, requiring firms to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk. Such controls must be comprehensive and proportionate to the nature, scale and complexity of their activities. In this context, financial crime includes any offence involving fraud or dishonesty, misconduct in, or misuse of information relating to, a financial market, handling the proceeds of crime or the financing of terrorism, as well as bribery and corruption offences.
Failure to maintain the necessary procedures is a criminal offence. The Proceeds of Crime Act 2002, the Terrorism Act 2000 and the Counter-Terrorism Act 2008 and the Criminal Justice Act 1993 also contain a number of offences in relation to money laundering. The Joint Money Laundering Steering Group provides good practice guidance and practical assistance in interpreting the MLRs.
AJ Bell has established appropriate systems and controls under the guidance of AJ Bell's Money Laundering Reporting Officer to help it mitigate the risk of financial crime. This including the appropriate suite of policies, use of anti-money laundering technology and ongoing training for all members of staff.
The ICO is the UK's data protection regulator set up as an independent body to uphold information rights. It is responsible for upholding information rights in the public interest, promoting openness by public bodies and data privacy for individuals. It has powers to enforce compliance with Data Protection Legislation which include criminal prosecution, non-criminal enforcement, audit and issuing monetary penalty notices. The ICO is involved in data protection policy making decisions and produces guidance and codes of practice.
AJ Bell collects and processes personal data and sensitive personal data (including names, addresses, contact details, financial information, health information and criminal records) information from its customers and employees as part of the operation of its business.
AJ Bell must therefore comply with all Data Protection Legislation including the recently implemented GDPR and the UK's Data Protection Act 2018.
GDPR imposes certain requirements on AJ Bell in respect of the collection, retention, use, processing and security of personal information. Failure to operate effective data use and information security controls could potentially lead to regulatory enforced compliance measures, fines, reputational and financial losses in responding to or defending its actions.
GDPR also provides data subjects far greater rights and control in respect of their personal data. Failure to be fully transparent at the point of collection about the purpose for and use of personal data or otherwise meet obligations relating to data subject rights could result in compensation payments to data subjects whose rights have been infringed.
GDPR allows representative bodies to bring claims on behalf of data subjects. This could result in a 'group action' being pursued by a third party on behalf of data subjects. A group action could potentially lead to reputational damage and increased financial defence costs and losses depending on the number of data subjects forming the group. The potential sanctions for the most egregious breaches of GDPR include financial penalties of up to 4% of the annual worldwide turnover of company groups.
The GDPR has increased the regulatory burden on AJ Bell in processing personal customer, employee and other data in the conduct of its business.
AJ Bell established a GDPR project to ensure that the new requirements were met by 25 May 2018, the date on which GDPR came into force. AJ Bell monitors ongoing compliance through its established regulatory systems and controls.
If AJ Bell or any of the third party service providers on which it relies (including non-subsidiary affiliates of AJ Bell) fails to comply with Data Protection Legislation, due to any failure to store or transmit information in a secure manner or any loss or wrongful processing of personal customer data, AJ Bell could be subject to investigative and enforcement action by the ICO and complaints or claims from data subjects.
Pension saving under registered pension schemes is subject to favourable tax treatment, which acts as an incentive for employees and individuals to save for retirement and thus be less reliant on the state pension system. However, the extent to which pension savings attract tax relief is subject to certain limits imposed by HMRC. In order to enjoy the tax advantages available to pension schemes in the UK the SIPPs and SSASs administered by AJ Bell are registered with HMRC.
As registered pension schemes, the SIPPs and SSASs are obliged to provide information to HMRC including the provision of a pension scheme return (to be provided on request), accounting for tax returns, event reports and reporting pension flexibility payments.
If payments are made from the schemes that are not authorised payments under the Finance Act 2004, HMRC will impose unauthorised payment charges, and scheme sanction charges in respect of the payments.
Tax considerations are relevant to a UK registered pension scheme when:
The current pensions tax relief system can broadly be described as 'Exempt-Exempt-Taxed' on the following basis:
The AJ Bell Platinum SSASs are occupational pension schemes for legislative purposes. As a result they are regulated by the Pensions Regulator.
The Pensions Regulator is the public body that protects workplace pensions in the UK. The post of the Pensions Regulator was created on 6 April 2005 by Pensions Act 2004. The principal objectives of the Pensions Regulator are set out in the Pensions Act 2004. These include:
The SSAS are registered with the Pensions Regulator in accordance with the Pensions Act 2004. As such the scheme administrator for each scheme is required to provide and update registrable information in respect of each scheme as well as providing a scheme return to the Pensions Regulator whenever the Pensions Regulator issues a scheme return notice. There are also whistleblowing obligations that apply in respect of the trustees and scheme administrators of SSASs.
The Pensions Regulator has issued a code of practice in respect of the governance and administration of occupational trust-based schemes providing money purchase benefits. This code applies to a limited extent to the SSASs although SSASs will generally be exempt from parts of the code (for example in respect of default arrangements and charge caps and the preparation of an annual chair's statement).
The Pensions Regulator has various enforcement powers in respect of defined contribution workplace schemes such as the SSASs, these include the ability to appoint and remove trustees of schemes and to issue fines for non-compliance with legislation under section 10 of the Pensions Act 1995.
An ISA is a scheme of investment managed in accordance with ISA regulations under terms agreed between the ISA manager and the investor. The ISA manager holds investments and claims repayment of income tax deducted at source, by submitting claims to HMRC. There are various types of ISAs permitted by UK law being:
Investors do not pay any tax on any of the income they receive from ISA savings and investments. Nor do they pay any tax on capital gains arising on ISA investments. In order to protect the integrity of the UK taxation system there are limits placed around who can hold an ISA, how many ISAs an individual can open in a tax year and the amount that can be paid into an individual's ISAs in a tax year. An ISA manager must also collect prescribed information and receive prescribed declarations from individuals applying for an ISA.
In order to be able to offer ISAs and LISAs to investors AJBSL has registered with, and been approved by, HMRC as an ISA manager and a LISA manager. As a registered ISA manager AJBSL is obliged to provide information to HMRC and make claims from HMRC including updating HMRC with any changes to the information provided in its application for registrations as an ISA manager, the making of an annual return and tax claim, the making of an annual return of information, and an annual market value return of statistical information (market value and subscriptions).
AJ Bell, including the Regulated Subsidiaries, is subject to EU law, both directly through European regulations and indirectly through European directives, to which the UK is currently obliged to give effect through its legislative powers. Recent EU regulation of most significance that applies to AJ Bell is set out below.
MiFID II applies to firms in the EEA who engage in certain investment activities, including dealing and execution services, investment advice and portfolio management. Building on MiFID, it aims to harmonise the regulatory framework across the EEA to make financial markets more efficient and resilient, increase transparency of both equity and non-equity markets, reinforce supervisory powers, and provide protection for investors.
MiFID II sets out detailed provisions on systems and controls, outsourcing, customer classification, conflicts of interest, best execution, client order handling, suitability and appropriateness, transparency and transaction reporting. Requirements relating to transaction reporting, costs and charges disclosure, product governance and conduct of business requirements all affect AJ Bell's operations.
MiFID II also allows investment firms authorised in accordance with its provisions to passport their services into other EEA states without needing to obtain separate authorisations locally.
The PRIIPs Regulation aims to encourage efficient EU markets by helping investors to better understand and compare the key features, risk, rewards and costs of different PRIIPs, by obliging PRIIPs manufacturers and distributors to provide access to a short and consumer-friendly Key Information Document.
PRIIPs can take a variety of legal forms but can be distinguished by the comparable functions they perform for retail investors. PRIIPS can be broadly categorised into four main groups: (i) investment funds, (ii) insurance-based investment products, (iii) retail structured securities, and (iv) structured term deposits. The PRIIPS Regulation has applied (subject to limited transitional provisions) to products such as units in an investment fund (except UCITS Schemes), life insurance policies with an investment element and structured deposits since 1 January 2018. It is set to apply to UCITS schemes with effect from 31 December 2019.
CRD IV, comprising the Capital Requirements Directive IV and the Capital Requirements Regulation, is an EU legislative framework for the prudential supervision of banks, building societies and investment firms. Certain MiFID investment firms, including those with permissions relating to the safeguarding of client assets or handling of client money, are subject to the provisions of CRD IV as regards prudential and capital standards. AJBAML and AJBSL are subject to these rules. There are changes being proposed to the capital requirements regime under Capital Requirements Directive V and Capital Requirements Regulation II but these are not anticipated prior to 2019. Therefore whether these changes will have any impact on the Regulated Subsidiaries is unclear because the possibility of these changes taking effect prior to the UK's planned departure from the EU is remote.
The UCITS regime provides a set of common standards applicable across all EU member states for the operation of and cross border promotion of UCITS Schemes.
The UCITS regime aims to create a single market for open-ended retail investment funds which affords enhanced protection for investors.
It requires EU member states to adopt harmonised rules regulating the authorisation, supervision, structure and activities of UCITS funds together with harmonised rules about investor information and passporting requirements. VT AJ Bell ICVC is a UCITS scheme and therefore must be operated in accordance with the UCITS Directive.
In addition to the FCA's prudential standards and capital adequacy requirements, AJBAML and AJBSL must comply with the wider prudential framework of CRD IV which mainly applies to banks.
The EBA contributes to a European Single Rulebook in banking by providing Binding Technical Standards (''BTS'') and Guidance. The Rulebook aims to provide a single set of harmonised prudential rules for financial institutions throughout the EU in order to create a level playing field and a high level of protection for customers.
The BTS are legal acts which specify particular aspects of an EU legislative text (directive or regulation) and aim at ensuring consistent harmonisation in specific areas. The BTS are legally binding and directly applicable in all Member States including in the UK and therefore AJBAML and AJBSL must comply with these to the extent they apply to their activities.
The EBA and European Securities and Market Authority are working on the review of the application of the prudential rules to investment firms, with the aim of establishing an appropriate prudential framework for investment firms.
FCA-regulated firms have recently been subject to substantial regulatory change. There is further regulatory change on the horizon, with the main changes likely to impact AJ Bell summarised below.
The FCA announced in 2017 that it would be undertaking the Investment Platform Market Study on investment platforms. The market study explores how investment platforms compete to win new, and retain existing, consumers, to allow the FCA to assess how to improve competition within the platform market and develop better consumer outcomes.
In particular, the FCA has looked to assess:
The FCA published its interim report the Investment Platform Market Study in July 2018, which noted that the investment platform market was working well in many respects. There are areas that the FCA identified where it was concerned that competition in the market was not working well and it is consulting on remedies for these areas. The FCA's consultation on remedies for the market focuses on the following main areas:
The FCA expects to publish its final report and recommendations in the first quarter of 2019, following the end of the consultation on its interim report proposals on 21 September 2018.
The Fifth Money Laundering Directive (''MLD5'') contains amendments to the existing money laundering directive as well as the Capital Requirements Directive. MLD5 will, amongst other things:
The majority of changes will be effected by 10 January 2020.
The FCA is consulting on draft guidance outlining the factors which financial services companies should consider when drafting and reviewing variation terms in consumer contracts, the first it has issued following the introduction of the Consumer Rights Act 2015 and several rulings on the topic by the Court of Justice of the EU. The draft guidance outlines factors for financial institutions to consider when seeking to draft variation terms, and also considers a number of reasons for contract variation that the FCA has observed firms commonly include when drafting variation terms allowing them to alter their consumer contracts. AJ Bell will take any finalised guidance into account in updating or changing customer terms.
In February 2018, the FCA published a discussion paper looking at effective competition in non-workplace pensions: DP18/1. The paper was launched in order for the FCA to better understand the market for non-workplace pensions: the providers, the consumers and the relationship between them, with a view to assessing the potential presence, nature and extent of harm. The FCA outlined its areas of potential concerns about how the market is working and the reasons for its concerns. It noted that in some aspects it sees parallels with the findings of the OFT study on the defined contribution workplace pensions market in 2013 which concluded that competition alone could not be relied on to drive value for money and good outcomes for consumers of DC workplace pensions. That study led to increased regulation of the workplace pensions market, including the introduction of caps on certain charges.
The period for submission of information has now closed. At this stage, it is difficult to assess whether the FCA focus on non-workplace pensions will have any material impact on the non-workplace pension market in the UK or lead to any material changes in the interaction between non-workplace pension providers and other participants in the UK wealth management sector, such as asset managers and financial advisers.
In June 2018, the FCA published a consultation paper regarding improving retirement outcomes for consumers: CP18/17. In the consultation paper the FCA proposes a remedy package to address the potential consumer harm and emerging issues it has identified arising from the pension freedoms introduced in 2015. The FCA's remedy package aims to: protect consumers from poor outcomes; improve consumer engagement with retirement income decisions; and promote competition by making the costs of drawdown clearer and comparisons easier.
The potential changes suggested by the FCA include:
Whilst it is not certain which of the proposed changes will be brought in to force and in what form, AJ Bell is actively engaging with the FCA in relation to its proposals. Whilst the proposed changes could lead to an increased administrative burden on AJ Bell, the directors believe that AJ Bell is in a good position to respond to any changes required and that any changes should not have a material adverse impact on its business.
Although the finalised text of the GDPR was published over two years ago, there is general uncertainty about how the GDPR and the Data Protection Act 2018 are going to be interpreted and enforced, with guidance related to many areas of the GDPR only having recently been published by UK and EU regulators. Therefore, AJ Bell must, in practice, ensure its compliance with the GDPR is constantly evolving. AJ Bell will ensure it continuously reviews its decisions and ensure that the latest guidance from the ICO, or indeed the European Data Protection Board, is taken into account in its decisions in relation to processing of personal data and reassess the risks in this context.
The E-Privacy Regulation was due to be implemented on 25 May 2018 at the same time as GDPR. It is anticipated that this will now be implemented in 2020. The E-Privacy Regulation will seek to harmonise protection of electronic communications across the EU Member States, broaden the electronic communications that are captured, implement a higher level of protection and simplify the rules in relation to cookies. The enforcement of the Regulation will be the responsibility of the ICO.
The ICO has indicated that it is unlikely that the UK will receive an adequacy decision on the UK's exit from the EU, pursuant to which the EU confirms that privacy legislation in a non-EU state is sufficiently stringent so as to permit transfer of data from inside the EU to that state. In the absence of an adequacy decision, the UK has implemented the Data Protection Act 2018 which incorporates the GDPR directly into UK legislation and ensures consistency with the EU in respect of requirements for processing of personal data. It is currently envisaged that a treaty will be implemented between the UK and the EU in order to ensure data transfers can still occur without the additional burden of entering into the EU Standard Contractual Clauses which have been developed by the European Commission to provide adequate terms to safeguard protection of personal data when an international transfer takes place without an adequacy decision or a treaty in place.
The following is a review of AJ Bell's operating performance and financial position.
The consolidated financial information referred to in this Part 5 has been prepared in accordance with (i) IFRS as adopted by the EU; (ii) the requirements of the Prospectus Directive; and (iii) the Listing Rules, and, unless otherwise stated, has been extracted without material adjustment from Part 6 (Historical Financial Information) of this Registration Document.
In this discussion and analysis, the financial years ended 30 September 2016, 30 September 2017 and 30 September 2018 are referred to as FY2016, FY2017 and FY2018, respectively.
The financial information referred to in the following discussion and analysis has been rounded to the nearest decimal place and percentage changes have been calculated based upon these rounded numbers and so may not conform exactly to the calculation based upon the underlying unrounded figures.
This Part 5 (Operating and Financial Review) of this Registration Document contains ''forward-looking statements''. Those statements are subject to risks, uncertainties and other factors that could cause AJ Bell's future results of operations or cash flows to differ materially from the results of operations or cash flows expressed or implied in such forward-looking statements. Prospective investors should read the section entitled ''Presentation of Information'' and Part 2 (Risk Factors) of this Registration Document for further information in this respect. In addition, certain industry issues also affect the Group's results of operations and are described in Part 1 (Market Overview) of this Registration Document.
AJ Bell is one of the largest investment platforms in the UK, based on the value of its AUA. The total value of the Group's AUA was £46.1 billion as at 30 September 2018. AJ Bell's flagship propositions are AJ Bell Investcentre, which operates in the advised segment of the platform market and AJ Bell Youinvest which operates in the D2C segment. The Group operates principally as a platform business although it also maintains an element of non-Platform business.
AJ Bell Youinvest and AJ Bell Investcentre combined had £38.6 billion in AUA as at 30 September 2018 with 183,213 customers. These two platform propositions are described briefly below:
AJ Bell Youinvest and AJ Bell Investcentre provide access to a broad investment range including shares and other financial instruments traded on the major stock exchanges around the world, as well as mainstream collective investments available in the UK. AJ Bell also offers a range of in-house investment solutions, including the AJ Bell Passive funds, the AJ Bell Investcentre Managed Portfolio Service and the AJ Bell Youinvest Favourite Funds list and from the end of the last quarter of 2018 Ready-made portfolios.
AJ Bell's non-Platform business, which had £7.5 billion in AUA as at 30 September 2018 with 14,699 customers, comprises:
* AJ Bell Securities stockbroking: providing dealing, settlement and custody services to institutional investment businesses.
AJ Bell was co-founded in 1995 in Manchester by Andy Bell and Nicholas Littlefair to provide actuarial, trustee and pension administration services to customers with a SSAS or SIPP. In 2000, AJ Bell launched Sippdeal, the first online SIPP in the UK for execution only investors. In 2002, AJ Bell launched Sippcentre, as a low cost SIPP for financial advisers and their clients. Since then, AJ Bell has grown its customers and AUA organically, but has also made some small strategic acquisitions to enhance AJ Bell's platform propositions. In December 2007, AJ Bell acquired Lawshare to bring its stockbroking capabilities in-house and facilitate the offering of ISAs and general investment/dealing accounts to its platform customers. In December 2012, AJ Bell acquired MSM Media to expand the range of investment content offered to its platform customers. More recently in February 2016, AJ Bell acquired Indexx Markets and Mansard Capital to facilitate the launch of its in-house range of investment solutions. AJ Bell's heritage is evident in the value of assets held in SIPPs, which was 72% of AJ Bell's overall AUA as at 30 September 2018. SIPPs are long term savings products which provide AJ Bell with a high proportion of recurring revenue.
AJ Bell's principal source of revenue arises from the fees charged for the provision of platform services. AJ Bell's revenue is classified into recurring revenues and transactional revenues as follows:
AJ Bell has a diverse revenue model with recurring income representing 82% of revenue in FY2018, and transactional revenue of 18%. The level of ad valorem charges included within recurring income varies with the size of the customer's portfolio and, as a consequence, more generally with the amount of AUA.
AJ Bell's distribution model is diversified, operating in both the advised and D2C segments of the platform market. Further, the business is not reliant on any key customer or independent financial adviser. The largest single distribution contract as at 30 September 2018 comprised less than 1.5% of total revenue.
AJ Bell's business is highly cash generative and it has a capital light model. Cash generated from operations has averaged over 100% of profit before taxation for the period covered by the historical financial information as AJ Bell benefits from a short working capital cycle and low levels of capital expenditure following the completion of its major re-platforming exercise in 2014.
Growth has been funded from retained earnings and has not required primary equity fundraising or material debt finance.
AJ Bell's strong regulatory capital position is evidenced by a regulatory capital surplus yielding coverage of 440% of its Pillar 1 regulatory capital requirements during the period covered by the historical financial information.
Management considers a variety of financial measures and other metrics when analysing AJ Bell's performance, and the Directors believe that each of these measures provides useful information with respect to AJ Bell's business and operations. With the exception of revenue and profit before tax, these are non-IFRS financial measures and metrics that are not audited. These non-IFRS financial measures and metrics are not meant to be considered in isolation or as a substitute for measures of financial performance reported in accordance with IFRS. Moreover, these non-IFRS financial measures and metrics may be defined or calculated differently by other companies, and as a result AJ Bell's key performance indicators may not be comparable to similar measures and metrics calculated by its peers.
| | As at
Platforum, Consumer Insights, January 2018.
As part of the FCA's Investment Platforms Market Study, the FCA identified only three investment platforms that had entered the market during the last 5 years (from 2012 to 2017): one adviser platform and two D2C platforms. However, as noted by the Investment Platforms Market Study, the AUA of these new entrants is negligible.
The Investment Platforms Market Study found that the market appears to be working well in many respects, for both advised and non-advised consumers, and customer satisfaction is currently high. The FCA commented that platform financial performance does not suggest widespread competition concerns in the market, although it noted that many platforms are loss making.
However, the Investment Platforms Market Study did highlight a number of areas of concern, including:
The FCA will be consulting on potential ways to address these areas of concern before publishing its final report and recommendations in the first quarter of 2019. Although it is not yet clear what regulatory changes will be made following the conclusion of this process, the Directors believe that these will not have a significant negative impact on the growth in either the advised or D2C segments of the investment platform market or AJ Bell's competitive position in these market segments.
Although the platform market is highly competitive with significant numbers of providers fighting for business, given AJ Bell's established market position, its financial performance and competitive pricing policy, the Directors believe it is well placed to benefit from future growth in the market.
AJ Bell is one of the largest investment platforms in the UK, based on the value of its AUA. AJ Bell operates successfully in both the advised and D2C segments of the platform market through its flagship platform propositions: AJ Bell Investcentre and AJ Bell Youinvest.
AJ Bell intends to apply to the FCA for the admission of the Company's issued ordinary shares, as created under the Share Capital Reorganisation, to the premium listing segment of the Official List and to trading on the main market for listed securities of London Stock Exchange plc. At the date of this Registration Document AJ Bell intends to make such application before the end of the calendar year.
AJ Bell offers SIPPs, ISAs and general investment/dealing accounts. Customers and advisers are provided with additional support in the form of various investment solutions, tools and investment content. AJ Bell offers access to a broad range of investments including shares and other instruments traded on the major stock exchanges around the world, as well as all mainstream collective investments available in the UK and a range of in-house investment solutions.
AJ Bell Investcentre is one of the UK's fastest growing platforms in the advised market segment. It provides regulated financial advisers and wealth managers with a suite of online tools to help manage their retail clients' portfolios. It also provides a number of in-house investment solutions, including a range of collective investment funds, called the AJ Bell Passive funds range, and its Managed Portfolio Service, with a range of managed portfolios of active and passive funds. AJ Bell Investcentre also provides a fully integrated investment custody administration solution to assist wealth management firms with the administration of client assets. As at 30 September 2018 AJ Bell Investcentre had 88,658 customers (76,498 – 2017), 102,897 accounts (88,230 – 2017) and held £29.9 billion of AUA (£24.3 billion – 2017).
AJ Bell Youinvest is one of the UK's fastest growing D2C retail investment platforms. The service is designed for retail customers, is online and execution only. No regulated advice in the form of personal recommendations is given by AJ Bell. Customers are supported with investment content, provided online and through Shares magazine, and have access to the in-house AJ Bell Passive funds, selected fund ideas via the AJ Bell Favourite Funds list and will have access to AJ Bell Ready-made portfolios due to be launched before the end of 2018. As at 30 September 2018 AJ Bell Youinvest had 94,555 customers (64,709 – 2017), 117,765 accounts (81,491 – 2017) and held £8.7 billion of AUA (£6.6 billion – 2017).
In addition to its investment platform business, AJ Bell offers three non-platform services:
Although AJ Bell's primary focus is on its flagship investment platform propositions, these non-platform services continue to make a valuable contribution to AJ Bell and are managed to deliver high quality service and value to existing and new customers.
AJ Bell is headquartered in Manchester and has an office in London.
AJ Bell was co-founded in 1995 in Manchester by Andy Bell and Nicholas Littlefair to provide actuarial, trustee and pension administration services to customers with a SSAS or SIPP.
In 2000 AJ Bell launched the UK's first online SIPP for execution only investors – Sippdeal (now AJ Bell Youinvest). Two years later in 2002, Sippcentre (now AJ Bell Investcentre) was launched as a low-cost SIPP for advised customers.
AJ Bell attracted its first institutional investment in 2005 with Midas Capital Partners (now Seneca Investment Managers) acquiring shares in the Company on behalf of its retail funds; and subsequently in 2007 Invesco Perpetual acquired shares in the Company, also on behalf of its retail funds.
While most of AJ Bell's business until 2007 was as a SIPP provider and administrator, in that year the Board decided to make a strategic move to broaden and deepen AJ Bell's product range and services. AJ Bell acquired a stockbroker called Lawshare Limited in 2007 (now AJ Bell Securities) and this enabled it to bring ''in-house'' the provision of dealing, custody and investment administration services to Sippdeal and Sippcentre customers, rather than outsource to a third party. This allowed it to take full control of pricing and service quality. The acquisition also paved the way for the transformation of Sippdeal and Sippcentre to full investment platform propositions in 2011; offering ISAs and general investment/dealing accounts in addition to the existing SIPP products.
In 2011 AJ Bell further expanded its service to advised customers through the launch of a custody solution for wealth managers. Also in 2011, co-founder Nicholas Littlefair, who had assumed a non-executive role in 2009, took early retirement.
In 2012 AJ Bell made its next strategic move, acquiring MSM Media Limited (now AJ Bell Media), the publisher of Shares magazine. This acquisition provided AJ Bell with access to a wide array of proprietary investment content, supplementing the technical expertise already present within the business. By leveraging the content available within Shares magazine, in particular, the acquisition has allowed AJ Bell to provide an increased level of relevant content to its Platform customers.
In 2013 and 2014 the flagship platform propositions were rebranded: Sippdeal was renamed AJ Bell Youinvest (2013) and Sippcentre was renamed AJ Bell Investcentre (2014).
In early 2016 AJ Bell acquired Mansard Capital LLP and Indexx Markets Limited which together became AJ Bell's investment management business. This allowed AJ Bell to develop a range of its own investment solutions designed specifically to meet the needs of its customers, with the first of these, the AJ Bell Investcentre Managed Portfolio Service, launched during the same year. This was followed, in 2017, by the launch of the AJ Bell Passive funds range and the AJ Bell Youinvest Favourite Funds List and, the AJ Bell Youinvest Ready-made portfolios (the latter due for launch before the end of 2018).
Also in 2017, all Manchester based staff relocated to new headquarters at Exchange Quay in Manchester and the Board subsequently made the strategic decision to close its Tunbridge Wells office, with all core operational functions relocating to the Manchester headquarters and some specialist functions relocating to the London office. The relocation of all functions was successfully completed by the end of September 2018.
In 2018 AJ Bell was named as one of ''the Sunday Times 100 Best Companies to Work For'' in the UK.
The investment platform market is a fast growing market, within the wider UK savings and investment market, with a number of structural growth drivers and barriers to entry for new entrants, as set out in Part 1 (Market Overview) of this Registration Document.
AJ Bell operates at scale within the investment platform market and since 2012 the average annual growth in AUA of AJ Bell has been greater than that of both the platform market and wider UK investment and savings market.
When considering the barriers to entry to the platform market, referred to in Part 1 (Market Overview) of this Registration Document the Directors believe that AJ Bell has a highly defendable proposition in the market due in part to:
The Group is also well placed to take advantage of the drivers for growth applying to both the advised and D2C market segments, including:
In relation to the advised market there are a number of specific growth drivers in addition to those general drivers for growth across the wider platform market:
The D2C market also has a number of specific growth drivers including the significant ''advice gap'' in the UK, highlighted in the FCA's Financial Advice Market Review, with an increasing number of investors unable to access, or afford, financial advice and turning to non-advised solutions. These investors are different to many of those who previously used D2C solutions – categorised by AJ Bell Youinvest as ''hungry for help'' or ''nervous newcomers'' – and are looking for more support and guidance to help them make the right investment decisions. AJ Bell's Passive funds, Favourite Funds list, and Ready-made portfolios (the latter due to launch in the last quarter of 2018) have been designed specifically with the needs of these investors in mind.
Following the Investment Platforms Market Study, there is no reason to believe that both the advised and D2C investment platform markets will not continue to grow strongly in the future. Given AJ Bell's established market position, its financial performance and competitive pricing policy, the Directors believe it is well placed to benefit from this future growth.
Unlike most of its competitors, AJ Bell operates at scale in both the advised and D2C platform market segments, which were estimated at £4909inciples of the FCA Remuneration Code, which are overseen by the Remuneration Committee. Material decisions in relation to the remuneration of staff whose actions have a material impact on the risk profile of AJ Bell and in relation to individuals in control functions are overseen by the Remuneration Committee.
The approach to Executive Directors' remuneration aims to align their interests with the longterm interests of Shareholders. Furthermore, it aims to promote a high performance culture with appropriate reward for superior performance, without creating incentives that will encourage excessive risk-taking or unsustainable performance.
The Company intends to deliver these outcomes via a remuneration framework which combines annual salary, benefits, pension, an annual bonus plan and share-based awards.
Further details of each Executive Director's remuneration are set out in paragraph 9 of Part 7 (Additional Information) of this Registration Document. The Company will submit its remuneration policy (as it relates to the Executive Directors) to a binding vote of Shareholders at the annual general meeting of the Company held in the first financial year which begins on or which follows any Admission. Accordingly, the Company will outline the detail of its future policy relating to the Executive Directors' remuneration in its annual report and accounts in due course.
The Company will adopt, with effect from the intended date of Admission, a code on dealings in relation to the shares and other securities. The code adopted will apply to the Directors and Senior Managers. The Directors will take all reasonable steps to secure compliance.
The landlord of the Group's head office at 4 Exchange Quay, Salford Quays, Manchester M5 3EE (Property), Exchange Quay Property Services Limited (EQPSL), is a company controlled by a number of members of the senior management team. The shareholders and directors of EQPSL are Andrew James Bell, Bestfield Investments (an unlimited company of which Fergus John Lyons and other family members are the shareholders and directors), Michael Thomas Summersgill, Charles William Galbraith and Roger John Stott. AJ Bell Limited, as tenant, and the Company, as guarantor, entered into the two leases of the Property on 17 August 2016. The leases were entered into on arms' length terms, the parties had separate legal advisers and the Board obtained advice on the lease terms from an independent surveyor. The reason for this structure being adopted was because the Board did not consider the purchase of business premises to be an appropriate use of the Company's capital. Shareholder approval was obtained before the parties entered into the leases. The parties entered into a supplemental lease of additional parts of the Property and a licence for alterations on 24 October 2018.
The Group made donations during FY2016 (£85,279), FY2017 (£109,125) and FY2018 (£139,675) to the AJ Bell Trust, a registered charity of which Andy Bell is a director of the trustee company.
For FY2016, FY2017 and FY2018, AJ Bell had an average of 607, 656, and 758 employees respectively, analysed by operational area as follows:
| FY2016 | FY2017 | FY2018 | |
|---|---|---|---|
| Technology | 74 | 95 | 116 |
| Distribution | 55 | 58 | 64 |
| Operations and Support | 478 | 503 | 578 |
| 607 | 656 | 758 |
As at 31 October 2018 AJ Bell had 776 employees.
AJ Bell has three regulated operating subsidiaries, AJBSL, AJBML and AJBAML.
AJBSL (number 155593), AJBML (number 211468) and AJBAML (number 774048) are authorised and regulated by the FCA. AJBSL is also a member of the London Stock Exchange.
AJ Bell also has two FCA authorised Open Ended Investment Companies: VT AJ BELL ICVC, which is operated as a UCITS Scheme, and VT Allium Portfolio Funds, a Non-UCITS Retail Scheme. Valu-Trac Investment Management Limited has been appointed as the external authorised corporate director and operator of each of the funds by the funds' sponsor, AJBAML.
There are currently three financial services regulators in the UK:
The FPC was established in 2013 as part of the new system of regulation brought in to improve financial stability after the 2008 financial crisis. The FPC sits within the Bank of England and is responsible for the macro prudential regulation of the entire financial services sector. Its role is to identify and monitor risks in the financial system, and to take action to reduce or remove such risks where necessary.
The FCA is the key regulator of the Regulated Subsidiaries, and as such the majority of this Part 4 (Regulation) of this Registration Document focuses on FCA authorisation and regulation. The FCA aims to make financial markets work well for individuals, businesses, and for the economy as a whole. The FCA is responsible for the conduct of business regulation of all authorised firms and the prudential regulation of firms not authorised and regulated by the PRA. It is the conduct regulator for more than 58,000 businesses and the prudential regulator for more than 18,000 of these businesses.
The FCA has powers to allow it to achieve its objectives. These enable it to intervene directly in the market and make product intervention rules with the aim of preventing harm to consumers. The FCA discharges its general functions by rule-making, preparing and issuing codes under FSMA, giving general guidance and determining general policy and principles.
The FCA's strategic objective is to ensure that the relevant markets function well. Its operational objectives are to:
The FCA must act in a way which is compatible with its strategic objective (so far as is reasonably possible) when discharging its general functions.
The FCA is bound by FSMA to regulate certain financial activities in the UK.
Under section 19 of FSMA, it is an offence for any person to carry on ''regulated activities'' in the UK unless they are an authorised person or exempt from the requirement to be authorised. An authorised person may only carry out regulated activities for which they have been given specific permission by the relevant regulator.
The various ''regulated activities'' are set out in the FSMA (Regulated Activities) Order 2001 (as amended). The activities most relevant for the Regulated Subsidiaries are the following:
The FCA may also grant authorised persons permission to hold or control client money. ABSL may hold client money and is required to protect the money it holds and/or controls on behalf of customers. It cannot lend this money or use it to finance its own business. AJBML is permitted to control client money only in respect of the personal pension scheme(s) that it operates and must not hold client money. AJBAML may control but must not hold client money.
As part of the firm authorisation process, the FCA may, at its discretion, determine the scope of, and include such restrictions on, the grant of regulatory permissions as appropriate.
The FCA must ensure that the authorised person/applicant meets certain threshold conditions (see below) whenever it grants or agrees to vary the terms of an authorised person's permissions.
Further, the FCA may impose such ''Requirements'' on an authorised person as it considers appropriate to require that person to take, or refrain from taking, specified action under FSMA.
These requirements apply to all of the financial services activities that the authorised person can operate and may relate to a range of matters, these include amongst others, the scope of the firm's business, the types of customer to whom the firm may provide services, how the firm may treat client money, capital adequacy and/or liquidity requirements.
Authorised firms are required to maintain a specified set of minimum standards set out in FSMA in order to become and remain authorised (the ''threshold conditions''). The threshold conditions cover matters including the location of offices, effective supervision, appropriate resources, the suitability of the authorised person and its business model.
The Regulated Subsidiaries must comply with, among other things, FSMA (and secondary legislation made under it), the FCA Rules and other relevant UK and directly applicable EU legislation.
The FCA Rules are divided into various blocks and sourcebooks containing rules and guidance.
The sections of most relevance for AJ Bell's day-to-day business are the Principles for Business and the COBS and CASS. Other important sections include those governing prudential standards and regulatory capital, senior management arrangements, systems and controls. The FSMA change of control regime for authorised persons is also relevant.
The FCA's principles (the Principles) form part of the FCA's High Level Standards set out in the FCA Rules; they are a general statement of the fundamental obligations of firms under the regulatory system. They derive their authority from the FCA's rulemaking powers as set out in FSMA and reflect the FCA's statutory objectives.
The Principles form the foundation of authorised firms' responsibilities to their clients. They are binding on firms and underpin the FCA Rules. The Principles provide authorised persons with a clear and concise statement of their fundamental obligations under the FSMA regulatory regime and the standards that the FCA expects authorised persons to meet in the day-to-day conduct of their business. They also provide a basis for supervisory activity and enforcement action by the FCA. Breaching a Principle makes a firm liable to disciplinary sanctions from the FCA (as further detailed in the Supervision and Enforcement section below).
The Principles set high standards for firms to comply with but allow firms to determine how they achieve those standards. The measures taken and the resources required by firms to comply with the Principles should depend on the nature and risks of the relevant firm's business. The Principles acknowledge that the measures taken should be proportionate to those risks.
The COBS rules set out a wide range of day-to-day business standards that authorised persons must comply with in various aspects of their relationships with clients.
The application of the COBS rules vary according to the scope of the firm's business and its activities and the types of client it deals with.
The application of the COBS rules will generally include: the need to provide retail clients with information about the firm; the need to categorise clients appropriately; the need to meet certain standards of disclosure about the firm's products and services including the related costs and charges; the firm ensuring that communications with clients are clear, fair and not misleading; the need to assess suitability when advising on certain products; ensuring it has appropriate agreements in place with clients; the need to manage conflicts of interest; and to report appropriately to clients.
The FCA requires firms to arrange adequate protection for clients' assets when such firm is responsible for them. Firms with permission to safeguard and administer custody assets and/or with permission to hold client money must comply with the Custody Rules and the Client Money Rules (respectively) in the CASS Rules. The CASS Rules require firms to clearly identify client assets, to hold client money separately from the firm's own money, to keep accurate records and carry on internal and external reconciliations, to make good any client money shortfalls, and to appoint an individual responsible for CASS compliance.
Authorised firms carrying on regulated activities must, at all times, comply with the prudential standards and capital adequacy requirements imposed by (in the case of the Regulated Subsidiaries) the EU Capital Requirements Directive and the FCA.
The capital adequacy rules applicable to the Regulated Subsidiaries are currently contained in the Prudential Standards Section of the FCA Rules and the CRD IV.
The FCA discharges its prudential supervision role, in part, through the regulatory capital requirements.
The regulatory capital rules require firms, at all times, to maintain a specified level of regulatory capital (based on the prudential risk the firm poses in conducting its particular business activities).
The rules are designed to ensure that firms can meet all liabilities as they fall due and to safeguard their financial stability and that of their clients and counterparties.
The FCA expects firms to be proactive in monitoring and managing financial risks, in accordance with its requirement for firms to maintain adequate financial resources.
The FCA's regulatory capital requirements apply both to individual authorised entities and at a consolidated level across groups of which an authorised firm or firms are members. The FCA may exercise consolidated supervision up to the top EEA parent in a firm's group. AJ Bell is subject to consolidated supervision.
Firms may apply to the FCA for a waiver from consolidated supervision however AJ Bell does not have such a waiver and AJ Bell does not intend to apply for such waiver in the foreseeable future.
There are certain ''controlled functions'' that are undertaken by individuals for (or on behalf of) an authorised firm and who usually have significant influence over the firm's regulatory conduct. As a result the persons who perform these functions must be approved by the FCA as fit and proper. These are known as ''approved persons''. An approved person must abide by the rules and principles set out in the APER. The rules and principles in the APER sourcebook apply to FCA approved persons.
The rules in the APER sourcebook include acting with integrity, acting with due skill, care and diligence, observing proper standards of market conduct and dealing with regulators in an open and co-operative way. If an approved person breaches the rules or principles the FCA may take enforcement action against the individual, including public censure, fines and/or the removal of approved status. A firm may also face enforcement action for breaches by its approved persons.
The SMCR, which currently applies to banks and very large investment firms, is set to be extended to include all authorised firms, including the Regulated Subsidiaries. The FCA has consulted on the rules to implement the SMCR and intends to replace the approved persons regime with the SMCR for almost all financial services firms.
As such a wide range of firms will be within the scope of the new SMCR requirements the FCA is not proposing to mirror the approach it took for banking firms. Instead it intends to apply consistent principles across the sector in a regime that is ''proportionate and flexible enough to accommodate the different business models and governance structures of firms''. The FCA is proposing:
The regime is expected to commence in relation to solo-authorised firms from 9 December 2019. AJBSL will be required to comply with an enhanced firm regime, whereas AJBML and AJBAML will be required to comply with the baseline core requirements.
Under the FSMA change of control regime, a person who is intending to acquire or increase ''control'' over a UK firm authorised and regulated by the FCA is required to seek the FCA's consent before doing so and submit certain specified information and documentation. An FCA-authorised firm must also notify the FCA when there is a transaction which results in that acquisition taking place. A disposal of a controlling interest in an FCA authorised firm must be notified to the FCA before the disposal takes place. Any acquisition of control over the Company or any of the Regulated Subsidiaries individually would be subject to the FCA change of control regime.
A proposed ''controller'' for the purposes of the change in control regime is any natural or legal person (or such persons ''acting in concert'') who decides to acquire, directly or indirectly, or increase control over an FCA-authorised firm. ''Control'' over the Regulated Subsidiaries would be acquired if the acquirer:
The FCA has up to 60 working days from the date of submission of a completed notification to approve or object to any such change in control. If the FCA does serve such a notice, it is required to specify its reasons for its objections in such notice. In the case of persons acting in concert, individual acquisitions will be amalgamated and treated as single holding for the purposes of the regime.
A person who ceases to be a 10% controller is required only to provide written notice to the FCA. In other words, FCA approval is not required for cessation of control.
Breach of the notification and approval regime imposed by FSMA on controllers is a criminal offence.
The FCA's priority in supervising firms is to ensure consumers are at the centre of a firm's business.
The FCA's main approaches to conduct supervision are split into three pillars:
AJ Bell is classified as a Pillar 1 entity.
The FCA allocates all authorised firms into one of two conduct categories either (i) fixed portfolio firms; or (ii) flexible portfolio firms.
Fixed portfolio firms are given a specific supervisor. The FCA proactively supervises such firms using firm-specific continuous assessment.
Flexible portfolio firms are supervised through thematic and market-based work, along with programmes of communication, engagement and education aligned to the key risks the FCA has identified in the relevant sector.
The FCA has recently confirmed that AJ Bell and the Regulated Subsidiaries will no longer be allocated a dedicated supervisory team and instead will be part of the ''Platform Portfolio''.
The FCA has a range of supervisory powers which allow it to intervene in a firm's affairs. The FCA can, for instance, require firms to provide particular information or documents to it, require the production of a report by a ''skilled person'' appointed by the FCA or formally investigate a firm.
In its prudential supervisory role, the FCA considers the systems and controls, governance arrangements, and risk management capabilities including the risk of misconduct. The FCA will seek to assess how well a firm understands the risks it is running, how well placed it is to manage those risks, and how well it can avoid large, unexpected costs.
Firms solely regulated by the FCA are allocated one of four prudential categories depending on the relative perceived risk their failure would pose to markets. AJ Bell is classified as a P2 entity, which applies to firms and groups whose failure would have less impact than P1 firms, but would nevertheless damage markets or consumers and client assets.
The FCA uses a wide range of enforcement powers, criminal, civil and regulatory, to protect consumers and to take action against firms and individuals that do not meet its standards. These include:
* withdrawing a firm's authorisation;
The FOS has compulsory jurisdiction over all FCA-regulated firms including the Regulated Subsidiaries. However, customer complaints relating to the administration of pensions are referred to the Pensions Ombudsman, not FOS, in accordance with the Memorandum of Understanding between FOS and the Pensions Ombudsman.
All FCA-regulated firms must have a procedure in place for resolving disputes with their customers and must respond to customer complaints within set deadlines. If a firm's complaints procedure fails to resolve a complaint, the FOS and Pensions Ombudsman provides a dispute resolution procedure for certain categories of customer complaints brought against applicable firms by individuals and small business customers.
The FOS and Pensions Ombudsman provide a more informal alternative to customers bringing complaints in the courts. They provide independent investigators who review and seek to resolve complaints between customers and firms.
If the FOS resolves a complaint in favour of a customer, it has the power to order a firm to pay fair compensation for any loss or damage it caused to the customer, or to direct a firm to take such steps in relation to the customer as the FOS considers just and appropriate, and irrespective of whether a similar award could be made by a court. Authorised firms fund the FOS through levies and case fees.
The FSCS was established under FSMA, it is a statutory compensation scheme of last resort for certain categories of customers of authorised firms. It provides compensation to eligible customers who suffer losses as a consequence of an authorised firm's inability to meet its liabilities arising from claims made in connection with its regulated activities. The FSCS is funded by levies on authorised firms and is independent of the FCA, the PRA and the UK government, although it is ultimately accountable to them.
The powers of the FSCS to raise funds from authorised firms are set out in the FEES sourcebook of the FCA Rules. In general terms, fees are levied on participant firms and the FSCS may impose three types of levy the 'management expenses levy' (comprising the 'bases costs levy' and the 'specific costs levy'), the 'compensation costs levy' (relating to compensation costs), and the 'MERS levy' which relates to management expenses in respect of 'relevant schemes'.
Participant firms are allocated to a funding class (or classes) on the basis of their regulated activities. The specific costs and compensation costs levies payable by the participating firms are calculated by reference to their funding class or classes. The main principle behind the calculation of these levies is that the levy should represent the amount of claims made or likely to be made against that type of firm. The Regulated Subsidiaries will fall into the ''Investments'' levy class. It should however be noted, that contributions are not restricted to failures in the sub-classes to which a particular firm belongs as there is the possibility that cross-subsidy between levy classes may be required.
The MLRs require relevant persons to apply risk-based customer due diligence measures and take other steps to prevent their services from being used for money laundering or terrorist financing. They also require relevant persons to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk.
SYSC contains financial crime rules that complement the MLRs, requiring firms to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk. Such controls must be comprehensive and proportionate to the nature, scale and complexity of their activities. In this context, financial crime includes any offence involving fraud or dishonesty, misconduct in, or misuse of information relating to, a financial market, handling the proceeds of crime or the financing of terrorism, as well as bribery and corruption offences.
Failure to maintain the necessary procedures is a criminal offence. The Proceeds of Crime Act 2002, the Terrorism Act 2000 and the Counter-Terrorism Act 2008 and the Criminal Justice Act 1993 also contain a number of offences in relation to money laundering. The Joint Money Laundering Steering Group provides good practice guidance and practical assistance in interpreting the MLRs.
AJ Bell has established appropriate systems and controls under the guidance of AJ Bell's Money Laundering Reporting Officer to help it mitigate the risk of financial crime. This including the appropriate suite of policies, use of anti-money laundering technology and ongoing training for all members of staff.
The ICO is the UK's data protection regulator set up as an independent body to uphold information rights. It is responsible for upholding information rights in the public interest, promoting openness by public bodies and data privacy for individuals. It has powers to enforce compliance with Data Protection Legislation which include criminal prosecution, non-criminal enforcement, audit and issuing monetary penalty notices. The ICO is involved in data protection policy making decisions and produces guidance and codes of practice.
AJ Bell collects and processes personal data and sensitive personal data (including names, addresses, contact details, financial information, health information and criminal records) information from its customers and employees as part of the operation of its business.
AJ Bell must therefore comply with all Data Protection Legislation including the recently implemented GDPR and the UK's Data Protection Act 2018.
GDPR imposes certain requirements on AJ Bell in respect of the collection, retention, use, processing and security of personal information. Failure to operate effective data use and information security controls could potentially lead to regulatory enforced compliance measures, fines, reputational and financial losses in responding to or defending its actions.
GDPR also provides data subjects far greater rights and control in respect of their personal data. Failure to be fully transparent at the point of collection about the purpose for and use of personal data or otherwise meet obligations relating to data subject rights could result in compensation payments to data subjects whose rights have been infringed.
GDPR allows representative bodies to bring claims on behalf of data subjects. This could result in a 'group action' being pursued by a third party on behalf of data subjects. A group action could potentially lead to reputational damage and increased financial defence costs and losses depending on the number of data subjects forming the group. The potential sanctions for the most egregious breaches of GDPR include financial penalties of up to 4% of the annual worldwide turnover of company groups.
The GDPR has increased the regulatory burden on AJ Bell in processing personal customer, employee and other data in the conduct of its business.
AJ Bell established a GDPR project to ensure that the new requirements were met by 25 May 2018, the date on which GDPR came into force. AJ Bell monitors ongoing compliance through its established regulatory systems and controls.
If AJ Bell or any of the third party service providers on which it relies (including non-subsidiary affiliates of AJ Bell) fails to comply with Data Protection Legislation, due to any failure to store or transmit information in a secure manner or any loss or wrongful processing of personal customer data, AJ Bell could be subject to investigative and enforcement action by the ICO and complaints or claims from data subjects.
Pension saving under registered pension schemes is subject to favourable tax treatment, which acts as an incentive for employees and individuals to save for retirement and thus be less reliant on the state pension system. However, the extent to which pension savings attract tax relief is subject to certain limits imposed by HMRC. In order to enjoy the tax advantages available to pension schemes in the UK the SIPPs and SSASs administered by AJ Bell are registered with HMRC.
As registered pension schemes, the SIPPs and SSASs are obliged to provide information to HMRC including the provision of a pension scheme return (to be provided on request), accounting for tax returns, event reports and reporting pension flexibility payments.
If payments are made from the schemes that are not authorised payments under the Finance Act 2004, HMRC will impose unauthorised payment charges, and scheme sanction charges in respect of the payments.
Tax considerations are relevant to a UK registered pension scheme when:
The current pensions tax relief system can broadly be described as 'Exempt-Exempt-Taxed' on the following basis:
The AJ Bell Platinum SSASs are occupational pension schemes for legislative purposes. As a result they are regulated by the Pensions Regulator.
The Pensions Regulator is the public body that protects workplace pensions in the UK. The post of the Pensions Regulator was created on 6 April 2005 by Pensions Act 2004. The principal objectives of the Pensions Regulator are set out in the Pensions Act 2004. These include:
The SSAS are registered with the Pensions Regulator in accordance with the Pensions Act 2004. As such the scheme administrator for each scheme is required to provide and update registrable information in respect of each scheme as well as providing a scheme return to the Pensions Regulator whenever the Pensions Regulator issues a scheme return notice. There are also whistleblowing obligations that apply in respect of the trustees and scheme administrators of SSASs.
The Pensions Regulator has issued a code of practice in respect of the governance and administration of occupational trust-based schemes providing money purchase benefits. This code applies to a limited extent to the SSASs although SSASs will generally be exempt from parts of the code (for example in respect of default arrangements and charge caps and the preparation of an annual chair's statement).
The Pensions Regulator has various enforcement powers in respect of defined contribution workplace schemes such as the SSASs, these include the ability to appoint and remove trustees of schemes and to issue fines for non-compliance with legislation under section 10 of the Pensions Act 1995.
An ISA is a scheme of investment managed in accordance with ISA regulations under terms agreed between the ISA manager and the investor. The ISA manager holds investments and claims repayment of income tax deducted at source, by submitting claims to HMRC. There are various types of ISAs permitted by UK law being:
Investors do not pay any tax on any of the income they receive from ISA savings and investments. Nor do they pay any tax on capital gains arising on ISA investments. In order to protect the integrity of the UK taxation system there are limits placed around who can hold an ISA, how many ISAs an individual can open in a tax year and the amount that can be paid into an individual's ISAs in a tax year. An ISA manager must also collect prescribed information and receive prescribed declarations from individuals applying for an ISA.
In order to be able to offer ISAs and LISAs to investors AJBSL has registered with, and been approved by, HMRC as an ISA manager and a LISA manager. As a registered ISA manager AJBSL is obliged to provide information to HMRC and make claims from HMRC including updating HMRC with any changes to the information provided in its application for registrations as an ISA manager, the making of an annual return and tax claim, the making of an annual return of information, and an annual market value return of statistical information (market value and subscriptions).
AJ Bell, including the Regulated Subsidiaries, is subject to EU law, both directly through European regulations and indirectly through European directives, to which the UK is currently obliged to give effect through its legislative powers. Recent EU regulation of most significance that applies to AJ Bell is set out below.
MiFID II applies to firms in the EEA who engage in certain investment activities, including dealing and execution services, investment advice and portfolio management. Building on MiFID, it aims to harmonise the regulatory framework across the EEA to make financial markets more efficient and resilient, increase transparency of both equity and non-equity markets, reinforce supervisory powers, and provide protection for investors.
MiFID II sets out detailed provisions on systems and controls, outsourcing, customer classification, conflicts of interest, best execution, client order handling, suitability and appropriateness, transparency and transaction reporting. Requirements relating to transaction reporting, costs and charges disclosure, product governance and conduct of business requirements all affect AJ Bell's operations.
MiFID II also allows investment firms authorised in accordance with its provisions to passport their services into other EEA states without needing to obtain separate authorisations locally.
The PRIIPs Regulation aims to encourage efficient EU markets by helping investors to better understand and compare the key features, risk, rewards and costs of different PRIIPs, by obliging PRIIPs manufacturers and distributors to provide access to a short and consumer-friendly Key Information Document.
PRIIPs can take a variety of legal forms but can be distinguished by the comparable functions they perform for retail investors. PRIIPS can be broadly categorised into four main groups: (i) investment funds, (ii) insurance-based investment products, (iii) retail structured securities, and (iv) structured term deposits. The PRIIPS Regulation has applied (subject to limited transitional provisions) to products such as units in an investment fund (except UCITS Schemes), life insurance policies with an investment element and structured deposits since 1 January 2018. It is set to apply to UCITS schemes with effect from 31 December 2019.
CRD IV, comprising the Capital Requirements Directive IV and the Capital Requirements Regulation, is an EU legislative framework for the prudential supervision of banks, building societies and investment firms. Certain MiFID investment firms, including those with permissions relating to the safeguarding of client assets or handling of client money, are subject to the provisions of CRD IV as regards prudential and capital standards. AJBAML and AJBSL are subject to these rules. There are changes being proposed to the capital requirements regime under Capital Requirements Directive V and Capital Requirements Regulation II but these are not anticipated prior to 2019. Therefore whether these changes will have any impact on the Regulated Subsidiaries is unclear because the possibility of these changes taking effect prior to the UK's planned departure from the EU is remote.
The UCITS regime provides a set of common standards applicable across all EU member states for the operation of and cross border promotion of UCITS Schemes.
The UCITS regime aims to create a single market for open-ended retail investment funds which affords enhanced protection for investors.
It requires EU member states to adopt harmonised rules regulating the authorisation, supervision, structure and activities of UCITS funds together with harmonised rules about investor information and passporting requirements. VT AJ Bell ICVC is a UCITS scheme and therefore must be operated in accordance with the UCITS Directive.
In addition to the FCA's prudential standards and capital adequacy requirements, AJBAML and AJBSL must comply with the wider prudential framework of CRD IV which mainly applies to banks.
The EBA contributes to a European Single Rulebook in banking by providing Binding Technical Standards (''BTS'') and Guidance. The Rulebook aims to provide a single set of harmonised prudential rules for financial institutions throughout the EU in order to create a level playing field and a high level of protection for customers.
The BTS are legal acts which specify particular aspects of an EU legislative text (directive or regulation) and aim at ensuring consistent harmonisation in specific areas. The BTS are legally binding and directly applicable in all Member States including in the UK and therefore AJBAML and AJBSL must comply with these to the extent they apply to their activities.
The EBA and European Securities and Market Authority are working on the review of the application of the prudential rules to investment firms, with the aim of establishing an appropriate prudential framework for investment firms.
FCA-regulated firms have recently been subject to substantial regulatory change. There is further regulatory change on the horizon, with the main changes likely to impact AJ Bell summarised below.
The FCA announced in 2017 that it would be undertaking the Investment Platform Market Study on investment platforms. The market study explores how investment platforms compete to win new, and retain existing, consumers, to allow the FCA to assess how to improve competition within the platform market and develop better consumer outcomes.
In particular, the FCA has looked to assess:
The FCA published its interim report the Investment Platform Market Study in July 2018, which noted that the investment platform market was working well in many respects. There are areas that the FCA identified where it was concerned that competition in the market was not working well and it is consulting on remedies for these areas. The FCA's consultation on remedies for the market focuses on the following main areas:
The FCA expects to publish its final report and recommendations in the first quarter of 2019, following the end of the consultation on its interim report proposals on 21 September 2018.
The Fifth Money Laundering Directive (''MLD5'') contains amendments to the existing money laundering directive as well as the Capital Requirements Directive. MLD5 will, amongst other things:
The majority of changes will be effected by 10 January 2020.
The FCA is consulting on draft guidance outlining the factors which financial services companies should consider when drafting and reviewing variation terms in consumer contracts, the first it has issued following the introduction of the Consumer Rights Act 2015 and several rulings on the topic by the Court of Justice of the EU. The draft guidance outlines factors for financial institutions to consider when seeking to draft variation terms, and also considers a number of reasons for contract variation that the FCA has observed firms commonly include when drafting variation terms allowing them to alter their consumer contracts. AJ Bell will take any finalised guidance into account in updating or changing customer terms.
In February 2018, the FCA published a discussion paper looking at effective competition in non-workplace pensions: DP18/1. The paper was launched in order for the FCA to better understand the market for non-workplace pensions: the providers, the consumers and the relationship between them, with a view to assessing the potential presence, nature and extent of harm. The FCA outlined its areas of potential concerns about how the market is working and the reasons for its concerns. It noted that in some aspects it sees parallels with the findings of the OFT study on the defined contribution workplace pensions market in 2013 which concluded that competition alone could not be relied on to drive value for money and good outcomes for consumers of DC workplace pensions. That study led to increased regulation of the workplace pensions market, including the introduction of caps on certain charges.
The period for submission of information has now closed. At this stage, it is difficult to assess whether the FCA focus on non-workplace pensions will have any material impact on the non-workplace pension market in the UK or lead to any material changes in the interaction between non-workplace pension providers and other participants in the UK wealth management sector, such as asset managers and financial advisers.
In June 2018, the FCA published a consultation paper regarding improving retirement outcomes for consumers: CP18/17. In the consultation paper the FCA proposes a remedy package to address the potential consumer harm and emerging issues it has identified arising from the pension freedoms introduced in 2015. The FCA's remedy package aims to: protect consumers from poor outcomes; improve consumer engagement with retirement income decisions; and promote competition by making the costs of drawdown clearer and comparisons easier.
The potential changes suggested by the FCA include:
Whilst it is not certain which of the proposed changes will be brought in to force and in what form, AJ Bell is actively engaging with the FCA in relation to its proposals. Whilst the proposed changes could lead to an increased administrative burden on AJ Bell, the directors believe that AJ Bell is in a good position to respond to any changes required and that any changes should not have a material adverse impact on its business.
Although the finalised text of the GDPR was published over two years ago, there is general uncertainty about how the GDPR and the Data Protection Act 2018 are going to be interpreted and enforced, with guidance related to many areas of the GDPR only having recently been published by UK and EU regulators. Therefore, AJ Bell must, in practice, ensure its compliance with the GDPR is constantly evolving. AJ Bell will ensure it continuously reviews its decisions and ensure that the latest guidance from the ICO, or indeed the European Data Protection Board, is taken into account in its decisions in relation to processing of personal data and reassess the risks in this context.
The E-Privacy Regulation was due to be implemented on 25 May 2018 at the same time as GDPR. It is anticipated that this will now be implemented in 2020. The E-Privacy Regulation will seek to harmonise protection of electronic communications across the EU Member States, broaden the electronic communications that are captured, implement a higher level of protection and simplify the rules in relation to cookies. The enforcement of the Regulation will be the responsibility of the ICO.
The ICO has indicated that it is unlikely that the UK will receive an adequacy decision on the UK's exit from the EU, pursuant to which the EU confirms that privacy legislation in a non-EU state is sufficiently stringent so as to permit transfer of data from inside the EU to that state. In the absence of an adequacy decision, the UK has implemented the Data Protection Act 2018 which incorporates the GDPR directly into UK legislation and ensures consistency with the EU in respect of requirements for processing of personal data. It is currently envisaged that a treaty will be implemented between the UK and the EU in order to ensure data transfers can still occur without the additional burden of entering into the EU Standard Contractual Clauses which have been developed by the European Commission to provide adequate terms to safeguard protection of personal data when an international transfer takes place without an adequacy decision or a treaty in place.
The following is a review of AJ Bell's operating performance and financial position.
The consolidated financial information referred to in this Part 5 has been prepared in accordance with (i) IFRS as adopted by the EU; (ii) the requirements of the Prospectus Directive; and (iii) the Listing Rules, and, unless otherwise stated, has been extracted without material adjustment from Part 6 (Historical Financial Information) of this Registration Document.
In this discussion and analysis, the financial years ended 30 September 2016, 30 September 2017 and 30 September 2018 are referred to as FY2016, FY2017 and FY2018, respectively.
The financial information referred to in the following discussion and analysis has been rounded to the nearest decimal place and percentage changes have been calculated based upon these rounded numbers and so may not conform exactly to the calculation based upon the underlying unrounded figures.
This Part 5 (Operating and Financial Review) of this Registration Document contains ''forward-looking statements''. Those statements are subject to risks, uncertainties and other factors that could cause AJ Bell's future results of operations or cash flows to differ materially from the results of operations or cash flows expressed or implied in such forward-looking statements. Prospective investors should read the section entitled ''Presentation of Information'' and Part 2 (Risk Factors) of this Registration Document for further information in this respect. In addition, certain industry issues also affect the Group's results of operations and are described in Part 1 (Market Overview) of this Registration Document.
AJ Bell is one of the largest investment platforms in the UK, based on the value of its AUA. The total value of the Group's AUA was £46.1 billion as at 30 September 2018. AJ Bell's flagship propositions are AJ Bell Investcentre, which operates in the advised segment of the platform market and AJ Bell Youinvest which operates in the D2C segment. The Group operates principally as a platform business although it also maintains an element of non-Platform business.
AJ Bell Youinvest and AJ Bell Investcentre combined had £38.6 billion in AUA as at 30 September 2018 with 183,213 customers. These two platform propositions are described briefly below:
AJ Bell Youinvest and AJ Bell Investcentre provide access to a broad investment range including shares and other financial instruments traded on the major stock exchanges around the world, as well as mainstream collective investments available in the UK. AJ Bell also offers a range of in-house investment solutions, including the AJ Bell Passive funds, the AJ Bell Investcentre Managed Portfolio Service and the AJ Bell Youinvest Favourite Funds list and from the end of the last quarter of 2018 Ready-made portfolios.
AJ Bell's non-Platform business, which had £7.5 billion in AUA as at 30 September 2018 with 14,699 customers, comprises:
* AJ Bell Securities stockbroking: providing dealing, settlement and custody services to institutional investment businesses.
AJ Bell was co-founded in 1995 in Manchester by Andy Bell and Nicholas Littlefair to provide actuarial, trustee and pension administration services to customers with a SSAS or SIPP. In 2000, AJ Bell launched Sippdeal, the first online SIPP in the UK for execution only investors. In 2002, AJ Bell launched Sippcentre, as a low cost SIPP for financial advisers and their clients. Since then, AJ Bell has grown its customers and AUA organically, but has also made some small strategic acquisitions to enhance AJ Bell's platform propositions. In December 2007, AJ Bell acquired Lawshare to bring its stockbroking capabilities in-house and facilitate the offering of ISAs and general investment/dealing accounts to its platform customers. In December 2012, AJ Bell acquired MSM Media to expand the range of investment content offered to its platform customers. More recently in February 2016, AJ Bell acquired Indexx Markets and Mansard Capital to facilitate the launch of its in-house range of investment solutions. AJ Bell's heritage is evident in the value of assets held in SIPPs, which was 72% of AJ Bell's overall AUA as at 30 September 2018. SIPPs are long term savings products which provide AJ Bell with a high proportion of recurring revenue.
AJ Bell's principal source of revenue arises from the fees charged for the provision of platform services. AJ Bell's revenue is classified into recurring revenues and transactional revenues as follows:
AJ Bell has a diverse revenue model with recurring income representing 82% of revenue in FY2018, and transactional revenue of 18%. The level of ad valorem charges included within recurring income varies with the size of the customer's portfolio and, as a consequence, more generally with the amount of AUA.
AJ Bell's distribution model is diversified, operating in both the advised and D2C segments of the platform market. Further, the business is not reliant on any key customer or independent financial adviser. The largest single distribution contract as at 30 September 2018 comprised less than 1.5% of total revenue.
AJ Bell's business is highly cash generative and it has a capital light model. Cash generated from operations has averaged over 100% of profit before taxation for the period covered by the historical financial information as AJ Bell benefits from a short working capital cycle and low levels of capital expenditure following the completion of its major re-platforming exercise in 2014.
Growth has been funded from retained earnings and has not required primary equity fundraising or material debt finance.
AJ Bell's strong regulatory capital position is evidenced by a regulatory capital surplus yielding coverage of 440% of its Pillar 1 regulatory capital requirements during the period covered by the historical financial information.
Management considers a variety of financial measures and other metrics when analysing AJ Bell's performance, and the Directors believe that each of these measures provides useful information with respect to AJ Bell's business and operations. With the exception of revenue and profit before tax, these are non-IFRS financial measures and metrics that are not audited. These non-IFRS financial measures and metrics are not meant to be considered in isolation or as a substitute for measures of financial performance reported in accordance with IFRS. Moreover, these non-IFRS financial measures and metrics may be defined or calculated differently by other companies, and as a result AJ Bell's key performance indicators may not be comparable to similar measures and metrics calculated by its peers.
| | As at
billion (as at 31 March 2018) and £20510rseen by the Remuneration Committee. Material decisions in relation to the remuneration of staff whose actions have a material impact on the risk profile of AJ Bell and in relation to individuals in control functions are overseen by the Remuneration Committee.
The approach to Executive Directors' remuneration aims to align their interests with the longterm interests of Shareholders. Furthermore, it aims to promote a high performance culture with appropriate reward for superior performance, without creating incentives that will encourage excessive risk-taking or unsustainable performance.
The Company intends to deliver these outcomes via a remuneration framework which combines annual salary, benefits, pension, an annual bonus plan and share-based awards.
Further details of each Executive Director's remuneration are set out in paragraph 9 of Part 7 (Additional Information) of this Registration Document. The Company will submit its remuneration policy (as it relates to the Executive Directors) to a binding vote of Shareholders at the annual general meeting of the Company held in the first financial year which begins on or which follows any Admission. Accordingly, the Company will outline the detail of its future policy relating to the Executive Directors' remuneration in its annual report and accounts in due course.
The Company will adopt, with effect from the intended date of Admission, a code on dealings in relation to the shares and other securities. The code adopted will apply to the Directors and Senior Managers. The Directors will take all reasonable steps to secure compliance.
The landlord of the Group's head office at 4 Exchange Quay, Salford Quays, Manchester M5 3EE (Property), Exchange Quay Property Services Limited (EQPSL), is a company controlled by a number of members of the senior management team. The shareholders and directors of EQPSL are Andrew James Bell, Bestfield Investments (an unlimited company of which Fergus John Lyons and other family members are the shareholders and directors), Michael Thomas Summersgill, Charles William Galbraith and Roger John Stott. AJ Bell Limited, as tenant, and the Company, as guarantor, entered into the two leases of the Property on 17 August 2016. The leases were entered into on arms' length terms, the parties had separate legal advisers and the Board obtained advice on the lease terms from an independent surveyor. The reason for this structure being adopted was because the Board did not consider the purchase of business premises to be an appropriate use of the Company's capital. Shareholder approval was obtained before the parties entered into the leases. The parties entered into a supplemental lease of additional parts of the Property and a licence for alterations on 24 October 2018.
The Group made donations during FY2016 (£85,279), FY2017 (£109,125) and FY2018 (£139,675) to the AJ Bell Trust, a registered charity of which Andy Bell is a director of the trustee company.
For FY2016, FY2017 and FY2018, AJ Bell had an average of 607, 656, and 758 employees respectively, analysed by operational area as follows:
| FY2016 | FY2017 | FY2018 | |
|---|---|---|---|
| Technology | 74 | 95 | 116 |
| Distribution | 55 | 58 | 64 |
| Operations and Support | 478 | 503 | 578 |
| 607 | 656 | 758 |
As at 31 October 2018 AJ Bell had 776 employees.
AJ Bell has three regulated operating subsidiaries, AJBSL, AJBML and AJBAML.
AJBSL (number 155593), AJBML (number 211468) and AJBAML (number 774048) are authorised and regulated by the FCA. AJBSL is also a member of the London Stock Exchange.
AJ Bell also has two FCA authorised Open Ended Investment Companies: VT AJ BELL ICVC, which is operated as a UCITS Scheme, and VT Allium Portfolio Funds, a Non-UCITS Retail Scheme. Valu-Trac Investment Management Limited has been appointed as the external authorised corporate director and operator of each of the funds by the funds' sponsor, AJBAML.
There are currently three financial services regulators in the UK:
The FPC was established in 2013 as part of the new system of regulation brought in to improve financial stability after the 2008 financial crisis. The FPC sits within the Bank of England and is responsible for the macro prudential regulation of the entire financial services sector. Its role is to identify and monitor risks in the financial system, and to take action to reduce or remove such risks where necessary.
The FCA is the key regulator of the Regulated Subsidiaries, and as such the majority of this Part 4 (Regulation) of this Registration Document focuses on FCA authorisation and regulation. The FCA aims to make financial markets work well for individuals, businesses, and for the economy as a whole. The FCA is responsible for the conduct of business regulation of all authorised firms and the prudential regulation of firms not authorised and regulated by the PRA. It is the conduct regulator for more than 58,000 businesses and the prudential regulator for more than 18,000 of these businesses.
The FCA has powers to allow it to achieve its objectives. These enable it to intervene directly in the market and make product intervention rules with the aim of preventing harm to consumers. The FCA discharges its general functions by rule-making, preparing and issuing codes under FSMA, giving general guidance and determining general policy and principles.
The FCA's strategic objective is to ensure that the relevant markets function well. Its operational objectives are to:
The FCA must act in a way which is compatible with its strategic objective (so far as is reasonably possible) when discharging its general functions.
The FCA is bound by FSMA to regulate certain financial activities in the UK.
Under section 19 of FSMA, it is an offence for any person to carry on ''regulated activities'' in the UK unless they are an authorised person or exempt from the requirement to be authorised. An authorised person may only carry out regulated activities for which they have been given specific permission by the relevant regulator.
The various ''regulated activities'' are set out in the FSMA (Regulated Activities) Order 2001 (as amended). The activities most relevant for the Regulated Subsidiaries are the following:
The FCA may also grant authorised persons permission to hold or control client money. ABSL may hold client money and is required to protect the money it holds and/or controls on behalf of customers. It cannot lend this money or use it to finance its own business. AJBML is permitted to control client money only in respect of the personal pension scheme(s) that it operates and must not hold client money. AJBAML may control but must not hold client money.
As part of the firm authorisation process, the FCA may, at its discretion, determine the scope of, and include such restrictions on, the grant of regulatory permissions as appropriate.
The FCA must ensure that the authorised person/applicant meets certain threshold conditions (see below) whenever it grants or agrees to vary the terms of an authorised person's permissions.
Further, the FCA may impose such ''Requirements'' on an authorised person as it considers appropriate to require that person to take, or refrain from taking, specified action under FSMA.
These requirements apply to all of the financial services activities that the authorised person can operate and may relate to a range of matters, these include amongst others, the scope of the firm's business, the types of customer to whom the firm may provide services, how the firm may treat client money, capital adequacy and/or liquidity requirements.
Authorised firms are required to maintain a specified set of minimum standards set out in FSMA in order to become and remain authorised (the ''threshold conditions''). The threshold conditions cover matters including the location of offices, effective supervision, appropriate resources, the suitability of the authorised person and its business model.
The Regulated Subsidiaries must comply with, among other things, FSMA (and secondary legislation made under it), the FCA Rules and other relevant UK and directly applicable EU legislation.
The FCA Rules are divided into various blocks and sourcebooks containing rules and guidance.
The sections of most relevance for AJ Bell's day-to-day business are the Principles for Business and the COBS and CASS. Other important sections include those governing prudential standards and regulatory capital, senior management arrangements, systems and controls. The FSMA change of control regime for authorised persons is also relevant.
The FCA's principles (the Principles) form part of the FCA's High Level Standards set out in the FCA Rules; they are a general statement of the fundamental obligations of firms under the regulatory system. They derive their authority from the FCA's rulemaking powers as set out in FSMA and reflect the FCA's statutory objectives.
The Principles form the foundation of authorised firms' responsibilities to their clients. They are binding on firms and underpin the FCA Rules. The Principles provide authorised persons with a clear and concise statement of their fundamental obligations under the FSMA regulatory regime and the standards that the FCA expects authorised persons to meet in the day-to-day conduct of their business. They also provide a basis for supervisory activity and enforcement action by the FCA. Breaching a Principle makes a firm liable to disciplinary sanctions from the FCA (as further detailed in the Supervision and Enforcement section below).
The Principles set high standards for firms to comply with but allow firms to determine how they achieve those standards. The measures taken and the resources required by firms to comply with the Principles should depend on the nature and risks of the relevant firm's business. The Principles acknowledge that the measures taken should be proportionate to those risks.
The COBS rules set out a wide range of day-to-day business standards that authorised persons must comply with in various aspects of their relationships with clients.
The application of the COBS rules vary according to the scope of the firm's business and its activities and the types of client it deals with.
The application of the COBS rules will generally include: the need to provide retail clients with information about the firm; the need to categorise clients appropriately; the need to meet certain standards of disclosure about the firm's products and services including the related costs and charges; the firm ensuring that communications with clients are clear, fair and not misleading; the need to assess suitability when advising on certain products; ensuring it has appropriate agreements in place with clients; the need to manage conflicts of interest; and to report appropriately to clients.
The FCA requires firms to arrange adequate protection for clients' assets when such firm is responsible for them. Firms with permission to safeguard and administer custody assets and/or with permission to hold client money must comply with the Custody Rules and the Client Money Rules (respectively) in the CASS Rules. The CASS Rules require firms to clearly identify client assets, to hold client money separately from the firm's own money, to keep accurate records and carry on internal and external reconciliations, to make good any client money shortfalls, and to appoint an individual responsible for CASS compliance.
Authorised firms carrying on regulated activities must, at all times, comply with the prudential standards and capital adequacy requirements imposed by (in the case of the Regulated Subsidiaries) the EU Capital Requirements Directive and the FCA.
The capital adequacy rules applicable to the Regulated Subsidiaries are currently contained in the Prudential Standards Section of the FCA Rules and the CRD IV.
The FCA discharges its prudential supervision role, in part, through the regulatory capital requirements.
The regulatory capital rules require firms, at all times, to maintain a specified level of regulatory capital (based on the prudential risk the firm poses in conducting its particular business activities).
The rules are designed to ensure that firms can meet all liabilities as they fall due and to safeguard their financial stability and that of their clients and counterparties.
The FCA expects firms to be proactive in monitoring and managing financial risks, in accordance with its requirement for firms to maintain adequate financial resources.
The FCA's regulatory capital requirements apply both to individual authorised entities and at a consolidated level across groups of which an authorised firm or firms are members. The FCA may exercise consolidated supervision up to the top EEA parent in a firm's group. AJ Bell is subject to consolidated supervision.
Firms may apply to the FCA for a waiver from consolidated supervision however AJ Bell does not have such a waiver and AJ Bell does not intend to apply for such waiver in the foreseeable future.
There are certain ''controlled functions'' that are undertaken by individuals for (or on behalf of) an authorised firm and who usually have significant influence over the firm's regulatory conduct. As a result the persons who perform these functions must be approved by the FCA as fit and proper. These are known as ''approved persons''. An approved person must abide by the rules and principles set out in the APER. The rules and principles in the APER sourcebook apply to FCA approved persons.
The rules in the APER sourcebook include acting with integrity, acting with due skill, care and diligence, observing proper standards of market conduct and dealing with regulators in an open and co-operative way. If an approved person breaches the rules or principles the FCA may take enforcement action against the individual, including public censure, fines and/or the removal of approved status. A firm may also face enforcement action for breaches by its approved persons.
The SMCR, which currently applies to banks and very large investment firms, is set to be extended to include all authorised firms, including the Regulated Subsidiaries. The FCA has consulted on the rules to implement the SMCR and intends to replace the approved persons regime with the SMCR for almost all financial services firms.
As such a wide range of firms will be within the scope of the new SMCR requirements the FCA is not proposing to mirror the approach it took for banking firms. Instead it intends to apply consistent principles across the sector in a regime that is ''proportionate and flexible enough to accommodate the different business models and governance structures of firms''. The FCA is proposing:
The regime is expected to commence in relation to solo-authorised firms from 9 December 2019. AJBSL will be required to comply with an enhanced firm regime, whereas AJBML and AJBAML will be required to comply with the baseline core requirements.
Under the FSMA change of control regime, a person who is intending to acquire or increase ''control'' over a UK firm authorised and regulated by the FCA is required to seek the FCA's consent before doing so and submit certain specified information and documentation. An FCA-authorised firm must also notify the FCA when there is a transaction which results in that acquisition taking place. A disposal of a controlling interest in an FCA authorised firm must be notified to the FCA before the disposal takes place. Any acquisition of control over the Company or any of the Regulated Subsidiaries individually would be subject to the FCA change of control regime.
A proposed ''controller'' for the purposes of the change in control regime is any natural or legal person (or such persons ''acting in concert'') who decides to acquire, directly or indirectly, or increase control over an FCA-authorised firm. ''Control'' over the Regulated Subsidiaries would be acquired if the acquirer:
The FCA has up to 60 working days from the date of submission of a completed notification to approve or object to any such change in control. If the FCA does serve such a notice, it is required to specify its reasons for its objections in such notice. In the case of persons acting in concert, individual acquisitions will be amalgamated and treated as single holding for the purposes of the regime.
A person who ceases to be a 10% controller is required only to provide written notice to the FCA. In other words, FCA approval is not required for cessation of control.
Breach of the notification and approval regime imposed by FSMA on controllers is a criminal offence.
The FCA's priority in supervising firms is to ensure consumers are at the centre of a firm's business.
The FCA's main approaches to conduct supervision are split into three pillars:
AJ Bell is classified as a Pillar 1 entity.
The FCA allocates all authorised firms into one of two conduct categories either (i) fixed portfolio firms; or (ii) flexible portfolio firms.
Fixed portfolio firms are given a specific supervisor. The FCA proactively supervises such firms using firm-specific continuous assessment.
Flexible portfolio firms are supervised through thematic and market-based work, along with programmes of communication, engagement and education aligned to the key risks the FCA has identified in the relevant sector.
The FCA has recently confirmed that AJ Bell and the Regulated Subsidiaries will no longer be allocated a dedicated supervisory team and instead will be part of the ''Platform Portfolio''.
The FCA has a range of supervisory powers which allow it to intervene in a firm's affairs. The FCA can, for instance, require firms to provide particular information or documents to it, require the production of a report by a ''skilled person'' appointed by the FCA or formally investigate a firm.
In its prudential supervisory role, the FCA considers the systems and controls, governance arrangements, and risk management capabilities including the risk of misconduct. The FCA will seek to assess how well a firm understands the risks it is running, how well placed it is to manage those risks, and how well it can avoid large, unexpected costs.
Firms solely regulated by the FCA are allocated one of four prudential categories depending on the relative perceived risk their failure would pose to markets. AJ Bell is classified as a P2 entity, which applies to firms and groups whose failure would have less impact than P1 firms, but would nevertheless damage markets or consumers and client assets.
The FCA uses a wide range of enforcement powers, criminal, civil and regulatory, to protect consumers and to take action against firms and individuals that do not meet its standards. These include:
* withdrawing a firm's authorisation;
The FOS has compulsory jurisdiction over all FCA-regulated firms including the Regulated Subsidiaries. However, customer complaints relating to the administration of pensions are referred to the Pensions Ombudsman, not FOS, in accordance with the Memorandum of Understanding between FOS and the Pensions Ombudsman.
All FCA-regulated firms must have a procedure in place for resolving disputes with their customers and must respond to customer complaints within set deadlines. If a firm's complaints procedure fails to resolve a complaint, the FOS and Pensions Ombudsman provides a dispute resolution procedure for certain categories of customer complaints brought against applicable firms by individuals and small business customers.
The FOS and Pensions Ombudsman provide a more informal alternative to customers bringing complaints in the courts. They provide independent investigators who review and seek to resolve complaints between customers and firms.
If the FOS resolves a complaint in favour of a customer, it has the power to order a firm to pay fair compensation for any loss or damage it caused to the customer, or to direct a firm to take such steps in relation to the customer as the FOS considers just and appropriate, and irrespective of whether a similar award could be made by a court. Authorised firms fund the FOS through levies and case fees.
The FSCS was established under FSMA, it is a statutory compensation scheme of last resort for certain categories of customers of authorised firms. It provides compensation to eligible customers who suffer losses as a consequence of an authorised firm's inability to meet its liabilities arising from claims made in connection with its regulated activities. The FSCS is funded by levies on authorised firms and is independent of the FCA, the PRA and the UK government, although it is ultimately accountable to them.
The powers of the FSCS to raise funds from authorised firms are set out in the FEES sourcebook of the FCA Rules. In general terms, fees are levied on participant firms and the FSCS may impose three types of levy the 'management expenses levy' (comprising the 'bases costs levy' and the 'specific costs levy'), the 'compensation costs levy' (relating to compensation costs), and the 'MERS levy' which relates to management expenses in respect of 'relevant schemes'.
Participant firms are allocated to a funding class (or classes) on the basis of their regulated activities. The specific costs and compensation costs levies payable by the participating firms are calculated by reference to their funding class or classes. The main principle behind the calculation of these levies is that the levy should represent the amount of claims made or likely to be made against that type of firm. The Regulated Subsidiaries will fall into the ''Investments'' levy class. It should however be noted, that contributions are not restricted to failures in the sub-classes to which a particular firm belongs as there is the possibility that cross-subsidy between levy classes may be required.
The MLRs require relevant persons to apply risk-based customer due diligence measures and take other steps to prevent their services from being used for money laundering or terrorist financing. They also require relevant persons to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk.
SYSC contains financial crime rules that complement the MLRs, requiring firms to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk. Such controls must be comprehensive and proportionate to the nature, scale and complexity of their activities. In this context, financial crime includes any offence involving fraud or dishonesty, misconduct in, or misuse of information relating to, a financial market, handling the proceeds of crime or the financing of terrorism, as well as bribery and corruption offences.
Failure to maintain the necessary procedures is a criminal offence. The Proceeds of Crime Act 2002, the Terrorism Act 2000 and the Counter-Terrorism Act 2008 and the Criminal Justice Act 1993 also contain a number of offences in relation to money laundering. The Joint Money Laundering Steering Group provides good practice guidance and practical assistance in interpreting the MLRs.
AJ Bell has established appropriate systems and controls under the guidance of AJ Bell's Money Laundering Reporting Officer to help it mitigate the risk of financial crime. This including the appropriate suite of policies, use of anti-money laundering technology and ongoing training for all members of staff.
The ICO is the UK's data protection regulator set up as an independent body to uphold information rights. It is responsible for upholding information rights in the public interest, promoting openness by public bodies and data privacy for individuals. It has powers to enforce compliance with Data Protection Legislation which include criminal prosecution, non-criminal enforcement, audit and issuing monetary penalty notices. The ICO is involved in data protection policy making decisions and produces guidance and codes of practice.
AJ Bell collects and processes personal data and sensitive personal data (including names, addresses, contact details, financial information, health information and criminal records) information from its customers and employees as part of the operation of its business.
AJ Bell must therefore comply with all Data Protection Legislation including the recently implemented GDPR and the UK's Data Protection Act 2018.
GDPR imposes certain requirements on AJ Bell in respect of the collection, retention, use, processing and security of personal information. Failure to operate effective data use and information security controls could potentially lead to regulatory enforced compliance measures, fines, reputational and financial losses in responding to or defending its actions.
GDPR also provides data subjects far greater rights and control in respect of their personal data. Failure to be fully transparent at the point of collection about the purpose for and use of personal data or otherwise meet obligations relating to data subject rights could result in compensation payments to data subjects whose rights have been infringed.
GDPR allows representative bodies to bring claims on behalf of data subjects. This could result in a 'group action' being pursued by a third party on behalf of data subjects. A group action could potentially lead to reputational damage and increased financial defence costs and losses depending on the number of data subjects forming the group. The potential sanctions for the most egregious breaches of GDPR include financial penalties of up to 4% of the annual worldwide turnover of company groups.
The GDPR has increased the regulatory burden on AJ Bell in processing personal customer, employee and other data in the conduct of its business.
AJ Bell established a GDPR project to ensure that the new requirements were met by 25 May 2018, the date on which GDPR came into force. AJ Bell monitors ongoing compliance through its established regulatory systems and controls.
If AJ Bell or any of the third party service providers on which it relies (including non-subsidiary affiliates of AJ Bell) fails to comply with Data Protection Legislation, due to any failure to store or transmit information in a secure manner or any loss or wrongful processing of personal customer data, AJ Bell could be subject to investigative and enforcement action by the ICO and complaints or claims from data subjects.
Pension saving under registered pension schemes is subject to favourable tax treatment, which acts as an incentive for employees and individuals to save for retirement and thus be less reliant on the state pension system. However, the extent to which pension savings attract tax relief is subject to certain limits imposed by HMRC. In order to enjoy the tax advantages available to pension schemes in the UK the SIPPs and SSASs administered by AJ Bell are registered with HMRC.
As registered pension schemes, the SIPPs and SSASs are obliged to provide information to HMRC including the provision of a pension scheme return (to be provided on request), accounting for tax returns, event reports and reporting pension flexibility payments.
If payments are made from the schemes that are not authorised payments under the Finance Act 2004, HMRC will impose unauthorised payment charges, and scheme sanction charges in respect of the payments.
Tax considerations are relevant to a UK registered pension scheme when:
The current pensions tax relief system can broadly be described as 'Exempt-Exempt-Taxed' on the following basis:
The AJ Bell Platinum SSASs are occupational pension schemes for legislative purposes. As a result they are regulated by the Pensions Regulator.
The Pensions Regulator is the public body that protects workplace pensions in the UK. The post of the Pensions Regulator was created on 6 April 2005 by Pensions Act 2004. The principal objectives of the Pensions Regulator are set out in the Pensions Act 2004. These include:
The SSAS are registered with the Pensions Regulator in accordance with the Pensions Act 2004. As such the scheme administrator for each scheme is required to provide and update registrable information in respect of each scheme as well as providing a scheme return to the Pensions Regulator whenever the Pensions Regulator issues a scheme return notice. There are also whistleblowing obligations that apply in respect of the trustees and scheme administrators of SSASs.
The Pensions Regulator has issued a code of practice in respect of the governance and administration of occupational trust-based schemes providing money purchase benefits. This code applies to a limited extent to the SSASs although SSASs will generally be exempt from parts of the code (for example in respect of default arrangements and charge caps and the preparation of an annual chair's statement).
The Pensions Regulator has various enforcement powers in respect of defined contribution workplace schemes such as the SSASs, these include the ability to appoint and remove trustees of schemes and to issue fines for non-compliance with legislation under section 10 of the Pensions Act 1995.
An ISA is a scheme of investment managed in accordance with ISA regulations under terms agreed between the ISA manager and the investor. The ISA manager holds investments and claims repayment of income tax deducted at source, by submitting claims to HMRC. There are various types of ISAs permitted by UK law being:
Investors do not pay any tax on any of the income they receive from ISA savings and investments. Nor do they pay any tax on capital gains arising on ISA investments. In order to protect the integrity of the UK taxation system there are limits placed around who can hold an ISA, how many ISAs an individual can open in a tax year and the amount that can be paid into an individual's ISAs in a tax year. An ISA manager must also collect prescribed information and receive prescribed declarations from individuals applying for an ISA.
In order to be able to offer ISAs and LISAs to investors AJBSL has registered with, and been approved by, HMRC as an ISA manager and a LISA manager. As a registered ISA manager AJBSL is obliged to provide information to HMRC and make claims from HMRC including updating HMRC with any changes to the information provided in its application for registrations as an ISA manager, the making of an annual return and tax claim, the making of an annual return of information, and an annual market value return of statistical information (market value and subscriptions).
AJ Bell, including the Regulated Subsidiaries, is subject to EU law, both directly through European regulations and indirectly through European directives, to which the UK is currently obliged to give effect through its legislative powers. Recent EU regulation of most significance that applies to AJ Bell is set out below.
MiFID II applies to firms in the EEA who engage in certain investment activities, including dealing and execution services, investment advice and portfolio management. Building on MiFID, it aims to harmonise the regulatory framework across the EEA to make financial markets more efficient and resilient, increase transparency of both equity and non-equity markets, reinforce supervisory powers, and provide protection for investors.
MiFID II sets out detailed provisions on systems and controls, outsourcing, customer classification, conflicts of interest, best execution, client order handling, suitability and appropriateness, transparency and transaction reporting. Requirements relating to transaction reporting, costs and charges disclosure, product governance and conduct of business requirements all affect AJ Bell's operations.
MiFID II also allows investment firms authorised in accordance with its provisions to passport their services into other EEA states without needing to obtain separate authorisations locally.
The PRIIPs Regulation aims to encourage efficient EU markets by helping investors to better understand and compare the key features, risk, rewards and costs of different PRIIPs, by obliging PRIIPs manufacturers and distributors to provide access to a short and consumer-friendly Key Information Document.
PRIIPs can take a variety of legal forms but can be distinguished by the comparable functions they perform for retail investors. PRIIPS can be broadly categorised into four main groups: (i) investment funds, (ii) insurance-based investment products, (iii) retail structured securities, and (iv) structured term deposits. The PRIIPS Regulation has applied (subject to limited transitional provisions) to products such as units in an investment fund (except UCITS Schemes), life insurance policies with an investment element and structured deposits since 1 January 2018. It is set to apply to UCITS schemes with effect from 31 December 2019.
CRD IV, comprising the Capital Requirements Directive IV and the Capital Requirements Regulation, is an EU legislative framework for the prudential supervision of banks, building societies and investment firms. Certain MiFID investment firms, including those with permissions relating to the safeguarding of client assets or handling of client money, are subject to the provisions of CRD IV as regards prudential and capital standards. AJBAML and AJBSL are subject to these rules. There are changes being proposed to the capital requirements regime under Capital Requirements Directive V and Capital Requirements Regulation II but these are not anticipated prior to 2019. Therefore whether these changes will have any impact on the Regulated Subsidiaries is unclear because the possibility of these changes taking effect prior to the UK's planned departure from the EU is remote.
The UCITS regime provides a set of common standards applicable across all EU member states for the operation of and cross border promotion of UCITS Schemes.
The UCITS regime aims to create a single market for open-ended retail investment funds which affords enhanced protection for investors.
It requires EU member states to adopt harmonised rules regulating the authorisation, supervision, structure and activities of UCITS funds together with harmonised rules about investor information and passporting requirements. VT AJ Bell ICVC is a UCITS scheme and therefore must be operated in accordance with the UCITS Directive.
In addition to the FCA's prudential standards and capital adequacy requirements, AJBAML and AJBSL must comply with the wider prudential framework of CRD IV which mainly applies to banks.
The EBA contributes to a European Single Rulebook in banking by providing Binding Technical Standards (''BTS'') and Guidance. The Rulebook aims to provide a single set of harmonised prudential rules for financial institutions throughout the EU in order to create a level playing field and a high level of protection for customers.
The BTS are legal acts which specify particular aspects of an EU legislative text (directive or regulation) and aim at ensuring consistent harmonisation in specific areas. The BTS are legally binding and directly applicable in all Member States including in the UK and therefore AJBAML and AJBSL must comply with these to the extent they apply to their activities.
The EBA and European Securities and Market Authority are working on the review of the application of the prudential rules to investment firms, with the aim of establishing an appropriate prudential framework for investment firms.
FCA-regulated firms have recently been subject to substantial regulatory change. There is further regulatory change on the horizon, with the main changes likely to impact AJ Bell summarised below.
The FCA announced in 2017 that it would be undertaking the Investment Platform Market Study on investment platforms. The market study explores how investment platforms compete to win new, and retain existing, consumers, to allow the FCA to assess how to improve competition within the platform market and develop better consumer outcomes.
In particular, the FCA has looked to assess:
The FCA published its interim report the Investment Platform Market Study in July 2018, which noted that the investment platform market was working well in many respects. There are areas that the FCA identified where it was concerned that competition in the market was not working well and it is consulting on remedies for these areas. The FCA's consultation on remedies for the market focuses on the following main areas:
The FCA expects to publish its final report and recommendations in the first quarter of 2019, following the end of the consultation on its interim report proposals on 21 September 2018.
The Fifth Money Laundering Directive (''MLD5'') contains amendments to the existing money laundering directive as well as the Capital Requirements Directive. MLD5 will, amongst other things:
The majority of changes will be effected by 10 January 2020.
The FCA is consulting on draft guidance outlining the factors which financial services companies should consider when drafting and reviewing variation terms in consumer contracts, the first it has issued following the introduction of the Consumer Rights Act 2015 and several rulings on the topic by the Court of Justice of the EU. The draft guidance outlines factors for financial institutions to consider when seeking to draft variation terms, and also considers a number of reasons for contract variation that the FCA has observed firms commonly include when drafting variation terms allowing them to alter their consumer contracts. AJ Bell will take any finalised guidance into account in updating or changing customer terms.
In February 2018, the FCA published a discussion paper looking at effective competition in non-workplace pensions: DP18/1. The paper was launched in order for the FCA to better understand the market for non-workplace pensions: the providers, the consumers and the relationship between them, with a view to assessing the potential presence, nature and extent of harm. The FCA outlined its areas of potential concerns about how the market is working and the reasons for its concerns. It noted that in some aspects it sees parallels with the findings of the OFT study on the defined contribution workplace pensions market in 2013 which concluded that competition alone could not be relied on to drive value for money and good outcomes for consumers of DC workplace pensions. That study led to increased regulation of the workplace pensions market, including the introduction of caps on certain charges.
The period for submission of information has now closed. At this stage, it is difficult to assess whether the FCA focus on non-workplace pensions will have any material impact on the non-workplace pension market in the UK or lead to any material changes in the interaction between non-workplace pension providers and other participants in the UK wealth management sector, such as asset managers and financial advisers.
In June 2018, the FCA published a consultation paper regarding improving retirement outcomes for consumers: CP18/17. In the consultation paper the FCA proposes a remedy package to address the potential consumer harm and emerging issues it has identified arising from the pension freedoms introduced in 2015. The FCA's remedy package aims to: protect consumers from poor outcomes; improve consumer engagement with retirement income decisions; and promote competition by making the costs of drawdown clearer and comparisons easier.
The potential changes suggested by the FCA include:
Whilst it is not certain which of the proposed changes will be brought in to force and in what form, AJ Bell is actively engaging with the FCA in relation to its proposals. Whilst the proposed changes could lead to an increased administrative burden on AJ Bell, the directors believe that AJ Bell is in a good position to respond to any changes required and that any changes should not have a material adverse impact on its business.
Although the finalised text of the GDPR was published over two years ago, there is general uncertainty about how the GDPR and the Data Protection Act 2018 are going to be interpreted and enforced, with guidance related to many areas of the GDPR only having recently been published by UK and EU regulators. Therefore, AJ Bell must, in practice, ensure its compliance with the GDPR is constantly evolving. AJ Bell will ensure it continuously reviews its decisions and ensure that the latest guidance from the ICO, or indeed the European Data Protection Board, is taken into account in its decisions in relation to processing of personal data and reassess the risks in this context.
The E-Privacy Regulation was due to be implemented on 25 May 2018 at the same time as GDPR. It is anticipated that this will now be implemented in 2020. The E-Privacy Regulation will seek to harmonise protection of electronic communications across the EU Member States, broaden the electronic communications that are captured, implement a higher level of protection and simplify the rules in relation to cookies. The enforcement of the Regulation will be the responsibility of the ICO.
The ICO has indicated that it is unlikely that the UK will receive an adequacy decision on the UK's exit from the EU, pursuant to which the EU confirms that privacy legislation in a non-EU state is sufficiently stringent so as to permit transfer of data from inside the EU to that state. In the absence of an adequacy decision, the UK has implemented the Data Protection Act 2018 which incorporates the GDPR directly into UK legislation and ensures consistency with the EU in respect of requirements for processing of personal data. It is currently envisaged that a treaty will be implemented between the UK and the EU in order to ensure data transfers can still occur without the additional burden of entering into the EU Standard Contractual Clauses which have been developed by the European Commission to provide adequate terms to safeguard protection of personal data when an international transfer takes place without an adequacy decision or a treaty in place.
The following is a review of AJ Bell's operating performance and financial position.
The consolidated financial information referred to in this Part 5 has been prepared in accordance with (i) IFRS as adopted by the EU; (ii) the requirements of the Prospectus Directive; and (iii) the Listing Rules, and, unless otherwise stated, has been extracted without material adjustment from Part 6 (Historical Financial Information) of this Registration Document.
In this discussion and analysis, the financial years ended 30 September 2016, 30 September 2017 and 30 September 2018 are referred to as FY2016, FY2017 and FY2018, respectively.
The financial information referred to in the following discussion and analysis has been rounded to the nearest decimal place and percentage changes have been calculated based upon these rounded numbers and so may not conform exactly to the calculation based upon the underlying unrounded figures.
This Part 5 (Operating and Financial Review) of this Registration Document contains ''forward-looking statements''. Those statements are subject to risks, uncertainties and other factors that could cause AJ Bell's future results of operations or cash flows to differ materially from the results of operations or cash flows expressed or implied in such forward-looking statements. Prospective investors should read the section entitled ''Presentation of Information'' and Part 2 (Risk Factors) of this Registration Document for further information in this respect. In addition, certain industry issues also affect the Group's results of operations and are described in Part 1 (Market Overview) of this Registration Document.
AJ Bell is one of the largest investment platforms in the UK, based on the value of its AUA. The total value of the Group's AUA was £46.1 billion as at 30 September 2018. AJ Bell's flagship propositions are AJ Bell Investcentre, which operates in the advised segment of the platform market and AJ Bell Youinvest which operates in the D2C segment. The Group operates principally as a platform business although it also maintains an element of non-Platform business.
AJ Bell Youinvest and AJ Bell Investcentre combined had £38.6 billion in AUA as at 30 September 2018 with 183,213 customers. These two platform propositions are described briefly below:
AJ Bell Youinvest and AJ Bell Investcentre provide access to a broad investment range including shares and other financial instruments traded on the major stock exchanges around the world, as well as mainstream collective investments available in the UK. AJ Bell also offers a range of in-house investment solutions, including the AJ Bell Passive funds, the AJ Bell Investcentre Managed Portfolio Service and the AJ Bell Youinvest Favourite Funds list and from the end of the last quarter of 2018 Ready-made portfolios.
AJ Bell's non-Platform business, which had £7.5 billion in AUA as at 30 September 2018 with 14,699 customers, comprises:
* AJ Bell Securities stockbroking: providing dealing, settlement and custody services to institutional investment businesses.
AJ Bell was co-founded in 1995 in Manchester by Andy Bell and Nicholas Littlefair to provide actuarial, trustee and pension administration services to customers with a SSAS or SIPP. In 2000, AJ Bell launched Sippdeal, the first online SIPP in the UK for execution only investors. In 2002, AJ Bell launched Sippcentre, as a low cost SIPP for financial advisers and their clients. Since then, AJ Bell has grown its customers and AUA organically, but has also made some small strategic acquisitions to enhance AJ Bell's platform propositions. In December 2007, AJ Bell acquired Lawshare to bring its stockbroking capabilities in-house and facilitate the offering of ISAs and general investment/dealing accounts to its platform customers. In December 2012, AJ Bell acquired MSM Media to expand the range of investment content offered to its platform customers. More recently in February 2016, AJ Bell acquired Indexx Markets and Mansard Capital to facilitate the launch of its in-house range of investment solutions. AJ Bell's heritage is evident in the value of assets held in SIPPs, which was 72% of AJ Bell's overall AUA as at 30 September 2018. SIPPs are long term savings products which provide AJ Bell with a high proportion of recurring revenue.
AJ Bell's principal source of revenue arises from the fees charged for the provision of platform services. AJ Bell's revenue is classified into recurring revenues and transactional revenues as follows:
AJ Bell has a diverse revenue model with recurring income representing 82% of revenue in FY2018, and transactional revenue of 18%. The level of ad valorem charges included within recurring income varies with the size of the customer's portfolio and, as a consequence, more generally with the amount of AUA.
AJ Bell's distribution model is diversified, operating in both the advised and D2C segments of the platform market. Further, the business is not reliant on any key customer or independent financial adviser. The largest single distribution contract as at 30 September 2018 comprised less than 1.5% of total revenue.
AJ Bell's business is highly cash generative and it has a capital light model. Cash generated from operations has averaged over 100% of profit before taxation for the period covered by the historical financial information as AJ Bell benefits from a short working capital cycle and low levels of capital expenditure following the completion of its major re-platforming exercise in 2014.
Growth has been funded from retained earnings and has not required primary equity fundraising or material debt finance.
AJ Bell's strong regulatory capital position is evidenced by a regulatory capital surplus yielding coverage of 440% of its Pillar 1 regulatory capital requirements during the period covered by the historical financial information.
Management considers a variety of financial measures and other metrics when analysing AJ Bell's performance, and the Directors believe that each of these measures provides useful information with respect to AJ Bell's business and operations. With the exception of revenue and profit before tax, these are non-IFRS financial measures and metrics that are not audited. These non-IFRS financial measures and metrics are not meant to be considered in isolation or as a substitute for measures of financial performance reported in accordance with IFRS. Moreover, these non-IFRS financial measures and metrics may be defined or calculated differently by other companies, and as a result AJ Bell's key performance indicators may not be comparable to similar measures and metrics calculated by its peers.
| | As at
billion (as at 30 September 2017) respectively. As discussed above, there are a number of factors driving growth within both market segments, and by operating in both market segments AJ Bell can maximise these growth opportunities.
AJ Bell's Platform delivers a quality service at a competitive price, servicing both advisers and retail customers. AJ Bell has won a total of 30 industry awards in 2016, 2017 and 2018.
Ease of use is a key driver of developments in the AJ Bell platform propositions. Price and service are the other key drivers for AJ Bell when developing product propositions.
AJ Bell's two flagship platform propositions give access to a wide range of tax wrappers and investments, allowing advisers and customers to choose how they invest, and provides relevant and accessible investment content to assist with that choice. The addition of simple, low-cost and transparent in-house investment solutions, like the AJ Bell Passive funds range and the AJ Bell Investcentre Managed Portfolio Service, together with the Favourite Funds list and Ready-made portfolios (due to launch in the last quarter of 2018) for AJ Bell Youinvest customers, has further enhanced AJ Bell's proposition.
Central to the AJ Bell proposition is the ability to offer great customer service, ease of use and the right functionality and choice, all at highly competitive prices across the platform propositions. AJ Bell's pricing is designed to be highly competitive, for customers falling in its target markets, and to be transparent and fair, with customers charged for the work undertaken on their accounts. Information on charges is easy to find on the AJ Bell website, is presented clearly, with different charging scenarios and tools to help the customer understand how much they will pay. Competitor pricing is closely monitored with reviews of changes to competitor pricing undertaken and compared to that of AJ Bell's on an ongoing basis. When compared by reference to revenue per £AUA, AJ Bell comes out lower than its key competitors in both the advised and D2C segments.
AJ Bell maintains a strong independent brand and has one of the highest levels of customer retention in the market. Customer retention levels have been approximately 95% in each of the last 3 years ended 30 September.
As referred to in the preceding sections, the customer base for AJ Bell's platform propositions has grown strongly in recent years, both in terms of the number of new customers (CAGR over the last 6 years of 24%) and AUA (CAGR over the last 6 years of 26%). Net inflows (total inflows less total outflows) are also positive at 17% for AJ Bell Investcentre and 26% for AJ Bell Youinvest, expressed as a percentage of opening assets for FY2018.
9andlord of the Group's head office at 4 Exchange Quay, Salford Quays, Manchester M5 3EE (Property), Exchange Quay Property Services Limited (EQPSL), is a company controlled by a number of members of the senior management team. The shareholders and directors of EQPSL are Andrew James Bell, Bestfield Investments (an unlimited company of which Fergus John Lyons and other family members are the shareholders and directors), Michael Thomas Summersgill, Charles William Galbraith and Roger John Stott. AJ Bell Limited, as tenant, and the Company, as guarantor, entered into the two leases of the Property on 17 August 2016. The leases were entered into on arms' length terms, the parties had separate legal advisers and the Board obtained advice on the lease terms from an independent surveyor. The reason for this structure being adopted was because the Board did not consider the purchase of business premises to be an appropriate use of the Company's capital. Shareholder approval was obtained before the parties entered into the leases. The parties entered into a supplemental lease of additional parts of the Property and a licence for alterations on 24 October 2018.
The Group made donations during FY2016 (£85,279), FY2017 (£109,125) and FY2018 (£139,675) to the AJ Bell Trust, a registered charity of which Andy Bell is a director of the trustee company.
For FY2016, FY2017 and FY2018, AJ Bell had an average of 607, 656, and 758 employees respectively, analysed by operational area as follows:
| FY2016 | FY2017 | FY2018 | |
|---|---|---|---|
| Technology | 74 | 95 | 116 |
| Distribution | 55 | 58 | 64 |
| Operations and Support | 478 | 503 | 578 |
| 607 | 656 | 758 |
As at 31 October 2018 AJ Bell had 776 employees.
AJ Bell has three regulated operating subsidiaries, AJBSL, AJBML and AJBAML.
AJBSL (number 155593), AJBML (number 211468) and AJBAML (number 774048) are authorised and regulated by the FCA. AJBSL is also a member of the London Stock Exchange.
AJ Bell also has two FCA authorised Open Ended Investment Companies: VT AJ BELL ICVC, which is operated as a UCITS Scheme, and VT Allium Portfolio Funds, a Non-UCITS Retail Scheme. Valu-Trac Investment Management Limited has been appointed as the external authorised corporate director and operator of each of the funds by the funds' sponsor, AJBAML.
There are currently three financial services regulators in the UK:
The FPC was established in 2013 as part of the new system of regulation brought in to improve financial stability after the 2008 financial crisis. The FPC sits within the Bank of England and is responsible for the macro prudential regulation of the entire financial services sector. Its role is to identify and monitor risks in the financial system, and to take action to reduce or remove such risks where necessary.
The FCA is the key regulator of the Regulated Subsidiaries, and as such the majority of this Part 4 (Regulation) of this Registration Document focuses on FCA authorisation and regulation. The FCA aims to make financial markets work well for individuals, businesses, and for the economy as a whole. The FCA is responsible for the conduct of business regulation of all authorised firms and the prudential regulation of firms not authorised and regulated by the PRA. It is the conduct regulator for more than 58,000 businesses and the prudential regulator for more than 18,000 of these businesses.
The FCA has powers to allow it to achieve its objectives. These enable it to intervene directly in the market and make product intervention rules with the aim of preventing harm to consumers. The FCA discharges its general functions by rule-making, preparing and issuing codes under FSMA, giving general guidance and determining general policy and principles.
The FCA's strategic objective is to ensure that the relevant markets function well. Its operational objectives are to:
The FCA must act in a way which is compatible with its strategic objective (so far as is reasonably possible) when discharging its general functions.
The FCA is bound by FSMA to regulate certain financial activities in the UK.
Under section 19 of FSMA, it is an offence for any person to carry on ''regulated activities'' in the UK unless they are an authorised person or exempt from the requirement to be authorised. An authorised person may only carry out regulated activities for which they have been given specific permission by the relevant regulator.
The various ''regulated activities'' are set out in the FSMA (Regulated Activities) Order 2001 (as amended). The activities most relevant for the Regulated Subsidiaries are the following:
The FCA may also grant authorised persons permission to hold or control client money. ABSL may hold client money and is required to protect the money it holds and/or controls on behalf of customers. It cannot lend this money or use it to finance its own business. AJBML is permitted to control client money only in respect of the personal pension scheme(s) that it operates and must not hold client money. AJBAML may control but must not hold client money.
As part of the firm authorisation process, the FCA may, at its discretion, determine the scope of, and include such restrictions on, the grant of regulatory permissions as appropriate.
The FCA must ensure that the authorised person/applicant meets certain threshold conditions (see below) whenever it grants or agrees to vary the terms of an authorised person's permissions.
Further, the FCA may impose such ''Requirements'' on an authorised person as it considers appropriate to require that person to take, or refrain from taking, specified action under FSMA.
These requirements apply to all of the financial services activities that the authorised person can operate and may relate to a range of matters, these include amongst others, the scope of the firm's business, the types of customer to whom the firm may provide services, how the firm may treat client money, capital adequacy and/or liquidity requirements.
Authorised firms are required to maintain a specified set of minimum standards set out in FSMA in order to become and remain authorised (the ''threshold conditions''). The threshold conditions cover matters including the location of offices, effective supervision, appropriate resources, the suitability of the authorised person and its business model.
The Regulated Subsidiaries must comply with, among other things, FSMA (and secondary legislation made under it), the FCA Rules and other relevant UK and directly applicable EU legislation.
The FCA Rules are divided into various blocks and sourcebooks containing rules and guidance.
The sections of most relevance for AJ Bell's day-to-day business are the Principles for Business and the COBS and CASS. Other important sections include those governing prudential standards and regulatory capital, senior management arrangements, systems and controls. The FSMA change of control regime for authorised persons is also relevant.
The FCA's principles (the Principles) form part of the FCA's High Level Standards set out in the FCA Rules; they are a general statement of the fundamental obligations of firms under the regulatory system. They derive their authority from the FCA's rulemaking powers as set out in FSMA and reflect the FCA's statutory objectives.
The Principles form the foundation of authorised firms' responsibilities to their clients. They are binding on firms and underpin the FCA Rules. The Principles provide authorised persons with a clear and concise statement of their fundamental obligations under the FSMA regulatory regime and the standards that the FCA expects authorised persons to meet in the day-to-day conduct of their business. They also provide a basis for supervisory activity and enforcement action by the FCA. Breaching a Principle makes a firm liable to disciplinary sanctions from the FCA (as further detailed in the Supervision and Enforcement section below).
The Principles set high standards for firms to comply with but allow firms to determine how they achieve those standards. The measures taken and the resources required by firms to comply with the Principles should depend on the nature and risks of the relevant firm's business. The Principles acknowledge that the measures taken should be proportionate to those risks.
The COBS rules set out a wide range of day-to-day business standards that authorised persons must comply with in various aspects of their relationships with clients.
The application of the COBS rules vary according to the scope of the firm's business and its activities and the types of client it deals with.
The application of the COBS rules will generally include: the need to provide retail clients with information about the firm; the need to categorise clients appropriately; the need to meet certain standards of disclosure about the firm's products and services including the related costs and charges; the firm ensuring that communications with clients are clear, fair and not misleading; the need to assess suitability when advising on certain products; ensuring it has appropriate agreements in place with clients; the need to manage conflicts of interest; and to report appropriately to clients.
The FCA requires firms to arrange adequate protection for clients' assets when such firm is responsible for them. Firms with permission to safeguard and administer custody assets and/or with permission to hold client money must comply with the Custody Rules and the Client Money Rules (respectively) in the CASS Rules. The CASS Rules require firms to clearly identify client assets, to hold client money separately from the firm's own money, to keep accurate records and carry on internal and external reconciliations, to make good any client money shortfalls, and to appoint an individual responsible for CASS compliance.
Authorised firms carrying on regulated activities must, at all times, comply with the prudential standards and capital adequacy requirements imposed by (in the case of the Regulated Subsidiaries) the EU Capital Requirements Directive and the FCA.
The capital adequacy rules applicable to the Regulated Subsidiaries are currently contained in the Prudential Standards Section of the FCA Rules and the CRD IV.
The FCA discharges its prudential supervision role, in part, through the regulatory capital requirements.
The regulatory capital rules require firms, at all times, to maintain a specified level of regulatory capital (based on the prudential risk the firm poses in conducting its particular business activities).
The rules are designed to ensure that firms can meet all liabilities as they fall due and to safeguard their financial stability and that of their clients and counterparties.
The FCA expects firms to be proactive in monitoring and managing financial risks, in accordance with its requirement for firms to maintain adequate financial resources.
The FCA's regulatory capital requirements apply both to individual authorised entities and at a consolidated level across groups of which an authorised firm or firms are members. The FCA may exercise consolidated supervision up to the top EEA parent in a firm's group. AJ Bell is subject to consolidated supervision.
Firms may apply to the FCA for a waiver from consolidated supervision however AJ Bell does not have such a waiver and AJ Bell does not intend to apply for such waiver in the foreseeable future.
There are certain ''controlled functions'' that are undertaken by individuals for (or on behalf of) an authorised firm and who usually have significant influence over the firm's regulatory conduct. As a result the persons who perform these functions must be approved by the FCA as fit and proper. These are known as ''approved persons''. An approved person must abide by the rules and principles set out in the APER. The rules and principles in the APER sourcebook apply to FCA approved persons.
The rules in the APER sourcebook include acting with integrity, acting with due skill, care and diligence, observing proper standards of market conduct and dealing with regulators in an open and co-operative way. If an approved person breaches the rules or principles the FCA may take enforcement action against the individual, including public censure, fines and/or the removal of approved status. A firm may also face enforcement action for breaches by its approved persons.
The SMCR, which currently applies to banks and very large investment firms, is set to be extended to include all authorised firms, including the Regulated Subsidiaries. The FCA has consulted on the rules to implement the SMCR and intends to replace the approved persons regime with the SMCR for almost all financial services firms.
As such a wide range of firms will be within the scope of the new SMCR requirements the FCA is not proposing to mirror the approach it took for banking firms. Instead it intends to apply consistent principles across the sector in a regime that is ''proportionate and flexible enough to accommodate the different business models and governance structures of firms''. The FCA is proposing:
The regime is expected to commence in relation to solo-authorised firms from 9 December 2019. AJBSL will be required to comply with an enhanced firm regime, whereas AJBML and AJBAML will be required to comply with the baseline core requirements.
Under the FSMA change of control regime, a person who is intending to acquire or increase ''control'' over a UK firm authorised and regulated by the FCA is required to seek the FCA's consent before doing so and submit certain specified information and documentation. An FCA-authorised firm must also notify the FCA when there is a transaction which results in that acquisition taking place. A disposal of a controlling interest in an FCA authorised firm must be notified to the FCA before the disposal takes place. Any acquisition of control over the Company or any of the Regulated Subsidiaries individually would be subject to the FCA change of control regime.
A proposed ''controller'' for the purposes of the change in control regime is any natural or legal person (or such persons ''acting in concert'') who decides to acquire, directly or indirectly, or increase control over an FCA-authorised firm. ''Control'' over the Regulated Subsidiaries would be acquired if the acquirer:
The FCA has up to 60 working days from the date of submission of a completed notification to approve or object to any such change in control. If the FCA does serve such a notice, it is required to specify its reasons for its objections in such notice. In the case of persons acting in concert, individual acquisitions will be amalgamated and treated as single holding for the purposes of the regime.
A person who ceases to be a 10% controller is required only to provide written notice to the FCA. In other words, FCA approval is not required for cessation of control.
Breach of the notification and approval regime imposed by FSMA on controllers is a criminal offence.
The FCA's priority in supervising firms is to ensure consumers are at the centre of a firm's business.
The FCA's main approaches to conduct supervision are split into three pillars:
AJ Bell is classified as a Pillar 1 entity.
The FCA allocates all authorised firms into one of two conduct categories either (i) fixed portfolio firms; or (ii) flexible portfolio firms.
Fixed portfolio firms are given a specific supervisor. The FCA proactively supervises such firms using firm-specific continuous assessment.
Flexible portfolio firms are supervised through thematic and market-based work, along with programmes of communication, engagement and education aligned to the key risks the FCA has identified in the relevant sector.
The FCA has recently confirmed that AJ Bell and the Regulated Subsidiaries will no longer be allocated a dedicated supervisory team and instead will be part of the ''Platform Portfolio''.
The FCA has a range of supervisory powers which allow it to intervene in a firm's affairs. The FCA can, for instance, require firms to provide particular information or documents to it, require the production of a report by a ''skilled person'' appointed by the FCA or formally investigate a firm.
In its prudential supervisory role, the FCA considers the systems and controls, governance arrangements, and risk management capabilities including the risk of misconduct. The FCA will seek to assess how well a firm understands the risks it is running, how well placed it is to manage those risks, and how well it can avoid large, unexpected costs.
Firms solely regulated by the FCA are allocated one of four prudential categories depending on the relative perceived risk their failure would pose to markets. AJ Bell is classified as a P2 entity, which applies to firms and groups whose failure would have less impact than P1 firms, but would nevertheless damage markets or consumers and client assets.
The FCA uses a wide range of enforcement powers, criminal, civil and regulatory, to protect consumers and to take action against firms and individuals that do not meet its standards. These include:
* withdrawing a firm's authorisation;
The FOS has compulsory jurisdiction over all FCA-regulated firms including the Regulated Subsidiaries. However, customer complaints relating to the administration of pensions are referred to the Pensions Ombudsman, not FOS, in accordance with the Memorandum of Understanding between FOS and the Pensions Ombudsman.
All FCA-regulated firms must have a procedure in place for resolving disputes with their customers and must respond to customer complaints within set deadlines. If a firm's complaints procedure fails to resolve a complaint, the FOS and Pensions Ombudsman provides a dispute resolution procedure for certain categories of customer complaints brought against applicable firms by individuals and small business customers.
The FOS and Pensions Ombudsman provide a more informal alternative to customers bringing complaints in the courts. They provide independent investigators who review and seek to resolve complaints between customers and firms.
If the FOS resolves a complaint in favour of a customer, it has the power to order a firm to pay fair compensation for any loss or damage it caused to the customer, or to direct a firm to take such steps in relation to the customer as the FOS considers just and appropriate, and irrespective of whether a similar award could be made by a court. Authorised firms fund the FOS through levies and case fees.
The FSCS was established under FSMA, it is a statutory compensation scheme of last resort for certain categories of customers of authorised firms. It provides compensation to eligible customers who suffer losses as a consequence of an authorised firm's inability to meet its liabilities arising from claims made in connection with its regulated activities. The FSCS is funded by levies on authorised firms and is independent of the FCA, the PRA and the UK government, although it is ultimately accountable to them.
The powers of the FSCS to raise funds from authorised firms are set out in the FEES sourcebook of the FCA Rules. In general terms, fees are levied on participant firms and the FSCS may impose three types of levy the 'management expenses levy' (comprising the 'bases costs levy' and the 'specific costs levy'), the 'compensation costs levy' (relating to compensation costs), and the 'MERS levy' which relates to management expenses in respect of 'relevant schemes'.
Participant firms are allocated to a funding class (or classes) on the basis of their regulated activities. The specific costs and compensation costs levies payable by the participating firms are calculated by reference to their funding class or classes. The main principle behind the calculation of these levies is that the levy should represent the amount of claims made or likely to be made against that type of firm. The Regulated Subsidiaries will fall into the ''Investments'' levy class. It should however be noted, that contributions are not restricted to failures in the sub-classes to which a particular firm belongs as there is the possibility that cross-subsidy between levy classes may be required.
The MLRs require relevant persons to apply risk-based customer due diligence measures and take other steps to prevent their services from being used for money laundering or terrorist financing. They also require relevant persons to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk.
SYSC contains financial crime rules that complement the MLRs, requiring firms to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk. Such controls must be comprehensive and proportionate to the nature, scale and complexity of their activities. In this context, financial crime includes any offence involving fraud or dishonesty, misconduct in, or misuse of information relating to, a financial market, handling the proceeds of crime or the financing of terrorism, as well as bribery and corruption offences.
Failure to maintain the necessary procedures is a criminal offence. The Proceeds of Crime Act 2002, the Terrorism Act 2000 and the Counter-Terrorism Act 2008 and the Criminal Justice Act 1993 also contain a number of offences in relation to money laundering. The Joint Money Laundering Steering Group provides good practice guidance and practical assistance in interpreting the MLRs.
AJ Bell has established appropriate systems and controls under the guidance of AJ Bell's Money Laundering Reporting Officer to help it mitigate the risk of financial crime. This including the appropriate suite of policies, use of anti-money laundering technology and ongoing training for all members of staff.
The ICO is the UK's data protection regulator set up as an independent body to uphold information rights. It is responsible for upholding information rights in the public interest, promoting openness by public bodies and data privacy for individuals. It has powers to enforce compliance with Data Protection Legislation which include criminal prosecution, non-criminal enforcement, audit and issuing monetary penalty notices. The ICO is involved in data protection policy making decisions and produces guidance and codes of practice.
AJ Bell collects and processes personal data and sensitive personal data (including names, addresses, contact details, financial information, health information and criminal records) information from its customers and employees as part of the operation of its business.
AJ Bell must therefore comply with all Data Protection Legislation including the recently implemented GDPR and the UK's Data Protection Act 2018.
GDPR imposes certain requirements on AJ Bell in respect of the collection, retention, use, processing and security of personal information. Failure to operate effective data use and information security controls could potentially lead to regulatory enforced compliance measures, fines, reputational and financial losses in responding to or defending its actions.
GDPR also provides data subjects far greater rights and control in respect of their personal data. Failure to be fully transparent at the point of collection about the purpose for and use of personal data or otherwise meet obligations relating to data subject rights could result in compensation payments to data subjects whose rights have been infringed.
GDPR allows representative bodies to bring claims on behalf of data subjects. This could result in a 'group action' being pursued by a third party on behalf of data subjects. A group action could potentially lead to reputational damage and increased financial defence costs and losses depending on the number of data subjects forming the group. The potential sanctions for the most egregious breaches of GDPR include financial penalties of up to 4% of the annual worldwide turnover of company groups.
The GDPR has increased the regulatory burden on AJ Bell in processing personal customer, employee and other data in the conduct of its business.
AJ Bell established a GDPR project to ensure that the new requirements were met by 25 May 2018, the date on which GDPR came into force. AJ Bell monitors ongoing compliance through its established regulatory systems and controls.
If AJ Bell or any of the third party service providers on which it relies (including non-subsidiary affiliates of AJ Bell) fails to comply with Data Protection Legislation, due to any failure to store or transmit information in a secure manner or any loss or wrongful processing of personal customer data, AJ Bell could be subject to investigative and enforcement action by the ICO and complaints or claims from data subjects.
Pension saving under registered pension schemes is subject to favourable tax treatment, which acts as an incentive for employees and individuals to save for retirement and thus be less reliant on the state pension system. However, the extent to which pension savings attract tax relief is subject to certain limits imposed by HMRC. In order to enjoy the tax advantages available to pension schemes in the UK the SIPPs and SSASs administered by AJ Bell are registered with HMRC.
As registered pension schemes, the SIPPs and SSASs are obliged to provide information to HMRC including the provision of a pension scheme return (to be provided on request), accounting for tax returns, event reports and reporting pension flexibility payments.
If payments are made from the schemes that are not authorised payments under the Finance Act 2004, HMRC will impose unauthorised payment charges, and scheme sanction charges in respect of the payments.
Tax considerations are relevant to a UK registered pension scheme when:
The current pensions tax relief system can broadly be described as 'Exempt-Exempt-Taxed' on the following basis:
The AJ Bell Platinum SSASs are occupational pension schemes for legislative purposes. As a result they are regulated by the Pensions Regulator.
The Pensions Regulator is the public body that protects workplace pensions in the UK. The post of the Pensions Regulator was created on 6 April 2005 by Pensions Act 2004. The principal objectives of the Pensions Regulator are set out in the Pensions Act 2004. These include:
The SSAS are registered with the Pensions Regulator in accordance with the Pensions Act 2004. As such the scheme administrator for each scheme is required to provide and update registrable information in respect of each scheme as well as providing a scheme return to the Pensions Regulator whenever the Pensions Regulator issues a scheme return notice. There are also whistleblowing obligations that apply in respect of the trustees and scheme administrators of SSASs.
The Pensions Regulator has issued a code of practice in respect of the governance and administration of occupational trust-based schemes providing money purchase benefits. This code applies to a limited extent to the SSASs although SSASs will generally be exempt from parts of the code (for example in respect of default arrangements and charge caps and the preparation of an annual chair's statement).
The Pensions Regulator has various enforcement powers in respect of defined contribution workplace schemes such as the SSASs, these include the ability to appoint and remove trustees of schemes and to issue fines for non-compliance with legislation under section 10 of the Pensions Act 1995.
An ISA is a scheme of investment managed in accordance with ISA regulations under terms agreed between the ISA manager and the investor. The ISA manager holds investments and claims repayment of income tax deducted at source, by submitting claims to HMRC. There are various types of ISAs permitted by UK law being:
Investors do not pay any tax on any of the income they receive from ISA savings and investments. Nor do they pay any tax on capital gains arising on ISA investments. In order to protect the integrity of the UK taxation system there are limits placed around who can hold an ISA, how many ISAs an individual can open in a tax year and the amount that can be paid into an individual's ISAs in a tax year. An ISA manager must also collect prescribed information and receive prescribed declarations from individuals applying for an ISA.
In order to be able to offer ISAs and LISAs to investors AJBSL has registered with, and been approved by, HMRC as an ISA manager and a LISA manager. As a registered ISA manager AJBSL is obliged to provide information to HMRC and make claims from HMRC including updating HMRC with any changes to the information provided in its application for registrations as an ISA manager, the making of an annual return and tax claim, the making of an annual return of information, and an annual market value return of statistical information (market value and subscriptions).
AJ Bell, including the Regulated Subsidiaries, is subject to EU law, both directly through European regulations and indirectly through European directives, to which the UK is currently obliged to give effect through its legislative powers. Recent EU regulation of most significance that applies to AJ Bell is set out below.
MiFID II applies to firms in the EEA who engage in certain investment activities, including dealing and execution services, investment advice and portfolio management. Building on MiFID, it aims to harmonise the regulatory framework across the EEA to make financial markets more efficient and resilient, increase transparency of both equity and non-equity markets, reinforce supervisory powers, and provide protection for investors.
MiFID II sets out detailed provisions on systems and controls, outsourcing, customer classification, conflicts of interest, best execution, client order handling, suitability and appropriateness, transparency and transaction reporting. Requirements relating to transaction reporting, costs and charges disclosure, product governance and conduct of business requirements all affect AJ Bell's operations.
MiFID II also allows investment firms authorised in accordance with its provisions to passport their services into other EEA states without needing to obtain separate authorisations locally.
The PRIIPs Regulation aims to encourage efficient EU markets by helping investors to better understand and compare the key features, risk, rewards and costs of different PRIIPs, by obliging PRIIPs manufacturers and distributors to provide access to a short and consumer-friendly Key Information Document.
PRIIPs can take a variety of legal forms but can be distinguished by the comparable functions they perform for retail investors. PRIIPS can be broadly categorised into four main groups: (i) investment funds, (ii) insurance-based investment products, (iii) retail structured securities, and (iv) structured term deposits. The PRIIPS Regulation has applied (subject to limited transitional provisions) to products such as units in an investment fund (except UCITS Schemes), life insurance policies with an investment element and structured deposits since 1 January 2018. It is set to apply to UCITS schemes with effect from 31 December 2019.
CRD IV, comprising the Capital Requirements Directive IV and the Capital Requirements Regulation, is an EU legislative framework for the prudential supervision of banks, building societies and investment firms. Certain MiFID investment firms, including those with permissions relating to the safeguarding of client assets or handling of client money, are subject to the provisions of CRD IV as regards prudential and capital standards. AJBAML and AJBSL are subject to these rules. There are changes being proposed to the capital requirements regime under Capital Requirements Directive V and Capital Requirements Regulation II but these are not anticipated prior to 2019. Therefore whether these changes will have any impact on the Regulated Subsidiaries is unclear because the possibility of these changes taking effect prior to the UK's planned departure from the EU is remote.
The UCITS regime provides a set of common standards applicable across all EU member states for the operation of and cross border promotion of UCITS Schemes.
The UCITS regime aims to create a single market for open-ended retail investment funds which affords enhanced protection for investors.
It requires EU member states to adopt harmonised rules regulating the authorisation, supervision, structure and activities of UCITS funds together with harmonised rules about investor information and passporting requirements. VT AJ Bell ICVC is a UCITS scheme and therefore must be operated in accordance with the UCITS Directive.
In addition to the FCA's prudential standards and capital adequacy requirements, AJBAML and AJBSL must comply with the wider prudential framework of CRD IV which mainly applies to banks.
The EBA contributes to a European Single Rulebook in banking by providing Binding Technical Standards (''BTS'') and Guidance. The Rulebook aims to provide a single set of harmonised prudential rules for financial institutions throughout the EU in order to create a level playing field and a high level of protection for customers.
The BTS are legal acts which specify particular aspects of an EU legislative text (directive or regulation) and aim at ensuring consistent harmonisation in specific areas. The BTS are legally binding and directly applicable in all Member States including in the UK and therefore AJBAML and AJBSL must comply with these to the extent they apply to their activities.
The EBA and European Securities and Market Authority are working on the review of the application of the prudential rules to investment firms, with the aim of establishing an appropriate prudential framework for investment firms.
FCA-regulated firms have recently been subject to substantial regulatory change. There is further regulatory change on the horizon, with the main changes likely to impact AJ Bell summarised below.
The FCA announced in 2017 that it would be undertaking the Investment Platform Market Study on investment platforms. The market study explores how investment platforms compete to win new, and retain existing, consumers, to allow the FCA to assess how to improve competition within the platform market and develop better consumer outcomes.
In particular, the FCA has looked to assess:
The FCA published its interim report the Investment Platform Market Study in July 2018, which noted that the investment platform market was working well in many respects. There are areas that the FCA identified where it was concerned that competition in the market was not working well and it is consulting on remedies for these areas. The FCA's consultation on remedies for the market focuses on the following main areas:
The FCA expects to publish its final report and recommendations in the first quarter of 2019, following the end of the consultation on its interim report proposals on 21 September 2018.
The Fifth Money Laundering Directive (''MLD5'') contains amendments to the existing money laundering directive as well as the Capital Requirements Directive. MLD5 will, amongst other things:
The majority of changes will be effected by 10 January 2020.
The FCA is consulting on draft guidance outlining the factors which financial services companies should consider when drafting and reviewing variation terms in consumer contracts, the first it has issued following the introduction of the Consumer Rights Act 2015 and several rulings on the topic by the Court of Justice of the EU. The draft guidance outlines factors for financial institutions to consider when seeking to draft variation terms, and also considers a number of reasons for contract variation that the FCA has observed firms commonly include when drafting variation terms allowing them to alter their consumer contracts. AJ Bell will take any finalised guidance into account in updating or changing customer terms.
In February 2018, the FCA published a discussion paper looking at effective competition in non-workplace pensions: DP18/1. The paper was launched in order for the FCA to better understand the market for non-workplace pensions: the providers, the consumers and the relationship between them, with a view to assessing the potential presence, nature and extent of harm. The FCA outlined its areas of potential concerns about how the market is working and the reasons for its concerns. It noted that in some aspects it sees parallels with the findings of the OFT study on the defined contribution workplace pensions market in 2013 which concluded that competition alone could not be relied on to drive value for money and good outcomes for consumers of DC workplace pensions. That study led to increased regulation of the workplace pensions market, including the introduction of caps on certain charges.
The period for submission of information has now closed. At this stage, it is difficult to assess whether the FCA focus on non-workplace pensions will have any material impact on the non-workplace pension market in the UK or lead to any material changes in the interaction between non-workplace pension providers and other participants in the UK wealth management sector, such as asset managers and financial advisers.
In June 2018, the FCA published a consultation paper regarding improving retirement outcomes for consumers: CP18/17. In the consultation paper the FCA proposes a remedy package to address the potential consumer harm and emerging issues it has identified arising from the pension freedoms introduced in 2015. The FCA's remedy package aims to: protect consumers from poor outcomes; improve consumer engagement with retirement income decisions; and promote competition by making the costs of drawdown clearer and comparisons easier.
The potential changes suggested by the FCA include:
Whilst it is not certain which of the proposed changes will be brought in to force and in what form, AJ Bell is actively engaging with the FCA in relation to its proposals. Whilst the proposed changes could lead to an increased administrative burden on AJ Bell, the directors believe that AJ Bell is in a good position to respond to any changes required and that any changes should not have a material adverse impact on its business.
Although the finalised text of the GDPR was published over two years ago, there is general uncertainty about how the GDPR and the Data Protection Act 2018 are going to be interpreted and enforced, with guidance related to many areas of the GDPR only having recently been published by UK and EU regulators. Therefore, AJ Bell must, in practice, ensure its compliance with the GDPR is constantly evolving. AJ Bell will ensure it continuously reviews its decisions and ensure that the latest guidance from the ICO, or indeed the European Data Protection Board, is taken into account in its decisions in relation to processing of personal data and reassess the risks in this context.
The E-Privacy Regulation was due to be implemented on 25 May 2018 at the same time as GDPR. It is anticipated that this will now be implemented in 2020. The E-Privacy Regulation will seek to harmonise protection of electronic communications across the EU Member States, broaden the electronic communications that are captured, implement a higher level of protection and simplify the rules in relation to cookies. The enforcement of the Regulation will be the responsibility of the ICO.
The ICO has indicated that it is unlikely that the UK will receive an adequacy decision on the UK's exit from the EU, pursuant to which the EU confirms that privacy legislation in a non-EU state is sufficiently stringent so as to permit transfer of data from inside the EU to that state. In the absence of an adequacy decision, the UK has implemented the Data Protection Act 2018 which incorporates the GDPR directly into UK legislation and ensures consistency with the EU in respect of requirements for processing of personal data. It is currently envisaged that a treaty will be implemented between the UK and the EU in order to ensure data transfers can still occur without the additional burden of entering into the EU Standard Contractual Clauses which have been developed by the European Commission to provide adequate terms to safeguard protection of personal data when an international transfer takes place without an adequacy decision or a treaty in place.
The following is a review of AJ Bell's operating performance and financial position.
The consolidated financial information referred to in this Part 5 has been prepared in accordance with (i) IFRS as adopted by the EU; (ii) the requirements of the Prospectus Directive; and (iii) the Listing Rules, and, unless otherwise stated, has been extracted without material adjustment from Part 6 (Historical Financial Information) of this Registration Document.
In this discussion and analysis, the financial years ended 30 September 2016, 30 September 2017 and 30 September 2018 are referred to as FY2016, FY2017 and FY2018, respectively.
The financial information referred to in the following discussion and analysis has been rounded to the nearest decimal place and percentage changes have been calculated based upon these rounded numbers and so may not conform exactly to the calculation based upon the underlying unrounded figures.
This Part 5 (Operating and Financial Review) of this Registration Document contains ''forward-looking statements''. Those statements are subject to risks, uncertainties and other factors that could cause AJ Bell's future results of operations or cash flows to differ materially from the results of operations or cash flows expressed or implied in such forward-looking statements. Prospective investors should read the section entitled ''Presentation of Information'' and Part 2 (Risk Factors) of this Registration Document for further information in this respect. In addition, certain industry issues also affect the Group's results of operations and are described in Part 1 (Market Overview) of this Registration Document.
AJ Bell is one of the largest investment platforms in the UK, based on the value of its AUA. The total value of the Group's AUA was £46.1 billion as at 30 September 2018. AJ Bell's flagship propositions are AJ Bell Investcentre, which operates in the advised segment of the platform market and AJ Bell Youinvest which operates in the D2C segment. The Group operates principally as a platform business although it also maintains an element of non-Platform business.
AJ Bell Youinvest and AJ Bell Investcentre combined had £38.6 billion in AUA as at 30 September 2018 with 183,213 customers. These two platform propositions are described briefly below:
AJ Bell Youinvest and AJ Bell Investcentre provide access to a broad investment range including shares and other financial instruments traded on the major stock exchanges around the world, as well as mainstream collective investments available in the UK. AJ Bell also offers a range of in-house investment solutions, including the AJ Bell Passive funds, the AJ Bell Investcentre Managed Portfolio Service and the AJ Bell Youinvest Favourite Funds list and from the end of the last quarter of 2018 Ready-made portfolios.
AJ Bell's non-Platform business, which had £7.5 billion in AUA as at 30 September 2018 with 14,699 customers, comprises:
* AJ Bell Securities stockbroking: providing dealing, settlement and custody services to institutional investment businesses.
AJ Bell was co-founded in 1995 in Manchester by Andy Bell and Nicholas Littlefair to provide actuarial, trustee and pension administration services to customers with a SSAS or SIPP. In 2000, AJ Bell launched Sippdeal, the first online SIPP in the UK for execution only investors. In 2002, AJ Bell launched Sippcentre, as a low cost SIPP for financial advisers and their clients. Since then, AJ Bell has grown its customers and AUA organically, but has also made some small strategic acquisitions to enhance AJ Bell's platform propositions. In December 2007, AJ Bell acquired Lawshare to bring its stockbroking capabilities in-house and facilitate the offering of ISAs and general investment/dealing accounts to its platform customers. In December 2012, AJ Bell acquired MSM Media to expand the range of investment content offered to its platform customers. More recently in February 2016, AJ Bell acquired Indexx Markets and Mansard Capital to facilitate the launch of its in-house range of investment solutions. AJ Bell's heritage is evident in the value of assets held in SIPPs, which was 72% of AJ Bell's overall AUA as at 30 September 2018. SIPPs are long term savings products which provide AJ Bell with a high proportion of recurring revenue.
AJ Bell's principal source of revenue arises from the fees charged for the provision of platform services. AJ Bell's revenue is classified into recurring revenues and transactional revenues as follows:
AJ Bell has a diverse revenue model with recurring income representing 82% of revenue in FY2018, and transactional revenue of 18%. The level of ad valorem charges included within recurring income varies with the size of the customer's portfolio and, as a consequence, more generally with the amount of AUA.
AJ Bell's distribution model is diversified, operating in both the advised and D2C segments of the platform market. Further, the business is not reliant on any key customer or independent financial adviser. The largest single distribution contract as at 30 September 2018 comprised less than 1.5% of total revenue.
AJ Bell's business is highly cash generative and it has a capital light model. Cash generated from operations has averaged over 100% of profit before taxation for the period covered by the historical financial information as AJ Bell benefits from a short working capital cycle and low levels of capital expenditure following the completion of its major re-platforming exercise in 2014.
Growth has been funded from retained earnings and has not required primary equity fundraising or material debt finance.
AJ Bell's strong regulatory capital position is evidenced by a regulatory capital surplus yielding coverage of 440% of its Pillar 1 regulatory capital requirements during the period covered by the historical financial information.
Management considers a variety of financial measures and other metrics when analysing AJ Bell's performance, and the Directors believe that each of these measures provides useful information with respect to AJ Bell's business and operations. With the exception of revenue and profit before tax, these are non-IFRS financial measures and metrics that are not audited. These non-IFRS financial measures and metrics are not meant to be considered in isolation or as a substitute for measures of financial performance reported in accordance with IFRS. Moreover, these non-IFRS financial measures and metrics may be defined or calculated differently by other companies, and as a result AJ Bell's key performance indicators may not be comparable to similar measures and metrics calculated by its peers.
| | As at
Platforum UK Adviser Platform Guide, May 2018
10oup made donations during FY2016 (£85,279), FY2017 (£109,125) and FY2018 (£139,675) to the AJ Bell Trust, a registered charity of which Andy Bell is a director of the trustee company.
For FY2016, FY2017 and FY2018, AJ Bell had an average of 607, 656, and 758 employees respectively, analysed by operational area as follows:
| FY2016 | FY2017 | FY2018 | |
|---|---|---|---|
| Technology | 74 | 95 | 116 |
| Distribution | 55 | 58 | 64 |
| Operations and Support | 478 | 503 | 578 |
| 607 | 656 | 758 |
As at 31 October 2018 AJ Bell had 776 employees.
AJ Bell has three regulated operating subsidiaries, AJBSL, AJBML and AJBAML.
AJBSL (number 155593), AJBML (number 211468) and AJBAML (number 774048) are authorised and regulated by the FCA. AJBSL is also a member of the London Stock Exchange.
AJ Bell also has two FCA authorised Open Ended Investment Companies: VT AJ BELL ICVC, which is operated as a UCITS Scheme, and VT Allium Portfolio Funds, a Non-UCITS Retail Scheme. Valu-Trac Investment Management Limited has been appointed as the external authorised corporate director and operator of each of the funds by the funds' sponsor, AJBAML.
There are currently three financial services regulators in the UK:
The FPC was established in 2013 as part of the new system of regulation brought in to improve financial stability after the 2008 financial crisis. The FPC sits within the Bank of England and is responsible for the macro prudential regulation of the entire financial services sector. Its role is to identify and monitor risks in the financial system, and to take action to reduce or remove such risks where necessary.
The FCA is the key regulator of the Regulated Subsidiaries, and as such the majority of this Part 4 (Regulation) of this Registration Document focuses on FCA authorisation and regulation. The FCA aims to make financial markets work well for individuals, businesses, and for the economy as a whole. The FCA is responsible for the conduct of business regulation of all authorised firms and the prudential regulation of firms not authorised and regulated by the PRA. It is the conduct regulator for more than 58,000 businesses and the prudential regulator for more than 18,000 of these businesses.
The FCA has powers to allow it to achieve its objectives. These enable it to intervene directly in the market and make product intervention rules with the aim of preventing harm to consumers. The FCA discharges its general functions by rule-making, preparing and issuing codes under FSMA, giving general guidance and determining general policy and principles.
The FCA's strategic objective is to ensure that the relevant markets function well. Its operational objectives are to:
The FCA must act in a way which is compatible with its strategic objective (so far as is reasonably possible) when discharging its general functions.
The FCA is bound by FSMA to regulate certain financial activities in the UK.
Under section 19 of FSMA, it is an offence for any person to carry on ''regulated activities'' in the UK unless they are an authorised person or exempt from the requirement to be authorised. An authorised person may only carry out regulated activities for which they have been given specific permission by the relevant regulator.
The various ''regulated activities'' are set out in the FSMA (Regulated Activities) Order 2001 (as amended). The activities most relevant for the Regulated Subsidiaries are the following:
The FCA may also grant authorised persons permission to hold or control client money. ABSL may hold client money and is required to protect the money it holds and/or controls on behalf of customers. It cannot lend this money or use it to finance its own business. AJBML is permitted to control client money only in respect of the personal pension scheme(s) that it operates and must not hold client money. AJBAML may control but must not hold client money.
As part of the firm authorisation process, the FCA may, at its discretion, determine the scope of, and include such restrictions on, the grant of regulatory permissions as appropriate.
The FCA must ensure that the authorised person/applicant meets certain threshold conditions (see below) whenever it grants or agrees to vary the terms of an authorised person's permissions.
Further, the FCA may impose such ''Requirements'' on an authorised person as it considers appropriate to require that person to take, or refrain from taking, specified action under FSMA.
These requirements apply to all of the financial services activities that the authorised person can operate and may relate to a range of matters, these include amongst others, the scope of the firm's business, the types of customer to whom the firm may provide services, how the firm may treat client money, capital adequacy and/or liquidity requirements.
Authorised firms are required to maintain a specified set of minimum standards set out in FSMA in order to become and remain authorised (the ''threshold conditions''). The threshold conditions cover matters including the location of offices, effective supervision, appropriate resources, the suitability of the authorised person and its business model.
The Regulated Subsidiaries must comply with, among other things, FSMA (and secondary legislation made under it), the FCA Rules and other relevant UK and directly applicable EU legislation.
The FCA Rules are divided into various blocks and sourcebooks containing rules and guidance.
The sections of most relevance for AJ Bell's day-to-day business are the Principles for Business and the COBS and CASS. Other important sections include those governing prudential standards and regulatory capital, senior management arrangements, systems and controls. The FSMA change of control regime for authorised persons is also relevant.
The FCA's principles (the Principles) form part of the FCA's High Level Standards set out in the FCA Rules; they are a general statement of the fundamental obligations of firms under the regulatory system. They derive their authority from the FCA's rulemaking powers as set out in FSMA and reflect the FCA's statutory objectives.
The Principles form the foundation of authorised firms' responsibilities to their clients. They are binding on firms and underpin the FCA Rules. The Principles provide authorised persons with a clear and concise statement of their fundamental obligations under the FSMA regulatory regime and the standards that the FCA expects authorised persons to meet in the day-to-day conduct of their business. They also provide a basis for supervisory activity and enforcement action by the FCA. Breaching a Principle makes a firm liable to disciplinary sanctions from the FCA (as further detailed in the Supervision and Enforcement section below).
The Principles set high standards for firms to comply with but allow firms to determine how they achieve those standards. The measures taken and the resources required by firms to comply with the Principles should depend on the nature and risks of the relevant firm's business. The Principles acknowledge that the measures taken should be proportionate to those risks.
The COBS rules set out a wide range of day-to-day business standards that authorised persons must comply with in various aspects of their relationships with clients.
The application of the COBS rules vary according to the scope of the firm's business and its activities and the types of client it deals with.
The application of the COBS rules will generally include: the need to provide retail clients with information about the firm; the need to categorise clients appropriately; the need to meet certain standards of disclosure about the firm's products and services including the related costs and charges; the firm ensuring that communications with clients are clear, fair and not misleading; the need to assess suitability when advising on certain products; ensuring it has appropriate agreements in place with clients; the need to manage conflicts of interest; and to report appropriately to clients.
The FCA requires firms to arrange adequate protection for clients' assets when such firm is responsible for them. Firms with permission to safeguard and administer custody assets and/or with permission to hold client money must comply with the Custody Rules and the Client Money Rules (respectively) in the CASS Rules. The CASS Rules require firms to clearly identify client assets, to hold client money separately from the firm's own money, to keep accurate records and carry on internal and external reconciliations, to make good any client money shortfalls, and to appoint an individual responsible for CASS compliance.
Authorised firms carrying on regulated activities must, at all times, comply with the prudential standards and capital adequacy requirements imposed by (in the case of the Regulated Subsidiaries) the EU Capital Requirements Directive and the FCA.
The capital adequacy rules applicable to the Regulated Subsidiaries are currently contained in the Prudential Standards Section of the FCA Rules and the CRD IV.
The FCA discharges its prudential supervision role, in part, through the regulatory capital requirements.
The regulatory capital rules require firms, at all times, to maintain a specified level of regulatory capital (based on the prudential risk the firm poses in conducting its particular business activities).
The rules are designed to ensure that firms can meet all liabilities as they fall due and to safeguard their financial stability and that of their clients and counterparties.
The FCA expects firms to be proactive in monitoring and managing financial risks, in accordance with its requirement for firms to maintain adequate financial resources.
The FCA's regulatory capital requirements apply both to individual authorised entities and at a consolidated level across groups of which an authorised firm or firms are members. The FCA may exercise consolidated supervision up to the top EEA parent in a firm's group. AJ Bell is subject to consolidated supervision.
Firms may apply to the FCA for a waiver from consolidated supervision however AJ Bell does not have such a waiver and AJ Bell does not intend to apply for such waiver in the foreseeable future.
There are certain ''controlled functions'' that are undertaken by individuals for (or on behalf of) an authorised firm and who usually have significant influence over the firm's regulatory conduct. As a result the persons who perform these functions must be approved by the FCA as fit and proper. These are known as ''approved persons''. An approved person must abide by the rules and principles set out in the APER. The rules and principles in the APER sourcebook apply to FCA approved persons.
The rules in the APER sourcebook include acting with integrity, acting with due skill, care and diligence, observing proper standards of market conduct and dealing with regulators in an open and co-operative way. If an approved person breaches the rules or principles the FCA may take enforcement action against the individual, including public censure, fines and/or the removal of approved status. A firm may also face enforcement action for breaches by its approved persons.
The SMCR, which currently applies to banks and very large investment firms, is set to be extended to include all authorised firms, including the Regulated Subsidiaries. The FCA has consulted on the rules to implement the SMCR and intends to replace the approved persons regime with the SMCR for almost all financial services firms.
As such a wide range of firms will be within the scope of the new SMCR requirements the FCA is not proposing to mirror the approach it took for banking firms. Instead it intends to apply consistent principles across the sector in a regime that is ''proportionate and flexible enough to accommodate the different business models and governance structures of firms''. The FCA is proposing:
The regime is expected to commence in relation to solo-authorised firms from 9 December 2019. AJBSL will be required to comply with an enhanced firm regime, whereas AJBML and AJBAML will be required to comply with the baseline core requirements.
Under the FSMA change of control regime, a person who is intending to acquire or increase ''control'' over a UK firm authorised and regulated by the FCA is required to seek the FCA's consent before doing so and submit certain specified information and documentation. An FCA-authorised firm must also notify the FCA when there is a transaction which results in that acquisition taking place. A disposal of a controlling interest in an FCA authorised firm must be notified to the FCA before the disposal takes place. Any acquisition of control over the Company or any of the Regulated Subsidiaries individually would be subject to the FCA change of control regime.
A proposed ''controller'' for the purposes of the change in control regime is any natural or legal person (or such persons ''acting in concert'') who decides to acquire, directly or indirectly, or increase control over an FCA-authorised firm. ''Control'' over the Regulated Subsidiaries would be acquired if the acquirer:
The FCA has up to 60 working days from the date of submission of a completed notification to approve or object to any such change in control. If the FCA does serve such a notice, it is required to specify its reasons for its objections in such notice. In the case of persons acting in concert, individual acquisitions will be amalgamated and treated as single holding for the purposes of the regime.
A person who ceases to be a 10% controller is required only to provide written notice to the FCA. In other words, FCA approval is not required for cessation of control.
Breach of the notification and approval regime imposed by FSMA on controllers is a criminal offence.
The FCA's priority in supervising firms is to ensure consumers are at the centre of a firm's business.
The FCA's main approaches to conduct supervision are split into three pillars:
AJ Bell is classified as a Pillar 1 entity.
The FCA allocates all authorised firms into one of two conduct categories either (i) fixed portfolio firms; or (ii) flexible portfolio firms.
Fixed portfolio firms are given a specific supervisor. The FCA proactively supervises such firms using firm-specific continuous assessment.
Flexible portfolio firms are supervised through thematic and market-based work, along with programmes of communication, engagement and education aligned to the key risks the FCA has identified in the relevant sector.
The FCA has recently confirmed that AJ Bell and the Regulated Subsidiaries will no longer be allocated a dedicated supervisory team and instead will be part of the ''Platform Portfolio''.
The FCA has a range of supervisory powers which allow it to intervene in a firm's affairs. The FCA can, for instance, require firms to provide particular information or documents to it, require the production of a report by a ''skilled person'' appointed by the FCA or formally investigate a firm.
In its prudential supervisory role, the FCA considers the systems and controls, governance arrangements, and risk management capabilities including the risk of misconduct. The FCA will seek to assess how well a firm understands the risks it is running, how well placed it is to manage those risks, and how well it can avoid large, unexpected costs.
Firms solely regulated by the FCA are allocated one of four prudential categories depending on the relative perceived risk their failure would pose to markets. AJ Bell is classified as a P2 entity, which applies to firms and groups whose failure would have less impact than P1 firms, but would nevertheless damage markets or consumers and client assets.
The FCA uses a wide range of enforcement powers, criminal, civil and regulatory, to protect consumers and to take action against firms and individuals that do not meet its standards. These include:
* withdrawing a firm's authorisation;
The FOS has compulsory jurisdiction over all FCA-regulated firms including the Regulated Subsidiaries. However, customer complaints relating to the administration of pensions are referred to the Pensions Ombudsman, not FOS, in accordance with the Memorandum of Understanding between FOS and the Pensions Ombudsman.
All FCA-regulated firms must have a procedure in place for resolving disputes with their customers and must respond to customer complaints within set deadlines. If a firm's complaints procedure fails to resolve a complaint, the FOS and Pensions Ombudsman provides a dispute resolution procedure for certain categories of customer complaints brought against applicable firms by individuals and small business customers.
The FOS and Pensions Ombudsman provide a more informal alternative to customers bringing complaints in the courts. They provide independent investigators who review and seek to resolve complaints between customers and firms.
If the FOS resolves a complaint in favour of a customer, it has the power to order a firm to pay fair compensation for any loss or damage it caused to the customer, or to direct a firm to take such steps in relation to the customer as the FOS considers just and appropriate, and irrespective of whether a similar award could be made by a court. Authorised firms fund the FOS through levies and case fees.
The FSCS was established under FSMA, it is a statutory compensation scheme of last resort for certain categories of customers of authorised firms. It provides compensation to eligible customers who suffer losses as a consequence of an authorised firm's inability to meet its liabilities arising from claims made in connection with its regulated activities. The FSCS is funded by levies on authorised firms and is independent of the FCA, the PRA and the UK government, although it is ultimately accountable to them.
The powers of the FSCS to raise funds from authorised firms are set out in the FEES sourcebook of the FCA Rules. In general terms, fees are levied on participant firms and the FSCS may impose three types of levy the 'management expenses levy' (comprising the 'bases costs levy' and the 'specific costs levy'), the 'compensation costs levy' (relating to compensation costs), and the 'MERS levy' which relates to management expenses in respect of 'relevant schemes'.
Participant firms are allocated to a funding class (or classes) on the basis of their regulated activities. The specific costs and compensation costs levies payable by the participating firms are calculated by reference to their funding class or classes. The main principle behind the calculation of these levies is that the levy should represent the amount of claims made or likely to be made against that type of firm. The Regulated Subsidiaries will fall into the ''Investments'' levy class. It should however be noted, that contributions are not restricted to failures in the sub-classes to which a particular firm belongs as there is the possibility that cross-subsidy between levy classes may be required.
The MLRs require relevant persons to apply risk-based customer due diligence measures and take other steps to prevent their services from being used for money laundering or terrorist financing. They also require relevant persons to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk.
SYSC contains financial crime rules that complement the MLRs, requiring firms to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk. Such controls must be comprehensive and proportionate to the nature, scale and complexity of their activities. In this context, financial crime includes any offence involving fraud or dishonesty, misconduct in, or misuse of information relating to, a financial market, handling the proceeds of crime or the financing of terrorism, as well as bribery and corruption offences.
Failure to maintain the necessary procedures is a criminal offence. The Proceeds of Crime Act 2002, the Terrorism Act 2000 and the Counter-Terrorism Act 2008 and the Criminal Justice Act 1993 also contain a number of offences in relation to money laundering. The Joint Money Laundering Steering Group provides good practice guidance and practical assistance in interpreting the MLRs.
AJ Bell has established appropriate systems and controls under the guidance of AJ Bell's Money Laundering Reporting Officer to help it mitigate the risk of financial crime. This including the appropriate suite of policies, use of anti-money laundering technology and ongoing training for all members of staff.
The ICO is the UK's data protection regulator set up as an independent body to uphold information rights. It is responsible for upholding information rights in the public interest, promoting openness by public bodies and data privacy for individuals. It has powers to enforce compliance with Data Protection Legislation which include criminal prosecution, non-criminal enforcement, audit and issuing monetary penalty notices. The ICO is involved in data protection policy making decisions and produces guidance and codes of practice.
AJ Bell collects and processes personal data and sensitive personal data (including names, addresses, contact details, financial information, health information and criminal records) information from its customers and employees as part of the operation of its business.
AJ Bell must therefore comply with all Data Protection Legislation including the recently implemented GDPR and the UK's Data Protection Act 2018.
GDPR imposes certain requirements on AJ Bell in respect of the collection, retention, use, processing and security of personal information. Failure to operate effective data use and information security controls could potentially lead to regulatory enforced compliance measures, fines, reputational and financial losses in responding to or defending its actions.
GDPR also provides data subjects far greater rights and control in respect of their personal data. Failure to be fully transparent at the point of collection about the purpose for and use of personal data or otherwise meet obligations relating to data subject rights could result in compensation payments to data subjects whose rights have been infringed.
GDPR allows representative bodies to bring claims on behalf of data subjects. This could result in a 'group action' being pursued by a third party on behalf of data subjects. A group action could potentially lead to reputational damage and increased financial defence costs and losses depending on the number of data subjects forming the group. The potential sanctions for the most egregious breaches of GDPR include financial penalties of up to 4% of the annual worldwide turnover of company groups.
The GDPR has increased the regulatory burden on AJ Bell in processing personal customer, employee and other data in the conduct of its business.
AJ Bell established a GDPR project to ensure that the new requirements were met by 25 May 2018, the date on which GDPR came into force. AJ Bell monitors ongoing compliance through its established regulatory systems and controls.
If AJ Bell or any of the third party service providers on which it relies (including non-subsidiary affiliates of AJ Bell) fails to comply with Data Protection Legislation, due to any failure to store or transmit information in a secure manner or any loss or wrongful processing of personal customer data, AJ Bell could be subject to investigative and enforcement action by the ICO and complaints or claims from data subjects.
Pension saving under registered pension schemes is subject to favourable tax treatment, which acts as an incentive for employees and individuals to save for retirement and thus be less reliant on the state pension system. However, the extent to which pension savings attract tax relief is subject to certain limits imposed by HMRC. In order to enjoy the tax advantages available to pension schemes in the UK the SIPPs and SSASs administered by AJ Bell are registered with HMRC.
As registered pension schemes, the SIPPs and SSASs are obliged to provide information to HMRC including the provision of a pension scheme return (to be provided on request), accounting for tax returns, event reports and reporting pension flexibility payments.
If payments are made from the schemes that are not authorised payments under the Finance Act 2004, HMRC will impose unauthorised payment charges, and scheme sanction charges in respect of the payments.
Tax considerations are relevant to a UK registered pension scheme when:
The current pensions tax relief system can broadly be described as 'Exempt-Exempt-Taxed' on the following basis:
The AJ Bell Platinum SSASs are occupational pension schemes for legislative purposes. As a result they are regulated by the Pensions Regulator.
The Pensions Regulator is the public body that protects workplace pensions in the UK. The post of the Pensions Regulator was created on 6 April 2005 by Pensions Act 2004. The principal objectives of the Pensions Regulator are set out in the Pensions Act 2004. These include:
The SSAS are registered with the Pensions Regulator in accordance with the Pensions Act 2004. As such the scheme administrator for each scheme is required to provide and update registrable information in respect of each scheme as well as providing a scheme return to the Pensions Regulator whenever the Pensions Regulator issues a scheme return notice. There are also whistleblowing obligations that apply in respect of the trustees and scheme administrators of SSASs.
The Pensions Regulator has issued a code of practice in respect of the governance and administration of occupational trust-based schemes providing money purchase benefits. This code applies to a limited extent to the SSASs although SSASs will generally be exempt from parts of the code (for example in respect of default arrangements and charge caps and the preparation of an annual chair's statement).
The Pensions Regulator has various enforcement powers in respect of defined contribution workplace schemes such as the SSASs, these include the ability to appoint and remove trustees of schemes and to issue fines for non-compliance with legislation under section 10 of the Pensions Act 1995.
An ISA is a scheme of investment managed in accordance with ISA regulations under terms agreed between the ISA manager and the investor. The ISA manager holds investments and claims repayment of income tax deducted at source, by submitting claims to HMRC. There are various types of ISAs permitted by UK law being:
Investors do not pay any tax on any of the income they receive from ISA savings and investments. Nor do they pay any tax on capital gains arising on ISA investments. In order to protect the integrity of the UK taxation system there are limits placed around who can hold an ISA, how many ISAs an individual can open in a tax year and the amount that can be paid into an individual's ISAs in a tax year. An ISA manager must also collect prescribed information and receive prescribed declarations from individuals applying for an ISA.
In order to be able to offer ISAs and LISAs to investors AJBSL has registered with, and been approved by, HMRC as an ISA manager and a LISA manager. As a registered ISA manager AJBSL is obliged to provide information to HMRC and make claims from HMRC including updating HMRC with any changes to the information provided in its application for registrations as an ISA manager, the making of an annual return and tax claim, the making of an annual return of information, and an annual market value return of statistical information (market value and subscriptions).
AJ Bell, including the Regulated Subsidiaries, is subject to EU law, both directly through European regulations and indirectly through European directives, to which the UK is currently obliged to give effect through its legislative powers. Recent EU regulation of most significance that applies to AJ Bell is set out below.
MiFID II applies to firms in the EEA who engage in certain investment activities, including dealing and execution services, investment advice and portfolio management. Building on MiFID, it aims to harmonise the regulatory framework across the EEA to make financial markets more efficient and resilient, increase transparency of both equity and non-equity markets, reinforce supervisory powers, and provide protection for investors.
MiFID II sets out detailed provisions on systems and controls, outsourcing, customer classification, conflicts of interest, best execution, client order handling, suitability and appropriateness, transparency and transaction reporting. Requirements relating to transaction reporting, costs and charges disclosure, product governance and conduct of business requirements all affect AJ Bell's operations.
MiFID II also allows investment firms authorised in accordance with its provisions to passport their services into other EEA states without needing to obtain separate authorisations locally.
The PRIIPs Regulation aims to encourage efficient EU markets by helping investors to better understand and compare the key features, risk, rewards and costs of different PRIIPs, by obliging PRIIPs manufacturers and distributors to provide access to a short and consumer-friendly Key Information Document.
PRIIPs can take a variety of legal forms but can be distinguished by the comparable functions they perform for retail investors. PRIIPS can be broadly categorised into four main groups: (i) investment funds, (ii) insurance-based investment products, (iii) retail structured securities, and (iv) structured term deposits. The PRIIPS Regulation has applied (subject to limited transitional provisions) to products such as units in an investment fund (except UCITS Schemes), life insurance policies with an investment element and structured deposits since 1 January 2018. It is set to apply to UCITS schemes with effect from 31 December 2019.
CRD IV, comprising the Capital Requirements Directive IV and the Capital Requirements Regulation, is an EU legislative framework for the prudential supervision of banks, building societies and investment firms. Certain MiFID investment firms, including those with permissions relating to the safeguarding of client assets or handling of client money, are subject to the provisions of CRD IV as regards prudential and capital standards. AJBAML and AJBSL are subject to these rules. There are changes being proposed to the capital requirements regime under Capital Requirements Directive V and Capital Requirements Regulation II but these are not anticipated prior to 2019. Therefore whether these changes will have any impact on the Regulated Subsidiaries is unclear because the possibility of these changes taking effect prior to the UK's planned departure from the EU is remote.
The UCITS regime provides a set of common standards applicable across all EU member states for the operation of and cross border promotion of UCITS Schemes.
The UCITS regime aims to create a single market for open-ended retail investment funds which affords enhanced protection for investors.
It requires EU member states to adopt harmonised rules regulating the authorisation, supervision, structure and activities of UCITS funds together with harmonised rules about investor information and passporting requirements. VT AJ Bell ICVC is a UCITS scheme and therefore must be operated in accordance with the UCITS Directive.
In addition to the FCA's prudential standards and capital adequacy requirements, AJBAML and AJBSL must comply with the wider prudential framework of CRD IV which mainly applies to banks.
The EBA contributes to a European Single Rulebook in banking by providing Binding Technical Standards (''BTS'') and Guidance. The Rulebook aims to provide a single set of harmonised prudential rules for financial institutions throughout the EU in order to create a level playing field and a high level of protection for customers.
The BTS are legal acts which specify particular aspects of an EU legislative text (directive or regulation) and aim at ensuring consistent harmonisation in specific areas. The BTS are legally binding and directly applicable in all Member States including in the UK and therefore AJBAML and AJBSL must comply with these to the extent they apply to their activities.
The EBA and European Securities and Market Authority are working on the review of the application of the prudential rules to investment firms, with the aim of establishing an appropriate prudential framework for investment firms.
FCA-regulated firms have recently been subject to substantial regulatory change. There is further regulatory change on the horizon, with the main changes likely to impact AJ Bell summarised below.
The FCA announced in 2017 that it would be undertaking the Investment Platform Market Study on investment platforms. The market study explores how investment platforms compete to win new, and retain existing, consumers, to allow the FCA to assess how to improve competition within the platform market and develop better consumer outcomes.
In particular, the FCA has looked to assess:
The FCA published its interim report the Investment Platform Market Study in July 2018, which noted that the investment platform market was working well in many respects. There are areas that the FCA identified where it was concerned that competition in the market was not working well and it is consulting on remedies for these areas. The FCA's consultation on remedies for the market focuses on the following main areas:
The FCA expects to publish its final report and recommendations in the first quarter of 2019, following the end of the consultation on its interim report proposals on 21 September 2018.
The Fifth Money Laundering Directive (''MLD5'') contains amendments to the existing money laundering directive as well as the Capital Requirements Directive. MLD5 will, amongst other things:
The majority of changes will be effected by 10 January 2020.
The FCA is consulting on draft guidance outlining the factors which financial services companies should consider when drafting and reviewing variation terms in consumer contracts, the first it has issued following the introduction of the Consumer Rights Act 2015 and several rulings on the topic by the Court of Justice of the EU. The draft guidance outlines factors for financial institutions to consider when seeking to draft variation terms, and also considers a number of reasons for contract variation that the FCA has observed firms commonly include when drafting variation terms allowing them to alter their consumer contracts. AJ Bell will take any finalised guidance into account in updating or changing customer terms.
In February 2018, the FCA published a discussion paper looking at effective competition in non-workplace pensions: DP18/1. The paper was launched in order for the FCA to better understand the market for non-workplace pensions: the providers, the consumers and the relationship between them, with a view to assessing the potential presence, nature and extent of harm. The FCA outlined its areas of potential concerns about how the market is working and the reasons for its concerns. It noted that in some aspects it sees parallels with the findings of the OFT study on the defined contribution workplace pensions market in 2013 which concluded that competition alone could not be relied on to drive value for money and good outcomes for consumers of DC workplace pensions. That study led to increased regulation of the workplace pensions market, including the introduction of caps on certain charges.
The period for submission of information has now closed. At this stage, it is difficult to assess whether the FCA focus on non-workplace pensions will have any material impact on the non-workplace pension market in the UK or lead to any material changes in the interaction between non-workplace pension providers and other participants in the UK wealth management sector, such as asset managers and financial advisers.
In June 2018, the FCA published a consultation paper regarding improving retirement outcomes for consumers: CP18/17. In the consultation paper the FCA proposes a remedy package to address the potential consumer harm and emerging issues it has identified arising from the pension freedoms introduced in 2015. The FCA's remedy package aims to: protect consumers from poor outcomes; improve consumer engagement with retirement income decisions; and promote competition by making the costs of drawdown clearer and comparisons easier.
The potential changes suggested by the FCA include:
Whilst it is not certain which of the proposed changes will be brought in to force and in what form, AJ Bell is actively engaging with the FCA in relation to its proposals. Whilst the proposed changes could lead to an increased administrative burden on AJ Bell, the directors believe that AJ Bell is in a good position to respond to any changes required and that any changes should not have a material adverse impact on its business.
Although the finalised text of the GDPR was published over two years ago, there is general uncertainty about how the GDPR and the Data Protection Act 2018 are going to be interpreted and enforced, with guidance related to many areas of the GDPR only having recently been published by UK and EU regulators. Therefore, AJ Bell must, in practice, ensure its compliance with the GDPR is constantly evolving. AJ Bell will ensure it continuously reviews its decisions and ensure that the latest guidance from the ICO, or indeed the European Data Protection Board, is taken into account in its decisions in relation to processing of personal data and reassess the risks in this context.
The E-Privacy Regulation was due to be implemented on 25 May 2018 at the same time as GDPR. It is anticipated that this will now be implemented in 2020. The E-Privacy Regulation will seek to harmonise protection of electronic communications across the EU Member States, broaden the electronic communications that are captured, implement a higher level of protection and simplify the rules in relation to cookies. The enforcement of the Regulation will be the responsibility of the ICO.
The ICO has indicated that it is unlikely that the UK will receive an adequacy decision on the UK's exit from the EU, pursuant to which the EU confirms that privacy legislation in a non-EU state is sufficiently stringent so as to permit transfer of data from inside the EU to that state. In the absence of an adequacy decision, the UK has implemented the Data Protection Act 2018 which incorporates the GDPR directly into UK legislation and ensures consistency with the EU in respect of requirements for processing of personal data. It is currently envisaged that a treaty will be implemented between the UK and the EU in order to ensure data transfers can still occur without the additional burden of entering into the EU Standard Contractual Clauses which have been developed by the European Commission to provide adequate terms to safeguard protection of personal data when an international transfer takes place without an adequacy decision or a treaty in place.
The following is a review of AJ Bell's operating performance and financial position.
The consolidated financial information referred to in this Part 5 has been prepared in accordance with (i) IFRS as adopted by the EU; (ii) the requirements of the Prospectus Directive; and (iii) the Listing Rules, and, unless otherwise stated, has been extracted without material adjustment from Part 6 (Historical Financial Information) of this Registration Document.
In this discussion and analysis, the financial years ended 30 September 2016, 30 September 2017 and 30 September 2018 are referred to as FY2016, FY2017 and FY2018, respectively.
The financial information referred to in the following discussion and analysis has been rounded to the nearest decimal place and percentage changes have been calculated based upon these rounded numbers and so may not conform exactly to the calculation based upon the underlying unrounded figures.
This Part 5 (Operating and Financial Review) of this Registration Document contains ''forward-looking statements''. Those statements are subject to risks, uncertainties and other factors that could cause AJ Bell's future results of operations or cash flows to differ materially from the results of operations or cash flows expressed or implied in such forward-looking statements. Prospective investors should read the section entitled ''Presentation of Information'' and Part 2 (Risk Factors) of this Registration Document for further information in this respect. In addition, certain industry issues also affect the Group's results of operations and are described in Part 1 (Market Overview) of this Registration Document.
AJ Bell is one of the largest investment platforms in the UK, based on the value of its AUA. The total value of the Group's AUA was £46.1 billion as at 30 September 2018. AJ Bell's flagship propositions are AJ Bell Investcentre, which operates in the advised segment of the platform market and AJ Bell Youinvest which operates in the D2C segment. The Group operates principally as a platform business although it also maintains an element of non-Platform business.
AJ Bell Youinvest and AJ Bell Investcentre combined had £38.6 billion in AUA as at 30 September 2018 with 183,213 customers. These two platform propositions are described briefly below:
AJ Bell Youinvest and AJ Bell Investcentre provide access to a broad investment range including shares and other financial instruments traded on the major stock exchanges around the world, as well as mainstream collective investments available in the UK. AJ Bell also offers a range of in-house investment solutions, including the AJ Bell Passive funds, the AJ Bell Investcentre Managed Portfolio Service and the AJ Bell Youinvest Favourite Funds list and from the end of the last quarter of 2018 Ready-made portfolios.
AJ Bell's non-Platform business, which had £7.5 billion in AUA as at 30 September 2018 with 14,699 customers, comprises:
* AJ Bell Securities stockbroking: providing dealing, settlement and custody services to institutional investment businesses.
AJ Bell was co-founded in 1995 in Manchester by Andy Bell and Nicholas Littlefair to provide actuarial, trustee and pension administration services to customers with a SSAS or SIPP. In 2000, AJ Bell launched Sippdeal, the first online SIPP in the UK for execution only investors. In 2002, AJ Bell launched Sippcentre, as a low cost SIPP for financial advisers and their clients. Since then, AJ Bell has grown its customers and AUA organically, but has also made some small strategic acquisitions to enhance AJ Bell's platform propositions. In December 2007, AJ Bell acquired Lawshare to bring its stockbroking capabilities in-house and facilitate the offering of ISAs and general investment/dealing accounts to its platform customers. In December 2012, AJ Bell acquired MSM Media to expand the range of investment content offered to its platform customers. More recently in February 2016, AJ Bell acquired Indexx Markets and Mansard Capital to facilitate the launch of its in-house range of investment solutions. AJ Bell's heritage is evident in the value of assets held in SIPPs, which was 72% of AJ Bell's overall AUA as at 30 September 2018. SIPPs are long term savings products which provide AJ Bell with a high proportion of recurring revenue.
AJ Bell's principal source of revenue arises from the fees charged for the provision of platform services. AJ Bell's revenue is classified into recurring revenues and transactional revenues as follows:
AJ Bell has a diverse revenue model with recurring income representing 82% of revenue in FY2018, and transactional revenue of 18%. The level of ad valorem charges included within recurring income varies with the size of the customer's portfolio and, as a consequence, more generally with the amount of AUA.
AJ Bell's distribution model is diversified, operating in both the advised and D2C segments of the platform market. Further, the business is not reliant on any key customer or independent financial adviser. The largest single distribution contract as at 30 September 2018 comprised less than 1.5% of total revenue.
AJ Bell's business is highly cash generative and it has a capital light model. Cash generated from operations has averaged over 100% of profit before taxation for the period covered by the historical financial information as AJ Bell benefits from a short working capital cycle and low levels of capital expenditure following the completion of its major re-platforming exercise in 2014.
Growth has been funded from retained earnings and has not required primary equity fundraising or material debt finance.
AJ Bell's strong regulatory capital position is evidenced by a regulatory capital surplus yielding coverage of 440% of its Pillar 1 regulatory capital requirements during the period covered by the historical financial information.
Management considers a variety of financial measures and other metrics when analysing AJ Bell's performance, and the Directors believe that each of these measures provides useful information with respect to AJ Bell's business and operations. With the exception of revenue and profit before tax, these are non-IFRS financial measures and metrics that are not audited. These non-IFRS financial measures and metrics are not meant to be considered in isolation or as a substitute for measures of financial performance reported in accordance with IFRS. Moreover, these non-IFRS financial measures and metrics may be defined or calculated differently by other companies, and as a result AJ Bell's key performance indicators may not be comparable to similar measures and metrics calculated by its peers.
| | As at
Platforum UK D2C: Market Size and Structure, February 2018
As at 30 September 2018, the value of the average customer portfolio for AJ Bell Investcentre was £337,000, and for AJ Bell Youinvest was £92,000, both of which are higher than the market leader (by market share) in the relevant market segment, which provides an indication of the quality of AJ Bell's customers.
As at 30 September 2018, AJ Bell Youinvest had around 94,000 customers, with a total of £8.7 billion AUA. Its target customers are UK residents seeking to invest online in a range of stock market investments and collective investment schemes, through a variety of tax wrappers (for example SIPPs, ISAs and dealing accounts) on an execution-only basis. Customers are segmented on the basis of their attitude to investing, defined as either ''nervous newcomer'', ''hungry for help'' or ''confident in control''. Based on the AJ Bell customer survey, in August 2018, 56% of AJ Bell Youinvest's customers define themselves as ''confident in control'', although this percentage has been falling gradually as AJ Bell Youinvest attracts more customers from the growing numbers of those falling into the ''advice gap''.
AJ Bell Investcentre receives business from financial advisers and wealth managers, who have advised around 89,000 of their clients to invest £29.9 billion of their assets through AJ Bell Investcentre as at 30 September 2018. In a recent survey by Platforum, AJ Bell is ranked fourth out of 17 investment platforms in being considered by its users as their primary platform. Platforum calculated that the primary platform attracts a 46% share of the advisers' platform business.
The table below, produced by Hardman & Co Research, shows the top ranked advised platforms, based on advisers transferring to and from the platform based on data in the Platforum, UK Adviser Platform Guide Issue 33, March 2018. The first column shows the percentage of a platform's users which are transferring assets away to a rival platform; the second column shows the percentage of advisers who would consider each platform for future use (it not being currently one of their suppliers); and the third column subtracts the ''Transfers from'' from the ''Transfers to'' to arrive at a net score. Hardman notes that the methodology is ''not exactly scientific, but it is a simple way of ranking the platforms by their current perceived attractiveness''.
| Transfer from | Transfer to | Net | |
|---|---|---|---|
| Aviva | 4% | 18% | 14% |
| AJ Bell Investcentre | 5% | 18% | 13% |
| Standard Life | 7% | 20% | 13% |
| Transact | 6% | 16% | 10% |
| Parmenion | 3% | 8% | 5% |
| Aegon | 6% | 10% | 4% |
| Fundsnetwork | 15% | 19% | 4% |
| 7IM | 8% | 9% | 1% |
| Zurich | 12% | 11% | -1% |
| Old Mutual Wealth | 18% | 16% | -2% |
| James Hay | 16% | 12% | -4% |
| Nucleus | 12% | 7% | -5% |
| Ascentric | 15% | 8% | -7% |
| Novia | 14% | 6% | -8% |
| Elevate | 20% | 9% | -11% |
| Cofunds | 25% | 9% | -16% |
| Alliance Trust Savings | 31% | 6% | -25% |
Sources: Hardman &Co Research ''AJ Bell – Insight Report'' 19 June 2018 using Platforum and Hardman data
The type of accounts opened by customers has become increasingly diverse, with more ISAs and dealing accounts being set up, but, as shown below, SIPPs still represent a significant percentage of accounts, both by number and AUA. This reflects both AJ Bell's heritage as one of the leading SIPP providers and its continued focus on attracting high value pension business.
(1): Source: AJ Bell Investcentre data as at 30 September 2018. (2): Source: AJ Bell Youinvest data as at 30 September 2018.
AJ Bell benefits from operational gearing and a low-cost business model. Margins have grown over the period covered by the historical financial information at the same time as the number of new customers have increased. The Directors believe that as new customers are added and existing customers continue to make contributions there will be margin growth opportunities.
AJ Bell has developed a hybrid technology model, which seeks to combine proprietary and third party components to best effect.
AJ Bell maintains complete control over its interactions with its customers and advisers through its adaptable and easy to use proprietary user interfaces, which are developed and maintained in-house. These include internal interfaces, which enhance ease of use for service teams, and AJ Bell's proprietary websites and mobile apps with the focus on ease of use for customers and advisers. The two main back-office systems are well-established within the platform market, these being GBST's Composer system and JHC's Figaro software. These suppliers provide scalable systems which are updated for regulatory change, with regular enhancements to system functionality in response to user feedback and support for additional AJ Bell specific development. AJ Bell's systems are well integrated and efficient, allowing high levels of online customer servicing, straight-through processing and automation. Around 99% of AJ Bell's retail equity and fund deals are now placed online. The Platform experiences high levels of activity with almost 43,000 accounts opened for AJ Bell Youinvest with gross inflows of £7.8 billion for AJ Bell Youinvest and AJ Bell Investcentre during FY2018.
Following completion of the back-office re-platforming in 2014, AJ Bell's Platform technology is robust, scalable and adaptable and well placed to support the planned growth. The technology is now fully embedded in the business, while many of AJ Bell's competitors are still in the midst of their re-platforming exercises. This allows new products to be added quickly, for example the LISA which was made available on AJ Bell Youinvest within two months of the legislative launch date.
The centralisation of all core operational functions in AJ Bell's Manchester headquarters, following the closure of its Tunbridge Wells office in 2018, is expected to create further opportunities to improve business efficiency and the service provided to customers.
AJ Bell continues to invest significantly in technology to ensure the Platform remains secure and efficient and to deliver enhancements to the services provided to customers and advisers, in line with their changing needs.
The regulatory landscape within which AJ Bell operates changes regularly and is increasingly stringent, but as a well-capitalised business with an adaptable platform, the Directors believe AJ Bell's business is well placed to cope with these future changes.
High customer retention rates and a mixture of revenue types combine to yield predictable and sustainable revenue streams from AJ Bell's business. AJ Bell's revenue comprises a mixture of transactional and recurring revenue, both as ad-valorem and fixed monetary charges.
Sources:
(2): Transactional revenue: Transactional / activity based income.
AJ Bell's stable, diverse earnings coupled with a low cost operating model, which is materially debt-free, supports AJ Bell's future profit potential.
Cash generated from operations has averaged over 100% of profit before tax over the past three years and the quick conversion of profits to cash has supported the growth of the business to date.
(1):ust ensure that the authorised person/applicant meets certain threshold conditions (see below) whenever it grants or agrees to vary the terms of an authorised person's permissions.
Further, the FCA may impose such ''Requirements'' on an authorised person as it considers appropriate to require that person to take, or refrain from taking, specified action under FSMA.
These requirements apply to all of the financial services activities that the authorised person can operate and may relate to a range of matters, these include amongst others, the scope of the firm's business, the types of customer to whom the firm may provide services, how the firm may treat client money, capital adequacy and/or liquidity requirements.
Authorised firms are required to maintain a specified set of minimum standards set out in FSMA in order to become and remain authorised (the ''threshold conditions''). The threshold conditions cover matters including the location of offices, effective supervision, appropriate resources, the suitability of the authorised person and its business model.
The Regulated Subsidiaries must comply with, among other things, FSMA (and secondary legislation made under it), the FCA Rules and other relevant UK and directly applicable EU legislation.
The FCA Rules are divided into various blocks and sourcebooks containing rules and guidance.
The sections of most relevance for AJ Bell's day-to-day business are the Principles for Business and the COBS and CASS. Other important sections include those governing prudential standards and regulatory capital, senior management arrangements, systems and controls. The FSMA change of control regime for authorised persons is also relevant.
The FCA's principles (the Principles) form part of the FCA's High Level Standards set out in the FCA Rules; they are a general statement of the fundamental obligations of firms under the regulatory system. They derive their authority from the FCA's rulemaking powers as set out in FSMA and reflect the FCA's statutory objectives.
The Principles form the foundation of authorised firms' responsibilities to their clients. They are binding on firms and underpin the FCA Rules. The Principles provide authorised persons with a clear and concise statement of their fundamental obligations under the FSMA regulatory regime and the standards that the FCA expects authorised persons to meet in the day-to-day conduct of their business. They also provide a basis for supervisory activity and enforcement action by the FCA. Breaching a Principle makes a firm liable to disciplinary sanctions from the FCA (as further detailed in the Supervision and Enforcement section below).
The Principles set high standards for firms to comply with but allow firms to determine how they achieve those standards. The measures taken and the resources required by firms to comply with the Principles should depend on the nature and risks of the relevant firm's business. The Principles acknowledge that the measures taken should be proportionate to those risks.
The COBS rules set out a wide range of day-to-day business standards that authorised persons must comply with in various aspects of their relationships with clients.
The application of the COBS rules vary according to the scope of the firm's business and its activities and the types of client it deals with.
The application of the COBS rules will generally include: the need to provide retail clients with information about the firm; the need to categorise clients appropriately; the need to meet certain standards of disclosure about the firm's products and services including the related costs and charges; the firm ensuring that communications with clients are clear, fair and not misleading; the need to assess suitability when advising on certain products; ensuring it has appropriate agreements in place with clients; the need to manage conflicts of interest; and to report appropriately to clients.
The FCA requires firms to arrange adequate protection for clients' assets when such firm is responsible for them. Firms with permission to safeguard and administer custody assets and/or with permission to hold client money must comply with the Custody Rules and the Client Money Rules (respectively) in the CASS Rules. The CASS Rules require firms to clearly identify client assets, to hold client money separately from the firm's own money, to keep accurate records and carry on internal and external reconciliations, to make good any client money shortfalls, and to appoint an individual responsible for CASS compliance.
Authorised firms carrying on regulated activities must, at all times, comply with the prudential standards and capital adequacy requirements imposed by (in the case of the Regulated Subsidiaries) the EU Capital Requirements Directive and the FCA.
The capital adequacy rules applicable to the Regulated Subsidiaries are currently contained in the Prudential Standards Section of the FCA Rules and the CRD IV.
The FCA discharges its prudential supervision role, in part, through the regulatory capital requirements.
The regulatory capital rules require firms, at all times, to maintain a specified level of regulatory capital (based on the prudential risk the firm poses in conducting its particular business activities).
The rules are designed to ensure that firms can meet all liabilities as they fall due and to safeguard their financial stability and that of their clients and counterparties.
The FCA expects firms to be proactive in monitoring and managing financial risks, in accordance with its requirement for firms to maintain adequate financial resources.
The FCA's regulatory capital requirements apply both to individual authorised entities and at a consolidated level across groups of which an authorised firm or firms are members. The FCA may exercise consolidated supervision up to the top EEA parent in a firm's group. AJ Bell is subject to consolidated supervision.
Firms may apply to the FCA for a waiver from consolidated supervision however AJ Bell does not have such a waiver and AJ Bell does not intend to apply for such waiver in the foreseeable future.
There are certain ''controlled functions'' that are undertaken by individuals for (or on behalf of) an authorised firm and who usually have significant influence over the firm's regulatory conduct. As a result the persons who perform these functions must be approved by the FCA as fit and proper. These are known as ''approved persons''. An approved person must abide by the rules and principles set out in the APER. The rules and principles in the APER sourcebook apply to FCA approved persons.
The rules in the APER sourcebook include acting with integrity, acting with due skill, care and diligence, observing proper standards of market conduct and dealing with regulators in an open and co-operative way. If an approved person breaches the rules or principles the FCA may take enforcement action against the individual, including public censure, fines and/or the removal of approved status. A firm may also face enforcement action for breaches by its approved persons.
The SMCR, which currently applies to banks and very large investment firms, is set to be extended to include all authorised firms, including the Regulated Subsidiaries. The FCA has consulted on the rules to implement the SMCR and intends to replace the approved persons regime with the SMCR for almost all financial services firms.
As such a wide range of firms will be within the scope of the new SMCR requirements the FCA is not proposing to mirror the approach it took for banking firms. Instead it intends to apply consistent principles across the sector in a regime that is ''proportionate and flexible enough to accommodate the different business models and governance structures of firms''. The FCA is proposing:
The regime is expected to commence in relation to solo-authorised firms from 9 December 2019. AJBSL will be required to comply with an enhanced firm regime, whereas AJBML and AJBAML will be required to comply with the baseline core requirements.
Under the FSMA change of control regime, a person who is intending to acquire or increase ''control'' over a UK firm authorised and regulated by the FCA is required to seek the FCA's consent before doing so and submit certain specified information and documentation. An FCA-authorised firm must also notify the FCA when there is a transaction which results in that acquisition taking place. A disposal of a controlling interest in an FCA authorised firm must be notified to the FCA before the disposal takes place. Any acquisition of control over the Company or any of the Regulated Subsidiaries individually would be subject to the FCA change of control regime.
A proposed ''controller'' for the purposes of the change in control regime is any natural or legal person (or such persons ''acting in concert'') who decides to acquire, directly or indirectly, or increase control over an FCA-authorised firm. ''Control'' over the Regulated Subsidiaries would be acquired if the acquirer:
The FCA has up to 60 working days from the date of submission of a completed notification to approve or object to any such change in control. If the FCA does serve such a notice, it is required to specify its reasons for its objections in such notice. In the case of persons acting in concert, individual acquisitions will be amalgamated and treated as single holding for the purposes of the regime.
A person who ceases to be a 10% controller is required only to provide written notice to the FCA. In other words, FCA approval is not required for cessation of control.
Breach of the notification and approval regime imposed by FSMA on controllers is a criminal offence.
The FCA's priority in supervising firms is to ensure consumers are at the centre of a firm's business.
The FCA's main approaches to conduct supervision are split into three pillars:
AJ Bell is classified as a Pillar 1 entity.
The FCA allocates all authorised firms into one of two conduct categories either (i) fixed portfolio firms; or (ii) flexible portfolio firms.
Fixed portfolio firms are given a specific supervisor. The FCA proactively supervises such firms using firm-specific continuous assessment.
Flexible portfolio firms are supervised through thematic and market-based work, along with programmes of communication, engagement and education aligned to the key risks the FCA has identified in the relevant sector.
The FCA has recently confirmed that AJ Bell and the Regulated Subsidiaries will no longer be allocated a dedicated supervisory team and instead will be part of the ''Platform Portfolio''.
The FCA has a range of supervisory powers which allow it to intervene in a firm's affairs. The FCA can, for instance, require firms to provide particular information or documents to it, require the production of a report by a ''skilled person'' appointed by the FCA or formally investigate a firm.
In its prudential supervisory role, the FCA considers the systems and controls, governance arrangements, and risk management capabilities including the risk of misconduct. The FCA will seek to assess how well a firm understands the risks it is running, how well placed it is to manage those risks, and how well it can avoid large, unexpected costs.
Firms solely regulated by the FCA are allocated one of four prudential categories depending on the relative perceived risk their failure would pose to markets. AJ Bell is classified as a P2 entity, which applies to firms and groups whose failure would have less impact than P1 firms, but would nevertheless damage markets or consumers and client assets.
The FCA uses a wide range of enforcement powers, criminal, civil and regulatory, to protect consumers and to take action against firms and individuals that do not meet its standards. These include:
* withdrawing a firm's authorisation;
The FOS has compulsory jurisdiction over all FCA-regulated firms including the Regulated Subsidiaries. However, customer complaints relating to the administration of pensions are referred to the Pensions Ombudsman, not FOS, in accordance with the Memorandum of Understanding between FOS and the Pensions Ombudsman.
All FCA-regulated firms must have a procedure in place for resolving disputes with their customers and must respond to customer complaints within set deadlines. If a firm's complaints procedure fails to resolve a complaint, the FOS and Pensions Ombudsman provides a dispute resolution procedure for certain categories of customer complaints brought against applicable firms by individuals and small business customers.
The FOS and Pensions Ombudsman provide a more informal alternative to customers bringing complaints in the courts. They provide independent investigators who review and seek to resolve complaints between customers and firms.
If the FOS resolves a complaint in favour of a customer, it has the power to order a firm to pay fair compensation for any loss or damage it caused to the customer, or to direct a firm to take such steps in relation to the customer as the FOS considers just and appropriate, and irrespective of whether a similar award could be made by a court. Authorised firms fund the FOS through levies and case fees.
The FSCS was established under FSMA, it is a statutory compensation scheme of last resort for certain categories of customers of authorised firms. It provides compensation to eligible customers who suffer losses as a consequence of an authorised firm's inability to meet its liabilities arising from claims made in connection with its regulated activities. The FSCS is funded by levies on authorised firms and is independent of the FCA, the PRA and the UK government, although it is ultimately accountable to them.
The powers of the FSCS to raise funds from authorised firms are set out in the FEES sourcebook of the FCA Rules. In general terms, fees are levied on participant firms and the FSCS may impose three types of levy the 'management expenses levy' (comprising the 'bases costs levy' and the 'specific costs levy'), the 'compensation costs levy' (relating to compensation costs), and the 'MERS levy' which relates to management expenses in respect of 'relevant schemes'.
Participant firms are allocated to a funding class (or classes) on the basis of their regulated activities. The specific costs and compensation costs levies payable by the participating firms are calculated by reference to their funding class or classes. The main principle behind the calculation of these levies is that the levy should represent the amount of claims made or likely to be made against that type of firm. The Regulated Subsidiaries will fall into the ''Investments'' levy class. It should however be noted, that contributions are not restricted to failures in the sub-classes to which a particular firm belongs as there is the possibility that cross-subsidy between levy classes may be required.
The MLRs require relevant persons to apply risk-based customer due diligence measures and take other steps to prevent their services from being used for money laundering or terrorist financing. They also require relevant persons to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk.
SYSC contains financial crime rules that complement the MLRs, requiring firms to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk. Such controls must be comprehensive and proportionate to the nature, scale and complexity of their activities. In this context, financial crime includes any offence involving fraud or dishonesty, misconduct in, or misuse of information relating to, a financial market, handling the proceeds of crime or the financing of terrorism, as well as bribery and corruption offences.
Failure to maintain the necessary procedures is a criminal offence. The Proceeds of Crime Act 2002, the Terrorism Act 2000 and the Counter-Terrorism Act 2008 and the Criminal Justice Act 1993 also contain a number of offences in relation to money laundering. The Joint Money Laundering Steering Group provides good practice guidance and practical assistance in interpreting the MLRs.
AJ Bell has established appropriate systems and controls under the guidance of AJ Bell's Money Laundering Reporting Officer to help it mitigate the risk of financial crime. This including the appropriate suite of policies, use of anti-money laundering technology and ongoing training for all members of staff.
The ICO is the UK's data protection regulator set up as an independent body to uphold information rights. It is responsible for upholding information rights in the public interest, promoting openness by public bodies and data privacy for individuals. It has powers to enforce compliance with Data Protection Legislation which include criminal prosecution, non-criminal enforcement, audit and issuing monetary penalty notices. The ICO is involved in data protection policy making decisions and produces guidance and codes of practice.
AJ Bell collects and processes personal data and sensitive personal data (including names, addresses, contact details, financial information, health information and criminal records) information from its customers and employees as part of the operation of its business.
AJ Bell must therefore comply with all Data Protection Legislation including the recently implemented GDPR and the UK's Data Protection Act 2018.
GDPR imposes certain requirements on AJ Bell in respect of the collection, retention, use, processing and security of personal information. Failure to operate effective data use and information security controls could potentially lead to regulatory enforced compliance measures, fines, reputational and financial losses in responding to or defending its actions.
GDPR also provides data subjects far greater rights and control in respect of their personal data. Failure to be fully transparent at the point of collection about the purpose for and use of personal data or otherwise meet obligations relating to data subject rights could result in compensation payments to data subjects whose rights have been infringed.
GDPR allows representative bodies to bring claims on behalf of data subjects. This could result in a 'group action' being pursued by a third party on behalf of data subjects. A group action could potentially lead to reputational damage and increased financial defence costs and losses depending on the number of data subjects forming the group. The potential sanctions for the most egregious breaches of GDPR include financial penalties of up to 4% of the annual worldwide turnover of company groups.
The GDPR has increased the regulatory burden on AJ Bell in processing personal customer, employee and other data in the conduct of its business.
AJ Bell established a GDPR project to ensure that the new requirements were met by 25 May 2018, the date on which GDPR came into force. AJ Bell monitors ongoing compliance through its established regulatory systems and controls.
If AJ Bell or any of the third party service providers on which it relies (including non-subsidiary affiliates of AJ Bell) fails to comply with Data Protection Legislation, due to any failure to store or transmit information in a secure manner or any loss or wrongful processing of personal customer data, AJ Bell could be subject to investigative and enforcement action by the ICO and complaints or claims from data subjects.
Pension saving under registered pension schemes is subject to favourable tax treatment, which acts as an incentive for employees and individuals to save for retirement and thus be less reliant on the state pension system. However, the extent to which pension savings attract tax relief is subject to certain limits imposed by HMRC. In order to enjoy the tax advantages available to pension schemes in the UK the SIPPs and SSASs administered by AJ Bell are registered with HMRC.
As registered pension schemes, the SIPPs and SSASs are obliged to provide information to HMRC including the provision of a pension scheme return (to be provided on request), accounting for tax returns, event reports and reporting pension flexibility payments.
If payments are made from the schemes that are not authorised payments under the Finance Act 2004, HMRC will impose unauthorised payment charges, and scheme sanction charges in respect of the payments.
Tax considerations are relevant to a UK registered pension scheme when:
The current pensions tax relief system can broadly be described as 'Exempt-Exempt-Taxed' on the following basis:
The AJ Bell Platinum SSASs are occupational pension schemes for legislative purposes. As a result they are regulated by the Pensions Regulator.
The Pensions Regulator is the public body that protects workplace pensions in the UK. The post of the Pensions Regulator was created on 6 April 2005 by Pensions Act 2004. The principal objectives of the Pensions Regulator are set out in the Pensions Act 2004. These include:
The SSAS are registered with the Pensions Regulator in accordance with the Pensions Act 2004. As such the scheme administrator for each scheme is required to provide and update registrable information in respect of each scheme as well as providing a scheme return to the Pensions Regulator whenever the Pensions Regulator issues a scheme return notice. There are also whistleblowing obligations that apply in respect of the trustees and scheme administrators of SSASs.
The Pensions Regulator has issued a code of practice in respect of the governance and administration of occupational trust-based schemes providing money purchase benefits. This code applies to a limited extent to the SSASs although SSASs will generally be exempt from parts of the code (for example in respect of default arrangements and charge caps and the preparation of an annual chair's statement).
The Pensions Regulator has various enforcement powers in respect of defined contribution workplace schemes such as the SSASs, these include the ability to appoint and remove trustees of schemes and to issue fines for non-compliance with legislation under section 10 of the Pensions Act 1995.
An ISA is a scheme of investment managed in accordance with ISA regulations under terms agreed between the ISA manager and the investor. The ISA manager holds investments and claims repayment of income tax deducted at source, by submitting claims to HMRC. There are various types of ISAs permitted by UK law being:
Investors do not pay any tax on any of the income they receive from ISA savings and investments. Nor do they pay any tax on capital gains arising on ISA investments. In order to protect the integrity of the UK taxation system there are limits placed around who can hold an ISA, how many ISAs an individual can open in a tax year and the amount that can be paid into an individual's ISAs in a tax year. An ISA manager must also collect prescribed information and receive prescribed declarations from individuals applying for an ISA.
In order to be able to offer ISAs and LISAs to investors AJBSL has registered with, and been approved by, HMRC as an ISA manager and a LISA manager. As a registered ISA manager AJBSL is obliged to provide information to HMRC and make claims from HMRC including updating HMRC with any changes to the information provided in its application for registrations as an ISA manager, the making of an annual return and tax claim, the making of an annual return of information, and an annual market value return of statistical information (market value and subscriptions).
AJ Bell, including the Regulated Subsidiaries, is subject to EU law, both directly through European regulations and indirectly through European directives, to which the UK is currently obliged to give effect through its legislative powers. Recent EU regulation of most significance that applies to AJ Bell is set out below.
MiFID II applies to firms in the EEA who engage in certain investment activities, including dealing and execution services, investment advice and portfolio management. Building on MiFID, it aims to harmonise the regulatory framework across the EEA to make financial markets more efficient and resilient, increase transparency of both equity and non-equity markets, reinforce supervisory powers, and provide protection for investors.
MiFID II sets out detailed provisions on systems and controls, outsourcing, customer classification, conflicts of interest, best execution, client order handling, suitability and appropriateness, transparency and transaction reporting. Requirements relating to transaction reporting, costs and charges disclosure, product governance and conduct of business requirements all affect AJ Bell's operations.
MiFID II also allows investment firms authorised in accordance with its provisions to passport their services into other EEA states without needing to obtain separate authorisations locally.
The PRIIPs Regulation aims to encourage efficient EU markets by helping investors to better understand and compare the key features, risk, rewards and costs of different PRIIPs, by obliging PRIIPs manufacturers and distributors to provide access to a short and consumer-friendly Key Information Document.
PRIIPs can take a variety of legal forms but can be distinguished by the comparable functions they perform for retail investors. PRIIPS can be broadly categorised into four main groups: (i) investment funds, (ii) insurance-based investment products, (iii) retail structured securities, and (iv) structured term deposits. The PRIIPS Regulation has applied (subject to limited transitional provisions) to products such as units in an investment fund (except UCITS Schemes), life insurance policies with an investment element and structured deposits since 1 January 2018. It is set to apply to UCITS schemes with effect from 31 December 2019.
CRD IV, comprising the Capital Requirements Directive IV and the Capital Requirements Regulation, is an EU legislative framework for the prudential supervision of banks, building societies and investment firms. Certain MiFID investment firms, including those with permissions relating to the safeguarding of client assets or handling of client money, are subject to the provisions of CRD IV as regards prudential and capital standards. AJBAML and AJBSL are subject to these rules. There are changes being proposed to the capital requirements regime under Capital Requirements Directive V and Capital Requirements Regulation II but these are not anticipated prior to 2019. Therefore whether these changes will have any impact on the Regulated Subsidiaries is unclear because the possibility of these changes taking effect prior to the UK's planned departure from the EU is remote.
The UCITS regime provides a set of common standards applicable across all EU member states for the operation of and cross border promotion of UCITS Schemes.
The UCITS regime aims to create a single market for open-ended retail investment funds which affords enhanced protection for investors.
It requires EU member states to adopt harmonised rules regulating the authorisation, supervision, structure and activities of UCITS funds together with harmonised rules about investor information and passporting requirements. VT AJ Bell ICVC is a UCITS scheme and therefore must be operated in accordance with the UCITS Directive.
In addition to the FCA's prudential standards and capital adequacy requirements, AJBAML and AJBSL must comply with the wider prudential framework of CRD IV which mainly applies to banks.
The EBA contributes to a European Single Rulebook in banking by providing Binding Technical Standards (''BTS'') and Guidance. The Rulebook aims to provide a single set of harmonised prudential rules for financial institutions throughout the EU in order to create a level playing field and a high level of protection for customers.
The BTS are legal acts which specify particular aspects of an EU legislative text (directive or regulation) and aim at ensuring consistent harmonisation in specific areas. The BTS are legally binding and directly applicable in all Member States including in the UK and therefore AJBAML and AJBSL must comply with these to the extent they apply to their activities.
The EBA and European Securities and Market Authority are working on the review of the application of the prudential rules to investment firms, with the aim of establishing an appropriate prudential framework for investment firms.
FCA-regulated firms have recently been subject to substantial regulatory change. There is further regulatory change on the horizon, with the main changes likely to impact AJ Bell summarised below.
The FCA announced in 2017 that it would be undertaking the Investment Platform Market Study on investment platforms. The market study explores how investment platforms compete to win new, and retain existing, consumers, to allow the FCA to assess how to improve competition within the platform market and develop better consumer outcomes.
In particular, the FCA has looked to assess:
The FCA published its interim report the Investment Platform Market Study in July 2018, which noted that the investment platform market was working well in many respects. There are areas that the FCA identified where it was concerned that competition in the market was not working well and it is consulting on remedies for these areas. The FCA's consultation on remedies for the market focuses on the following main areas:
The FCA expects to publish its final report and recommendations in the first quarter of 2019, following the end of the consultation on its interim report proposals on 21 September 2018.
The Fifth Money Laundering Directive (''MLD5'') contains amendments to the existing money laundering directive as well as the Capital Requirements Directive. MLD5 will, amongst other things:
The majority of changes will be effected by 10 January 2020.
The FCA is consulting on draft guidance outlining the factors which financial services companies should consider when drafting and reviewing variation terms in consumer contracts, the first it has issued following the introduction of the Consumer Rights Act 2015 and several rulings on the topic by the Court of Justice of the EU. The draft guidance outlines factors for financial institutions to consider when seeking to draft variation terms, and also considers a number of reasons for contract variation that the FCA has observed firms commonly include when drafting variation terms allowing them to alter their consumer contracts. AJ Bell will take any finalised guidance into account in updating or changing customer terms.
In February 2018, the FCA published a discussion paper looking at effective competition in non-workplace pensions: DP18/1. The paper was launched in order for the FCA to better understand the market for non-workplace pensions: the providers, the consumers and the relationship between them, with a view to assessing the potential presence, nature and extent of harm. The FCA outlined its areas of potential concerns about how the market is working and the reasons for its concerns. It noted that in some aspects it sees parallels with the findings of the OFT study on the defined contribution workplace pensions market in 2013 which concluded that competition alone could not be relied on to drive value for money and good outcomes for consumers of DC workplace pensions. That study led to increased regulation of the workplace pensions market, including the introduction of caps on certain charges.
The period for submission of information has now closed. At this stage, it is difficult to assess whether the FCA focus on non-workplace pensions will have any material impact on the non-workplace pension market in the UK or lead to any material changes in the interaction between non-workplace pension providers and other participants in the UK wealth management sector, such as asset managers and financial advisers.
In June 2018, the FCA published a consultation paper regarding improving retirement outcomes for consumers: CP18/17. In the consultation paper the FCA proposes a remedy package to address the potential consumer harm and emerging issues it has identified arising from the pension freedoms introduced in 2015. The FCA's remedy package aims to: protect consumers from poor outcomes; improve consumer engagement with retirement income decisions; and promote competition by making the costs of drawdown clearer and comparisons easier.
The potential changes suggested by the FCA include:
Whilst it is not certain which of the proposed changes will be brought in to force and in what form, AJ Bell is actively engaging with the FCA in relation to its proposals. Whilst the proposed changes could lead to an increased administrative burden on AJ Bell, the directors believe that AJ Bell is in a good position to respond to any changes required and that any changes should not have a material adverse impact on its business.
Although the finalised text of the GDPR was published over two years ago, there is general uncertainty about how the GDPR and the Data Protection Act 2018 are going to be interpreted and enforced, with guidance related to many areas of the GDPR only having recently been published by UK and EU regulators. Therefore, AJ Bell must, in practice, ensure its compliance with the GDPR is constantly evolving. AJ Bell will ensure it continuously reviews its decisions and ensure that the latest guidance from the ICO, or indeed the European Data Protection Board, is taken into account in its decisions in relation to processing of personal data and reassess the risks in this context.
The E-Privacy Regulation was due to be implemented on 25 May 2018 at the same time as GDPR. It is anticipated that this will now be implemented in 2020. The E-Privacy Regulation will seek to harmonise protection of electronic communications across the EU Member States, broaden the electronic communications that are captured, implement a higher level of protection and simplify the rules in relation to cookies. The enforcement of the Regulation will be the responsibility of the ICO.
The ICO has indicated that it is unlikely that the UK will receive an adequacy decision on the UK's exit from the EU, pursuant to which the EU confirms that privacy legislation in a non-EU state is sufficiently stringent so as to permit transfer of data from inside the EU to that state. In the absence of an adequacy decision, the UK has implemented the Data Protection Act 2018 which incorporates the GDPR directly into UK legislation and ensures consistency with the EU in respect of requirements for processing of personal data. It is currently envisaged that a treaty will be implemented between the UK and the EU in order to ensure data transfers can still occur without the additional burden of entering into the EU Standard Contractual Clauses which have been developed by the European Commission to provide adequate terms to safeguard protection of personal data when an international transfer takes place without an adequacy decision or a treaty in place.
The following is a review of AJ Bell's operating performance and financial position.
The consolidated financial information referred to in this Part 5 has been prepared in accordance with (i) IFRS as adopted by the EU; (ii) the requirements of the Prospectus Directive; and (iii) the Listing Rules, and, unless otherwise stated, has been extracted without material adjustment from Part 6 (Historical Financial Information) of this Registration Document.
In this discussion and analysis, the financial years ended 30 September 2016, 30 September 2017 and 30 September 2018 are referred to as FY2016, FY2017 and FY2018, respectively.
The financial information referred to in the following discussion and analysis has been rounded to the nearest decimal place and percentage changes have been calculated based upon these rounded numbers and so may not conform exactly to the calculation based upon the underlying unrounded figures.
This Part 5 (Operating and Financial Review) of this Registration Document contains ''forward-looking statements''. Those statements are subject to risks, uncertainties and other factors that could cause AJ Bell's future results of operations or cash flows to differ materially from the results of operations or cash flows expressed or implied in such forward-looking statements. Prospective investors should read the section entitled ''Presentation of Information'' and Part 2 (Risk Factors) of this Registration Document for further information in this respect. In addition, certain industry issues also affect the Group's results of operations and are described in Part 1 (Market Overview) of this Registration Document.
AJ Bell is one of the largest investment platforms in the UK, based on the value of its AUA. The total value of the Group's AUA was £46.1 billion as at 30 September 2018. AJ Bell's flagship propositions are AJ Bell Investcentre, which operates in the advised segment of the platform market and AJ Bell Youinvest which operates in the D2C segment. The Group operates principally as a platform business although it also maintains an element of non-Platform business.
AJ Bell Youinvest and AJ Bell Investcentre combined had £38.6 billion in AUA as at 30 September 2018 with 183,213 customers. These two platform propositions are described briefly below:
AJ Bell Youinvest and AJ Bell Investcentre provide access to a broad investment range including shares and other financial instruments traded on the major stock exchanges around the world, as well as mainstream collective investments available in the UK. AJ Bell also offers a range of in-house investment solutions, including the AJ Bell Passive funds, the AJ Bell Investcentre Managed Portfolio Service and the AJ Bell Youinvest Favourite Funds list and from the end of the last quarter of 2018 Ready-made portfolios.
AJ Bell's non-Platform business, which had £7.5 billion in AUA as at 30 September 2018 with 14,699 customers, comprises:
* AJ Bell Securities stockbroking: providing dealing, settlement and custody services to institutional investment businesses.
AJ Bell was co-founded in 1995 in Manchester by Andy Bell and Nicholas Littlefair to provide actuarial, trustee and pension administration services to customers with a SSAS or SIPP. In 2000, AJ Bell launched Sippdeal, the first online SIPP in the UK for execution only investors. In 2002, AJ Bell launched Sippcentre, as a low cost SIPP for financial advisers and their clients. Since then, AJ Bell has grown its customers and AUA organically, but has also made some small strategic acquisitions to enhance AJ Bell's platform propositions. In December 2007, AJ Bell acquired Lawshare to bring its stockbroking capabilities in-house and facilitate the offering of ISAs and general investment/dealing accounts to its platform customers. In December 2012, AJ Bell acquired MSM Media to expand the range of investment content offered to its platform customers. More recently in February 2016, AJ Bell acquired Indexx Markets and Mansard Capital to facilitate the launch of its in-house range of investment solutions. AJ Bell's heritage is evident in the value of assets held in SIPPs, which was 72% of AJ Bell's overall AUA as at 30 September 2018. SIPPs are long term savings products which provide AJ Bell with a high proportion of recurring revenue.
AJ Bell's principal source of revenue arises from the fees charged for the provision of platform services. AJ Bell's revenue is classified into recurring revenues and transactional revenues as follows:
AJ Bell has a diverse revenue model with recurring income representing 82% of revenue in FY2018, and transactional revenue of 18%. The level of ad valorem charges included within recurring income varies with the size of the customer's portfolio and, as a consequence, more generally with the amount of AUA.
AJ Bell's distribution model is diversified, operating in both the advised and D2C segments of the platform market. Further, the business is not reliant on any key customer or independent financial adviser. The largest single distribution contract as at 30 September 2018 comprised less than 1.5% of total revenue.
AJ Bell's business is highly cash generative and it has a capital light model. Cash generated from operations has averaged over 100% of profit before taxation for the period covered by the historical financial information as AJ Bell benefits from a short working capital cycle and low levels of capital expenditure following the completion of its major re-platforming exercise in 2014.
Growth has been funded from retained earnings and has not required primary equity fundraising or material debt finance.
AJ Bell's strong regulatory capital position is evidenced by a regulatory capital surplus yielding coverage of 440% of its Pillar 1 regulatory capital requirements during the period covered by the historical financial information.
Management considers a variety of financial measures and other metrics when analysing AJ Bell's performance, and the Directors believe that each of these measures provides useful information with respect to AJ Bell's business and operations. With the exception of revenue and profit before tax, these are non-IFRS financial measures and metrics that are not audited. These non-IFRS financial measures and metrics are not meant to be considered in isolation or as a substitute for measures of financial performance reported in accordance with IFRS. Moreover, these non-IFRS financial measures and metrics may be defined or calculated differently by other companies, and as a result AJ Bell's key performance indicators may not be comparable to similar measures and metrics calculated by its peers.
| | As at
Recurring revenue: Ad valorem and fixed charges and fees.
AJ Bell's distribution model is diversified, operating in both the advised and D2C segments of the platform market. It is not reliant on any key customer or introducer, providing stable earnings despite customer inflows and outflows. As at 30 September 2018, AJ Bell Investcentre had a total of 2,730 adviser firms, with 80% of AUA controlled by 325 adviser firms and with no one firm controlling more than 3%. The largest single contract in AJ Bell's non-Platform business relates to less than 1.5% of total AJ Bell revenue and was renewed in 2017 for a term of 5 years.
Growth has been funded from retained earnings and has not required primary equity funding or debt finance. All investment in customer acquisition and product development has been expensed through the income statement and, apart from re-platforming, the vast majority of IT expenditure has also been expensed. AJ Bell has a track record of both maintaining investment in its Platform, expanding its customer base and paying dividends.
The annual dividend per share paid by AJ Bell has increased year on year over the last 15 years and the Directors believe AJ Bell's capital light model will continue to support a progressive dividend policy.
AJ Bell's cash generative business means it has a strong regulatory capital position. This was supported by a recent FCA SREP review and the strong regulatory capital position is also evidenced by consistently high coverage of AJ Bell's Pillar 1 requirement.
AJ Bell's business was founded on a transparent and innovative culture, and is supported by a committed management team and strong corporate governance.
The senior management team has an average length of service of 11 years and is led by AJ Bell's co-founder, Andy Bell. The Senior Managers combine sector and product expertise with the benefit of long experience within the business and industry.
AJ Bell's staff are highly engaged, and ranked AJ Bell in ''the Sunday Times Best Companies to Work For'' list in 2018. As at 30 September 2018, 137 members of staff have shares or options in the business.
AJ Bell has a well-established corporate governance framework. The Board meets a minimum of nine times each financial year and is supported by four sub-committees: Audit; Risk and Compliance; Remuneration; and Nomination, with a fifth, the Disclosure Committee, having been established in anticipation of Admission.
The management team is familiar with the reporting obligations and delivery expectations of a listed company, through AJ Bell's relationship with its two long-standing institutional investors, Invesco Perpetual and Seneca Investment Managers.
AJ Bell operates in both the advised and D2C segments of the platform market. Its platform propositions are AJ Bell Investcentre, an adviser-led investment platform and custody solution for wealth managers and AJ Bell Youinvest, a D2C investment platform.
AJ Bell Investcentre is distributed through advisers who are authorised by the FCA in the UK, with either advisory or full discretionary permissions. It is one of the UK's fastest growing adviser platforms, with the average AUA per customer significantly higher than the market leaders11, driven by its SIPP heritage.
AJ Bell Investcentre's target customers are retail customers who seek advice on investment and financial planning, and buy a wide range of financial products through authorised, independent financial advisers.
Customers will have accumulated savings in a range of retail investment products and appreciate the benefits of remaining invested up to, and in to, retirement. The target customer will generally be late in the accumulation stage, or in retirement, although the proposition is also suitable for those early in the accumulation stage.
The typical adviser user of the platform is a medium to large size regional adviser firm or wealth manager. The proposition is primarily targeted at advisory firms but is also suitable for those with discretionary permissions. Some advisers will be seeking to manage investments themselves, others to implement their own centralised investment propositions and others will look to outsource investment management to third party providers.
11sed firms carrying on regulated activities must, at all times, comply with the prudential standards and capital adequacy requirements imposed by (in the case of the Regulated Subsidiaries) the EU Capital Requirements Directive and the FCA.
The capital adequacy rules applicable to the Regulated Subsidiaries are currently contained in the Prudential Standards Section of the FCA Rules and the CRD IV.
The FCA discharges its prudential supervision role, in part, through the regulatory capital requirements.
The regulatory capital rules require firms, at all times, to maintain a specified level of regulatory capital (based on the prudential risk the firm poses in conducting its particular business activities).
The rules are designed to ensure that firms can meet all liabilities as they fall due and to safeguard their financial stability and that of their clients and counterparties.
The FCA expects firms to be proactive in monitoring and managing financial risks, in accordance with its requirement for firms to maintain adequate financial resources.
The FCA's regulatory capital requirements apply both to individual authorised entities and at a consolidated level across groups of which an authorised firm or firms are members. The FCA may exercise consolidated supervision up to the top EEA parent in a firm's group. AJ Bell is subject to consolidated supervision.
Firms may apply to the FCA for a waiver from consolidated supervision however AJ Bell does not have such a waiver and AJ Bell does not intend to apply for such waiver in the foreseeable future.
There are certain ''controlled functions'' that are undertaken by individuals for (or on behalf of) an authorised firm and who usually have significant influence over the firm's regulatory conduct. As a result the persons who perform these functions must be approved by the FCA as fit and proper. These are known as ''approved persons''. An approved person must abide by the rules and principles set out in the APER. The rules and principles in the APER sourcebook apply to FCA approved persons.
The rules in the APER sourcebook include acting with integrity, acting with due skill, care and diligence, observing proper standards of market conduct and dealing with regulators in an open and co-operative way. If an approved person breaches the rules or principles the FCA may take enforcement action against the individual, including public censure, fines and/or the removal of approved status. A firm may also face enforcement action for breaches by its approved persons.
The SMCR, which currently applies to banks and very large investment firms, is set to be extended to include all authorised firms, including the Regulated Subsidiaries. The FCA has consulted on the rules to implement the SMCR and intends to replace the approved persons regime with the SMCR for almost all financial services firms.
As such a wide range of firms will be within the scope of the new SMCR requirements the FCA is not proposing to mirror the approach it took for banking firms. Instead it intends to apply consistent principles across the sector in a regime that is ''proportionate and flexible enough to accommodate the different business models and governance structures of firms''. The FCA is proposing:
The regime is expected to commence in relation to solo-authorised firms from 9 December 2019. AJBSL will be required to comply with an enhanced firm regime, whereas AJBML and AJBAML will be required to comply with the baseline core requirements.
Under the FSMA change of control regime, a person who is intending to acquire or increase ''control'' over a UK firm authorised and regulated by the FCA is required to seek the FCA's consent before doing so and submit certain specified information and documentation. An FCA-authorised firm must also notify the FCA when there is a transaction which results in that acquisition taking place. A disposal of a controlling interest in an FCA authorised firm must be notified to the FCA before the disposal takes place. Any acquisition of control over the Company or any of the Regulated Subsidiaries individually would be subject to the FCA change of control regime.
A proposed ''controller'' for the purposes of the change in control regime is any natural or legal person (or such persons ''acting in concert'') who decides to acquire, directly or indirectly, or increase control over an FCA-authorised firm. ''Control'' over the Regulated Subsidiaries would be acquired if the acquirer:
The FCA has up to 60 working days from the date of submission of a completed notification to approve or object to any such change in control. If the FCA does serve such a notice, it is required to specify its reasons for its objections in such notice. In the case of persons acting in concert, individual acquisitions will be amalgamated and treated as single holding for the purposes of the regime.
A person who ceases to be a 10% controller is required only to provide written notice to the FCA. In other words, FCA approval is not required for cessation of control.
Breach of the notification and approval regime imposed by FSMA on controllers is a criminal offence.
The FCA's priority in supervising firms is to ensure consumers are at the centre of a firm's business.
The FCA's main approaches to conduct supervision are split into three pillars:
AJ Bell is classified as a Pillar 1 entity.
The FCA allocates all authorised firms into one of two conduct categories either (i) fixed portfolio firms; or (ii) flexible portfolio firms.
Fixed portfolio firms are given a specific supervisor. The FCA proactively supervises such firms using firm-specific continuous assessment.
Flexible portfolio firms are supervised through thematic and market-based work, along with programmes of communication, engagement and education aligned to the key risks the FCA has identified in the relevant sector.
The FCA has recently confirmed that AJ Bell and the Regulated Subsidiaries will no longer be allocated a dedicated supervisory team and instead will be part of the ''Platform Portfolio''.
The FCA has a range of supervisory powers which allow it to intervene in a firm's affairs. The FCA can, for instance, require firms to provide particular information or documents to it, require the production of a report by a ''skilled person'' appointed by the FCA or formally investigate a firm.
In its prudential supervisory role, the FCA considers the systems and controls, governance arrangements, and risk management capabilities including the risk of misconduct. The FCA will seek to assess how well a firm understands the risks it is running, how well placed it is to manage those risks, and how well it can avoid large, unexpected costs.
Firms solely regulated by the FCA are allocated one of four prudential categories depending on the relative perceived risk their failure would pose to markets. AJ Bell is classified as a P2 entity, which applies to firms and groups whose failure would have less impact than P1 firms, but would nevertheless damage markets or consumers and client assets.
The FCA uses a wide range of enforcement powers, criminal, civil and regulatory, to protect consumers and to take action against firms and individuals that do not meet its standards. These include:
* withdrawing a firm's authorisation;
The FOS has compulsory jurisdiction over all FCA-regulated firms including the Regulated Subsidiaries. However, customer complaints relating to the administration of pensions are referred to the Pensions Ombudsman, not FOS, in accordance with the Memorandum of Understanding between FOS and the Pensions Ombudsman.
All FCA-regulated firms must have a procedure in place for resolving disputes with their customers and must respond to customer complaints within set deadlines. If a firm's complaints procedure fails to resolve a complaint, the FOS and Pensions Ombudsman provides a dispute resolution procedure for certain categories of customer complaints brought against applicable firms by individuals and small business customers.
The FOS and Pensions Ombudsman provide a more informal alternative to customers bringing complaints in the courts. They provide independent investigators who review and seek to resolve complaints between customers and firms.
If the FOS resolves a complaint in favour of a customer, it has the power to order a firm to pay fair compensation for any loss or damage it caused to the customer, or to direct a firm to take such steps in relation to the customer as the FOS considers just and appropriate, and irrespective of whether a similar award could be made by a court. Authorised firms fund the FOS through levies and case fees.
The FSCS was established under FSMA, it is a statutory compensation scheme of last resort for certain categories of customers of authorised firms. It provides compensation to eligible customers who suffer losses as a consequence of an authorised firm's inability to meet its liabilities arising from claims made in connection with its regulated activities. The FSCS is funded by levies on authorised firms and is independent of the FCA, the PRA and the UK government, although it is ultimately accountable to them.
The powers of the FSCS to raise funds from authorised firms are set out in the FEES sourcebook of the FCA Rules. In general terms, fees are levied on participant firms and the FSCS may impose three types of levy the 'management expenses levy' (comprising the 'bases costs levy' and the 'specific costs levy'), the 'compensation costs levy' (relating to compensation costs), and the 'MERS levy' which relates to management expenses in respect of 'relevant schemes'.
Participant firms are allocated to a funding class (or classes) on the basis of their regulated activities. The specific costs and compensation costs levies payable by the participating firms are calculated by reference to their funding class or classes. The main principle behind the calculation of these levies is that the levy should represent the amount of claims made or likely to be made against that type of firm. The Regulated Subsidiaries will fall into the ''Investments'' levy class. It should however be noted, that contributions are not restricted to failures in the sub-classes to which a particular firm belongs as there is the possibility that cross-subsidy between levy classes may be required.
The MLRs require relevant persons to apply risk-based customer due diligence measures and take other steps to prevent their services from being used for money laundering or terrorist financing. They also require relevant persons to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk.
SYSC contains financial crime rules that complement the MLRs, requiring firms to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk. Such controls must be comprehensive and proportionate to the nature, scale and complexity of their activities. In this context, financial crime includes any offence involving fraud or dishonesty, misconduct in, or misuse of information relating to, a financial market, handling the proceeds of crime or the financing of terrorism, as well as bribery and corruption offences.
Failure to maintain the necessary procedures is a criminal offence. The Proceeds of Crime Act 2002, the Terrorism Act 2000 and the Counter-Terrorism Act 2008 and the Criminal Justice Act 1993 also contain a number of offences in relation to money laundering. The Joint Money Laundering Steering Group provides good practice guidance and practical assistance in interpreting the MLRs.
AJ Bell has established appropriate systems and controls under the guidance of AJ Bell's Money Laundering Reporting Officer to help it mitigate the risk of financial crime. This including the appropriate suite of policies, use of anti-money laundering technology and ongoing training for all members of staff.
The ICO is the UK's data protection regulator set up as an independent body to uphold information rights. It is responsible for upholding information rights in the public interest, promoting openness by public bodies and data privacy for individuals. It has powers to enforce compliance with Data Protection Legislation which include criminal prosecution, non-criminal enforcement, audit and issuing monetary penalty notices. The ICO is involved in data protection policy making decisions and produces guidance and codes of practice.
AJ Bell collects and processes personal data and sensitive personal data (including names, addresses, contact details, financial information, health information and criminal records) information from its customers and employees as part of the operation of its business.
AJ Bell must therefore comply with all Data Protection Legislation including the recently implemented GDPR and the UK's Data Protection Act 2018.
GDPR imposes certain requirements on AJ Bell in respect of the collection, retention, use, processing and security of personal information. Failure to operate effective data use and information security controls could potentially lead to regulatory enforced compliance measures, fines, reputational and financial losses in responding to or defending its actions.
GDPR also provides data subjects far greater rights and control in respect of their personal data. Failure to be fully transparent at the point of collection about the purpose for and use of personal data or otherwise meet obligations relating to data subject rights could result in compensation payments to data subjects whose rights have been infringed.
GDPR allows representative bodies to bring claims on behalf of data subjects. This could result in a 'group action' being pursued by a third party on behalf of data subjects. A group action could potentially lead to reputational damage and increased financial defence costs and losses depending on the number of data subjects forming the group. The potential sanctions for the most egregious breaches of GDPR include financial penalties of up to 4% of the annual worldwide turnover of company groups.
The GDPR has increased the regulatory burden on AJ Bell in processing personal customer, employee and other data in the conduct of its business.
AJ Bell established a GDPR project to ensure that the new requirements were met by 25 May 2018, the date on which GDPR came into force. AJ Bell monitors ongoing compliance through its established regulatory systems and controls.
If AJ Bell or any of the third party service providers on which it relies (including non-subsidiary affiliates of AJ Bell) fails to comply with Data Protection Legislation, due to any failure to store or transmit information in a secure manner or any loss or wrongful processing of personal customer data, AJ Bell could be subject to investigative and enforcement action by the ICO and complaints or claims from data subjects.
Pension saving under registered pension schemes is subject to favourable tax treatment, which acts as an incentive for employees and individuals to save for retirement and thus be less reliant on the state pension system. However, the extent to which pension savings attract tax relief is subject to certain limits imposed by HMRC. In order to enjoy the tax advantages available to pension schemes in the UK the SIPPs and SSASs administered by AJ Bell are registered with HMRC.
As registered pension schemes, the SIPPs and SSASs are obliged to provide information to HMRC including the provision of a pension scheme return (to be provided on request), accounting for tax returns, event reports and reporting pension flexibility payments.
If payments are made from the schemes that are not authorised payments under the Finance Act 2004, HMRC will impose unauthorised payment charges, and scheme sanction charges in respect of the payments.
Tax considerations are relevant to a UK registered pension scheme when:
The current pensions tax relief system can broadly be described as 'Exempt-Exempt-Taxed' on the following basis:
The AJ Bell Platinum SSASs are occupational pension schemes for legislative purposes. As a result they are regulated by the Pensions Regulator.
The Pensions Regulator is the public body that protects workplace pensions in the UK. The post of the Pensions Regulator was created on 6 April 2005 by Pensions Act 2004. The principal objectives of the Pensions Regulator are set out in the Pensions Act 2004. These include:
The SSAS are registered with the Pensions Regulator in accordance with the Pensions Act 2004. As such the scheme administrator for each scheme is required to provide and update registrable information in respect of each scheme as well as providing a scheme return to the Pensions Regulator whenever the Pensions Regulator issues a scheme return notice. There are also whistleblowing obligations that apply in respect of the trustees and scheme administrators of SSASs.
The Pensions Regulator has issued a code of practice in respect of the governance and administration of occupational trust-based schemes providing money purchase benefits. This code applies to a limited extent to the SSASs although SSASs will generally be exempt from parts of the code (for example in respect of default arrangements and charge caps and the preparation of an annual chair's statement).
The Pensions Regulator has various enforcement powers in respect of defined contribution workplace schemes such as the SSASs, these include the ability to appoint and remove trustees of schemes and to issue fines for non-compliance with legislation under section 10 of the Pensions Act 1995.
An ISA is a scheme of investment managed in accordance with ISA regulations under terms agreed between the ISA manager and the investor. The ISA manager holds investments and claims repayment of income tax deducted at source, by submitting claims to HMRC. There are various types of ISAs permitted by UK law being:
Investors do not pay any tax on any of the income they receive from ISA savings and investments. Nor do they pay any tax on capital gains arising on ISA investments. In order to protect the integrity of the UK taxation system there are limits placed around who can hold an ISA, how many ISAs an individual can open in a tax year and the amount that can be paid into an individual's ISAs in a tax year. An ISA manager must also collect prescribed information and receive prescribed declarations from individuals applying for an ISA.
In order to be able to offer ISAs and LISAs to investors AJBSL has registered with, and been approved by, HMRC as an ISA manager and a LISA manager. As a registered ISA manager AJBSL is obliged to provide information to HMRC and make claims from HMRC including updating HMRC with any changes to the information provided in its application for registrations as an ISA manager, the making of an annual return and tax claim, the making of an annual return of information, and an annual market value return of statistical information (market value and subscriptions).
AJ Bell, including the Regulated Subsidiaries, is subject to EU law, both directly through European regulations and indirectly through European directives, to which the UK is currently obliged to give effect through its legislative powers. Recent EU regulation of most significance that applies to AJ Bell is set out below.
MiFID II applies to firms in the EEA who engage in certain investment activities, including dealing and execution services, investment advice and portfolio management. Building on MiFID, it aims to harmonise the regulatory framework across the EEA to make financial markets more efficient and resilient, increase transparency of both equity and non-equity markets, reinforce supervisory powers, and provide protection for investors.
MiFID II sets out detailed provisions on systems and controls, outsourcing, customer classification, conflicts of interest, best execution, client order handling, suitability and appropriateness, transparency and transaction reporting. Requirements relating to transaction reporting, costs and charges disclosure, product governance and conduct of business requirements all affect AJ Bell's operations.
MiFID II also allows investment firms authorised in accordance with its provisions to passport their services into other EEA states without needing to obtain separate authorisations locally.
The PRIIPs Regulation aims to encourage efficient EU markets by helping investors to better understand and compare the key features, risk, rewards and costs of different PRIIPs, by obliging PRIIPs manufacturers and distributors to provide access to a short and consumer-friendly Key Information Document.
PRIIPs can take a variety of legal forms but can be distinguished by the comparable functions they perform for retail investors. PRIIPS can be broadly categorised into four main groups: (i) investment funds, (ii) insurance-based investment products, (iii) retail structured securities, and (iv) structured term deposits. The PRIIPS Regulation has applied (subject to limited transitional provisions) to products such as units in an investment fund (except UCITS Schemes), life insurance policies with an investment element and structured deposits since 1 January 2018. It is set to apply to UCITS schemes with effect from 31 December 2019.
CRD IV, comprising the Capital Requirements Directive IV and the Capital Requirements Regulation, is an EU legislative framework for the prudential supervision of banks, building societies and investment firms. Certain MiFID investment firms, including those with permissions relating to the safeguarding of client assets or handling of client money, are subject to the provisions of CRD IV as regards prudential and capital standards. AJBAML and AJBSL are subject to these rules. There are changes being proposed to the capital requirements regime under Capital Requirements Directive V and Capital Requirements Regulation II but these are not anticipated prior to 2019. Therefore whether these changes will have any impact on the Regulated Subsidiaries is unclear because the possibility of these changes taking effect prior to the UK's planned departure from the EU is remote.
The UCITS regime provides a set of common standards applicable across all EU member states for the operation of and cross border promotion of UCITS Schemes.
The UCITS regime aims to create a single market for open-ended retail investment funds which affords enhanced protection for investors.
It requires EU member states to adopt harmonised rules regulating the authorisation, supervision, structure and activities of UCITS funds together with harmonised rules about investor information and passporting requirements. VT AJ Bell ICVC is a UCITS scheme and therefore must be operated in accordance with the UCITS Directive.
In addition to the FCA's prudential standards and capital adequacy requirements, AJBAML and AJBSL must comply with the wider prudential framework of CRD IV which mainly applies to banks.
The EBA contributes to a European Single Rulebook in banking by providing Binding Technical Standards (''BTS'') and Guidance. The Rulebook aims to provide a single set of harmonised prudential rules for financial institutions throughout the EU in order to create a level playing field and a high level of protection for customers.
The BTS are legal acts which specify particular aspects of an EU legislative text (directive or regulation) and aim at ensuring consistent harmonisation in specific areas. The BTS are legally binding and directly applicable in all Member States including in the UK and therefore AJBAML and AJBSL must comply with these to the extent they apply to their activities.
The EBA and European Securities and Market Authority are working on the review of the application of the prudential rules to investment firms, with the aim of establishing an appropriate prudential framework for investment firms.
FCA-regulated firms have recently been subject to substantial regulatory change. There is further regulatory change on the horizon, with the main changes likely to impact AJ Bell summarised below.
The FCA announced in 2017 that it would be undertaking the Investment Platform Market Study on investment platforms. The market study explores how investment platforms compete to win new, and retain existing, consumers, to allow the FCA to assess how to improve competition within the platform market and develop better consumer outcomes.
In particular, the FCA has looked to assess:
The FCA published its interim report the Investment Platform Market Study in July 2018, which noted that the investment platform market was working well in many respects. There are areas that the FCA identified where it was concerned that competition in the market was not working well and it is consulting on remedies for these areas. The FCA's consultation on remedies for the market focuses on the following main areas:
The FCA expects to publish its final report and recommendations in the first quarter of 2019, following the end of the consultation on its interim report proposals on 21 September 2018.
The Fifth Money Laundering Directive (''MLD5'') contains amendments to the existing money laundering directive as well as the Capital Requirements Directive. MLD5 will, amongst other things:
The majority of changes will be effected by 10 January 2020.
The FCA is consulting on draft guidance outlining the factors which financial services companies should consider when drafting and reviewing variation terms in consumer contracts, the first it has issued following the introduction of the Consumer Rights Act 2015 and several rulings on the topic by the Court of Justice of the EU. The draft guidance outlines factors for financial institutions to consider when seeking to draft variation terms, and also considers a number of reasons for contract variation that the FCA has observed firms commonly include when drafting variation terms allowing them to alter their consumer contracts. AJ Bell will take any finalised guidance into account in updating or changing customer terms.
In February 2018, the FCA published a discussion paper looking at effective competition in non-workplace pensions: DP18/1. The paper was launched in order for the FCA to better understand the market for non-workplace pensions: the providers, the consumers and the relationship between them, with a view to assessing the potential presence, nature and extent of harm. The FCA outlined its areas of potential concerns about how the market is working and the reasons for its concerns. It noted that in some aspects it sees parallels with the findings of the OFT study on the defined contribution workplace pensions market in 2013 which concluded that competition alone could not be relied on to drive value for money and good outcomes for consumers of DC workplace pensions. That study led to increased regulation of the workplace pensions market, including the introduction of caps on certain charges.
The period for submission of information has now closed. At this stage, it is difficult to assess whether the FCA focus on non-workplace pensions will have any material impact on the non-workplace pension market in the UK or lead to any material changes in the interaction between non-workplace pension providers and other participants in the UK wealth management sector, such as asset managers and financial advisers.
In June 2018, the FCA published a consultation paper regarding improving retirement outcomes for consumers: CP18/17. In the consultation paper the FCA proposes a remedy package to address the potential consumer harm and emerging issues it has identified arising from the pension freedoms introduced in 2015. The FCA's remedy package aims to: protect consumers from poor outcomes; improve consumer engagement with retirement income decisions; and promote competition by making the costs of drawdown clearer and comparisons easier.
The potential changes suggested by the FCA include:
Whilst it is not certain which of the proposed changes will be brought in to force and in what form, AJ Bell is actively engaging with the FCA in relation to its proposals. Whilst the proposed changes could lead to an increased administrative burden on AJ Bell, the directors believe that AJ Bell is in a good position to respond to any changes required and that any changes should not have a material adverse impact on its business.
Although the finalised text of the GDPR was published over two years ago, there is general uncertainty about how the GDPR and the Data Protection Act 2018 are going to be interpreted and enforced, with guidance related to many areas of the GDPR only having recently been published by UK and EU regulators. Therefore, AJ Bell must, in practice, ensure its compliance with the GDPR is constantly evolving. AJ Bell will ensure it continuously reviews its decisions and ensure that the latest guidance from the ICO, or indeed the European Data Protection Board, is taken into account in its decisions in relation to processing of personal data and reassess the risks in this context.
The E-Privacy Regulation was due to be implemented on 25 May 2018 at the same time as GDPR. It is anticipated that this will now be implemented in 2020. The E-Privacy Regulation will seek to harmonise protection of electronic communications across the EU Member States, broaden the electronic communications that are captured, implement a higher level of protection and simplify the rules in relation to cookies. The enforcement of the Regulation will be the responsibility of the ICO.
The ICO has indicated that it is unlikely that the UK will receive an adequacy decision on the UK's exit from the EU, pursuant to which the EU confirms that privacy legislation in a non-EU state is sufficiently stringent so as to permit transfer of data from inside the EU to that state. In the absence of an adequacy decision, the UK has implemented the Data Protection Act 2018 which incorporates the GDPR directly into UK legislation and ensures consistency with the EU in respect of requirements for processing of personal data. It is currently envisaged that a treaty will be implemented between the UK and the EU in order to ensure data transfers can still occur without the additional burden of entering into the EU Standard Contractual Clauses which have been developed by the European Commission to provide adequate terms to safeguard protection of personal data when an international transfer takes place without an adequacy decision or a treaty in place.
The following is a review of AJ Bell's operating performance and financial position.
The consolidated financial information referred to in this Part 5 has been prepared in accordance with (i) IFRS as adopted by the EU; (ii) the requirements of the Prospectus Directive; and (iii) the Listing Rules, and, unless otherwise stated, has been extracted without material adjustment from Part 6 (Historical Financial Information) of this Registration Document.
In this discussion and analysis, the financial years ended 30 September 2016, 30 September 2017 and 30 September 2018 are referred to as FY2016, FY2017 and FY2018, respectively.
The financial information referred to in the following discussion and analysis has been rounded to the nearest decimal place and percentage changes have been calculated based upon these rounded numbers and so may not conform exactly to the calculation based upon the underlying unrounded figures.
This Part 5 (Operating and Financial Review) of this Registration Document contains ''forward-looking statements''. Those statements are subject to risks, uncertainties and other factors that could cause AJ Bell's future results of operations or cash flows to differ materially from the results of operations or cash flows expressed or implied in such forward-looking statements. Prospective investors should read the section entitled ''Presentation of Information'' and Part 2 (Risk Factors) of this Registration Document for further information in this respect. In addition, certain industry issues also affect the Group's results of operations and are described in Part 1 (Market Overview) of this Registration Document.
AJ Bell is one of the largest investment platforms in the UK, based on the value of its AUA. The total value of the Group's AUA was £46.1 billion as at 30 September 2018. AJ Bell's flagship propositions are AJ Bell Investcentre, which operates in the advised segment of the platform market and AJ Bell Youinvest which operates in the D2C segment. The Group operates principally as a platform business although it also maintains an element of non-Platform business.
AJ Bell Youinvest and AJ Bell Investcentre combined had £38.6 billion in AUA as at 30 September 2018 with 183,213 customers. These two platform propositions are described briefly below:
AJ Bell Youinvest and AJ Bell Investcentre provide access to a broad investment range including shares and other financial instruments traded on the major stock exchanges around the world, as well as mainstream collective investments available in the UK. AJ Bell also offers a range of in-house investment solutions, including the AJ Bell Passive funds, the AJ Bell Investcentre Managed Portfolio Service and the AJ Bell Youinvest Favourite Funds list and from the end of the last quarter of 2018 Ready-made portfolios.
AJ Bell's non-Platform business, which had £7.5 billion in AUA as at 30 September 2018 with 14,699 customers, comprises:
* AJ Bell Securities stockbroking: providing dealing, settlement and custody services to institutional investment businesses.
AJ Bell was co-founded in 1995 in Manchester by Andy Bell and Nicholas Littlefair to provide actuarial, trustee and pension administration services to customers with a SSAS or SIPP. In 2000, AJ Bell launched Sippdeal, the first online SIPP in the UK for execution only investors. In 2002, AJ Bell launched Sippcentre, as a low cost SIPP for financial advisers and their clients. Since then, AJ Bell has grown its customers and AUA organically, but has also made some small strategic acquisitions to enhance AJ Bell's platform propositions. In December 2007, AJ Bell acquired Lawshare to bring its stockbroking capabilities in-house and facilitate the offering of ISAs and general investment/dealing accounts to its platform customers. In December 2012, AJ Bell acquired MSM Media to expand the range of investment content offered to its platform customers. More recently in February 2016, AJ Bell acquired Indexx Markets and Mansard Capital to facilitate the launch of its in-house range of investment solutions. AJ Bell's heritage is evident in the value of assets held in SIPPs, which was 72% of AJ Bell's overall AUA as at 30 September 2018. SIPPs are long term savings products which provide AJ Bell with a high proportion of recurring revenue.
AJ Bell's principal source of revenue arises from the fees charged for the provision of platform services. AJ Bell's revenue is classified into recurring revenues and transactional revenues as follows:
AJ Bell has a diverse revenue model with recurring income representing 82% of revenue in FY2018, and transactional revenue of 18%. The level of ad valorem charges included within recurring income varies with the size of the customer's portfolio and, as a consequence, more generally with the amount of AUA.
AJ Bell's distribution model is diversified, operating in both the advised and D2C segments of the platform market. Further, the business is not reliant on any key customer or independent financial adviser. The largest single distribution contract as at 30 September 2018 comprised less than 1.5% of total revenue.
AJ Bell's business is highly cash generative and it has a capital light model. Cash generated from operations has averaged over 100% of profit before taxation for the period covered by the historical financial information as AJ Bell benefits from a short working capital cycle and low levels of capital expenditure following the completion of its major re-platforming exercise in 2014.
Growth has been funded from retained earnings and has not required primary equity fundraising or material debt finance.
AJ Bell's strong regulatory capital position is evidenced by a regulatory capital surplus yielding coverage of 440% of its Pillar 1 regulatory capital requirements during the period covered by the historical financial information.
Management considers a variety of financial measures and other metrics when analysing AJ Bell's performance, and the Directors believe that each of these measures provides useful information with respect to AJ Bell's business and operations. With the exception of revenue and profit before tax, these are non-IFRS financial measures and metrics that are not audited. These non-IFRS financial measures and metrics are not meant to be considered in isolation or as a substitute for measures of financial performance reported in accordance with IFRS. Moreover, these non-IFRS financial measures and metrics may be defined or calculated differently by other companies, and as a result AJ Bell's key performance indicators may not be comparable to similar measures and metrics calculated by its peers.
| | As at
Based on data on competitors in the Platforum UK Adviser Platform Guide, March 2018.
AJ Bell Investcentre is designed to meet the needs of customers and advisers in its target markets by providing:
The pricing strategy for AJ Bell Investcentre is for it to be highly competitive for customers falling within its target market. In its Platform Market Scorecard Q1 2018, the lang cat commented ''AJ Bell looks to be a natural vehicle for medium-to-high sized portfolios'' and ''AJ Bell and Zurich are the front runners at the top end (above £450,000)''. The following chart shows the annual ongoing platform charges for a variety of UK platforms for different portfolio sizes.
Cluster D is most relevant to AJ Bell; it demonstrates the effect of the SIPP administration charge once the portfolio size exceeds £200,000.
Source: the lang cat, Platform Market Scorecard Q1 2018.
Under the adviser segmentation model, each adviser firm has been assigned to one of four segments:
AJ Bell Investcentre has an efficient distribution model with seven regional sales teams focused on owner managed adviser firms. There is no reliance on networks nor any significant concentration risk.
There is a clearly defined and differentiated contact strategy for each segment. The primary focus of this strategy is to enable the distribution team to match the most appropriate resource required to ensure that it is developing every adviser which is exposed to the platform and product set. Over time, the aim of the strategy is to move more firms into the ''Maintain'' and ''Key'' segments and ultimately develop the success of the investment solutions with these adviser firms.
Strong personal relationships have been forged with supporting firms over many years, leading to a broad spread of support:
AJ Bell Investcentre is actively managed through all stages of the product lifecycle, in accordance with AJ Bell's product management framework. Fergus Lyons is the AJ Bell Investcentre Managing Director and Product Owner and has responsibility for the management and delivery of the AJ Bell Investcentre proposition, supported by dedicated product management, business development and marketing teams. The framework is designed to ensure the product proposition meets the needs of its customers and their advisers, on an ongoing basis, and is properly positioned within the market to meet AJ Bell's objectives. AJ Bell conducts a full review of the product proposition on an annual basis, including carrying out customer and adviser surveys.
Planned product developments include a number of changes designed to enhance the proposition and to make the Platform easier to use for customers and advisers. These are expected to include introducing an execution-only dealing facility for customers under ISA and GIA to complement the recently introduced execution only functionality for SIPPs.
AJ Bell Youinvest is one of the UK's fastest growing D2C retail investment platforms, with the average AUA per customer again significantly higher than the market leader, driven by its SIPP heritage.12e split into three pillars:
AJ Bell is classified as a Pillar 1 entity.
The FCA allocates all authorised firms into one of two conduct categories either (i) fixed portfolio firms; or (ii) flexible portfolio firms.
Fixed portfolio firms are given a specific supervisor. The FCA proactively supervises such firms using firm-specific continuous assessment.
Flexible portfolio firms are supervised through thematic and market-based work, along with programmes of communication, engagement and education aligned to the key risks the FCA has identified in the relevant sector.
The FCA has recently confirmed that AJ Bell and the Regulated Subsidiaries will no longer be allocated a dedicated supervisory team and instead will be part of the ''Platform Portfolio''.
The FCA has a range of supervisory powers which allow it to intervene in a firm's affairs. The FCA can, for instance, require firms to provide particular information or documents to it, require the production of a report by a ''skilled person'' appointed by the FCA or formally investigate a firm.
In its prudential supervisory role, the FCA considers the systems and controls, governance arrangements, and risk management capabilities including the risk of misconduct. The FCA will seek to assess how well a firm understands the risks it is running, how well placed it is to manage those risks, and how well it can avoid large, unexpected costs.
Firms solely regulated by the FCA are allocated one of four prudential categories depending on the relative perceived risk their failure would pose to markets. AJ Bell is classified as a P2 entity, which applies to firms and groups whose failure would have less impact than P1 firms, but would nevertheless damage markets or consumers and client assets.
The FCA uses a wide range of enforcement powers, criminal, civil and regulatory, to protect consumers and to take action against firms and individuals that do not meet its standards. These include:
* withdrawing a firm's authorisation;
The FOS has compulsory jurisdiction over all FCA-regulated firms including the Regulated Subsidiaries. However, customer complaints relating to the administration of pensions are referred to the Pensions Ombudsman, not FOS, in accordance with the Memorandum of Understanding between FOS and the Pensions Ombudsman.
All FCA-regulated firms must have a procedure in place for resolving disputes with their customers and must respond to customer complaints within set deadlines. If a firm's complaints procedure fails to resolve a complaint, the FOS and Pensions Ombudsman provides a dispute resolution procedure for certain categories of customer complaints brought against applicable firms by individuals and small business customers.
The FOS and Pensions Ombudsman provide a more informal alternative to customers bringing complaints in the courts. They provide independent investigators who review and seek to resolve complaints between customers and firms.
If the FOS resolves a complaint in favour of a customer, it has the power to order a firm to pay fair compensation for any loss or damage it caused to the customer, or to direct a firm to take such steps in relation to the customer as the FOS considers just and appropriate, and irrespective of whether a similar award could be made by a court. Authorised firms fund the FOS through levies and case fees.
The FSCS was established under FSMA, it is a statutory compensation scheme of last resort for certain categories of customers of authorised firms. It provides compensation to eligible customers who suffer losses as a consequence of an authorised firm's inability to meet its liabilities arising from claims made in connection with its regulated activities. The FSCS is funded by levies on authorised firms and is independent of the FCA, the PRA and the UK government, although it is ultimately accountable to them.
The powers of the FSCS to raise funds from authorised firms are set out in the FEES sourcebook of the FCA Rules. In general terms, fees are levied on participant firms and the FSCS may impose three types of levy the 'management expenses levy' (comprising the 'bases costs levy' and the 'specific costs levy'), the 'compensation costs levy' (relating to compensation costs), and the 'MERS levy' which relates to management expenses in respect of 'relevant schemes'.
Participant firms are allocated to a funding class (or classes) on the basis of their regulated activities. The specific costs and compensation costs levies payable by the participating firms are calculated by reference to their funding class or classes. The main principle behind the calculation of these levies is that the levy should represent the amount of claims made or likely to be made against that type of firm. The Regulated Subsidiaries will fall into the ''Investments'' levy class. It should however be noted, that contributions are not restricted to failures in the sub-classes to which a particular firm belongs as there is the possibility that cross-subsidy between levy classes may be required.
The MLRs require relevant persons to apply risk-based customer due diligence measures and take other steps to prevent their services from being used for money laundering or terrorist financing. They also require relevant persons to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk.
SYSC contains financial crime rules that complement the MLRs, requiring firms to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk. Such controls must be comprehensive and proportionate to the nature, scale and complexity of their activities. In this context, financial crime includes any offence involving fraud or dishonesty, misconduct in, or misuse of information relating to, a financial market, handling the proceeds of crime or the financing of terrorism, as well as bribery and corruption offences.
Failure to maintain the necessary procedures is a criminal offence. The Proceeds of Crime Act 2002, the Terrorism Act 2000 and the Counter-Terrorism Act 2008 and the Criminal Justice Act 1993 also contain a number of offences in relation to money laundering. The Joint Money Laundering Steering Group provides good practice guidance and practical assistance in interpreting the MLRs.
AJ Bell has established appropriate systems and controls under the guidance of AJ Bell's Money Laundering Reporting Officer to help it mitigate the risk of financial crime. This including the appropriate suite of policies, use of anti-money laundering technology and ongoing training for all members of staff.
The ICO is the UK's data protection regulator set up as an independent body to uphold information rights. It is responsible for upholding information rights in the public interest, promoting openness by public bodies and data privacy for individuals. It has powers to enforce compliance with Data Protection Legislation which include criminal prosecution, non-criminal enforcement, audit and issuing monetary penalty notices. The ICO is involved in data protection policy making decisions and produces guidance and codes of practice.
AJ Bell collects and processes personal data and sensitive personal data (including names, addresses, contact details, financial information, health information and criminal records) information from its customers and employees as part of the operation of its business.
AJ Bell must therefore comply with all Data Protection Legislation including the recently implemented GDPR and the UK's Data Protection Act 2018.
GDPR imposes certain requirements on AJ Bell in respect of the collection, retention, use, processing and security of personal information. Failure to operate effective data use and information security controls could potentially lead to regulatory enforced compliance measures, fines, reputational and financial losses in responding to or defending its actions.
GDPR also provides data subjects far greater rights and control in respect of their personal data. Failure to be fully transparent at the point of collection about the purpose for and use of personal data or otherwise meet obligations relating to data subject rights could result in compensation payments to data subjects whose rights have been infringed.
GDPR allows representative bodies to bring claims on behalf of data subjects. This could result in a 'group action' being pursued by a third party on behalf of data subjects. A group action could potentially lead to reputational damage and increased financial defence costs and losses depending on the number of data subjects forming the group. The potential sanctions for the most egregious breaches of GDPR include financial penalties of up to 4% of the annual worldwide turnover of company groups.
The GDPR has increased the regulatory burden on AJ Bell in processing personal customer, employee and other data in the conduct of its business.
AJ Bell established a GDPR project to ensure that the new requirements were met by 25 May 2018, the date on which GDPR came into force. AJ Bell monitors ongoing compliance through its established regulatory systems and controls.
If AJ Bell or any of the third party service providers on which it relies (including non-subsidiary affiliates of AJ Bell) fails to comply with Data Protection Legislation, due to any failure to store or transmit information in a secure manner or any loss or wrongful processing of personal customer data, AJ Bell could be subject to investigative and enforcement action by the ICO and complaints or claims from data subjects.
Pension saving under registered pension schemes is subject to favourable tax treatment, which acts as an incentive for employees and individuals to save for retirement and thus be less reliant on the state pension system. However, the extent to which pension savings attract tax relief is subject to certain limits imposed by HMRC. In order to enjoy the tax advantages available to pension schemes in the UK the SIPPs and SSASs administered by AJ Bell are registered with HMRC.
As registered pension schemes, the SIPPs and SSASs are obliged to provide information to HMRC including the provision of a pension scheme return (to be provided on request), accounting for tax returns, event reports and reporting pension flexibility payments.
If payments are made from the schemes that are not authorised payments under the Finance Act 2004, HMRC will impose unauthorised payment charges, and scheme sanction charges in respect of the payments.
Tax considerations are relevant to a UK registered pension scheme when:
The current pensions tax relief system can broadly be described as 'Exempt-Exempt-Taxed' on the following basis:
The AJ Bell Platinum SSASs are occupational pension schemes for legislative purposes. As a result they are regulated by the Pensions Regulator.
The Pensions Regulator is the public body that protects workplace pensions in the UK. The post of the Pensions Regulator was created on 6 April 2005 by Pensions Act 2004. The principal objectives of the Pensions Regulator are set out in the Pensions Act 2004. These include:
The SSAS are registered with the Pensions Regulator in accordance with the Pensions Act 2004. As such the scheme administrator for each scheme is required to provide and update registrable information in respect of each scheme as well as providing a scheme return to the Pensions Regulator whenever the Pensions Regulator issues a scheme return notice. There are also whistleblowing obligations that apply in respect of the trustees and scheme administrators of SSASs.
The Pensions Regulator has issued a code of practice in respect of the governance and administration of occupational trust-based schemes providing money purchase benefits. This code applies to a limited extent to the SSASs although SSASs will generally be exempt from parts of the code (for example in respect of default arrangements and charge caps and the preparation of an annual chair's statement).
The Pensions Regulator has various enforcement powers in respect of defined contribution workplace schemes such as the SSASs, these include the ability to appoint and remove trustees of schemes and to issue fines for non-compliance with legislation under section 10 of the Pensions Act 1995.
An ISA is a scheme of investment managed in accordance with ISA regulations under terms agreed between the ISA manager and the investor. The ISA manager holds investments and claims repayment of income tax deducted at source, by submitting claims to HMRC. There are various types of ISAs permitted by UK law being:
Investors do not pay any tax on any of the income they receive from ISA savings and investments. Nor do they pay any tax on capital gains arising on ISA investments. In order to protect the integrity of the UK taxation system there are limits placed around who can hold an ISA, how many ISAs an individual can open in a tax year and the amount that can be paid into an individual's ISAs in a tax year. An ISA manager must also collect prescribed information and receive prescribed declarations from individuals applying for an ISA.
In order to be able to offer ISAs and LISAs to investors AJBSL has registered with, and been approved by, HMRC as an ISA manager and a LISA manager. As a registered ISA manager AJBSL is obliged to provide information to HMRC and make claims from HMRC including updating HMRC with any changes to the information provided in its application for registrations as an ISA manager, the making of an annual return and tax claim, the making of an annual return of information, and an annual market value return of statistical information (market value and subscriptions).
AJ Bell, including the Regulated Subsidiaries, is subject to EU law, both directly through European regulations and indirectly through European directives, to which the UK is currently obliged to give effect through its legislative powers. Recent EU regulation of most significance that applies to AJ Bell is set out below.
MiFID II applies to firms in the EEA who engage in certain investment activities, including dealing and execution services, investment advice and portfolio management. Building on MiFID, it aims to harmonise the regulatory framework across the EEA to make financial markets more efficient and resilient, increase transparency of both equity and non-equity markets, reinforce supervisory powers, and provide protection for investors.
MiFID II sets out detailed provisions on systems and controls, outsourcing, customer classification, conflicts of interest, best execution, client order handling, suitability and appropriateness, transparency and transaction reporting. Requirements relating to transaction reporting, costs and charges disclosure, product governance and conduct of business requirements all affect AJ Bell's operations.
MiFID II also allows investment firms authorised in accordance with its provisions to passport their services into other EEA states without needing to obtain separate authorisations locally.
The PRIIPs Regulation aims to encourage efficient EU markets by helping investors to better understand and compare the key features, risk, rewards and costs of different PRIIPs, by obliging PRIIPs manufacturers and distributors to provide access to a short and consumer-friendly Key Information Document.
PRIIPs can take a variety of legal forms but can be distinguished by the comparable functions they perform for retail investors. PRIIPS can be broadly categorised into four main groups: (i) investment funds, (ii) insurance-based investment products, (iii) retail structured securities, and (iv) structured term deposits. The PRIIPS Regulation has applied (subject to limited transitional provisions) to products such as units in an investment fund (except UCITS Schemes), life insurance policies with an investment element and structured deposits since 1 January 2018. It is set to apply to UCITS schemes with effect from 31 December 2019.
CRD IV, comprising the Capital Requirements Directive IV and the Capital Requirements Regulation, is an EU legislative framework for the prudential supervision of banks, building societies and investment firms. Certain MiFID investment firms, including those with permissions relating to the safeguarding of client assets or handling of client money, are subject to the provisions of CRD IV as regards prudential and capital standards. AJBAML and AJBSL are subject to these rules. There are changes being proposed to the capital requirements regime under Capital Requirements Directive V and Capital Requirements Regulation II but these are not anticipated prior to 2019. Therefore whether these changes will have any impact on the Regulated Subsidiaries is unclear because the possibility of these changes taking effect prior to the UK's planned departure from the EU is remote.
The UCITS regime provides a set of common standards applicable across all EU member states for the operation of and cross border promotion of UCITS Schemes.
The UCITS regime aims to create a single market for open-ended retail investment funds which affords enhanced protection for investors.
It requires EU member states to adopt harmonised rules regulating the authorisation, supervision, structure and activities of UCITS funds together with harmonised rules about investor information and passporting requirements. VT AJ Bell ICVC is a UCITS scheme and therefore must be operated in accordance with the UCITS Directive.
In addition to the FCA's prudential standards and capital adequacy requirements, AJBAML and AJBSL must comply with the wider prudential framework of CRD IV which mainly applies to banks.
The EBA contributes to a European Single Rulebook in banking by providing Binding Technical Standards (''BTS'') and Guidance. The Rulebook aims to provide a single set of harmonised prudential rules for financial institutions throughout the EU in order to create a level playing field and a high level of protection for customers.
The BTS are legal acts which specify particular aspects of an EU legislative text (directive or regulation) and aim at ensuring consistent harmonisation in specific areas. The BTS are legally binding and directly applicable in all Member States including in the UK and therefore AJBAML and AJBSL must comply with these to the extent they apply to their activities.
The EBA and European Securities and Market Authority are working on the review of the application of the prudential rules to investment firms, with the aim of establishing an appropriate prudential framework for investment firms.
FCA-regulated firms have recently been subject to substantial regulatory change. There is further regulatory change on the horizon, with the main changes likely to impact AJ Bell summarised below.
The FCA announced in 2017 that it would be undertaking the Investment Platform Market Study on investment platforms. The market study explores how investment platforms compete to win new, and retain existing, consumers, to allow the FCA to assess how to improve competition within the platform market and develop better consumer outcomes.
In particular, the FCA has looked to assess:
The FCA published its interim report the Investment Platform Market Study in July 2018, which noted that the investment platform market was working well in many respects. There are areas that the FCA identified where it was concerned that competition in the market was not working well and it is consulting on remedies for these areas. The FCA's consultation on remedies for the market focuses on the following main areas:
The FCA expects to publish its final report and recommendations in the first quarter of 2019, following the end of the consultation on its interim report proposals on 21 September 2018.
The Fifth Money Laundering Directive (''MLD5'') contains amendments to the existing money laundering directive as well as the Capital Requirements Directive. MLD5 will, amongst other things:
The majority of changes will be effected by 10 January 2020.
The FCA is consulting on draft guidance outlining the factors which financial services companies should consider when drafting and reviewing variation terms in consumer contracts, the first it has issued following the introduction of the Consumer Rights Act 2015 and several rulings on the topic by the Court of Justice of the EU. The draft guidance outlines factors for financial institutions to consider when seeking to draft variation terms, and also considers a number of reasons for contract variation that the FCA has observed firms commonly include when drafting variation terms allowing them to alter their consumer contracts. AJ Bell will take any finalised guidance into account in updating or changing customer terms.
In February 2018, the FCA published a discussion paper looking at effective competition in non-workplace pensions: DP18/1. The paper was launched in order for the FCA to better understand the market for non-workplace pensions: the providers, the consumers and the relationship between them, with a view to assessing the potential presence, nature and extent of harm. The FCA outlined its areas of potential concerns about how the market is working and the reasons for its concerns. It noted that in some aspects it sees parallels with the findings of the OFT study on the defined contribution workplace pensions market in 2013 which concluded that competition alone could not be relied on to drive value for money and good outcomes for consumers of DC workplace pensions. That study led to increased regulation of the workplace pensions market, including the introduction of caps on certain charges.
The period for submission of information has now closed. At this stage, it is difficult to assess whether the FCA focus on non-workplace pensions will have any material impact on the non-workplace pension market in the UK or lead to any material changes in the interaction between non-workplace pension providers and other participants in the UK wealth management sector, such as asset managers and financial advisers.
In June 2018, the FCA published a consultation paper regarding improving retirement outcomes for consumers: CP18/17. In the consultation paper the FCA proposes a remedy package to address the potential consumer harm and emerging issues it has identified arising from the pension freedoms introduced in 2015. The FCA's remedy package aims to: protect consumers from poor outcomes; improve consumer engagement with retirement income decisions; and promote competition by making the costs of drawdown clearer and comparisons easier.
The potential changes suggested by the FCA include:
Whilst it is not certain which of the proposed changes will be brought in to force and in what form, AJ Bell is actively engaging with the FCA in relation to its proposals. Whilst the proposed changes could lead to an increased administrative burden on AJ Bell, the directors believe that AJ Bell is in a good position to respond to any changes required and that any changes should not have a material adverse impact on its business.
Although the finalised text of the GDPR was published over two years ago, there is general uncertainty about how the GDPR and the Data Protection Act 2018 are going to be interpreted and enforced, with guidance related to many areas of the GDPR only having recently been published by UK and EU regulators. Therefore, AJ Bell must, in practice, ensure its compliance with the GDPR is constantly evolving. AJ Bell will ensure it continuously reviews its decisions and ensure that the latest guidance from the ICO, or indeed the European Data Protection Board, is taken into account in its decisions in relation to processing of personal data and reassess the risks in this context.
The E-Privacy Regulation was due to be implemented on 25 May 2018 at the same time as GDPR. It is anticipated that this will now be implemented in 2020. The E-Privacy Regulation will seek to harmonise protection of electronic communications across the EU Member States, broaden the electronic communications that are captured, implement a higher level of protection and simplify the rules in relation to cookies. The enforcement of the Regulation will be the responsibility of the ICO.
The ICO has indicated that it is unlikely that the UK will receive an adequacy decision on the UK's exit from the EU, pursuant to which the EU confirms that privacy legislation in a non-EU state is sufficiently stringent so as to permit transfer of data from inside the EU to that state. In the absence of an adequacy decision, the UK has implemented the Data Protection Act 2018 which incorporates the GDPR directly into UK legislation and ensures consistency with the EU in respect of requirements for processing of personal data. It is currently envisaged that a treaty will be implemented between the UK and the EU in order to ensure data transfers can still occur without the additional burden of entering into the EU Standard Contractual Clauses which have been developed by the European Commission to provide adequate terms to safeguard protection of personal data when an international transfer takes place without an adequacy decision or a treaty in place.
The following is a review of AJ Bell's operating performance and financial position.
The consolidated financial information referred to in this Part 5 has been prepared in accordance with (i) IFRS as adopted by the EU; (ii) the requirements of the Prospectus Directive; and (iii) the Listing Rules, and, unless otherwise stated, has been extracted without material adjustment from Part 6 (Historical Financial Information) of this Registration Document.
In this discussion and analysis, the financial years ended 30 September 2016, 30 September 2017 and 30 September 2018 are referred to as FY2016, FY2017 and FY2018, respectively.
The financial information referred to in the following discussion and analysis has been rounded to the nearest decimal place and percentage changes have been calculated based upon these rounded numbers and so may not conform exactly to the calculation based upon the underlying unrounded figures.
This Part 5 (Operating and Financial Review) of this Registration Document contains ''forward-looking statements''. Those statements are subject to risks, uncertainties and other factors that could cause AJ Bell's future results of operations or cash flows to differ materially from the results of operations or cash flows expressed or implied in such forward-looking statements. Prospective investors should read the section entitled ''Presentation of Information'' and Part 2 (Risk Factors) of this Registration Document for further information in this respect. In addition, certain industry issues also affect the Group's results of operations and are described in Part 1 (Market Overview) of this Registration Document.
AJ Bell is one of the largest investment platforms in the UK, based on the value of its AUA. The total value of the Group's AUA was £46.1 billion as at 30 September 2018. AJ Bell's flagship propositions are AJ Bell Investcentre, which operates in the advised segment of the platform market and AJ Bell Youinvest which operates in the D2C segment. The Group operates principally as a platform business although it also maintains an element of non-Platform business.
AJ Bell Youinvest and AJ Bell Investcentre combined had £38.6 billion in AUA as at 30 September 2018 with 183,213 customers. These two platform propositions are described briefly below:
AJ Bell Youinvest and AJ Bell Investcentre provide access to a broad investment range including shares and other financial instruments traded on the major stock exchanges around the world, as well as mainstream collective investments available in the UK. AJ Bell also offers a range of in-house investment solutions, including the AJ Bell Passive funds, the AJ Bell Investcentre Managed Portfolio Service and the AJ Bell Youinvest Favourite Funds list and from the end of the last quarter of 2018 Ready-made portfolios.
AJ Bell's non-Platform business, which had £7.5 billion in AUA as at 30 September 2018 with 14,699 customers, comprises:
* AJ Bell Securities stockbroking: providing dealing, settlement and custody services to institutional investment businesses.
AJ Bell was co-founded in 1995 in Manchester by Andy Bell and Nicholas Littlefair to provide actuarial, trustee and pension administration services to customers with a SSAS or SIPP. In 2000, AJ Bell launched Sippdeal, the first online SIPP in the UK for execution only investors. In 2002, AJ Bell launched Sippcentre, as a low cost SIPP for financial advisers and their clients. Since then, AJ Bell has grown its customers and AUA organically, but has also made some small strategic acquisitions to enhance AJ Bell's platform propositions. In December 2007, AJ Bell acquired Lawshare to bring its stockbroking capabilities in-house and facilitate the offering of ISAs and general investment/dealing accounts to its platform customers. In December 2012, AJ Bell acquired MSM Media to expand the range of investment content offered to its platform customers. More recently in February 2016, AJ Bell acquired Indexx Markets and Mansard Capital to facilitate the launch of its in-house range of investment solutions. AJ Bell's heritage is evident in the value of assets held in SIPPs, which was 72% of AJ Bell's overall AUA as at 30 September 2018. SIPPs are long term savings products which provide AJ Bell with a high proportion of recurring revenue.
AJ Bell's principal source of revenue arises from the fees charged for the provision of platform services. AJ Bell's revenue is classified into recurring revenues and transactional revenues as follows:
AJ Bell has a diverse revenue model with recurring income representing 82% of revenue in FY2018, and transactional revenue of 18%. The level of ad valorem charges included within recurring income varies with the size of the customer's portfolio and, as a consequence, more generally with the amount of AUA.
AJ Bell's distribution model is diversified, operating in both the advised and D2C segments of the platform market. Further, the business is not reliant on any key customer or independent financial adviser. The largest single distribution contract as at 30 September 2018 comprised less than 1.5% of total revenue.
AJ Bell's business is highly cash generative and it has a capital light model. Cash generated from operations has averaged over 100% of profit before taxation for the period covered by the historical financial information as AJ Bell benefits from a short working capital cycle and low levels of capital expenditure following the completion of its major re-platforming exercise in 2014.
Growth has been funded from retained earnings and has not required primary equity fundraising or material debt finance.
AJ Bell's strong regulatory capital position is evidenced by a regulatory capital surplus yielding coverage of 440% of its Pillar 1 regulatory capital requirements during the period covered by the historical financial information.
Management considers a variety of financial measures and other metrics when analysing AJ Bell's performance, and the Directors believe that each of these measures provides useful information with respect to AJ Bell's business and operations. With the exception of revenue and profit before tax, these are non-IFRS financial measures and metrics that are not audited. These non-IFRS financial measures and metrics are not meant to be considered in isolation or as a substitute for measures of financial performance reported in accordance with IFRS. Moreover, these non-IFRS financial measures and metrics may be defined or calculated differently by other companies, and as a result AJ Bell's key performance indicators may not be comparable to similar measures and metrics calculated by its peers.
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Target customers of AJ Bell Youinvest are UK residents, seeking to invest in a range of stock market investments through a variety of tax wrappers (i.e. SIPPs, ISAs, LISAs, dealing accounts and junior SIPP and JISA accounts), online on an execution-only basis. The nature of the proposition, together with the services and wide range of investment options available, means that it can be suitable for many different types of customers with different investment needs and approaches.
The target market is segmented in terms of customers' behaviour or attitude to investing, to better understand differing customer needs within the wider market. AJ Bell Youinvest's three target customer segments are ''confident in control'', ''hungry for help'' and ''nervous newcomers''. Historically, most of Youinvest's customers have been ''confident in control'' but, given the ''advice gap'' identified by the FCA, the segments offering the most potential for growth may be the hungry for help and nervous newcomer segments and AJ Bell Youinvest is working on developing its propositions to more readily meet the needs of these customers, for example, through the introduction of the AJ Bell Passive funds, Ready-made portfolios to be launched in Q4 2018 and investment content aimed at less experienced investors and those needing more help in making investment decisions.
Investment guidance is provided but no regulated investment advice in the form of personal recommendations is given.
AJ Bell Youinvest is designed to meet the needs of customers in its target markets by providing:
12A allocates all authorised firms into one of two conduct categories either (i) fixed portfolio firms; or (ii) flexible portfolio firms.
Fixed portfolio firms are given a specific supervisor. The FCA proactively supervises such firms using firm-specific continuous assessment.
Flexible portfolio firms are supervised through thematic and market-based work, along with programmes of communication, engagement and education aligned to the key risks the FCA has identified in the relevant sector.
The FCA has recently confirmed that AJ Bell and the Regulated Subsidiaries will no longer be allocated a dedicated supervisory team and instead will be part of the ''Platform Portfolio''.
The FCA has a range of supervisory powers which allow it to intervene in a firm's affairs. The FCA can, for instance, require firms to provide particular information or documents to it, require the production of a report by a ''skilled person'' appointed by the FCA or formally investigate a firm.
In its prudential supervisory role, the FCA considers the systems and controls, governance arrangements, and risk management capabilities including the risk of misconduct. The FCA will seek to assess how well a firm understands the risks it is running, how well placed it is to manage those risks, and how well it can avoid large, unexpected costs.
Firms solely regulated by the FCA are allocated one of four prudential categories depending on the relative perceived risk their failure would pose to markets. AJ Bell is classified as a P2 entity, which applies to firms and groups whose failure would have less impact than P1 firms, but would nevertheless damage markets or consumers and client assets.
The FCA uses a wide range of enforcement powers, criminal, civil and regulatory, to protect consumers and to take action against firms and individuals that do not meet its standards. These include:
* withdrawing a firm's authorisation;
The FOS has compulsory jurisdiction over all FCA-regulated firms including the Regulated Subsidiaries. However, customer complaints relating to the administration of pensions are referred to the Pensions Ombudsman, not FOS, in accordance with the Memorandum of Understanding between FOS and the Pensions Ombudsman.
All FCA-regulated firms must have a procedure in place for resolving disputes with their customers and must respond to customer complaints within set deadlines. If a firm's complaints procedure fails to resolve a complaint, the FOS and Pensions Ombudsman provides a dispute resolution procedure for certain categories of customer complaints brought against applicable firms by individuals and small business customers.
The FOS and Pensions Ombudsman provide a more informal alternative to customers bringing complaints in the courts. They provide independent investigators who review and seek to resolve complaints between customers and firms.
If the FOS resolves a complaint in favour of a customer, it has the power to order a firm to pay fair compensation for any loss or damage it caused to the customer, or to direct a firm to take such steps in relation to the customer as the FOS considers just and appropriate, and irrespective of whether a similar award could be made by a court. Authorised firms fund the FOS through levies and case fees.
The FSCS was established under FSMA, it is a statutory compensation scheme of last resort for certain categories of customers of authorised firms. It provides compensation to eligible customers who suffer losses as a consequence of an authorised firm's inability to meet its liabilities arising from claims made in connection with its regulated activities. The FSCS is funded by levies on authorised firms and is independent of the FCA, the PRA and the UK government, although it is ultimately accountable to them.
The powers of the FSCS to raise funds from authorised firms are set out in the FEES sourcebook of the FCA Rules. In general terms, fees are levied on participant firms and the FSCS may impose three types of levy the 'management expenses levy' (comprising the 'bases costs levy' and the 'specific costs levy'), the 'compensation costs levy' (relating to compensation costs), and the 'MERS levy' which relates to management expenses in respect of 'relevant schemes'.
Participant firms are allocated to a funding class (or classes) on the basis of their regulated activities. The specific costs and compensation costs levies payable by the participating firms are calculated by reference to their funding class or classes. The main principle behind the calculation of these levies is that the levy should represent the amount of claims made or likely to be made against that type of firm. The Regulated Subsidiaries will fall into the ''Investments'' levy class. It should however be noted, that contributions are not restricted to failures in the sub-classes to which a particular firm belongs as there is the possibility that cross-subsidy between levy classes may be required.
The MLRs require relevant persons to apply risk-based customer due diligence measures and take other steps to prevent their services from being used for money laundering or terrorist financing. They also require relevant persons to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk.
SYSC contains financial crime rules that complement the MLRs, requiring firms to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk. Such controls must be comprehensive and proportionate to the nature, scale and complexity of their activities. In this context, financial crime includes any offence involving fraud or dishonesty, misconduct in, or misuse of information relating to, a financial market, handling the proceeds of crime or the financing of terrorism, as well as bribery and corruption offences.
Failure to maintain the necessary procedures is a criminal offence. The Proceeds of Crime Act 2002, the Terrorism Act 2000 and the Counter-Terrorism Act 2008 and the Criminal Justice Act 1993 also contain a number of offences in relation to money laundering. The Joint Money Laundering Steering Group provides good practice guidance and practical assistance in interpreting the MLRs.
AJ Bell has established appropriate systems and controls under the guidance of AJ Bell's Money Laundering Reporting Officer to help it mitigate the risk of financial crime. This including the appropriate suite of policies, use of anti-money laundering technology and ongoing training for all members of staff.
The ICO is the UK's data protection regulator set up as an independent body to uphold information rights. It is responsible for upholding information rights in the public interest, promoting openness by public bodies and data privacy for individuals. It has powers to enforce compliance with Data Protection Legislation which include criminal prosecution, non-criminal enforcement, audit and issuing monetary penalty notices. The ICO is involved in data protection policy making decisions and produces guidance and codes of practice.
AJ Bell collects and processes personal data and sensitive personal data (including names, addresses, contact details, financial information, health information and criminal records) information from its customers and employees as part of the operation of its business.
AJ Bell must therefore comply with all Data Protection Legislation including the recently implemented GDPR and the UK's Data Protection Act 2018.
GDPR imposes certain requirements on AJ Bell in respect of the collection, retention, use, processing and security of personal information. Failure to operate effective data use and information security controls could potentially lead to regulatory enforced compliance measures, fines, reputational and financial losses in responding to or defending its actions.
GDPR also provides data subjects far greater rights and control in respect of their personal data. Failure to be fully transparent at the point of collection about the purpose for and use of personal data or otherwise meet obligations relating to data subject rights could result in compensation payments to data subjects whose rights have been infringed.
GDPR allows representative bodies to bring claims on behalf of data subjects. This could result in a 'group action' being pursued by a third party on behalf of data subjects. A group action could potentially lead to reputational damage and increased financial defence costs and losses depending on the number of data subjects forming the group. The potential sanctions for the most egregious breaches of GDPR include financial penalties of up to 4% of the annual worldwide turnover of company groups.
The GDPR has increased the regulatory burden on AJ Bell in processing personal customer, employee and other data in the conduct of its business.
AJ Bell established a GDPR project to ensure that the new requirements were met by 25 May 2018, the date on which GDPR came into force. AJ Bell monitors ongoing compliance through its established regulatory systems and controls.
If AJ Bell or any of the third party service providers on which it relies (including non-subsidiary affiliates of AJ Bell) fails to comply with Data Protection Legislation, due to any failure to store or transmit information in a secure manner or any loss or wrongful processing of personal customer data, AJ Bell could be subject to investigative and enforcement action by the ICO and complaints or claims from data subjects.
Pension saving under registered pension schemes is subject to favourable tax treatment, which acts as an incentive for employees and individuals to save for retirement and thus be less reliant on the state pension system. However, the extent to which pension savings attract tax relief is subject to certain limits imposed by HMRC. In order to enjoy the tax advantages available to pension schemes in the UK the SIPPs and SSASs administered by AJ Bell are registered with HMRC.
As registered pension schemes, the SIPPs and SSASs are obliged to provide information to HMRC including the provision of a pension scheme return (to be provided on request), accounting for tax returns, event reports and reporting pension flexibility payments.
If payments are made from the schemes that are not authorised payments under the Finance Act 2004, HMRC will impose unauthorised payment charges, and scheme sanction charges in respect of the payments.
Tax considerations are relevant to a UK registered pension scheme when:
The current pensions tax relief system can broadly be described as 'Exempt-Exempt-Taxed' on the following basis:
The AJ Bell Platinum SSASs are occupational pension schemes for legislative purposes. As a result they are regulated by the Pensions Regulator.
The Pensions Regulator is the public body that protects workplace pensions in the UK. The post of the Pensions Regulator was created on 6 April 2005 by Pensions Act 2004. The principal objectives of the Pensions Regulator are set out in the Pensions Act 2004. These include:
The SSAS are registered with the Pensions Regulator in accordance with the Pensions Act 2004. As such the scheme administrator for each scheme is required to provide and update registrable information in respect of each scheme as well as providing a scheme return to the Pensions Regulator whenever the Pensions Regulator issues a scheme return notice. There are also whistleblowing obligations that apply in respect of the trustees and scheme administrators of SSASs.
The Pensions Regulator has issued a code of practice in respect of the governance and administration of occupational trust-based schemes providing money purchase benefits. This code applies to a limited extent to the SSASs although SSASs will generally be exempt from parts of the code (for example in respect of default arrangements and charge caps and the preparation of an annual chair's statement).
The Pensions Regulator has various enforcement powers in respect of defined contribution workplace schemes such as the SSASs, these include the ability to appoint and remove trustees of schemes and to issue fines for non-compliance with legislation under section 10 of the Pensions Act 1995.
An ISA is a scheme of investment managed in accordance with ISA regulations under terms agreed between the ISA manager and the investor. The ISA manager holds investments and claims repayment of income tax deducted at source, by submitting claims to HMRC. There are various types of ISAs permitted by UK law being:
Investors do not pay any tax on any of the income they receive from ISA savings and investments. Nor do they pay any tax on capital gains arising on ISA investments. In order to protect the integrity of the UK taxation system there are limits placed around who can hold an ISA, how many ISAs an individual can open in a tax year and the amount that can be paid into an individual's ISAs in a tax year. An ISA manager must also collect prescribed information and receive prescribed declarations from individuals applying for an ISA.
In order to be able to offer ISAs and LISAs to investors AJBSL has registered with, and been approved by, HMRC as an ISA manager and a LISA manager. As a registered ISA manager AJBSL is obliged to provide information to HMRC and make claims from HMRC including updating HMRC with any changes to the information provided in its application for registrations as an ISA manager, the making of an annual return and tax claim, the making of an annual return of information, and an annual market value return of statistical information (market value and subscriptions).
AJ Bell, including the Regulated Subsidiaries, is subject to EU law, both directly through European regulations and indirectly through European directives, to which the UK is currently obliged to give effect through its legislative powers. Recent EU regulation of most significance that applies to AJ Bell is set out below.
MiFID II applies to firms in the EEA who engage in certain investment activities, including dealing and execution services, investment advice and portfolio management. Building on MiFID, it aims to harmonise the regulatory framework across the EEA to make financial markets more efficient and resilient, increase transparency of both equity and non-equity markets, reinforce supervisory powers, and provide protection for investors.
MiFID II sets out detailed provisions on systems and controls, outsourcing, customer classification, conflicts of interest, best execution, client order handling, suitability and appropriateness, transparency and transaction reporting. Requirements relating to transaction reporting, costs and charges disclosure, product governance and conduct of business requirements all affect AJ Bell's operations.
MiFID II also allows investment firms authorised in accordance with its provisions to passport their services into other EEA states without needing to obtain separate authorisations locally.
The PRIIPs Regulation aims to encourage efficient EU markets by helping investors to better understand and compare the key features, risk, rewards and costs of different PRIIPs, by obliging PRIIPs manufacturers and distributors to provide access to a short and consumer-friendly Key Information Document.
PRIIPs can take a variety of legal forms but can be distinguished by the comparable functions they perform for retail investors. PRIIPS can be broadly categorised into four main groups: (i) investment funds, (ii) insurance-based investment products, (iii) retail structured securities, and (iv) structured term deposits. The PRIIPS Regulation has applied (subject to limited transitional provisions) to products such as units in an investment fund (except UCITS Schemes), life insurance policies with an investment element and structured deposits since 1 January 2018. It is set to apply to UCITS schemes with effect from 31 December 2019.
CRD IV, comprising the Capital Requirements Directive IV and the Capital Requirements Regulation, is an EU legislative framework for the prudential supervision of banks, building societies and investment firms. Certain MiFID investment firms, including those with permissions relating to the safeguarding of client assets or handling of client money, are subject to the provisions of CRD IV as regards prudential and capital standards. AJBAML and AJBSL are subject to these rules. There are changes being proposed to the capital requirements regime under Capital Requirements Directive V and Capital Requirements Regulation II but these are not anticipated prior to 2019. Therefore whether these changes will have any impact on the Regulated Subsidiaries is unclear because the possibility of these changes taking effect prior to the UK's planned departure from the EU is remote.
The UCITS regime provides a set of common standards applicable across all EU member states for the operation of and cross border promotion of UCITS Schemes.
The UCITS regime aims to create a single market for open-ended retail investment funds which affords enhanced protection for investors.
It requires EU member states to adopt harmonised rules regulating the authorisation, supervision, structure and activities of UCITS funds together with harmonised rules about investor information and passporting requirements. VT AJ Bell ICVC is a UCITS scheme and therefore must be operated in accordance with the UCITS Directive.
In addition to the FCA's prudential standards and capital adequacy requirements, AJBAML and AJBSL must comply with the wider prudential framework of CRD IV which mainly applies to banks.
The EBA contributes to a European Single Rulebook in banking by providing Binding Technical Standards (''BTS'') and Guidance. The Rulebook aims to provide a single set of harmonised prudential rules for financial institutions throughout the EU in order to create a level playing field and a high level of protection for customers.
The BTS are legal acts which specify particular aspects of an EU legislative text (directive or regulation) and aim at ensuring consistent harmonisation in specific areas. The BTS are legally binding and directly applicable in all Member States including in the UK and therefore AJBAML and AJBSL must comply with these to the extent they apply to their activities.
The EBA and European Securities and Market Authority are working on the review of the application of the prudential rules to investment firms, with the aim of establishing an appropriate prudential framework for investment firms.
FCA-regulated firms have recently been subject to substantial regulatory change. There is further regulatory change on the horizon, with the main changes likely to impact AJ Bell summarised below.
The FCA announced in 2017 that it would be undertaking the Investment Platform Market Study on investment platforms. The market study explores how investment platforms compete to win new, and retain existing, consumers, to allow the FCA to assess how to improve competition within the platform market and develop better consumer outcomes.
In particular, the FCA has looked to assess:
The FCA published its interim report the Investment Platform Market Study in July 2018, which noted that the investment platform market was working well in many respects. There are areas that the FCA identified where it was concerned that competition in the market was not working well and it is consulting on remedies for these areas. The FCA's consultation on remedies for the market focuses on the following main areas:
The FCA expects to publish its final report and recommendations in the first quarter of 2019, following the end of the consultation on its interim report proposals on 21 September 2018.
The Fifth Money Laundering Directive (''MLD5'') contains amendments to the existing money laundering directive as well as the Capital Requirements Directive. MLD5 will, amongst other things:
The majority of changes will be effected by 10 January 2020.
The FCA is consulting on draft guidance outlining the factors which financial services companies should consider when drafting and reviewing variation terms in consumer contracts, the first it has issued following the introduction of the Consumer Rights Act 2015 and several rulings on the topic by the Court of Justice of the EU. The draft guidance outlines factors for financial institutions to consider when seeking to draft variation terms, and also considers a number of reasons for contract variation that the FCA has observed firms commonly include when drafting variation terms allowing them to alter their consumer contracts. AJ Bell will take any finalised guidance into account in updating or changing customer terms.
In February 2018, the FCA published a discussion paper looking at effective competition in non-workplace pensions: DP18/1. The paper was launched in order for the FCA to better understand the market for non-workplace pensions: the providers, the consumers and the relationship between them, with a view to assessing the potential presence, nature and extent of harm. The FCA outlined its areas of potential concerns about how the market is working and the reasons for its concerns. It noted that in some aspects it sees parallels with the findings of the OFT study on the defined contribution workplace pensions market in 2013 which concluded that competition alone could not be relied on to drive value for money and good outcomes for consumers of DC workplace pensions. That study led to increased regulation of the workplace pensions market, including the introduction of caps on certain charges.
The period for submission of information has now closed. At this stage, it is difficult to assess whether the FCA focus on non-workplace pensions will have any material impact on the non-workplace pension market in the UK or lead to any material changes in the interaction between non-workplace pension providers and other participants in the UK wealth management sector, such as asset managers and financial advisers.
In June 2018, the FCA published a consultation paper regarding improving retirement outcomes for consumers: CP18/17. In the consultation paper the FCA proposes a remedy package to address the potential consumer harm and emerging issues it has identified arising from the pension freedoms introduced in 2015. The FCA's remedy package aims to: protect consumers from poor outcomes; improve consumer engagement with retirement income decisions; and promote competition by making the costs of drawdown clearer and comparisons easier.
The potential changes suggested by the FCA include:
Whilst it is not certain which of the proposed changes will be brought in to force and in what form, AJ Bell is actively engaging with the FCA in relation to its proposals. Whilst the proposed changes could lead to an increased administrative burden on AJ Bell, the directors believe that AJ Bell is in a good position to respond to any changes required and that any changes should not have a material adverse impact on its business.
Although the finalised text of the GDPR was published over two years ago, there is general uncertainty about how the GDPR and the Data Protection Act 2018 are going to be interpreted and enforced, with guidance related to many areas of the GDPR only having recently been published by UK and EU regulators. Therefore, AJ Bell must, in practice, ensure its compliance with the GDPR is constantly evolving. AJ Bell will ensure it continuously reviews its decisions and ensure that the latest guidance from the ICO, or indeed the European Data Protection Board, is taken into account in its decisions in relation to processing of personal data and reassess the risks in this context.
The E-Privacy Regulation was due to be implemented on 25 May 2018 at the same time as GDPR. It is anticipated that this will now be implemented in 2020. The E-Privacy Regulation will seek to harmonise protection of electronic communications across the EU Member States, broaden the electronic communications that are captured, implement a higher level of protection and simplify the rules in relation to cookies. The enforcement of the Regulation will be the responsibility of the ICO.
The ICO has indicated that it is unlikely that the UK will receive an adequacy decision on the UK's exit from the EU, pursuant to which the EU confirms that privacy legislation in a non-EU state is sufficiently stringent so as to permit transfer of data from inside the EU to that state. In the absence of an adequacy decision, the UK has implemented the Data Protection Act 2018 which incorporates the GDPR directly into UK legislation and ensures consistency with the EU in respect of requirements for processing of personal data. It is currently envisaged that a treaty will be implemented between the UK and the EU in order to ensure data transfers can still occur without the additional burden of entering into the EU Standard Contractual Clauses which have been developed by the European Commission to provide adequate terms to safeguard protection of personal data when an international transfer takes place without an adequacy decision or a treaty in place.
The following is a review of AJ Bell's operating performance and financial position.
The consolidated financial information referred to in this Part 5 has been prepared in accordance with (i) IFRS as adopted by the EU; (ii) the requirements of the Prospectus Directive; and (iii) the Listing Rules, and, unless otherwise stated, has been extracted without material adjustment from Part 6 (Historical Financial Information) of this Registration Document.
In this discussion and analysis, the financial years ended 30 September 2016, 30 September 2017 and 30 September 2018 are referred to as FY2016, FY2017 and FY2018, respectively.
The financial information referred to in the following discussion and analysis has been rounded to the nearest decimal place and percentage changes have been calculated based upon these rounded numbers and so may not conform exactly to the calculation based upon the underlying unrounded figures.
This Part 5 (Operating and Financial Review) of this Registration Document contains ''forward-looking statements''. Those statements are subject to risks, uncertainties and other factors that could cause AJ Bell's future results of operations or cash flows to differ materially from the results of operations or cash flows expressed or implied in such forward-looking statements. Prospective investors should read the section entitled ''Presentation of Information'' and Part 2 (Risk Factors) of this Registration Document for further information in this respect. In addition, certain industry issues also affect the Group's results of operations and are described in Part 1 (Market Overview) of this Registration Document.
AJ Bell is one of the largest investment platforms in the UK, based on the value of its AUA. The total value of the Group's AUA was £46.1 billion as at 30 September 2018. AJ Bell's flagship propositions are AJ Bell Investcentre, which operates in the advised segment of the platform market and AJ Bell Youinvest which operates in the D2C segment. The Group operates principally as a platform business although it also maintains an element of non-Platform business.
AJ Bell Youinvest and AJ Bell Investcentre combined had £38.6 billion in AUA as at 30 September 2018 with 183,213 customers. These two platform propositions are described briefly below:
AJ Bell Youinvest and AJ Bell Investcentre provide access to a broad investment range including shares and other financial instruments traded on the major stock exchanges around the world, as well as mainstream collective investments available in the UK. AJ Bell also offers a range of in-house investment solutions, including the AJ Bell Passive funds, the AJ Bell Investcentre Managed Portfolio Service and the AJ Bell Youinvest Favourite Funds list and from the end of the last quarter of 2018 Ready-made portfolios.
AJ Bell's non-Platform business, which had £7.5 billion in AUA as at 30 September 2018 with 14,699 customers, comprises:
* AJ Bell Securities stockbroking: providing dealing, settlement and custody services to institutional investment businesses.
AJ Bell was co-founded in 1995 in Manchester by Andy Bell and Nicholas Littlefair to provide actuarial, trustee and pension administration services to customers with a SSAS or SIPP. In 2000, AJ Bell launched Sippdeal, the first online SIPP in the UK for execution only investors. In 2002, AJ Bell launched Sippcentre, as a low cost SIPP for financial advisers and their clients. Since then, AJ Bell has grown its customers and AUA organically, but has also made some small strategic acquisitions to enhance AJ Bell's platform propositions. In December 2007, AJ Bell acquired Lawshare to bring its stockbroking capabilities in-house and facilitate the offering of ISAs and general investment/dealing accounts to its platform customers. In December 2012, AJ Bell acquired MSM Media to expand the range of investment content offered to its platform customers. More recently in February 2016, AJ Bell acquired Indexx Markets and Mansard Capital to facilitate the launch of its in-house range of investment solutions. AJ Bell's heritage is evident in the value of assets held in SIPPs, which was 72% of AJ Bell's overall AUA as at 30 September 2018. SIPPs are long term savings products which provide AJ Bell with a high proportion of recurring revenue.
AJ Bell's principal source of revenue arises from the fees charged for the provision of platform services. AJ Bell's revenue is classified into recurring revenues and transactional revenues as follows:
AJ Bell has a diverse revenue model with recurring income representing 82% of revenue in FY2018, and transactional revenue of 18%. The level of ad valorem charges included within recurring income varies with the size of the customer's portfolio and, as a consequence, more generally with the amount of AUA.
AJ Bell's distribution model is diversified, operating in both the advised and D2C segments of the platform market. Further, the business is not reliant on any key customer or independent financial adviser. The largest single distribution contract as at 30 September 2018 comprised less than 1.5% of total revenue.
AJ Bell's business is highly cash generative and it has a capital light model. Cash generated from operations has averaged over 100% of profit before taxation for the period covered by the historical financial information as AJ Bell benefits from a short working capital cycle and low levels of capital expenditure following the completion of its major re-platforming exercise in 2014.
Growth has been funded from retained earnings and has not required primary equity fundraising or material debt finance.
AJ Bell's strong regulatory capital position is evidenced by a regulatory capital surplus yielding coverage of 440% of its Pillar 1 regulatory capital requirements during the period covered by the historical financial information.
Management considers a variety of financial measures and other metrics when analysing AJ Bell's performance, and the Directors believe that each of these measures provides useful information with respect to AJ Bell's business and operations. With the exception of revenue and profit before tax, these are non-IFRS financial measures and metrics that are not audited. These non-IFRS financial measures and metrics are not meant to be considered in isolation or as a substitute for measures of financial performance reported in accordance with IFRS. Moreover, these non-IFRS financial measures and metrics may be defined or calculated differently by other companies, and as a result AJ Bell's key performance indicators may not be comparable to similar measures and metrics calculated by its peers.
| | As at
Based on data on competitors in the Platforum UK D2C Market Size and Structure report, February 2018.
According to Platforum's market survey in January 201813, supported by AJ Bell's own customer survey, price remains a key factor in customers choosing a D2C investment platform. AJ Bell Youinvest aims to be in the top three of D2C investment platforms for pricing for customers falling into its target market. Based on direct feedback, customers generally perceive AJ Bell Youinvest as providing good value.
Along with the majority of the leading D2C investment platform providers, AJ Bell Youinvest has an ad valorem custody charge, although some competitors have fixed monetary charges. AJ Bell Youinvest's basic custody charge rate is 0.25% per annum, capped for equities (£100 for SIPPs and £30 for ISAs and dealing accounts) and tiered for investments in funds.
The AJ Bell Youinvest product team constantly monitor what competitors are doing on pricing so that they are in a position to react, if necessary, to maintain AJ Bell Youinvest's competitive position.
The principal sources of new business for AJ Bell Youinvest include:
AJ Bell may also take advantage of opportunities to acquire books of business but only where there is a strong business case to do so.
The AJ Bell Youinvest proposition is managed on a similar basis to AJ Bell Investcentre, with Charles Galbraith, the AJ Bell Youinvest Managing Director and Product Owner, responsible for the management and delivery of the proposition supported by dedicated teams covering marketing, customer relationship management, customer engagement and product management and governance. A full review of the product proposition is completed on an annual basis, including a customer survey.
13S and Pensions Ombudsman provide a more informal alternative to customers bringing complaints in the courts. They provide independent investigators who review and seek to resolve complaints between customers and firms.
If the FOS resolves a complaint in favour of a customer, it has the power to order a firm to pay fair compensation for any loss or damage it caused to the customer, or to direct a firm to take such steps in relation to the customer as the FOS considers just and appropriate, and irrespective of whether a similar award could be made by a court. Authorised firms fund the FOS through levies and case fees.
The FSCS was established under FSMA, it is a statutory compensation scheme of last resort for certain categories of customers of authorised firms. It provides compensation to eligible customers who suffer losses as a consequence of an authorised firm's inability to meet its liabilities arising from claims made in connection with its regulated activities. The FSCS is funded by levies on authorised firms and is independent of the FCA, the PRA and the UK government, although it is ultimately accountable to them.
The powers of the FSCS to raise funds from authorised firms are set out in the FEES sourcebook of the FCA Rules. In general terms, fees are levied on participant firms and the FSCS may impose three types of levy the 'management expenses levy' (comprising the 'bases costs levy' and the 'specific costs levy'), the 'compensation costs levy' (relating to compensation costs), and the 'MERS levy' which relates to management expenses in respect of 'relevant schemes'.
Participant firms are allocated to a funding class (or classes) on the basis of their regulated activities. The specific costs and compensation costs levies payable by the participating firms are calculated by reference to their funding class or classes. The main principle behind the calculation of these levies is that the levy should represent the amount of claims made or likely to be made against that type of firm. The Regulated Subsidiaries will fall into the ''Investments'' levy class. It should however be noted, that contributions are not restricted to failures in the sub-classes to which a particular firm belongs as there is the possibility that cross-subsidy between levy classes may be required.
The MLRs require relevant persons to apply risk-based customer due diligence measures and take other steps to prevent their services from being used for money laundering or terrorist financing. They also require relevant persons to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk.
SYSC contains financial crime rules that complement the MLRs, requiring firms to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk. Such controls must be comprehensive and proportionate to the nature, scale and complexity of their activities. In this context, financial crime includes any offence involving fraud or dishonesty, misconduct in, or misuse of information relating to, a financial market, handling the proceeds of crime or the financing of terrorism, as well as bribery and corruption offences.
Failure to maintain the necessary procedures is a criminal offence. The Proceeds of Crime Act 2002, the Terrorism Act 2000 and the Counter-Terrorism Act 2008 and the Criminal Justice Act 1993 also contain a number of offences in relation to money laundering. The Joint Money Laundering Steering Group provides good practice guidance and practical assistance in interpreting the MLRs.
AJ Bell has established appropriate systems and controls under the guidance of AJ Bell's Money Laundering Reporting Officer to help it mitigate the risk of financial crime. This including the appropriate suite of policies, use of anti-money laundering technology and ongoing training for all members of staff.
The ICO is the UK's data protection regulator set up as an independent body to uphold information rights. It is responsible for upholding information rights in the public interest, promoting openness by public bodies and data privacy for individuals. It has powers to enforce compliance with Data Protection Legislation which include criminal prosecution, non-criminal enforcement, audit and issuing monetary penalty notices. The ICO is involved in data protection policy making decisions and produces guidance and codes of practice.
AJ Bell collects and processes personal data and sensitive personal data (including names, addresses, contact details, financial information, health information and criminal records) information from its customers and employees as part of the operation of its business.
AJ Bell must therefore comply with all Data Protection Legislation including the recently implemented GDPR and the UK's Data Protection Act 2018.
GDPR imposes certain requirements on AJ Bell in respect of the collection, retention, use, processing and security of personal information. Failure to operate effective data use and information security controls could potentially lead to regulatory enforced compliance measures, fines, reputational and financial losses in responding to or defending its actions.
GDPR also provides data subjects far greater rights and control in respect of their personal data. Failure to be fully transparent at the point of collection about the purpose for and use of personal data or otherwise meet obligations relating to data subject rights could result in compensation payments to data subjects whose rights have been infringed.
GDPR allows representative bodies to bring claims on behalf of data subjects. This could result in a 'group action' being pursued by a third party on behalf of data subjects. A group action could potentially lead to reputational damage and increased financial defence costs and losses depending on the number of data subjects forming the group. The potential sanctions for the most egregious breaches of GDPR include financial penalties of up to 4% of the annual worldwide turnover of company groups.
The GDPR has increased the regulatory burden on AJ Bell in processing personal customer, employee and other data in the conduct of its business.
AJ Bell established a GDPR project to ensure that the new requirements were met by 25 May 2018, the date on which GDPR came into force. AJ Bell monitors ongoing compliance through its established regulatory systems and controls.
If AJ Bell or any of the third party service providers on which it relies (including non-subsidiary affiliates of AJ Bell) fails to comply with Data Protection Legislation, due to any failure to store or transmit information in a secure manner or any loss or wrongful processing of personal customer data, AJ Bell could be subject to investigative and enforcement action by the ICO and complaints or claims from data subjects.
Pension saving under registered pension schemes is subject to favourable tax treatment, which acts as an incentive for employees and individuals to save for retirement and thus be less reliant on the state pension system. However, the extent to which pension savings attract tax relief is subject to certain limits imposed by HMRC. In order to enjoy the tax advantages available to pension schemes in the UK the SIPPs and SSASs administered by AJ Bell are registered with HMRC.
As registered pension schemes, the SIPPs and SSASs are obliged to provide information to HMRC including the provision of a pension scheme return (to be provided on request), accounting for tax returns, event reports and reporting pension flexibility payments.
If payments are made from the schemes that are not authorised payments under the Finance Act 2004, HMRC will impose unauthorised payment charges, and scheme sanction charges in respect of the payments.
Tax considerations are relevant to a UK registered pension scheme when:
The current pensions tax relief system can broadly be described as 'Exempt-Exempt-Taxed' on the following basis:
The AJ Bell Platinum SSASs are occupational pension schemes for legislative purposes. As a result they are regulated by the Pensions Regulator.
The Pensions Regulator is the public body that protects workplace pensions in the UK. The post of the Pensions Regulator was created on 6 April 2005 by Pensions Act 2004. The principal objectives of the Pensions Regulator are set out in the Pensions Act 2004. These include:
The SSAS are registered with the Pensions Regulator in accordance with the Pensions Act 2004. As such the scheme administrator for each scheme is required to provide and update registrable information in respect of each scheme as well as providing a scheme return to the Pensions Regulator whenever the Pensions Regulator issues a scheme return notice. There are also whistleblowing obligations that apply in respect of the trustees and scheme administrators of SSASs.
The Pensions Regulator has issued a code of practice in respect of the governance and administration of occupational trust-based schemes providing money purchase benefits. This code applies to a limited extent to the SSASs although SSASs will generally be exempt from parts of the code (for example in respect of default arrangements and charge caps and the preparation of an annual chair's statement).
The Pensions Regulator has various enforcement powers in respect of defined contribution workplace schemes such as the SSASs, these include the ability to appoint and remove trustees of schemes and to issue fines for non-compliance with legislation under section 10 of the Pensions Act 1995.
An ISA is a scheme of investment managed in accordance with ISA regulations under terms agreed between the ISA manager and the investor. The ISA manager holds investments and claims repayment of income tax deducted at source, by submitting claims to HMRC. There are various types of ISAs permitted by UK law being:
Investors do not pay any tax on any of the income they receive from ISA savings and investments. Nor do they pay any tax on capital gains arising on ISA investments. In order to protect the integrity of the UK taxation system there are limits placed around who can hold an ISA, how many ISAs an individual can open in a tax year and the amount that can be paid into an individual's ISAs in a tax year. An ISA manager must also collect prescribed information and receive prescribed declarations from individuals applying for an ISA.
In order to be able to offer ISAs and LISAs to investors AJBSL has registered with, and been approved by, HMRC as an ISA manager and a LISA manager. As a registered ISA manager AJBSL is obliged to provide information to HMRC and make claims from HMRC including updating HMRC with any changes to the information provided in its application for registrations as an ISA manager, the making of an annual return and tax claim, the making of an annual return of information, and an annual market value return of statistical information (market value and subscriptions).
AJ Bell, including the Regulated Subsidiaries, is subject to EU law, both directly through European regulations and indirectly through European directives, to which the UK is currently obliged to give effect through its legislative powers. Recent EU regulation of most significance that applies to AJ Bell is set out below.
MiFID II applies to firms in the EEA who engage in certain investment activities, including dealing and execution services, investment advice and portfolio management. Building on MiFID, it aims to harmonise the regulatory framework across the EEA to make financial markets more efficient and resilient, increase transparency of both equity and non-equity markets, reinforce supervisory powers, and provide protection for investors.
MiFID II sets out detailed provisions on systems and controls, outsourcing, customer classification, conflicts of interest, best execution, client order handling, suitability and appropriateness, transparency and transaction reporting. Requirements relating to transaction reporting, costs and charges disclosure, product governance and conduct of business requirements all affect AJ Bell's operations.
MiFID II also allows investment firms authorised in accordance with its provisions to passport their services into other EEA states without needing to obtain separate authorisations locally.
The PRIIPs Regulation aims to encourage efficient EU markets by helping investors to better understand and compare the key features, risk, rewards and costs of different PRIIPs, by obliging PRIIPs manufacturers and distributors to provide access to a short and consumer-friendly Key Information Document.
PRIIPs can take a variety of legal forms but can be distinguished by the comparable functions they perform for retail investors. PRIIPS can be broadly categorised into four main groups: (i) investment funds, (ii) insurance-based investment products, (iii) retail structured securities, and (iv) structured term deposits. The PRIIPS Regulation has applied (subject to limited transitional provisions) to products such as units in an investment fund (except UCITS Schemes), life insurance policies with an investment element and structured deposits since 1 January 2018. It is set to apply to UCITS schemes with effect from 31 December 2019.
CRD IV, comprising the Capital Requirements Directive IV and the Capital Requirements Regulation, is an EU legislative framework for the prudential supervision of banks, building societies and investment firms. Certain MiFID investment firms, including those with permissions relating to the safeguarding of client assets or handling of client money, are subject to the provisions of CRD IV as regards prudential and capital standards. AJBAML and AJBSL are subject to these rules. There are changes being proposed to the capital requirements regime under Capital Requirements Directive V and Capital Requirements Regulation II but these are not anticipated prior to 2019. Therefore whether these changes will have any impact on the Regulated Subsidiaries is unclear because the possibility of these changes taking effect prior to the UK's planned departure from the EU is remote.
The UCITS regime provides a set of common standards applicable across all EU member states for the operation of and cross border promotion of UCITS Schemes.
The UCITS regime aims to create a single market for open-ended retail investment funds which affords enhanced protection for investors.
It requires EU member states to adopt harmonised rules regulating the authorisation, supervision, structure and activities of UCITS funds together with harmonised rules about investor information and passporting requirements. VT AJ Bell ICVC is a UCITS scheme and therefore must be operated in accordance with the UCITS Directive.
In addition to the FCA's prudential standards and capital adequacy requirements, AJBAML and AJBSL must comply with the wider prudential framework of CRD IV which mainly applies to banks.
The EBA contributes to a European Single Rulebook in banking by providing Binding Technical Standards (''BTS'') and Guidance. The Rulebook aims to provide a single set of harmonised prudential rules for financial institutions throughout the EU in order to create a level playing field and a high level of protection for customers.
The BTS are legal acts which specify particular aspects of an EU legislative text (directive or regulation) and aim at ensuring consistent harmonisation in specific areas. The BTS are legally binding and directly applicable in all Member States including in the UK and therefore AJBAML and AJBSL must comply with these to the extent they apply to their activities.
The EBA and European Securities and Market Authority are working on the review of the application of the prudential rules to investment firms, with the aim of establishing an appropriate prudential framework for investment firms.
FCA-regulated firms have recently been subject to substantial regulatory change. There is further regulatory change on the horizon, with the main changes likely to impact AJ Bell summarised below.
The FCA announced in 2017 that it would be undertaking the Investment Platform Market Study on investment platforms. The market study explores how investment platforms compete to win new, and retain existing, consumers, to allow the FCA to assess how to improve competition within the platform market and develop better consumer outcomes.
In particular, the FCA has looked to assess:
The FCA published its interim report the Investment Platform Market Study in July 2018, which noted that the investment platform market was working well in many respects. There are areas that the FCA identified where it was concerned that competition in the market was not working well and it is consulting on remedies for these areas. The FCA's consultation on remedies for the market focuses on the following main areas:
The FCA expects to publish its final report and recommendations in the first quarter of 2019, following the end of the consultation on its interim report proposals on 21 September 2018.
The Fifth Money Laundering Directive (''MLD5'') contains amendments to the existing money laundering directive as well as the Capital Requirements Directive. MLD5 will, amongst other things:
The majority of changes will be effected by 10 January 2020.
The FCA is consulting on draft guidance outlining the factors which financial services companies should consider when drafting and reviewing variation terms in consumer contracts, the first it has issued following the introduction of the Consumer Rights Act 2015 and several rulings on the topic by the Court of Justice of the EU. The draft guidance outlines factors for financial institutions to consider when seeking to draft variation terms, and also considers a number of reasons for contract variation that the FCA has observed firms commonly include when drafting variation terms allowing them to alter their consumer contracts. AJ Bell will take any finalised guidance into account in updating or changing customer terms.
In February 2018, the FCA published a discussion paper looking at effective competition in non-workplace pensions: DP18/1. The paper was launched in order for the FCA to better understand the market for non-workplace pensions: the providers, the consumers and the relationship between them, with a view to assessing the potential presence, nature and extent of harm. The FCA outlined its areas of potential concerns about how the market is working and the reasons for its concerns. It noted that in some aspects it sees parallels with the findings of the OFT study on the defined contribution workplace pensions market in 2013 which concluded that competition alone could not be relied on to drive value for money and good outcomes for consumers of DC workplace pensions. That study led to increased regulation of the workplace pensions market, including the introduction of caps on certain charges.
The period for submission of information has now closed. At this stage, it is difficult to assess whether the FCA focus on non-workplace pensions will have any material impact on the non-workplace pension market in the UK or lead to any material changes in the interaction between non-workplace pension providers and other participants in the UK wealth management sector, such as asset managers and financial advisers.
In June 2018, the FCA published a consultation paper regarding improving retirement outcomes for consumers: CP18/17. In the consultation paper the FCA proposes a remedy package to address the potential consumer harm and emerging issues it has identified arising from the pension freedoms introduced in 2015. The FCA's remedy package aims to: protect consumers from poor outcomes; improve consumer engagement with retirement income decisions; and promote competition by making the costs of drawdown clearer and comparisons easier.
The potential changes suggested by the FCA include:
Whilst it is not certain which of the proposed changes will be brought in to force and in what form, AJ Bell is actively engaging with the FCA in relation to its proposals. Whilst the proposed changes could lead to an increased administrative burden on AJ Bell, the directors believe that AJ Bell is in a good position to respond to any changes required and that any changes should not have a material adverse impact on its business.
Although the finalised text of the GDPR was published over two years ago, there is general uncertainty about how the GDPR and the Data Protection Act 2018 are going to be interpreted and enforced, with guidance related to many areas of the GDPR only having recently been published by UK and EU regulators. Therefore, AJ Bell must, in practice, ensure its compliance with the GDPR is constantly evolving. AJ Bell will ensure it continuously reviews its decisions and ensure that the latest guidance from the ICO, or indeed the European Data Protection Board, is taken into account in its decisions in relation to processing of personal data and reassess the risks in this context.
The E-Privacy Regulation was due to be implemented on 25 May 2018 at the same time as GDPR. It is anticipated that this will now be implemented in 2020. The E-Privacy Regulation will seek to harmonise protection of electronic communications across the EU Member States, broaden the electronic communications that are captured, implement a higher level of protection and simplify the rules in relation to cookies. The enforcement of the Regulation will be the responsibility of the ICO.
The ICO has indicated that it is unlikely that the UK will receive an adequacy decision on the UK's exit from the EU, pursuant to which the EU confirms that privacy legislation in a non-EU state is sufficiently stringent so as to permit transfer of data from inside the EU to that state. In the absence of an adequacy decision, the UK has implemented the Data Protection Act 2018 which incorporates the GDPR directly into UK legislation and ensures consistency with the EU in respect of requirements for processing of personal data. It is currently envisaged that a treaty will be implemented between the UK and the EU in order to ensure data transfers can still occur without the additional burden of entering into the EU Standard Contractual Clauses which have been developed by the European Commission to provide adequate terms to safeguard protection of personal data when an international transfer takes place without an adequacy decision or a treaty in place.
The following is a review of AJ Bell's operating performance and financial position.
The consolidated financial information referred to in this Part 5 has been prepared in accordance with (i) IFRS as adopted by the EU; (ii) the requirements of the Prospectus Directive; and (iii) the Listing Rules, and, unless otherwise stated, has been extracted without material adjustment from Part 6 (Historical Financial Information) of this Registration Document.
In this discussion and analysis, the financial years ended 30 September 2016, 30 September 2017 and 30 September 2018 are referred to as FY2016, FY2017 and FY2018, respectively.
The financial information referred to in the following discussion and analysis has been rounded to the nearest decimal place and percentage changes have been calculated based upon these rounded numbers and so may not conform exactly to the calculation based upon the underlying unrounded figures.
This Part 5 (Operating and Financial Review) of this Registration Document contains ''forward-looking statements''. Those statements are subject to risks, uncertainties and other factors that could cause AJ Bell's future results of operations or cash flows to differ materially from the results of operations or cash flows expressed or implied in such forward-looking statements. Prospective investors should read the section entitled ''Presentation of Information'' and Part 2 (Risk Factors) of this Registration Document for further information in this respect. In addition, certain industry issues also affect the Group's results of operations and are described in Part 1 (Market Overview) of this Registration Document.
AJ Bell is one of the largest investment platforms in the UK, based on the value of its AUA. The total value of the Group's AUA was £46.1 billion as at 30 September 2018. AJ Bell's flagship propositions are AJ Bell Investcentre, which operates in the advised segment of the platform market and AJ Bell Youinvest which operates in the D2C segment. The Group operates principally as a platform business although it also maintains an element of non-Platform business.
AJ Bell Youinvest and AJ Bell Investcentre combined had £38.6 billion in AUA as at 30 September 2018 with 183,213 customers. These two platform propositions are described briefly below:
AJ Bell Youinvest and AJ Bell Investcentre provide access to a broad investment range including shares and other financial instruments traded on the major stock exchanges around the world, as well as mainstream collective investments available in the UK. AJ Bell also offers a range of in-house investment solutions, including the AJ Bell Passive funds, the AJ Bell Investcentre Managed Portfolio Service and the AJ Bell Youinvest Favourite Funds list and from the end of the last quarter of 2018 Ready-made portfolios.
AJ Bell's non-Platform business, which had £7.5 billion in AUA as at 30 September 2018 with 14,699 customers, comprises:
* AJ Bell Securities stockbroking: providing dealing, settlement and custody services to institutional investment businesses.
AJ Bell was co-founded in 1995 in Manchester by Andy Bell and Nicholas Littlefair to provide actuarial, trustee and pension administration services to customers with a SSAS or SIPP. In 2000, AJ Bell launched Sippdeal, the first online SIPP in the UK for execution only investors. In 2002, AJ Bell launched Sippcentre, as a low cost SIPP for financial advisers and their clients. Since then, AJ Bell has grown its customers and AUA organically, but has also made some small strategic acquisitions to enhance AJ Bell's platform propositions. In December 2007, AJ Bell acquired Lawshare to bring its stockbroking capabilities in-house and facilitate the offering of ISAs and general investment/dealing accounts to its platform customers. In December 2012, AJ Bell acquired MSM Media to expand the range of investment content offered to its platform customers. More recently in February 2016, AJ Bell acquired Indexx Markets and Mansard Capital to facilitate the launch of its in-house range of investment solutions. AJ Bell's heritage is evident in the value of assets held in SIPPs, which was 72% of AJ Bell's overall AUA as at 30 September 2018. SIPPs are long term savings products which provide AJ Bell with a high proportion of recurring revenue.
AJ Bell's principal source of revenue arises from the fees charged for the provision of platform services. AJ Bell's revenue is classified into recurring revenues and transactional revenues as follows:
AJ Bell has a diverse revenue model with recurring income representing 82% of revenue in FY2018, and transactional revenue of 18%. The level of ad valorem charges included within recurring income varies with the size of the customer's portfolio and, as a consequence, more generally with the amount of AUA.
AJ Bell's distribution model is diversified, operating in both the advised and D2C segments of the platform market. Further, the business is not reliant on any key customer or independent financial adviser. The largest single distribution contract as at 30 September 2018 comprised less than 1.5% of total revenue.
AJ Bell's business is highly cash generative and it has a capital light model. Cash generated from operations has averaged over 100% of profit before taxation for the period covered by the historical financial information as AJ Bell benefits from a short working capital cycle and low levels of capital expenditure following the completion of its major re-platforming exercise in 2014.
Growth has been funded from retained earnings and has not required primary equity fundraising or material debt finance.
AJ Bell's strong regulatory capital position is evidenced by a regulatory capital surplus yielding coverage of 440% of its Pillar 1 regulatory capital requirements during the period covered by the historical financial information.
Management considers a variety of financial measures and other metrics when analysing AJ Bell's performance, and the Directors believe that each of these measures provides useful information with respect to AJ Bell's business and operations. With the exception of revenue and profit before tax, these are non-IFRS financial measures and metrics that are not audited. These non-IFRS financial measures and metrics are not meant to be considered in isolation or as a substitute for measures of financial performance reported in accordance with IFRS. Moreover, these non-IFRS financial measures and metrics may be defined or calculated differently by other companies, and as a result AJ Bell's key performance indicators may not be comparable to similar measures and metrics calculated by its peers.
| | As at
Platforum, Consumer Insights, January 2018.
AJ Bell Youinvest is always looking at ways to innovate and use new technologies to enhance its proposition for customers. It was the first retail investment platform to introduce two factor authentication and one of the first to make its accounts accessible via Amazon's Alexa, Google Assistant, Apple watch and Apple TV. Future planned developments include the launch of a range of Ready-made portfolios in the final quarter of 2018.
AJ Bell offers a range of in-house investment solutions for AJ Bell Investcentre and AJ Bell Youinvest, managed by its own team of experienced investment professionals.
The AJ Bell Managed Portfolio Service is exclusively available on AJ Bell Investcentre and is designed to help advisers to select an appropriate investment portfolio for a client, based on the client's investment objectives and attitude to risk. The AJ Bell Managed Portfolio Service provides a range of 16 risk targeted portfolios that are mapped to leading industry risk profiling tools, with an AJ Bell annual management charge of 0.15% plus VAT. Based on the investment objective for each portfolio, AJ Bell determines the asset allocation, selects investments to be held and manages the portfolio on an ongoing basis. Advisers can select from portfolios investing passively (using lower-cost passive instruments, such as index tracker funds) and active portfolios (investing in actively managed collective investment schemes and funds).
The AJ Bell Passive fund range provides an easy, low-cost way for customers to access the investment markets. It includes a range of six risk-targeted funds, managed by AJ Bell's experienced team of investment professionals, investing in low-cost, passive instruments such as Exchange Traded Funds (ETFs) and index tracking funds, that are designed to track the performance of indices such as the S&P 500 and FTSE 100, to give exposure to a variety of assets across a diversified range of asset classes. The AJ Bell annual management charge is 0.15% and the OCF (Ongoing Charge Figure) is capped at 0.5%.
The AJ Bell Favourite Funds list is designed to help customers choose their investments. The list is updated regularly and includes both active and passively managed funds, from across a range of markets, which have been chosen by AJ Bell's investment team because they believe them to offer a combination of:
The AJ Bell's Ready-made portfolios (due to launch in the last quarter of 2018) will be exclusively available to AJ Bell Youinvest customers and offer customers a range of 3 growth portfolios, based on different levels of risk, and an income portfolio. Based on the investment objective and risk profile for each portfolio, AJ Bell will determine the asset allocation and select the investments to be held from those included on the AJ Bell Youinvest Favourite Funds list. Customers will have the option to purchase the portfolios 'off-the-shelf' or alternatively be able to edit the portfolios to build their own preferred asset allocation or to include/exclude funds based on their own preferences. Customers will be responsible for the ongoing management of their portfolios but AJ Bell will provide regular information, including on the performance of the Ready-made portfolios.
AJ Bell's non-Platform services, which had £7.5 billion in AUA as at 30 September 2018 with 14,699 customers, are described below.
The Directors believe that the investment platform market will continue to grow strongly and offers much greater potential to grow its business than its non-Platform businesses. Non-Platform customers declined during the period covered by the historical financial information, reflecting AJ Bell's strategic decision to concentrate on its Platform business.
Although AJ Bell's primary focus is on its flagship platform propositions, these non-Platform services continue to make a contribution to AJ Bell and are managed to deliver high quality service and value to existing and new customers.
* AJ Bell Platinum: which provides adviser led and D2C pension trustee and administration services to customers with Platinum SIPP and SSAS accounts.
The AJ Bell Platinum SIPP is designed to meet the needs of retail customers and, where applicable, their advisers, who require access to a SIPP with:
and which provides the customer with greater control over the investments within their SIPP, as joint trustee and joint signatory for investments.
The AJ Bell Platinum SSAS allows company directors of small to medium sized companies to set up their own occupational pension scheme for directors and senior employees. The schemes allow a broad range of investments, including UK commercial property and employer loanbacks, and the services provided by AJ Bell include:
Each scheme member is typically a trustee of the scheme, alongside the AJ Bell professional trustee, giving the members direct control over the investments held within the scheme.
Customers are able to appoint a range of professionals to support them in the management of their scheme, including financial advisers, accountants and legal advisers.
Platinum SIPP and SSAS customers are able to access AJ Bell's investment dealing, custody and administration services and in-house investment solutions through an AJ Bell Youinvest Dealing Account, or AJ Bell Investcentre GIA, depending on whether they have a financial adviser or are dealing directly with AJ Bell.
As at 30 September 2018 there were 3,233 Platinum SIPP customers and 798 Platinum SSAS schemes. The average fund value for a Platinum SIPP is £497,000 and it is £1.2 million for a Platinum SSAS.
Although there has been significant growth in the SIPP market over recent years this has been driven by the increase in the number of platform SIPPs and there has been little, or no, growth in the number of non-platform SIPPs. AJ Bell's strategy for the Platinum service is to seek to maintain the existing customer numbers and to drive efficiencies in the operating model, while continuing to provide a high level of service, technical support and consultancy support to customers and their advisers. The Platinum service is not actively marketed, with most new business driven by the activity of the consultancy team, adviser recommendations and word of mouth referrals from existing customers.
AJ Bell provides white labelled SIPP products for customers of Barclays Stockbrokers and Halifax Share Dealing. AJ Bell acts as the administrator and scheme operator, for HMRC and FCA purposes, but the products are co-branded, with the white label partner being responsible for distribution as well as the provision of investment services to customers.
AJ Bell provides a complete pension administration service, through a dedicated support team. Barclays and Halifax provide their customers with investment dealing, administration and custody services and take full responsibility for marketing and promotion of the product.
In 2016 and 2017 AJ Bell gave notices to terminate two of its white labelled SIPP arrangements as they were deemed to be non-core. Such arrangements ceased formally in 2018.
AJ Bell is not actively looking for new white labelled opportunities and believes there is little opportunity to grow this part of its business on terms which are commercially attractive. However, AJ Bell is committed to working with its existing partners to grow customer numbers and deliver a first class service.
* AJ Bell Securities stockbroking: providing dealing, settlement and custody services to institutional investment businesses.
AJ Bell Securities Limited has a long history of providing services to institutional investment businesses, from before becoming a member of the Group. These services included:
Although closed to new clients, AJ Bell continues to provide services to existing clients, with the focus on ensuring that they continue to receive an excellent service, whilst seeking opportunities to simplify the product range to drive operational efficiency.
The UK advised and D2C platform market segments are highly competitive with fund supermarkets, investment firms, pension providers, insurers and smaller specialist advisers competing for market share.
AJ Bell features in the Platforum top 10 lists by AUA for both the advised and D2C market segments and is one of the fastest growing (year on year) investment platforms on both lists. AJ Bell Investcentre was also ranked in the Top 5 of the Platforum User Leaderboard (based on adviser feedback), in its UK Adviser Platform Guide May 2018, and AJ Bell Youinvest topped the Platforum Investor Experience review in January 2018.
Both AJ Bell Youinvest and AJ Bell Investcentre rank highly in these studies for the value of their propositions and quality of the customer service. Service and price are seen to be amongst the most significant factors in choosing a platform for both advisers and consumers. The Directors believe that AJ Bell will continue to prosper given its market position, its focus on delivering a quality low-cost service, its strong balance sheet and long track record of profitability.
(1): Platforum UK Adviser Platform Guide, May 2018. Note: FundsNetwork number of customers not disclosed to derive average portfolio size.
(2): Standard Life Elevate represents 2016 average customer portfolio value (£122k). Average customer portfolio value calculated as AUA divided by number of customers.
(4): AJ Bell AUA, AUA Growth and average portfolio size derived from internal systems as at 31 March 2018.
(3): including the Regulated Subsidiaries, is subject to EU law, both directly through European regulations and indirectly through European directives, to which the UK is currently obliged to give effect through its legislative powers. Recent EU regulation of most significance that applies to AJ Bell is set out below.
MiFID II applies to firms in the EEA who engage in certain investment activities, including dealing and execution services, investment advice and portfolio management. Building on MiFID, it aims to harmonise the regulatory framework across the EEA to make financial markets more efficient and resilient, increase transparency of both equity and non-equity markets, reinforce supervisory powers, and provide protection for investors.
MiFID II sets out detailed provisions on systems and controls, outsourcing, customer classification, conflicts of interest, best execution, client order handling, suitability and appropriateness, transparency and transaction reporting. Requirements relating to transaction reporting, costs and charges disclosure, product governance and conduct of business requirements all affect AJ Bell's operations.
MiFID II also allows investment firms authorised in accordance with its provisions to passport their services into other EEA states without needing to obtain separate authorisations locally.
The PRIIPs Regulation aims to encourage efficient EU markets by helping investors to better understand and compare the key features, risk, rewards and costs of different PRIIPs, by obliging PRIIPs manufacturers and distributors to provide access to a short and consumer-friendly Key Information Document.
PRIIPs can take a variety of legal forms but can be distinguished by the comparable functions they perform for retail investors. PRIIPS can be broadly categorised into four main groups: (i) investment funds, (ii) insurance-based investment products, (iii) retail structured securities, and (iv) structured term deposits. The PRIIPS Regulation has applied (subject to limited transitional provisions) to products such as units in an investment fund (except UCITS Schemes), life insurance policies with an investment element and structured deposits since 1 January 2018. It is set to apply to UCITS schemes with effect from 31 December 2019.
CRD IV, comprising the Capital Requirements Directive IV and the Capital Requirements Regulation, is an EU legislative framework for the prudential supervision of banks, building societies and investment firms. Certain MiFID investment firms, including those with permissions relating to the safeguarding of client assets or handling of client money, are subject to the provisions of CRD IV as regards prudential and capital standards. AJBAML and AJBSL are subject to these rules. There are changes being proposed to the capital requirements regime under Capital Requirements Directive V and Capital Requirements Regulation II but these are not anticipated prior to 2019. Therefore whether these changes will have any impact on the Regulated Subsidiaries is unclear because the possibility of these changes taking effect prior to the UK's planned departure from the EU is remote.
The UCITS regime provides a set of common standards applicable across all EU member states for the operation of and cross border promotion of UCITS Schemes.
The UCITS regime aims to create a single market for open-ended retail investment funds which affords enhanced protection for investors.
It requires EU member states to adopt harmonised rules regulating the authorisation, supervision, structure and activities of UCITS funds together with harmonised rules about investor information and passporting requirements. VT AJ Bell ICVC is a UCITS scheme and therefore must be operated in accordance with the UCITS Directive.
In addition to the FCA's prudential standards and capital adequacy requirements, AJBAML and AJBSL must comply with the wider prudential framework of CRD IV which mainly applies to banks.
The EBA contributes to a European Single Rulebook in banking by providing Binding Technical Standards (''BTS'') and Guidance. The Rulebook aims to provide a single set of harmonised prudential rules for financial institutions throughout the EU in order to create a level playing field and a high level of protection for customers.
The BTS are legal acts which specify particular aspects of an EU legislative text (directive or regulation) and aim at ensuring consistent harmonisation in specific areas. The BTS are legally binding and directly applicable in all Member States including in the UK and therefore AJBAML and AJBSL must comply with these to the extent they apply to their activities.
The EBA and European Securities and Market Authority are working on the review of the application of the prudential rules to investment firms, with the aim of establishing an appropriate prudential framework for investment firms.
FCA-regulated firms have recently been subject to substantial regulatory change. There is further regulatory change on the horizon, with the main changes likely to impact AJ Bell summarised below.
The FCA announced in 2017 that it would be undertaking the Investment Platform Market Study on investment platforms. The market study explores how investment platforms compete to win new, and retain existing, consumers, to allow the FCA to assess how to improve competition within the platform market and develop better consumer outcomes.
In particular, the FCA has looked to assess:
The FCA published its interim report the Investment Platform Market Study in July 2018, which noted that the investment platform market was working well in many respects. There are areas that the FCA identified where it was concerned that competition in the market was not working well and it is consulting on remedies for these areas. The FCA's consultation on remedies for the market focuses on the following main areas:
The FCA expects to publish its final report and recommendations in the first quarter of 2019, following the end of the consultation on its interim report proposals on 21 September 2018.
The Fifth Money Laundering Directive (''MLD5'') contains amendments to the existing money laundering directive as well as the Capital Requirements Directive. MLD5 will, amongst other things:
The majority of changes will be effected by 10 January 2020.
The FCA is consulting on draft guidance outlining the factors which financial services companies should consider when drafting and reviewing variation terms in consumer contracts, the first it has issued following the introduction of the Consumer Rights Act 2015 and several rulings on the topic by the Court of Justice of the EU. The draft guidance outlines factors for financial institutions to consider when seeking to draft variation terms, and also considers a number of reasons for contract variation that the FCA has observed firms commonly include when drafting variation terms allowing them to alter their consumer contracts. AJ Bell will take any finalised guidance into account in updating or changing customer terms.
In February 2018, the FCA published a discussion paper looking at effective competition in non-workplace pensions: DP18/1. The paper was launched in order for the FCA to better understand the market for non-workplace pensions: the providers, the consumers and the relationship between them, with a view to assessing the potential presence, nature and extent of harm. The FCA outlined its areas of potential concerns about how the market is working and the reasons for its concerns. It noted that in some aspects it sees parallels with the findings of the OFT study on the defined contribution workplace pensions market in 2013 which concluded that competition alone could not be relied on to drive value for money and good outcomes for consumers of DC workplace pensions. That study led to increased regulation of the workplace pensions market, including the introduction of caps on certain charges.
The period for submission of information has now closed. At this stage, it is difficult to assess whether the FCA focus on non-workplace pensions will have any material impact on the non-workplace pension market in the UK or lead to any material changes in the interaction between non-workplace pension providers and other participants in the UK wealth management sector, such as asset managers and financial advisers.
In June 2018, the FCA published a consultation paper regarding improving retirement outcomes for consumers: CP18/17. In the consultation paper the FCA proposes a remedy package to address the potential consumer harm and emerging issues it has identified arising from the pension freedoms introduced in 2015. The FCA's remedy package aims to: protect consumers from poor outcomes; improve consumer engagement with retirement income decisions; and promote competition by making the costs of drawdown clearer and comparisons easier.
The potential changes suggested by the FCA include:
Whilst it is not certain which of the proposed changes will be brought in to force and in what form, AJ Bell is actively engaging with the FCA in relation to its proposals. Whilst the proposed changes could lead to an increased administrative burden on AJ Bell, the directors believe that AJ Bell is in a good position to respond to any changes required and that any changes should not have a material adverse impact on its business.
Although the finalised text of the GDPR was published over two years ago, there is general uncertainty about how the GDPR and the Data Protection Act 2018 are going to be interpreted and enforced, with guidance related to many areas of the GDPR only having recently been published by UK and EU regulators. Therefore, AJ Bell must, in practice, ensure its compliance with the GDPR is constantly evolving. AJ Bell will ensure it continuously reviews its decisions and ensure that the latest guidance from the ICO, or indeed the European Data Protection Board, is taken into account in its decisions in relation to processing of personal data and reassess the risks in this context.
The E-Privacy Regulation was due to be implemented on 25 May 2018 at the same time as GDPR. It is anticipated that this will now be implemented in 2020. The E-Privacy Regulation will seek to harmonise protection of electronic communications across the EU Member States, broaden the electronic communications that are captured, implement a higher level of protection and simplify the rules in relation to cookies. The enforcement of the Regulation will be the responsibility of the ICO.
The ICO has indicated that it is unlikely that the UK will receive an adequacy decision on the UK's exit from the EU, pursuant to which the EU confirms that privacy legislation in a non-EU state is sufficiently stringent so as to permit transfer of data from inside the EU to that state. In the absence of an adequacy decision, the UK has implemented the Data Protection Act 2018 which incorporates the GDPR directly into UK legislation and ensures consistency with the EU in respect of requirements for processing of personal data. It is currently envisaged that a treaty will be implemented between the UK and the EU in order to ensure data transfers can still occur without the additional burden of entering into the EU Standard Contractual Clauses which have been developed by the European Commission to provide adequate terms to safeguard protection of personal data when an international transfer takes place without an adequacy decision or a treaty in place.
The following is a review of AJ Bell's operating performance and financial position.
The consolidated financial information referred to in this Part 5 has been prepared in accordance with (i) IFRS as adopted by the EU; (ii) the requirements of the Prospectus Directive; and (iii) the Listing Rules, and, unless otherwise stated, has been extracted without material adjustment from Part 6 (Historical Financial Information) of this Registration Document.
In this discussion and analysis, the financial years ended 30 September 2016, 30 September 2017 and 30 September 2018 are referred to as FY2016, FY2017 and FY2018, respectively.
The financial information referred to in the following discussion and analysis has been rounded to the nearest decimal place and percentage changes have been calculated based upon these rounded numbers and so may not conform exactly to the calculation based upon the underlying unrounded figures.
This Part 5 (Operating and Financial Review) of this Registration Document contains ''forward-looking statements''. Those statements are subject to risks, uncertainties and other factors that could cause AJ Bell's future results of operations or cash flows to differ materially from the results of operations or cash flows expressed or implied in such forward-looking statements. Prospective investors should read the section entitled ''Presentation of Information'' and Part 2 (Risk Factors) of this Registration Document for further information in this respect. In addition, certain industry issues also affect the Group's results of operations and are described in Part 1 (Market Overview) of this Registration Document.
AJ Bell is one of the largest investment platforms in the UK, based on the value of its AUA. The total value of the Group's AUA was £46.1 billion as at 30 September 2018. AJ Bell's flagship propositions are AJ Bell Investcentre, which operates in the advised segment of the platform market and AJ Bell Youinvest which operates in the D2C segment. The Group operates principally as a platform business although it also maintains an element of non-Platform business.
AJ Bell Youinvest and AJ Bell Investcentre combined had £38.6 billion in AUA as at 30 September 2018 with 183,213 customers. These two platform propositions are described briefly below:
AJ Bell Youinvest and AJ Bell Investcentre provide access to a broad investment range including shares and other financial instruments traded on the major stock exchanges around the world, as well as mainstream collective investments available in the UK. AJ Bell also offers a range of in-house investment solutions, including the AJ Bell Passive funds, the AJ Bell Investcentre Managed Portfolio Service and the AJ Bell Youinvest Favourite Funds list and from the end of the last quarter of 2018 Ready-made portfolios.
AJ Bell's non-Platform business, which had £7.5 billion in AUA as at 30 September 2018 with 14,699 customers, comprises:
* AJ Bell Securities stockbroking: providing dealing, settlement and custody services to institutional investment businesses.
AJ Bell was co-founded in 1995 in Manchester by Andy Bell and Nicholas Littlefair to provide actuarial, trustee and pension administration services to customers with a SSAS or SIPP. In 2000, AJ Bell launched Sippdeal, the first online SIPP in the UK for execution only investors. In 2002, AJ Bell launched Sippcentre, as a low cost SIPP for financial advisers and their clients. Since then, AJ Bell has grown its customers and AUA organically, but has also made some small strategic acquisitions to enhance AJ Bell's platform propositions. In December 2007, AJ Bell acquired Lawshare to bring its stockbroking capabilities in-house and facilitate the offering of ISAs and general investment/dealing accounts to its platform customers. In December 2012, AJ Bell acquired MSM Media to expand the range of investment content offered to its platform customers. More recently in February 2016, AJ Bell acquired Indexx Markets and Mansard Capital to facilitate the launch of its in-house range of investment solutions. AJ Bell's heritage is evident in the value of assets held in SIPPs, which was 72% of AJ Bell's overall AUA as at 30 September 2018. SIPPs are long term savings products which provide AJ Bell with a high proportion of recurring revenue.
AJ Bell's principal source of revenue arises from the fees charged for the provision of platform services. AJ Bell's revenue is classified into recurring revenues and transactional revenues as follows:
AJ Bell has a diverse revenue model with recurring income representing 82% of revenue in FY2018, and transactional revenue of 18%. The level of ad valorem charges included within recurring income varies with the size of the customer's portfolio and, as a consequence, more generally with the amount of AUA.
AJ Bell's distribution model is diversified, operating in both the advised and D2C segments of the platform market. Further, the business is not reliant on any key customer or independent financial adviser. The largest single distribution contract as at 30 September 2018 comprised less than 1.5% of total revenue.
AJ Bell's business is highly cash generative and it has a capital light model. Cash generated from operations has averaged over 100% of profit before taxation for the period covered by the historical financial information as AJ Bell benefits from a short working capital cycle and low levels of capital expenditure following the completion of its major re-platforming exercise in 2014.
Growth has been funded from retained earnings and has not required primary equity fundraising or material debt finance.
AJ Bell's strong regulatory capital position is evidenced by a regulatory capital surplus yielding coverage of 440% of its Pillar 1 regulatory capital requirements during the period covered by the historical financial information.
Management considers a variety of financial measures and other metrics when analysing AJ Bell's performance, and the Directors believe that each of these measures provides useful information with respect to AJ Bell's business and operations. With the exception of revenue and profit before tax, these are non-IFRS financial measures and metrics that are not audited. These non-IFRS financial measures and metrics are not meant to be considered in isolation or as a substitute for measures of financial performance reported in accordance with IFRS. Moreover, these non-IFRS financial measures and metrics may be defined or calculated differently by other companies, and as a result AJ Bell's key performance indicators may not be comparable to similar measures and metrics calculated by its peers.
| | As at
Platforum UK Adviser Platform Guide, May 2018. AUA growth represents 31 March 2017 to 31 March 2018.
D2C
(1): Platforum UK D2C: Market Size and Structure, July 2018. AUA growth represents 31 March 2017 to 31 March 2018. (2): AJ Bell AUA, AUA Growth and average portfolio size derived from internal systems as at 31 March 2018.
The AJ Bell Way wheel (shown below) is a structured framework that aids the development and communication of AJ Bell's strategy and is the primary tool used for communicating strategy to all key stakeholders.
The simple statement at the heart of the AJ Bell Way is ''We help people to invest'' and this is AJ Bell's principal focus, alongside the ambition to be the easiest platform to use. AJ Bell delivers to its customers by working to ensure that its prices are highly competitive, its service is first class and its propositions meet their needs.
The key elements of the AJ Bell Way are:
AJ Bell's strategy focuses on:
* Our customers: making investing easier
AJ Bell intends to continue to develop its customer propositions, with a focus on ease of use, price and service. AJ Bell seeks to attract new customers and to improve customer satisfaction and loyalty by taking action to improve the customer journey and by delivering a range of straightforward, transparent, low cost and mainstream investment solutions that make investing easier.
The ease of use of the Platform is central to this strategy. The in-house development teams focus on developing AJ Bell's website using new technologies and linking to the core operating systems using APIs to ensure control is maintained over customer interfaces.
AJ Bell continues to focus on organic growth, both in terms of customer numbers and the level of AUA, by developing its marketing capabilities and improving its brand awareness. AJ Bell seeks to grow its business in a sustainable and cost effective manner by attracting new customers to the Platform through various marketing campaigns and ensuring it retains its existing customers through first-class service.
AJ Bell has a strong corporate culture and has developed and maintained strong relationships with institutional investors since 2005. AJ Bell has a well established risk and compliance framework to ensure that it meets its regulatory responsibilities and to preserve its financial security and regulatory and reputational standing in the market. Under the supervision of the senior management team, it seeks to maintain an open and constructive relationship with the regulatory authorities.
AJ Bell continually seeks to improve the quality, efficiency and security of the services it provides to its customers with an experienced, knowledgeable customer services team, supported by a resilient, stable and secure IT platform. AJ Bell completed its migration of its Platform to a new technology platform in 2014 and its IT systems are fully embedded in the business. Ongoing investment in the Platform and the IT systems ensures that AJ Bell maintains a robust, scalable and adaptable operating model and technology solution.
AJ Bell recognises the importance of ensuring its staff are fully engaged with AJ Bell's objectives and strategy and are aligned with its culture. AJ Bell seeks to maintain a working environment in which its employees are fairly rewarded, provided with the right tools to do their jobs and given opportunities to progress within AJ Bell to ensure loyalty to AJ Bell and a first-class service for its customers.
The provision by the Platform of high quality, relevant and timely investment content has been a factor in the growth of both AJ Bell Youinvest and AJ Bell Investcentre, providing customers and advisers with valuable insights into market developments and help in making the right investment decisions.
The acquisition, in 2012, of MSM Media (now AJ Bell Media), the publisher of Shares magazine, provided AJ Bell with access to a wide array of proprietary investment content, supplementing the technical expertise already present within the business. By leveraging the content available within Shares magazine, in particular, the acquisition has allowed AJ Bell to provide an increased level of relevant content to its Platform customers.
In addition to its comprehensive research centre, with data supplied by Morningstar, which provides valuable information, pricing and performance information and documentation for over 4,000 funds and other collective investments available on the Platform, AJ Bell now provides a wide range of investment market updates, articles and videos on the Platform's websites, written and presented by its experienced investment team and by Shares' journalists.
Shares magazine is available free of charge to all AJ Bell Youinvest customers with account balances of £4,000 or more. Shares is produced weekly and is one of the UK's leading online investment publications, designed to help private investors make the most of their money. It provides in depth research on stocks, shares, funds and investment trusts as well as personal finance issues. Each week customers have access to:
* Ideas on new investments;
Shares does not provide personal recommendations or advice but can provide valuable help for customers making their own decisions.
In addition to Shares, AJ Bell Youinvest also provides its customers with daily market updates and weekly investment insights by email and access to a wide range of investment articles. The Investment Ideas section of the AJ Bell Youinvest website also provides full details of AJ Bell's own in-house investment solutions, including – the AJ Bell Passive funds and AJ Bell Favourite Funds list designed specifically to meet the needs of its customers.
The investment content available to AJ Bell Investcentre advisers and customers includes:
As described in section 3.4, AJ Bell has developed a hybrid technology model, which seeks to combine proprietary and third party components to best effect.
AJ Bell maintains complete control over its user interfaces, which are developed and maintained in-house. This not only covers the Platform websites and mobile apps used by customers and advisers, but also extends to internal interfaces used by customer services teams. Maintaining control over the user interfaces allows AJ Bell to control the customer journey, a key point of differentiation in the platform market.
The base of the technology model is provided by the two main back-office systems supplied by third parties, these being GBST's Composer system and JHC's Figaro software. These proven partners provide scalable systems which are continually updated to ensure compliance with the latest regulations and legislation. The functionality of these systems is regularly enhanced, in response to feedback from across the user base, and AJ Bell specific development is also provided.
These back-office systems are well-established within the platform market. Both systems are in active use by other large scale platform providers which provides confidence in the ability of the Platform to support historical and anticipated customer and AUA growth. The increasing list of large platform providers becoming customers of those same suppliers reinforces AJ Bell's confidence in the sustainability of the suppliers' business models and the continued provision of the services.
Using TIBCO, a third party messaging hub and workflow engine, those two main back-office systems are combined to create a single technology platform. All messaging and workflow maintenance, updates and enhancements are undertaken by AJ Bell's internal teams, which allows changes to be made without reliance on third party development.
To supplement the components built in-house, or sourced through partnership, AJ Bell buys commoditised services to provide specific capabilities that would be inefficient to develop internally (e.g. debit card payments). Those systems can be changed relatively quickly although they typically are, and will continue to be, proven solutions widely used within the financial services industry.
A sustained programme of investment in infrastructure, system development and monitoring helps to ensure the capabilities of the technology platform components can be maximised.
Whereas some other platform providers are yet to consider re-platforming, are in the middle of the process or are currently dealing with the adverse consequences of their own re-platforming exercise, AJ Bell successfully concluded its Platform migration in 2014. Whilst AJ Bell's service oriented architecture allows for the replacement of any technology platform component, should that be considered necessary or beneficial, AJ Bell does not currently foresee any reason to replace the core back office elements of the system provided by GBST Composer and JHC Figaro.
Against an evolving cyber security threat landscape, AJ Bell's vigilance and investment is constantly increasing. AJ Bell actively maintains defences against a broad range of likely attacks by global actors, coupling tools from well-known providers, external consultancy and its own internal expertise. The latter includes intelligence shared through the regulatory, industry and national cyber networks in which AJ Bell engages.
One of AJ Bell's aims is to become one of the best-known names in its markets. A wellknown and respected brand is one of the most important selection criteria for retail investors as noted by market commentators and hence an important development area for AJ Bell.
Strategically, there are four key elements employed by AJ Bell to improve its brand awareness and recall.
A central PR function was created by AJ Bell in 2015. Its team of expert commentators, comprising former financial journalists and knowledgeable experienced internal subject matter experts is focused on producing content for the press, with a focus on high profile broadcast opportunities and the mainstream national press.
The team produces daily stock market commentary, individual company analysis, financial services thought leadership and financial planning themes, with two to three pro-active press announcements issued every day on average. AJ Bell has an in-house, broadcast-ready camera and studio and aims to be the quickest in the market to react to media requests and breaking news.
As a result, for the year ended 30 September 2018, AJ Bell averaged 10 appearances per month on mainstream media broadcast programmes and averaged over 750 mentions in the press per month.
Strategic sponsorship partnerships with sporting teams, events, venues and individuals have delivered strong exposure across a range of media channels, including national television. The current model is a simple one where any opportunity must have:
Recent sponsorship activity has included:
The key focus for sponsorship activity is to promote the AJ Bell brand and drive potential customers to www.ajbell.co.uk, with traffic then funnelled to the appropriate AJ Bell product websites according to the area of interest. More detailed product-related messages are promoted on the product website in question.
AJ Bell carried out a TV test campaign between 2 February 2018 and 2 May 2018. The campaign ran primarily on Sky Adsmart, and was supported by activity on the ITV Player, Channel 4 on-demand and YouTube, as well as AJ Bell's websites and social media channels.
Our 'Invest in the life you want to live' campaign was a brand-led campaign. The brand message centred on the idea that investing can facilitate the lifestyle and life choices an individual aspires to. It aims to tackle pre-conceptions of what investing is, and show the benefits of investing to the way people live their lives.
For AJ Bell Youinvest, marketing is undertaken across a variety of channels, both online and offline. The online marketing efforts are focussed primarily on display advertising, pay-per-click on search engines, such as Google, and affiliate advertising on price comparison websites. Offline marketing efforts include press advertising (specialist financial magazines) as well as national press (e.g. the Daily Telegraph), national press campaigns, radio advertising and Out-Of-Home billboards at London Underground stations which are largely confined to the busy tax year end period in March/April.
AJ Bell's business was founded on a transparent and innovative culture, and is supported by a committed management team and strong corporate governance.
The senior management team has an average length of service of 11 years and is led by AJ Bell's co-founder, Andy Bell. The Senior Managers combine sector and product expertise with the benefit of long experience within the business and industry.
AJ Bell had 773 full time equivalent employees, at 30 September 2018, located at either its Manchester Headquarters or London Office. Its staff are highly engaged, and ranked AJ Bell in the ''Sunday Times 100 Best Companies To Work For'' list in 2018.
As at 30 September 2018, 137 members of staff had shares or options in the business.
AJ Bell recognises the importance of ensuring its staff are fully engaged with AJ Bell's objectives and strategy and are aligned with its culture. Its guiding principles, embodied in the ''AJ Bell Way'', help to drive the culture of the business and are used to communicate its strategy and objectives. AJ Bell is run on strong values/principles as set out below:
An assessment of behaviours against these guiding principles forms part of the ongoing staff performance review process.
AJ Bell seeks to maintain a working environment in which its employees are fairly rewarded, provided with the right tools to do their jobs and given opportunities to progress within AJ Bell to build loyalty to AJ Bell and to support the delivery of a first-class service for its customers. The ''Best Companies To Work For'' framework is effectively embedded into the business and will continue to be used to measure staff engagement levels and to target AJ Bell's activities most appropriately.
AJ Bell continues to invest in its technology and the training of its employees to ensure that they are properly equipped to do their jobs. Its ambition to be the easiest platform to use extends not only to the experience for customers and advisers but also to its own employees.
AJ Bell has an excellent track record of developing and promoting its employees, as the business has grown in size and complexity. To ensure this remains the case AJ Bell has established a more formal talent management programme, involving a range of learning, development and career progression opportunities which will apply to different groups of employees across the business. Following the success of AJ Bell's first apprenticeship programme, a second intake for customer services staff took place in FY2018 and a further programme is to be introduced for technology staff, at degree level, in FY2019.
The move of AJ Bell's Manchester operations to its new headquarters building in Exchange Quay, Manchester has provided a much better working environment for staff and relocating the core operational functions from Tunbridge Wells to Manchester is expected to see further benefits for staff as well as a more efficient and improved service for customers and advisers. AJ Bell has plans in place to ensure full use is made of the facilities offered by the Exchange Quay office and to introduce improved mechanisms for internal communication, along with a more structured approach to charitable and volunteering activity by staff, to increase staff engagement further.
AJ Bell's interim and final dividends totalled £14.6 million (35.5 pence per share) in respect of FY2018, together with a further special dividend of £8.0 million (19.5 pence per share). Dividends paid in respect of FY2017 and FY2016 amounted to £11.6 million (28.25 pence per share) and £10.5 million (25.75 pence per share) respectively.
Any surplus capital accrued over and above regulatory requirements or other specific needs will be considered by the Board, from time to time and, if appropriate, will be returned to shareholders in an appropriate form and at an appropriate time. The Company intends to announce dividends at the time of publication of its interim and annual results each year.
It is expected that the Company will pay an interim dividend equal to approximately 40% of the prior year's total ordinary dividend payment (excluding any special dividends paid) and a final dividend, or second interim dividend, equal to approximately 65% of AJ Bell's full year profit after tax, less any interim dividends already paid in respect of that financial year.
The Board may, however, revise the Company's dividend policy from time to time in line with the actual results of the Group. The ability of the Company to pay dividends is dependent on a number of factors, including market conditions, prospective investment opportunities and the Group's regulatory and financial requirements as assessed by the Board at the time. As a result, there can be no assurance that the Company will pay dividends or, if a dividend is paid, what the amount of such dividend will be.
The tables below present selected historical financial information and certain non-IFRS financial measures and other metrics for AJ Bell as at and for the years ended 30 September 2016, 2017 and 2018. Unless otherwise indicated, the selected historical financial information has been extracted without material adjustment from AJ Bell's historical financial information set out in Part 6 (Historical Financial Information) of this Registration Document.
| Year ended 30 September | ||||
|---|---|---|---|---|
| 2016 £'000 |
2017 £'000 |
2018 £'000 |
||
| Revenue | 64,466 | 75,576 | 89,691 | |
| Profit before tax | 16,779 | 21,697 | 28,359 |
| As at 30 September | |||
|---|---|---|---|
| 2016 £'000 |
2017 £'000 |
2018 £'000 |
|
| Assets Total non-current assets |
9,993 | 11,722 | 11,589 |
| Current assets Trade and other receivables Cash and cash equivalents |
17,738 39,510 |
22,172 42,138 |
20,075 49,695 |
| Total current assets | 57,248 | 64,310 | 69,770 |
| Total assets | 67,241 | 76,032 | 81,359 |
| Liabilities Total current liabilities Total non-current liabilities |
(11,693) (1,760) |
(13,634) (1,036) |
(15,511) (1,812) |
| Total Liabilities | (13,453) | (14,670) | (17,323) |
| Net assets | 53,788 | 61,362 | 64,036 |
| Total equity | 53,788 | 61,362 | 64,036 |
| Year ended 30 September | ||||
|---|---|---|---|---|
| 2016 £'000 |
2017 £'000 |
2018 £'000 |
||
| Net cash generated from operating activities Net cash used in investing activities Net cash used in financing activities |
15,590 (845) (11,553) |
16,399 (3,517) (10,254) |
28,848 (829) (20,462) |
|
| Net increase in cash and cash equivalents | 3,192 | 2,628 | 7,557 | |
| Cash and cash equivalents at end of year | 39,510 | 42,138 | 49,695 |
| As at 30 September | |||
|---|---|---|---|
| 2016 | 2017 | 2018 | |
| Unaudited | |||
| AUA (£bn) | 31.8 | 39.8 | 46.1 |
| Platform retail customers (000) | 117 | 141 | 183 |
| Non-Platform retail customers (000) | 23 | 23 | 15 |
| Total retail customers (000) | 140 | 164 | 198 |
| Customer retention rate (%) | 94.2 | 94.4 | 95.1 |
| Year ended 30 September | |||||
|---|---|---|---|---|---|
| 2016 | 2017 | 2018 | |||
| PBT margin (%) | 26.0 | 28.7 | 31.6 | ||
| Revenue per £AUA (bps) | 22.6 | 21.1 | 21.0 |
The unaudited non-IFRS financial measures and other metrics have been derived from the following sources:
1.1 The following table lists the names, ages, positions and dates of appointment of the current members of the Board:
| Name Leslie (''Les'') Michael Platts Andrew (''Andy'') James Bell |
Age 64 52 |
Position Non-Executive Chairman Chief Executive Officer |
Date of appointment 15 September 2008 5 August 2002 (to the Company but co-founded the business on 16 August 1995) |
|---|---|---|---|
| Michael Thomas Summersgill | 34 | Chief Financial Officer | 31 May 2011 |
| Laura Martine Carstensen | 57 | Senior Independent Non Executive Director |
29 March 2018 |
| Eamonn Michael Flanagan | 55 | Independent Non Executive Director |
22 March 2018 |
| Simon Turner | 66 | Independent Non Executive Director |
1 July 2014 |
1.2 The business address of each Director is 4 Exchange Quay, Salford Quays, Manchester M5 3EE. The management expertise and experience of each Director is set out in their biography below:
Les joined AJ Bell in September 2008 having retired as an Audit Partner and practice Senior Partner for the north-east with Deloitte, a leading international professional services firm. Over a period of 33 years, Les gained extensive UK and international experience across all industry sectors, including FTSE 100, FTSE 250, smaller listed PLCs, large private companies and private equity investments. He has advised at board level on a wide range of financial, commercial and governance issues, and is also Vice Chairman of Leeds Building Society.
Andy co-founded AJ Bell in 1995, having spent a number of years working within the financial services sector. Graduating from Nottingham University in 1987 with a first class degree in Mathematics, he qualified as a Fellow of the Institute of Actuaries in 1993 and has built AJ Bell into one of the largest online investment platforms in the UK.
Michael joined AJ Bell in July 2007 and was subsequently appointed as Chief Financial Officer in May 2011. In addition to overseeing the financing management of the Group he is responsible for all operational functions in the business. Michael graduated from the University of Sheffield with a degree in Economics and began his career as an accountant in public practice.
Laura joined the Board in March 2018. Amongst other roles she is currently Non-Executive Chairman of Park Group Plc, an AIM-listed UK financial services business, and a Non-Executive Director and Chairman of the Values and Ethics Board Committee at the Co-operative Bank p.l.c. Previously Laura spent nearly 20 years at Slaughter and May, a major City law firm, ten years of which were as a partner and has also served as Deputy Chairman of the Competition Commission and a Commissioner of the Equality and Human Rights Commission.
Eamonn joined the Board in March 2018, having previously been a director in Shore Capital Markets, a respected independent securities business, since its establishment in 2003. Prior to this, Eamonn was a director and then Head of European Insurance at a leading investment bank. He is a Fellow of the Institute of Actuaries and the Institute of Directors.
Simon joined the Board in July 2014 with strong experience in the retail, consumer electronics and IT industries, thanks to his time as Group Managing Director at Dixons PC World, a leading UK electrical retailer, and his appointment to the boards of several large internet businesses. Simon has experience in the financial services industry having spent eight years on the board at Yorkshire Building Society, one of Britain's biggest building societies and was on the UK board of Allied Irish Bank for 3 years.
In addition to the Executive Directors, each of the following persons is a senior manager of AJ Bell:
| Name | Age | Position | Date of employment |
|---|---|---|---|
| Fergus Lyons | 57 | Managing Director, AJ Bell Investcentre |
4 September 2000 |
| Charles Galbraith | 56 | Managing Director, AJ Bell Youinvest |
1 August 2006 |
| Louis Petherick | 43 | Chief Risk officer | 19 September 2016 |
| Roger Stott | 53 | Group Finance Director | 1 September 2008 |
| Christopher Bruce Robinson | 61 | Group Legal Services Director and Company Secretary |
1 October 2012 |
1.4 The management expertise and experience of each of the Senior Managers listed above is set out below:
Fergus worked at a major bank for over 20 years before joining AJ Bell in September 2000. Since then he has worked in many areas of the business, and is currently Managing Director of AJ Bell Investcentre. Fergus is also responsible for AJ Bell's investment and Platinum SIPP and SSAS products.
Charles became Managing Director of Lawshare (now AJ Bell Securities) in 2006 and joined AJ Bell's senior management team on its acquisition of Lawshare in 2007. He has worked in a number of stockbroking firms over the past 20 years, concentrating on both private and institutional clients. Previously he was Managing Director of a well-known stockbroker, and was also responsible for the stocks and shares ISA business of a major high street bank. Charles has overall responsibility for AJ Bell Youinvest and AJ Bell's institutional stockbroking business.
Louis joined AJ Bell in September 2016 as AJ Bell's Risk and Compliance Director before taking on the role of Chief Risk Officer in July 2017. Louis has worked for a number of financial services firms over the past 20 years, holding various senior risk, compliance and conduct roles across the insurance, wealth management and banking sector. He is responsible for the risk, compliance and counter-financial crime functions within AJ Bell.
Roger qualified as a Chartered Accountant in 1990 and has worked in retail stockbroking since 1999. He spent seven years as Finance Director at a well-known stockbroker, joining that company at start-up and seeing it through an MBO and sale. With AJ Bell since 2008, Roger is responsible for overseeing the finance department, treasury function, the commercial management of supplier relationships and AJ Bell's third party products.
Bruce joined AJ Bell in October 2012, having previously acted as one of AJ Bell's external legal advisers. Before joining AJ Bell, Bruce spent 20 years in private practice as a corporate and commercial lawyer.
The Board is committed to the highest standards of corporate governance and to maintaining a sound framework for the control and management of AJ Bell.
In the event of Admission, the Company intends to comply with the UK Corporate Governance Code and will report to Shareholders on such compliance in accordance with the Listing Rules. It is the Company's current intention that each of the Directors will stand for reelection on an annual basis.
The Board is responsible for leading and controlling AJ Bell and has overall authority for the management and conduct of AJ Bell's business, strategy and development. The Board is also responsible for ensuring the maintenance of a sound system of internal controls and risk management (including financial, operational and compliance controls) and for reviewing the overall effectiveness of systems in place as well as for the approval of any changes to the capital, corporate and/or management structure of AJ Bell.
The UK Corporate Governance Code recommends that at least half the board of directors of a UK listed company, excluding the chairman, should comprise nonexecutive directors determined by the Board to be independent in character and judgment and free from relationships or circumstances which may affect, or could appear to affect, this judgment. The Board has determined that all of the Non-Executive Directors are free from any business or other relationship that could materially interfere with the exercise of their independent judgment and are therefore ''independent nonexecutive directors'' within the meaning of the UK Corporate Governance Code. On Admission, the Company will have two Executive Directors and three independent Non-Executive Directors plus the Chairman and therefore will comply with the UK Corporate Governance Code in this respect.
* Chairman
The UK Corporate Governance Code recommends that a chairman should meet the independence criteria set out in the UK Corporate Governance Code on appointment. The Board has concluded that Les Platts was independent at the date of his appointment as chairman. The Board are aware that under the provisions of the new version of the UK Corporate Governance Code, which will apply to AJ Bell's accounting period starting on 1 October 2019, the chair should not remain in post beyond nine years from the date of their first appointment to the board. Les Platts was appointed to the Board as a non-executive director on 15 September 2008 and assumed the role of chair on 1 January 2014.
The new version of the UK Corporate Governance Code also confirms that that where the chair was an existing non-executive director on appointment, which is the case for Les, this period can be extended for a limited time to facilitate effective succession and the development of a diverse Board. A succession plan for Les will be considered in 2019.
The UK Corporate Governance Code also recommends that the board of directors of a company should appoint one of the independent non-executive directors to be the senior independent director to provide a sounding board for the chairman and to serve as an intermediary for the other directors when necessary. The senior independent director has an important role on the Board in leading on corporate governance issues and being available to Shareholders if they have concerns which contact through the normal channels of the Chairman, Chief Executive Officer or other Executive Directors has failed to resolve or for which such contact is inappropriate. Laura Carstensen has been appointed as the senior independent director of the Board.
As envisaged by the UK Corporate Governance Code, the Board has established four committees: Audit, Risk; and Compliance; Remuneration; and Nomination, each with written terms of reference. The Board has also established a Disclosure Committee in anticipation of Admission. If the need should arise, the Board may set up additional committees as appropriate.
The Audit Committee has responsibility for, among other things, the monitoring of the financial integrity of the financial statements of AJ Bell and the involvement of AJ Bell's auditors in that process. It focuses in particular on compliance with accounting policies and ensuring that an effective system of internal and external audit and financial control is maintained, including considering the scope of the annual audit and the extent of the non-audit work undertaken by external auditors and advising on the appointment of external auditors. The ultimate responsibility for reviewing and approving the annual report and accounts and the half-yearly reports remains with the Board. The Audit Committee will meet at least four times a year at the appropriate times in the financial reporting and audit cycle.
The terms of reference of the Audit Committee cover such issues as membership and the frequency of meetings, as mentioned above, together with requirements of any quorum for and the right to attend meetings. The responsibilities of the Audit Committee covered in its terms of reference include the following: external audit, financial reporting and internal financial controls. Other internal controls and risk management falls within the express responsibilities of the Risk and Compliance Committee. In addition the internal audit function has a direct reporting line to the Audit Committee. The terms of reference also set out the authority of the committee to carry out its responsibilities.
The UK Corporate Governance Code recommends that the Audit Committee comprises at least three members who are all independent non-executive directors and includes one member with recent and relevant financial experience, be independent in character and judgment and free from any relationship or circumstance which may, could or would be likely to, or appear to, affect their judgment. The Chairman is a member of the Audit Committee but does not act as chair which is compliant with the UK Corporate Governance Code as long as AJ Bell remains outside of the FTSE 350. The Board considers it appropriate for Les Platts to be a member of the Audit Committee in order to support succession, as two of the other members of the Audit Committee, including the chair, have only recently been appointed. This is especially considered to be the case in the light of Les' previous experience of listed company audit work. The Board will review the position as and when it becomes necessary to do so under the UK Corporate Governance Code following Admission. The Audit Committee also comprises all of the independent Non-Executive Directors: Simon Turner, Laura Carstensen and Eamonn Flanagan. The committee is chaired by Eamonn Flanagan.
The Risk and Compliance Committee has responsibility for, among other things, the monitoring of the appropriateness and effectiveness of AJ Bell's internal controls; compliance and risk management systems; oversight of the Group's anti-money laundering and financial crime prevention systems and controls; and ICAAP. It focuses in particular on reviewing the annual risk and compliance plans, reviewing all risk and compliance related reports from AJ Bell's Executive Management Assurance Committee and reviewing the management team's responsiveness to recommendations of AJ Bell's risk management and compliance functions. The Risk and Compliance Committee will meet at least four times year.
The terms of reference of the Risk and Compliance Committee cover such issues as membership and the frequency of meetings, as mentioned above, together with requirements of any quorum for and the right to attend meetings. The responsibilities of the Risk and Compliance Committee covered in its terms of reference include the following: risk reporting, internal compliance procedures and monitoring and risk management. The terms of reference also set out the authority of the committee to carry out its responsibilities.
The Risk and Compliance Committee comprises all of the independent Non-Executive Directors: Simon Turner, Laura Carstensen and Eamonn Flanagan and the Chairman, Les Platts. The committee is chaired by Simon Turner.
The Remuneration Committee has responsibility for the determination of specific remuneration packages for each of the Executive Directors, the Chairman and certain senior executives of AJ Bell, including pension rights and any compensation payments, and recommending and monitoring the level and structure of remuneration for senior management, and the implementation of share option, or other performance related schemes. It will meet at least twice a year. The Remuneration Committee will also generate an annual remuneration report to be approved by the Shareholders of the Company at the annual general meeting.
The responsibilities of the Remuneration Committee covered in its terms of reference include the following: determining and monitoring policy on and setting levels of remuneration, termination, performance-related pay, pension arrangements, reporting and disclosure, share incentive plans and remuneration consultants. The terms of reference also set out the reporting responsibilities and the authority of the committee to carry out its responsibilities.
The UK Corporate Governance Code recommends that the Remuneration Committee comprises at least three members who are all independent non-executive directors, be independent in character and judgment and free from any relationship or circumstance which may, could or would be likely to, or appear to, affect their judgment. The Board considers that the Company complies with the requirement of the UK Corporate Governance Code in that regard.
The Remuneration Committee comprises all of the independent Non-Executive Directors: Simon Turner, Laura Carstensen and Eamonn Flanagan and the Chairman, Les Platts. The committee is chaired by Laura Carstensen.
The Nomination Committee is responsible for considering and making recommendations to the Board in respect of appointments to the Board, the Board committees and the chairmanship of the Board committees. It is also responsible for keeping the structure, size and composition of the Board under regular review, and for making recommendations to the Board with regard to any changes necessary, taking into account the skills and expertise that will be needed on the Board in the future. The Nomination Committee's terms of reference deal with such things as membership, quorum and reporting responsibilities. The Nomination Committee will meet at least once a year.
The UK Corporate Governance Code recommends that a majority of the members of the Nomination Committee should be independent non-executive directors, be independent in character and judgment and free from any relationship or circumstance which may, could or would be likely to, or appear to, affect their judgment. The Board considers that the Company complies with the requirement of the UK Corporate Governance Code in that regard.
The Nomination Committee comprises all of the independent Non-Executive Directors: Simon Tuner, Laura Carstensen and Eamonn Flanagan and the Chairman, Les Platts. The Committee is chaired by Les Platts, except when dealing with the appointment of a successor to the chairmanship.
The Disclosure Committee is responsible for the review and implementation, on an ongoing basis, of AJ Bell's disclosure policy to ensure that it addresses AJ Bell's ongoing compliance with the Disclosure Guidance and Transparency Rules, Listing Rules and Prospectus Rules and the Market Abuse Regulation. The Disclosure Committee shall have the responsibility for ensuring that this disclosure policy is properly communicated across AJ Bell, that AJ Bell's directors, officers, employees and contractors are educated with respect to this policy and the related controls and procedures, that AJ Bell's disclosure policy remains effective in design and in operation, and that any violation of the policy is properly addressed and remedial action is taken as appropriate.
The Disclosure Committee shall submit the results of its annual review of its operation, the adequacy and effectiveness of the disclosure policy and procedures and its own procedures to the Board. The Board or the Chairman will, wherever practicable be consulted in relation to the disclosure (or delayed disclosure) of major announcements and asked to approve such announcements (or delays).
The Disclosure Committee comprises four members: Eamonn Flanagan, Andy Bell, Michael Summersgill and Bruce Robinson. The committee is chaired by Eamonn Flanagan.
AJ Bell's approach to remuneration reflects its culture and supports delivery of its strategy. The aim is to attract, retain and motivate talented people to help ensure continued growth and success.
Remuneration levels for the Executive Directors and Senior Managers have been set at a level that is considered by the Remuneration Committee to be appropriate for the size and nature of the business.
AJ Bell is subject to CRD IV requirements and therefore the FCA Remuneration Code. AJ Bell's remuneration practices accord with the applicable principles of the FCA Remuneration Code, which are overseen by the Remuneration Committee. Material decisions in relation to the remuneration of staff whose actions have a material impact on the risk profile of AJ Bell and in relation to individuals in control functions are overseen by the Remuneration Committee.
The approach to Executive Directors' remuneration aims to align their interests with the longterm interests of Shareholders. Furthermore, it aims to promote a high performance culture with appropriate reward for superior performance, without creating incentives that will encourage excessive risk-taking or unsustainable performance.
The Company intends to deliver these outcomes via a remuneration framework which combines annual salary, benefits, pension, an annual bonus plan and share-based awards.
Further details of each Executive Director's remuneration are set out in paragraph 9 of Part 7 (Additional Information) of this Registration Document. The Company will submit its remuneration policy (as it relates to the Executive Directors) to a binding vote of Shareholders at the annual general meeting of the Company held in the first financial year which begins on or which follows any Admission. Accordingly, the Company will outline the detail of its future policy relating to the Executive Directors' remuneration in its annual report and accounts in due course.
The Company will adopt, with effect from the intended date of Admission, a code on dealings in relation to the shares and other securities. The code adopted will apply to the Directors and Senior Managers. The Directors will take all reasonable steps to secure compliance.
The landlord of the Group's head office at 4 Exchange Quay, Salford Quays, Manchester M5 3EE (Property), Exchange Quay Property Services Limited (EQPSL), is a company controlled by a number of members of the senior management team. The shareholders and directors of EQPSL are Andrew James Bell, Bestfield Investments (an unlimited company of which Fergus John Lyons and other family members are the shareholders and directors), Michael Thomas Summersgill, Charles William Galbraith and Roger John Stott. AJ Bell Limited, as tenant, and the Company, as guarantor, entered into the two leases of the Property on 17 August 2016. The leases were entered into on arms' length terms, the parties had separate legal advisers and the Board obtained advice on the lease terms from an independent surveyor. The reason for this structure being adopted was because the Board did not consider the purchase of business premises to be an appropriate use of the Company's capital. Shareholder approval was obtained before the parties entered into the leases. The parties entered into a supplemental lease of additional parts of the Property and a licence for alterations on 24 October 2018.
The Group made donations during FY2016 (£85,279), FY2017 (£109,125) and FY2018 (£139,675) to the AJ Bell Trust, a registered charity of which Andy Bell is a director of the trustee company.
For FY2016, FY2017 and FY2018, AJ Bell had an average of 607, 656, and 758 employees respectively, analysed by operational area as follows:
| FY2016 | FY2017 | FY2018 | |
|---|---|---|---|
| Technology | 74 | 95 | 116 |
| Distribution | 55 | 58 | 64 |
| Operations and Support | 478 | 503 | 578 |
| 607 | 656 | 758 |
As at 31 October 2018 AJ Bell had 776 employees.
AJ Bell has three regulated operating subsidiaries, AJBSL, AJBML and AJBAML.
AJBSL (number 155593), AJBML (number 211468) and AJBAML (number 774048) are authorised and regulated by the FCA. AJBSL is also a member of the London Stock Exchange.
AJ Bell also has two FCA authorised Open Ended Investment Companies: VT AJ BELL ICVC, which is operated as a UCITS Scheme, and VT Allium Portfolio Funds, a Non-UCITS Retail Scheme. Valu-Trac Investment Management Limited has been appointed as the external authorised corporate director and operator of each of the funds by the funds' sponsor, AJBAML.
There are currently three financial services regulators in the UK:
The FPC was established in 2013 as part of the new system of regulation brought in to improve financial stability after the 2008 financial crisis. The FPC sits within the Bank of England and is responsible for the macro prudential regulation of the entire financial services sector. Its role is to identify and monitor risks in the financial system, and to take action to reduce or remove such risks where necessary.
The FCA is the key regulator of the Regulated Subsidiaries, and as such the majority of this Part 4 (Regulation) of this Registration Document focuses on FCA authorisation and regulation. The FCA aims to make financial markets work well for individuals, businesses, and for the economy as a whole. The FCA is responsible for the conduct of business regulation of all authorised firms and the prudential regulation of firms not authorised and regulated by the PRA. It is the conduct regulator for more than 58,000 businesses and the prudential regulator for more than 18,000 of these businesses.
The FCA has powers to allow it to achieve its objectives. These enable it to intervene directly in the market and make product intervention rules with the aim of preventing harm to consumers. The FCA discharges its general functions by rule-making, preparing and issuing codes under FSMA, giving general guidance and determining general policy and principles.
The FCA's strategic objective is to ensure that the relevant markets function well. Its operational objectives are to:
The FCA must act in a way which is compatible with its strategic objective (so far as is reasonably possible) when discharging its general functions.
The FCA is bound by FSMA to regulate certain financial activities in the UK.
Under section 19 of FSMA, it is an offence for any person to carry on ''regulated activities'' in the UK unless they are an authorised person or exempt from the requirement to be authorised. An authorised person may only carry out regulated activities for which they have been given specific permission by the relevant regulator.
The various ''regulated activities'' are set out in the FSMA (Regulated Activities) Order 2001 (as amended). The activities most relevant for the Regulated Subsidiaries are the following:
The FCA may also grant authorised persons permission to hold or control client money. ABSL may hold client money and is required to protect the money it holds and/or controls on behalf of customers. It cannot lend this money or use it to finance its own business. AJBML is permitted to control client money only in respect of the personal pension scheme(s) that it operates and must not hold client money. AJBAML may control but must not hold client money.
As part of the firm authorisation process, the FCA may, at its discretion, determine the scope of, and include such restrictions on, the grant of regulatory permissions as appropriate.
The FCA must ensure that the authorised person/applicant meets certain threshold conditions (see below) whenever it grants or agrees to vary the terms of an authorised person's permissions.
Further, the FCA may impose such ''Requirements'' on an authorised person as it considers appropriate to require that person to take, or refrain from taking, specified action under FSMA.
These requirements apply to all of the financial services activities that the authorised person can operate and may relate to a range of matters, these include amongst others, the scope of the firm's business, the types of customer to whom the firm may provide services, how the firm may treat client money, capital adequacy and/or liquidity requirements.
Authorised firms are required to maintain a specified set of minimum standards set out in FSMA in order to become and remain authorised (the ''threshold conditions''). The threshold conditions cover matters including the location of offices, effective supervision, appropriate resources, the suitability of the authorised person and its business model.
The Regulated Subsidiaries must comply with, among other things, FSMA (and secondary legislation made under it), the FCA Rules and other relevant UK and directly applicable EU legislation.
The FCA Rules are divided into various blocks and sourcebooks containing rules and guidance.
The sections of most relevance for AJ Bell's day-to-day business are the Principles for Business and the COBS and CASS. Other important sections include those governing prudential standards and regulatory capital, senior management arrangements, systems and controls. The FSMA change of control regime for authorised persons is also relevant.
The FCA's principles (the Principles) form part of the FCA's High Level Standards set out in the FCA Rules; they are a general statement of the fundamental obligations of firms under the regulatory system. They derive their authority from the FCA's rulemaking powers as set out in FSMA and reflect the FCA's statutory objectives.
The Principles form the foundation of authorised firms' responsibilities to their clients. They are binding on firms and underpin the FCA Rules. The Principles provide authorised persons with a clear and concise statement of their fundamental obligations under the FSMA regulatory regime and the standards that the FCA expects authorised persons to meet in the day-to-day conduct of their business. They also provide a basis for supervisory activity and enforcement action by the FCA. Breaching a Principle makes a firm liable to disciplinary sanctions from the FCA (as further detailed in the Supervision and Enforcement section below).
The Principles set high standards for firms to comply with but allow firms to determine how they achieve those standards. The measures taken and the resources required by firms to comply with the Principles should depend on the nature and risks of the relevant firm's business. The Principles acknowledge that the measures taken should be proportionate to those risks.
The COBS rules set out a wide range of day-to-day business standards that authorised persons must comply with in various aspects of their relationships with clients.
The application of the COBS rules vary according to the scope of the firm's business and its activities and the types of client it deals with.
The application of the COBS rules will generally include: the need to provide retail clients with information about the firm; the need to categorise clients appropriately; the need to meet certain standards of disclosure about the firm's products and services including the related costs and charges; the firm ensuring that communications with clients are clear, fair and not misleading; the need to assess suitability when advising on certain products; ensuring it has appropriate agreements in place with clients; the need to manage conflicts of interest; and to report appropriately to clients.
The FCA requires firms to arrange adequate protection for clients' assets when such firm is responsible for them. Firms with permission to safeguard and administer custody assets and/or with permission to hold client money must comply with the Custody Rules and the Client Money Rules (respectively) in the CASS Rules. The CASS Rules require firms to clearly identify client assets, to hold client money separately from the firm's own money, to keep accurate records and carry on internal and external reconciliations, to make good any client money shortfalls, and to appoint an individual responsible for CASS compliance.
Authorised firms carrying on regulated activities must, at all times, comply with the prudential standards and capital adequacy requirements imposed by (in the case of the Regulated Subsidiaries) the EU Capital Requirements Directive and the FCA.
The capital adequacy rules applicable to the Regulated Subsidiaries are currently contained in the Prudential Standards Section of the FCA Rules and the CRD IV.
The FCA discharges its prudential supervision role, in part, through the regulatory capital requirements.
The regulatory capital rules require firms, at all times, to maintain a specified level of regulatory capital (based on the prudential risk the firm poses in conducting its particular business activities).
The rules are designed to ensure that firms can meet all liabilities as they fall due and to safeguard their financial stability and that of their clients and counterparties.
The FCA expects firms to be proactive in monitoring and managing financial risks, in accordance with its requirement for firms to maintain adequate financial resources.
The FCA's regulatory capital requirements apply both to individual authorised entities and at a consolidated level across groups of which an authorised firm or firms are members. The FCA may exercise consolidated supervision up to the top EEA parent in a firm's group. AJ Bell is subject to consolidated supervision.
Firms may apply to the FCA for a waiver from consolidated supervision however AJ Bell does not have such a waiver and AJ Bell does not intend to apply for such waiver in the foreseeable future.
There are certain ''controlled functions'' that are undertaken by individuals for (or on behalf of) an authorised firm and who usually have significant influence over the firm's regulatory conduct. As a result the persons who perform these functions must be approved by the FCA as fit and proper. These are known as ''approved persons''. An approved person must abide by the rules and principles set out in the APER. The rules and principles in the APER sourcebook apply to FCA approved persons.
The rules in the APER sourcebook include acting with integrity, acting with due skill, care and diligence, observing proper standards of market conduct and dealing with regulators in an open and co-operative way. If an approved person breaches the rules or principles the FCA may take enforcement action against the individual, including public censure, fines and/or the removal of approved status. A firm may also face enforcement action for breaches by its approved persons.
The SMCR, which currently applies to banks and very large investment firms, is set to be extended to include all authorised firms, including the Regulated Subsidiaries. The FCA has consulted on the rules to implement the SMCR and intends to replace the approved persons regime with the SMCR for almost all financial services firms.
As such a wide range of firms will be within the scope of the new SMCR requirements the FCA is not proposing to mirror the approach it took for banking firms. Instead it intends to apply consistent principles across the sector in a regime that is ''proportionate and flexible enough to accommodate the different business models and governance structures of firms''. The FCA is proposing:
The regime is expected to commence in relation to solo-authorised firms from 9 December 2019. AJBSL will be required to comply with an enhanced firm regime, whereas AJBML and AJBAML will be required to comply with the baseline core requirements.
Under the FSMA change of control regime, a person who is intending to acquire or increase ''control'' over a UK firm authorised and regulated by the FCA is required to seek the FCA's consent before doing so and submit certain specified information and documentation. An FCA-authorised firm must also notify the FCA when there is a transaction which results in that acquisition taking place. A disposal of a controlling interest in an FCA authorised firm must be notified to the FCA before the disposal takes place. Any acquisition of control over the Company or any of the Regulated Subsidiaries individually would be subject to the FCA change of control regime.
A proposed ''controller'' for the purposes of the change in control regime is any natural or legal person (or such persons ''acting in concert'') who decides to acquire, directly or indirectly, or increase control over an FCA-authorised firm. ''Control'' over the Regulated Subsidiaries would be acquired if the acquirer:
The FCA has up to 60 working days from the date of submission of a completed notification to approve or object to any such change in control. If the FCA does serve such a notice, it is required to specify its reasons for its objections in such notice. In the case of persons acting in concert, individual acquisitions will be amalgamated and treated as single holding for the purposes of the regime.
A person who ceases to be a 10% controller is required only to provide written notice to the FCA. In other words, FCA approval is not required for cessation of control.
Breach of the notification and approval regime imposed by FSMA on controllers is a criminal offence.
The FCA's priority in supervising firms is to ensure consumers are at the centre of a firm's business.
The FCA's main approaches to conduct supervision are split into three pillars:
AJ Bell is classified as a Pillar 1 entity.
The FCA allocates all authorised firms into one of two conduct categories either (i) fixed portfolio firms; or (ii) flexible portfolio firms.
Fixed portfolio firms are given a specific supervisor. The FCA proactively supervises such firms using firm-specific continuous assessment.
Flexible portfolio firms are supervised through thematic and market-based work, along with programmes of communication, engagement and education aligned to the key risks the FCA has identified in the relevant sector.
The FCA has recently confirmed that AJ Bell and the Regulated Subsidiaries will no longer be allocated a dedicated supervisory team and instead will be part of the ''Platform Portfolio''.
The FCA has a range of supervisory powers which allow it to intervene in a firm's affairs. The FCA can, for instance, require firms to provide particular information or documents to it, require the production of a report by a ''skilled person'' appointed by the FCA or formally investigate a firm.
In its prudential supervisory role, the FCA considers the systems and controls, governance arrangements, and risk management capabilities including the risk of misconduct. The FCA will seek to assess how well a firm understands the risks it is running, how well placed it is to manage those risks, and how well it can avoid large, unexpected costs.
Firms solely regulated by the FCA are allocated one of four prudential categories depending on the relative perceived risk their failure would pose to markets. AJ Bell is classified as a P2 entity, which applies to firms and groups whose failure would have less impact than P1 firms, but would nevertheless damage markets or consumers and client assets.
The FCA uses a wide range of enforcement powers, criminal, civil and regulatory, to protect consumers and to take action against firms and individuals that do not meet its standards. These include:
* withdrawing a firm's authorisation;
The FOS has compulsory jurisdiction over all FCA-regulated firms including the Regulated Subsidiaries. However, customer complaints relating to the administration of pensions are referred to the Pensions Ombudsman, not FOS, in accordance with the Memorandum of Understanding between FOS and the Pensions Ombudsman.
All FCA-regulated firms must have a procedure in place for resolving disputes with their customers and must respond to customer complaints within set deadlines. If a firm's complaints procedure fails to resolve a complaint, the FOS and Pensions Ombudsman provides a dispute resolution procedure for certain categories of customer complaints brought against applicable firms by individuals and small business customers.
The FOS and Pensions Ombudsman provide a more informal alternative to customers bringing complaints in the courts. They provide independent investigators who review and seek to resolve complaints between customers and firms.
If the FOS resolves a complaint in favour of a customer, it has the power to order a firm to pay fair compensation for any loss or damage it caused to the customer, or to direct a firm to take such steps in relation to the customer as the FOS considers just and appropriate, and irrespective of whether a similar award could be made by a court. Authorised firms fund the FOS through levies and case fees.
The FSCS was established under FSMA, it is a statutory compensation scheme of last resort for certain categories of customers of authorised firms. It provides compensation to eligible customers who suffer losses as a consequence of an authorised firm's inability to meet its liabilities arising from claims made in connection with its regulated activities. The FSCS is funded by levies on authorised firms and is independent of the FCA, the PRA and the UK government, although it is ultimately accountable to them.
The powers of the FSCS to raise funds from authorised firms are set out in the FEES sourcebook of the FCA Rules. In general terms, fees are levied on participant firms and the FSCS may impose three types of levy the 'management expenses levy' (comprising the 'bases costs levy' and the 'specific costs levy'), the 'compensation costs levy' (relating to compensation costs), and the 'MERS levy' which relates to management expenses in respect of 'relevant schemes'.
Participant firms are allocated to a funding class (or classes) on the basis of their regulated activities. The specific costs and compensation costs levies payable by the participating firms are calculated by reference to their funding class or classes. The main principle behind the calculation of these levies is that the levy should represent the amount of claims made or likely to be made against that type of firm. The Regulated Subsidiaries will fall into the ''Investments'' levy class. It should however be noted, that contributions are not restricted to failures in the sub-classes to which a particular firm belongs as there is the possibility that cross-subsidy between levy classes may be required.
The MLRs require relevant persons to apply risk-based customer due diligence measures and take other steps to prevent their services from being used for money laundering or terrorist financing. They also require relevant persons to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk.
SYSC contains financial crime rules that complement the MLRs, requiring firms to ensure they have systems and controls that enable them to identify, assess, monitor and manage money laundering risk. Such controls must be comprehensive and proportionate to the nature, scale and complexity of their activities. In this context, financial crime includes any offence involving fraud or dishonesty, misconduct in, or misuse of information relating to, a financial market, handling the proceeds of crime or the financing of terrorism, as well as bribery and corruption offences.
Failure to maintain the necessary procedures is a criminal offence. The Proceeds of Crime Act 2002, the Terrorism Act 2000 and the Counter-Terrorism Act 2008 and the Criminal Justice Act 1993 also contain a number of offences in relation to money laundering. The Joint Money Laundering Steering Group provides good practice guidance and practical assistance in interpreting the MLRs.
AJ Bell has established appropriate systems and controls under the guidance of AJ Bell's Money Laundering Reporting Officer to help it mitigate the risk of financial crime. This including the appropriate suite of policies, use of anti-money laundering technology and ongoing training for all members of staff.
The ICO is the UK's data protection regulator set up as an independent body to uphold information rights. It is responsible for upholding information rights in the public interest, promoting openness by public bodies and data privacy for individuals. It has powers to enforce compliance with Data Protection Legislation which include criminal prosecution, non-criminal enforcement, audit and issuing monetary penalty notices. The ICO is involved in data protection policy making decisions and produces guidance and codes of practice.
AJ Bell collects and processes personal data and sensitive personal data (including names, addresses, contact details, financial information, health information and criminal records) information from its customers and employees as part of the operation of its business.
AJ Bell must therefore comply with all Data Protection Legislation including the recently implemented GDPR and the UK's Data Protection Act 2018.
GDPR imposes certain requirements on AJ Bell in respect of the collection, retention, use, processing and security of personal information. Failure to operate effective data use and information security controls could potentially lead to regulatory enforced compliance measures, fines, reputational and financial losses in responding to or defending its actions.
GDPR also provides data subjects far greater rights and control in respect of their personal data. Failure to be fully transparent at the point of collection about the purpose for and use of personal data or otherwise meet obligations relating to data subject rights could result in compensation payments to data subjects whose rights have been infringed.
GDPR allows representative bodies to bring claims on behalf of data subjects. This could result in a 'group action' being pursued by a third party on behalf of data subjects. A group action could potentially lead to reputational damage and increased financial defence costs and losses depending on the number of data subjects forming the group. The potential sanctions for the most egregious breaches of GDPR include financial penalties of up to 4% of the annual worldwide turnover of company groups.
The GDPR has increased the regulatory burden on AJ Bell in processing personal customer, employee and other data in the conduct of its business.
AJ Bell established a GDPR project to ensure that the new requirements were met by 25 May 2018, the date on which GDPR came into force. AJ Bell monitors ongoing compliance through its established regulatory systems and controls.
If AJ Bell or any of the third party service providers on which it relies (including non-subsidiary affiliates of AJ Bell) fails to comply with Data Protection Legislation, due to any failure to store or transmit information in a secure manner or any loss or wrongful processing of personal customer data, AJ Bell could be subject to investigative and enforcement action by the ICO and complaints or claims from data subjects.
Pension saving under registered pension schemes is subject to favourable tax treatment, which acts as an incentive for employees and individuals to save for retirement and thus be less reliant on the state pension system. However, the extent to which pension savings attract tax relief is subject to certain limits imposed by HMRC. In order to enjoy the tax advantages available to pension schemes in the UK the SIPPs and SSASs administered by AJ Bell are registered with HMRC.
As registered pension schemes, the SIPPs and SSASs are obliged to provide information to HMRC including the provision of a pension scheme return (to be provided on request), accounting for tax returns, event reports and reporting pension flexibility payments.
If payments are made from the schemes that are not authorised payments under the Finance Act 2004, HMRC will impose unauthorised payment charges, and scheme sanction charges in respect of the payments.
Tax considerations are relevant to a UK registered pension scheme when:
The current pensions tax relief system can broadly be described as 'Exempt-Exempt-Taxed' on the following basis:
The AJ Bell Platinum SSASs are occupational pension schemes for legislative purposes. As a result they are regulated by the Pensions Regulator.
The Pensions Regulator is the public body that protects workplace pensions in the UK. The post of the Pensions Regulator was created on 6 April 2005 by Pensions Act 2004. The principal objectives of the Pensions Regulator are set out in the Pensions Act 2004. These include:
The SSAS are registered with the Pensions Regulator in accordance with the Pensions Act 2004. As such the scheme administrator for each scheme is required to provide and update registrable information in respect of each scheme as well as providing a scheme return to the Pensions Regulator whenever the Pensions Regulator issues a scheme return notice. There are also whistleblowing obligations that apply in respect of the trustees and scheme administrators of SSASs.
The Pensions Regulator has issued a code of practice in respect of the governance and administration of occupational trust-based schemes providing money purchase benefits. This code applies to a limited extent to the SSASs although SSASs will generally be exempt from parts of the code (for example in respect of default arrangements and charge caps and the preparation of an annual chair's statement).
The Pensions Regulator has various enforcement powers in respect of defined contribution workplace schemes such as the SSASs, these include the ability to appoint and remove trustees of schemes and to issue fines for non-compliance with legislation under section 10 of the Pensions Act 1995.
An ISA is a scheme of investment managed in accordance with ISA regulations under terms agreed between the ISA manager and the investor. The ISA manager holds investments and claims repayment of income tax deducted at source, by submitting claims to HMRC. There are various types of ISAs permitted by UK law being:
Investors do not pay any tax on any of the income they receive from ISA savings and investments. Nor do they pay any tax on capital gains arising on ISA investments. In order to protect the integrity of the UK taxation system there are limits placed around who can hold an ISA, how many ISAs an individual can open in a tax year and the amount that can be paid into an individual's ISAs in a tax year. An ISA manager must also collect prescribed information and receive prescribed declarations from individuals applying for an ISA.
In order to be able to offer ISAs and LISAs to investors AJBSL has registered with, and been approved by, HMRC as an ISA manager and a LISA manager. As a registered ISA manager AJBSL is obliged to provide information to HMRC and make claims from HMRC including updating HMRC with any changes to the information provided in its application for registrations as an ISA manager, the making of an annual return and tax claim, the making of an annual return of information, and an annual market value return of statistical information (market value and subscriptions).
AJ Bell, including the Regulated Subsidiaries, is subject to EU law, both directly through European regulations and indirectly through European directives, to which the UK is currently obliged to give effect through its legislative powers. Recent EU regulation of most significance that applies to AJ Bell is set out below.
MiFID II applies to firms in the EEA who engage in certain investment activities, including dealing and execution services, investment advice and portfolio management. Building on MiFID, it aims to harmonise the regulatory framework across the EEA to make financial markets more efficient and resilient, increase transparency of both equity and non-equity markets, reinforce supervisory powers, and provide protection for investors.
MiFID II sets out detailed provisions on systems and controls, outsourcing, customer classification, conflicts of interest, best execution, client order handling, suitability and appropriateness, transparency and transaction reporting. Requirements relating to transaction reporting, costs and charges disclosure, product governance and conduct of business requirements all affect AJ Bell's operations.
MiFID II also allows investment firms authorised in accordance with its provisions to passport their services into other EEA states without needing to obtain separate authorisations locally.
The PRIIPs Regulation aims to encourage efficient EU markets by helping investors to better understand and compare the key features, risk, rewards and costs of different PRIIPs, by obliging PRIIPs manufacturers and distributors to provide access to a short and consumer-friendly Key Information Document.
PRIIPs can take a variety of legal forms but can be distinguished by the comparable functions they perform for retail investors. PRIIPS can be broadly categorised into four main groups: (i) investment funds, (ii) insurance-based investment products, (iii) retail structured securities, and (iv) structured term deposits. The PRIIPS Regulation has applied (subject to limited transitional provisions) to products such as units in an investment fund (except UCITS Schemes), life insurance policies with an investment element and structured deposits since 1 January 2018. It is set to apply to UCITS schemes with effect from 31 December 2019.
CRD IV, comprising the Capital Requirements Directive IV and the Capital Requirements Regulation, is an EU legislative framework for the prudential supervision of banks, building societies and investment firms. Certain MiFID investment firms, including those with permissions relating to the safeguarding of client assets or handling of client money, are subject to the provisions of CRD IV as regards prudential and capital standards. AJBAML and AJBSL are subject to these rules. There are changes being proposed to the capital requirements regime under Capital Requirements Directive V and Capital Requirements Regulation II but these are not anticipated prior to 2019. Therefore whether these changes will have any impact on the Regulated Subsidiaries is unclear because the possibility of these changes taking effect prior to the UK's planned departure from the EU is remote.
The UCITS regime provides a set of common standards applicable across all EU member states for the operation of and cross border promotion of UCITS Schemes.
The UCITS regime aims to create a single market for open-ended retail investment funds which affords enhanced protection for investors.
It requires EU member states to adopt harmonised rules regulating the authorisation, supervision, structure and activities of UCITS funds together with harmonised rules about investor information and passporting requirements. VT AJ Bell ICVC is a UCITS scheme and therefore must be operated in accordance with the UCITS Directive.
In addition to the FCA's prudential standards and capital adequacy requirements, AJBAML and AJBSL must comply with the wider prudential framework of CRD IV which mainly applies to banks.
The EBA contributes to a European Single Rulebook in banking by providing Binding Technical Standards (''BTS'') and Guidance. The Rulebook aims to provide a single set of harmonised prudential rules for financial institutions throughout the EU in order to create a level playing field and a high level of protection for customers.
The BTS are legal acts which specify particular aspects of an EU legislative text (directive or regulation) and aim at ensuring consistent harmonisation in specific areas. The BTS are legally binding and directly applicable in all Member States including in the UK and therefore AJBAML and AJBSL must comply with these to the extent they apply to their activities.
The EBA and European Securities and Market Authority are working on the review of the application of the prudential rules to investment firms, with the aim of establishing an appropriate prudential framework for investment firms.
FCA-regulated firms have recently been subject to substantial regulatory change. There is further regulatory change on the horizon, with the main changes likely to impact AJ Bell summarised below.
The FCA announced in 2017 that it would be undertaking the Investment Platform Market Study on investment platforms. The market study explores how investment platforms compete to win new, and retain existing, consumers, to allow the FCA to assess how to improve competition within the platform market and develop better consumer outcomes.
In particular, the FCA has looked to assess:
The FCA published its interim report the Investment Platform Market Study in July 2018, which noted that the investment platform market was working well in many respects. There are areas that the FCA identified where it was concerned that competition in the market was not working well and it is consulting on remedies for these areas. The FCA's consultation on remedies for the market focuses on the following main areas:
The FCA expects to publish its final report and recommendations in the first quarter of 2019, following the end of the consultation on its interim report proposals on 21 September 2018.
The Fifth Money Laundering Directive (''MLD5'') contains amendments to the existing money laundering directive as well as the Capital Requirements Directive. MLD5 will, amongst other things:
The majority of changes will be effected by 10 January 2020.
The FCA is consulting on draft guidance outlining the factors which financial services companies should consider when drafting and reviewing variation terms in consumer contracts, the first it has issued following the introduction of the Consumer Rights Act 2015 and several rulings on the topic by the Court of Justice of the EU. The draft guidance outlines factors for financial institutions to consider when seeking to draft variation terms, and also considers a number of reasons for contract variation that the FCA has observed firms commonly include when drafting variation terms allowing them to alter their consumer contracts. AJ Bell will take any finalised guidance into account in updating or changing customer terms.
In February 2018, the FCA published a discussion paper looking at effective competition in non-workplace pensions: DP18/1. The paper was launched in order for the FCA to better understand the market for non-workplace pensions: the providers, the consumers and the relationship between them, with a view to assessing the potential presence, nature and extent of harm. The FCA outlined its areas of potential concerns about how the market is working and the reasons for its concerns. It noted that in some aspects it sees parallels with the findings of the OFT study on the defined contribution workplace pensions market in 2013 which concluded that competition alone could not be relied on to drive value for money and good outcomes for consumers of DC workplace pensions. That study led to increased regulation of the workplace pensions market, including the introduction of caps on certain charges.
The period for submission of information has now closed. At this stage, it is difficult to assess whether the FCA focus on non-workplace pensions will have any material impact on the non-workplace pension market in the UK or lead to any material changes in the interaction between non-workplace pension providers and other participants in the UK wealth management sector, such as asset managers and financial advisers.
In June 2018, the FCA published a consultation paper regarding improving retirement outcomes for consumers: CP18/17. In the consultation paper the FCA proposes a remedy package to address the potential consumer harm and emerging issues it has identified arising from the pension freedoms introduced in 2015. The FCA's remedy package aims to: protect consumers from poor outcomes; improve consumer engagement with retirement income decisions; and promote competition by making the costs of drawdown clearer and comparisons easier.
The potential changes suggested by the FCA include:
Whilst it is not certain which of the proposed changes will be brought in to force and in what form, AJ Bell is actively engaging with the FCA in relation to its proposals. Whilst the proposed changes could lead to an increased administrative burden on AJ Bell, the directors believe that AJ Bell is in a good position to respond to any changes required and that any changes should not have a material adverse impact on its business.
Although the finalised text of the GDPR was published over two years ago, there is general uncertainty about how the GDPR and the Data Protection Act 2018 are going to be interpreted and enforced, with guidance related to many areas of the GDPR only having recently been published by UK and EU regulators. Therefore, AJ Bell must, in practice, ensure its compliance with the GDPR is constantly evolving. AJ Bell will ensure it continuously reviews its decisions and ensure that the latest guidance from the ICO, or indeed the European Data Protection Board, is taken into account in its decisions in relation to processing of personal data and reassess the risks in this context.
The E-Privacy Regulation was due to be implemented on 25 May 2018 at the same time as GDPR. It is anticipated that this will now be implemented in 2020. The E-Privacy Regulation will seek to harmonise protection of electronic communications across the EU Member States, broaden the electronic communications that are captured, implement a higher level of protection and simplify the rules in relation to cookies. The enforcement of the Regulation will be the responsibility of the ICO.
The ICO has indicated that it is unlikely that the UK will receive an adequacy decision on the UK's exit from the EU, pursuant to which the EU confirms that privacy legislation in a non-EU state is sufficiently stringent so as to permit transfer of data from inside the EU to that state. In the absence of an adequacy decision, the UK has implemented the Data Protection Act 2018 which incorporates the GDPR directly into UK legislation and ensures consistency with the EU in respect of requirements for processing of personal data. It is currently envisaged that a treaty will be implemented between the UK and the EU in order to ensure data transfers can still occur without the additional burden of entering into the EU Standard Contractual Clauses which have been developed by the European Commission to provide adequate terms to safeguard protection of personal data when an international transfer takes place without an adequacy decision or a treaty in place.
The following is a review of AJ Bell's operating performance and financial position.
The consolidated financial information referred to in this Part 5 has been prepared in accordance with (i) IFRS as adopted by the EU; (ii) the requirements of the Prospectus Directive; and (iii) the Listing Rules, and, unless otherwise stated, has been extracted without material adjustment from Part 6 (Historical Financial Information) of this Registration Document.
In this discussion and analysis, the financial years ended 30 September 2016, 30 September 2017 and 30 September 2018 are referred to as FY2016, FY2017 and FY2018, respectively.
The financial information referred to in the following discussion and analysis has been rounded to the nearest decimal place and percentage changes have been calculated based upon these rounded numbers and so may not conform exactly to the calculation based upon the underlying unrounded figures.
This Part 5 (Operating and Financial Review) of this Registration Document contains ''forward-looking statements''. Those statements are subject to risks, uncertainties and other factors that could cause AJ Bell's future results of operations or cash flows to differ materially from the results of operations or cash flows expressed or implied in such forward-looking statements. Prospective investors should read the section entitled ''Presentation of Information'' and Part 2 (Risk Factors) of this Registration Document for further information in this respect. In addition, certain industry issues also affect the Group's results of operations and are described in Part 1 (Market Overview) of this Registration Document.
AJ Bell is one of the largest investment platforms in the UK, based on the value of its AUA. The total value of the Group's AUA was £46.1 billion as at 30 September 2018. AJ Bell's flagship propositions are AJ Bell Investcentre, which operates in the advised segment of the platform market and AJ Bell Youinvest which operates in the D2C segment. The Group operates principally as a platform business although it also maintains an element of non-Platform business.
AJ Bell Youinvest and AJ Bell Investcentre combined had £38.6 billion in AUA as at 30 September 2018 with 183,213 customers. These two platform propositions are described briefly below:
AJ Bell Youinvest and AJ Bell Investcentre provide access to a broad investment range including shares and other financial instruments traded on the major stock exchanges around the world, as well as mainstream collective investments available in the UK. AJ Bell also offers a range of in-house investment solutions, including the AJ Bell Passive funds, the AJ Bell Investcentre Managed Portfolio Service and the AJ Bell Youinvest Favourite Funds list and from the end of the last quarter of 2018 Ready-made portfolios.
AJ Bell's non-Platform business, which had £7.5 billion in AUA as at 30 September 2018 with 14,699 customers, comprises:
* AJ Bell Securities stockbroking: providing dealing, settlement and custody services to institutional investment businesses.
AJ Bell was co-founded in 1995 in Manchester by Andy Bell and Nicholas Littlefair to provide actuarial, trustee and pension administration services to customers with a SSAS or SIPP. In 2000, AJ Bell launched Sippdeal, the first online SIPP in the UK for execution only investors. In 2002, AJ Bell launched Sippcentre, as a low cost SIPP for financial advisers and their clients. Since then, AJ Bell has grown its customers and AUA organically, but has also made some small strategic acquisitions to enhance AJ Bell's platform propositions. In December 2007, AJ Bell acquired Lawshare to bring its stockbroking capabilities in-house and facilitate the offering of ISAs and general investment/dealing accounts to its platform customers. In December 2012, AJ Bell acquired MSM Media to expand the range of investment content offered to its platform customers. More recently in February 2016, AJ Bell acquired Indexx Markets and Mansard Capital to facilitate the launch of its in-house range of investment solutions. AJ Bell's heritage is evident in the value of assets held in SIPPs, which was 72% of AJ Bell's overall AUA as at 30 September 2018. SIPPs are long term savings products which provide AJ Bell with a high proportion of recurring revenue.
AJ Bell's principal source of revenue arises from the fees charged for the provision of platform services. AJ Bell's revenue is classified into recurring revenues and transactional revenues as follows:
AJ Bell has a diverse revenue model with recurring income representing 82% of revenue in FY2018, and transactional revenue of 18%. The level of ad valorem charges included within recurring income varies with the size of the customer's portfolio and, as a consequence, more generally with the amount of AUA.
AJ Bell's distribution model is diversified, operating in both the advised and D2C segments of the platform market. Further, the business is not reliant on any key customer or independent financial adviser. The largest single distribution contract as at 30 September 2018 comprised less than 1.5% of total revenue.
AJ Bell's business is highly cash generative and it has a capital light model. Cash generated from operations has averaged over 100% of profit before taxation for the period covered by the historical financial information as AJ Bell benefits from a short working capital cycle and low levels of capital expenditure following the completion of its major re-platforming exercise in 2014.
Growth has been funded from retained earnings and has not required primary equity fundraising or material debt finance.
AJ Bell's strong regulatory capital position is evidenced by a regulatory capital surplus yielding coverage of 440% of its Pillar 1 regulatory capital requirements during the period covered by the historical financial information.
Management considers a variety of financial measures and other metrics when analysing AJ Bell's performance, and the Directors believe that each of these measures provides useful information with respect to AJ Bell's business and operations. With the exception of revenue and profit before tax, these are non-IFRS financial measures and metrics that are not audited. These non-IFRS financial measures and metrics are not meant to be considered in isolation or as a substitute for measures of financial performance reported in accordance with IFRS. Moreover, these non-IFRS financial measures and metrics may be defined or calculated differently by other companies, and as a result AJ Bell's key performance indicators may not be comparable to similar measures and metrics calculated by its peers.
| As at 30 September 2016 |
As at 30 September 2017 |
As at 30 September 2018 |
|
|---|---|---|---|
| AUA (£bn) (1) | 31.8 | 39.8 | 46.1 |
| Platform retail customers ('000) (2) | 117 | 141 | 183 |
| Non-Platform retail customer ('000) (3) | 23 | 23 | 15 |
| Total retail customers ('000) (4) | 140 | 164 | 198 |
| Customer retention rate (%) (5) | 94.2 | 94.4 | 95.1 |
| FY2016 | FY2017 | FY2018 | |
| PBT margin (%) (6) | 26.0 | 28.7 | 31.6 |
| Revenue (£000) (audited) | 64,466 | 75,576 | 89,691 |
| Profit before tax (£000) (audited) | 16,779 | 21,697 | 28,359 |
| Revenue per £ AUA (bps) (7) | 22.6 | 21.1 | 21.0 |
| Diluted EPS (pence) (8) | 32.7 | 42.6 | 54.05 |
Notes:
The Group's results of operations and financial condition are affected by a variety of factors, a number of which are outside the control of AJ Bell. Set out below is a discussion of the principal factors that the Directors believe have affected the Group's operations and financial results during the periods under review and which the Directors currently expect to affect its operations and financial results in the future. Factors other than those presented below could also have a significant impact on the Group's results of operation and financial condition.
The most significant component of the Group's revenue is recurring ad-valorem charges derived from the AUA held on behalf of its customers. These recurring ad-valorem charges and represented approximately 53% of the Group's revenue in FY2018. The level of AUA has the largest single influence on revenue. As at 30 September 2018, the Group had £46.1 billion AUA and in FY2018 generated revenue of £89.7 million.
The historical AUA and associated movements are provided below. These are non-IFRS financial measures and metrics that are not audited:
| Opening AUA as at 1 October 2015 |
Inflows(1) | Outflows(1) | Net inflows |
Market growth and other(2) |
Closing AUA as at 30 September(3) |
|
|---|---|---|---|---|---|---|
| (£ billions) | ||||||
| 2015 | 2016 | |||||
| Platform(4) | 18.0 | 4.1 | (1.2) | 2.9 | 2.4 | 23.3 |
| Non-platform(5) | 8.1 | 0.4 | (0.3) | 0.1 | 0.3 | 8.5 |
| Total | 26.1 | 4.5 | (1.5) | 3.0 | 2.7 | 31.8 |
| 2016 | 2017 | |||||
| Platform(4) | 23.3 | 7.3 | (1.8) | 5.5 | 2.1 | 30.9 |
| Non-platform(5) | 8.5 | 0.4 | (0.6) | (0.2) | 0.6 | 8.9 |
| Total | 31.8 | 7.7 | (2.4) | 5.3 | 2.7 | 39.8 |
| 2017 | 2018 | |||||
| Platform(4) | 30.9 | 7.8 | (1.9) | 5.9 | 1.8 | 38.6 |
| Non-platform(5) | 8.9 | 0.2 | (1.7) | (1.5) | 0.1 | 7.5 |
| Total | 39.8 | 8.0 | (3.6) | 4.4 | 1.9 | 46.1 |
| Total over the | ||||||
| indicated periods | 26.1 | 20.2 | (7.5) | 12.7 | 7.3 | 46.1 |
Notes:
(1) Inflows and outflows represent the gross inflows and outflows during the 12 month period.
a) Level of inflows and outflows
The total AUA net inflows from FY2016 to FY2018 amounted to £12.7 billion. This growth was principally driven by gross inflows into AJ Bell's Platform business, which were £19.2 billion in the periods indicated.
Inflow of AUA is derived from a combination of the value of SIPP contributions, tax reclaimed at source on these contributions, subscriptions and transfers in from other platforms or product providers. Outflows are principally a result of transfers to other platforms or product providers, withdrawal of assets by customers, including the drawdown of pension assets by eligible customers and realisation of assets on the death of a customer.
The net inflows in FY2017 amounted to £5.3 billion. Gross inflows increased from £4.5 billion in FY2016 to £7.7 billion in FY2017. This was largely driven by the underlying growth in customers for AJ Bell's flagship product propositions, AJ Bell Investcentre and AJ Bell Youinvest, and inflows from these new customers and existing customers. An element of the AJBIC gross AUA inflows were related to defined benefit occupational pension schemes transferring into SIPPs during the period. Gross outflows increased from £1.5 billion to £2.4 billion over the same period. This increase was largely due to an increase in AUA while retention rates remained stable.
The net inflows in FY2018 amounted to £4.4 billion. Gross inflows increased marginally from £7.7 billion in FY2017 to £8.0 billion in FY2018. This was largely driven by the underlying growth in customers for AJ Bell's flagship product propositions, AJ Bell Investcentre and AJ Bell Youinvest, and inflows from these new customers and existing customers. The value of gross inflows from defined benefit occupational pension scheme transferring into AJBIC SIPPs remained high, but were lower than the prior year. Gross platform outflows have grown from £1.2 billion in FY2016 to £1.9 billion in FY2018 which was largely due to an increase in the overall AUA. Gross non-platform outflows increased from £0.6 billion in FY2017 to £1.7 billion in FY2018. This increase was partly due to the termination of two white label SIPP arrangements resulting in the migration of approximately £560 million to other platforms and product providers.
The Group has experienced an increase in platform net inflows year on year over the historical financial period. An important factor which may have influenced the levels of such inflows over this period has been changes in UK pension legislation, namely the Pension Freedom & Choice legislation in 2015. The changes have given individuals greater flexibility in how they can access money purchase pension funds at retirement. Prior to the changes the vast majority of individuals with money purchase pension savings had to use their funds to purchase an annuity policy on retirement. Following the changes, individuals approaching retirement have the option to take their whole pension as cash (the first 25% generally tax free, with the balance taxed at the individual's marginal rate of income tax). Individuals who do not withdraw their whole pension fund immediately have significantly more control and flexibility with regard to managing their remaining funds. These funds can continue to be invested and drawn down as and when the individual wishes with an increased flexibility to transfer pension wealth to dependants and other beneficiaries in a tax efficient manner following an individual's death. AJ Bell offers a range of retirement options to provide customers with choice as they drawdown their pension. The Directors believe that impact of the Pension Freedom legislation has been positive for AJ Bell and for the platform industry as a whole.
In addition, over the period covered by the historical financial information there has been a significant increase in the volume of transfers from DB occupational pension schemes to defined contribution pension contributions, driven by a number of factors including relatively high transfer values and a desire to access the pension freedoms not available to members of defined benefit schemes. Transfers from DB pension schemes accounted for £0.4 billion in FY2016, rising to £2.3 billion in FY2017. DB pension transfers continued to contribute to new business in FY2018, though they fell back from the peak seen in FY2017 and the first half of FY2018, accounting for £1.8 billion of inflows in FY2018.
The FCA's Investment Platform Market Study, while commenting that the market appears to be working well in many respects, highlights a number of areas of concern, including that switching between platforms can be difficult and suggesting that investment platforms need to take steps to remove or lower any barriers to transfer. The Directors believe that, because of AJ Bell's established market position, its financial performance and competitive pricing policy, any changes introduced as a result of the FCA's Investment Platform Market Study would be unlikely to have a material impact on AJ Bell. While the Group has continued to see an increase in platform net inflows year on year, it operates in a competitive market and as such there is no guarantee that it will continue to see an increase in net inflows. Any slowing or decline in net inflows may affect the Group's results of operation.
The historical retail customer numbers and retention rates are provided below. These are non-IFRS financial measures and metrics that are not audited:
| Platform retail customers (1) Non-Platform retail customer (1) Total retail customers (1) |
As at 30 September 2016 117,169 23,282 140,451 |
As at 30 September 2017 141,207 23,350 164,557 |
As at 30 September 2018 183,213 14,699 197,912 |
|---|---|---|---|
| Customer retention rate (%) (1) | 94.2 | 94.4 | 95.1 |
Notes:
(1) Definitions are set out within section 2 ''Key performance indicators''.
Retail customer numbers have increased each year during FY2016, FY2017 and FY2018, which had a consequential effect on the amount of AUA held by the Group when new customers pay money into and transfer assets held with other platforms and product providers into their AJ Bell accounts.
Platform customers increased by 42,006 in FY2018, representing an increase of 29.7%, to a total of 183,213 from 141,207 in FY2017. In FY2017, platform customers increased by 24,038, representing an increase of 20.5%, to a total of 141,207 from 117,169 in FY2016. AJ Bell operates in a competitive market and these increases in customer numbers reflects the investment that AJ Bell has made into developing its platform propositions, and is an indicator of the attractiveness of AJ Bell's platform offering.
An increase in retail customer numbers also reflects AJ Bell's investment in marketing and public relations activities designed to promote its brand and to organically grow the customer base. The increase in the number of customers is indicative of the effectiveness of this strategy.
The quality of new platform customers has remained high in FY2018, with the AJ Bell Investcentre average customer portfolio value at £337,000 and the AJ Bell Youinvest average customer portfolio value at £92,000. The high average customer portfolio value, which remains higher than benchmark competitors, reflects AJ Bell's heritage as a SIPP operator: the majority of the Group's AUA – 72% as at 30 September 2018 – is held in SIPPs.
The retention rate of existing customers over the same period has remained relatively constant at approximately 95%. This is partly due to the nature of the tax wrapper in which the assets are mainly held, SIPP or ISA. As at 30 September 2018, 49% of AJ Bell's funded accounts were SIPPs and 32% were ISAs. SIPPs are by nature long term investments and the assets are not generally withdrawn by customers for many years. Similarly, customers lose the tax advantages offered by ISAs once the assets are removed from the wrapper. Accordingly, a customer will tend to hold such tax wrappers for many years on the same platform subject to being happy with the service provided by the platform. This may also make it more difficult and expensive to attract customers from other platforms, beyond those who are unhappy with the service they are receiving.
High customer retention rate can for that reason be indicative of customer satisfaction. AJ Bell invests in its technology and staff to ensure it has a robust, scalable operating system and is able to maintain the high quality of its customer service. Its strategic aim is to be the easiest platform to use.
As explained above in paragraph 3.1(a) ''Levels of inflows and outflows'', the Investment Platform Market Study highlights a number of areas of concern, including that switching between platforms can be difficult, for example because of exit charges and complex transfer processes, and suggests that investment platforms need to take steps to remove or lower any barriers to transfer. The Directors believe that, because of AJ Bell's established market position, its financial performance and competitive pricing policy, any changes introduced as a result of the Investment Platform Market Study, would be unlikely to have a material impact on AJ Bell. Conversely, if there is a decline in the Group's quality of service or if they are dissatisfied with any future pricing changes, it may mean that it is easier for customers to transfer away to another platform or product provider.
Numbers of Non-Platform customers remained relatively constant in FY2016 and FY2017, at approximately 23,000, before declining to 14,699 in FY2018. The reduction in FY2018 reflects AJ Bell's strategic decision to concentrate on its Platform business and, therefore, the closure of two white label products.
The value of the AUA held by the Group is affected by a wide range of economic and market conditions and, to a lesser extent, a variety of other influences such as investment performance. Any factors which impact the amount of AUA held by the Group and/or consequently increase the ad valorem element of the Group's recurring income, which is the largest single component of revenue, will impact on the Group's results of operations accordingly.
Factors such as the strength and volatility of capital markets, interest rates, inflation, consumer spending, business investment and exchange rates all affect the economic environment, investor confidence and, ultimately, the volume and profitability of AJ Bell's business. In an economic downturn characterised by higher unemployment, lower household income, lower corporate earnings, lower business investment and lower consumer spending, the demand for savings products could be adversely affected. Further, customer sentiment regarding the future prospects of investment markets and of the economy more generally, could impact customer behaviour and reduce demand for AJ Bell's products and services.
The Group's operating results may be impacted by the UK's exit from the EU. Due to the size and importance of the UK economy, particularly with respect to the financial services market, as well as the uncertainty and unpredictability concerning the UK's legal, political and economic relationship with Europe after the UK's exit from the EU, there may continue to be instability in the national and international investment markets. This could result in significant currency fluctuations and otherwise adverse effects on consumer confidence for the foreseeable future, including beyond the date of the UK's withdrawal from the EU, which could reduce the demand for AJ Bell's products and services or the value of assets held by customers.
Further, following the first rise in the UK base rate of interest for ten years in November 2017, on 2 August 2018 the Bank of England raised the UK base rate of interest again from 0.5% to 0.75%. Recurring revenue includes ad valorem custody charges in relation to the holding of client assets and retained interest margin received on customer cash balances. AJ Bell received revenue at the prevailing rate of interest earned on any cash held in customer accounts above the rates paid to customers, which are disclosed on AJ Bell's websites in line with regulatory requirements. The prevailing rate of interest is outside AJ Bell's control however it does control how much is passed on to its customers. It is the Company's intention to pass the majority of the benefit of future base rate rises to its customers. Details of sensitivities are contained in note 25 of Part 6 (Historical Financial Information) of this Registration Document. There can, however, be no assurance that the Bank of England will not reverse this increase, as it did in November 2016, or that the amount of cash held in customer accounts will continue to grow or that AJ Bell will be able to capitalise on the recent increase.
Given the Group's diverse revenue model, the Directors believe that macro-economic conditions can present both challenges and opportunities in the market place.
Increases in asset values and positive investment returns and performance may increase the amount of AUA held by AJ Bell and consequently may increase the ad valorem element of AJ Bell's recurring income. Equally, stagnation in investment performance or a decline in asset values and investment returns may have a negative impact on the ad valorem element of AJ Bell's recurring income. Asset values, investment returns and performance can therefore impact the Group's financial results.
During the period covered by the historical financial information, AJ Bell has expanded its product offering to include its own in-house managed portfolio services and range of collective investment funds. The investment performance of the managed portfolios and collective investment funds is therefore a factor that could impact inflows and outflows into these products, because customers and advisers are attracted to such products with a consistent, strong record of investment performance. Net sales of such products have and will continue to affect the Group's revenues and financial results as its revenue is derived as a percentage of assets held in the managed portfolio service or collective investment funds.
The Directors believe there are a number of structural factors that have contributed to the growth in the Group's AUA and may continue to impact its results of operation.
The demographic trends within the UK are such that it now has an ageing population, which is both working and living for longer. As a consequence, people are increasingly conscious of saving for their retirement.
As a reflection of the changing demographics, there has been an increasing drive by the UK government to promote greater personal responsibility for long term savings and for self-provision for retirement income to avoid over-reliance on state pensions. This is evident in recent UK pension legislation, with the introduction of Pension Freedoms and Choice Legislation in 2015 and auto-enrolment which has been phased in between 2012 to 2017. However, the success of the UK government's drive relies on the population having enough disposable income to start saving for the long term, and this may not necessarily be the case. Whilst most of the recent changes have been favourable, the UK government has introduced reductions in the annual lifetime allowance and has also reduced the tax relief available to higher earners for contributions into pensions.
A combination of changing demographics and the UK government policies described above means there is a growing awareness of the UK savings gap, and individuals are increasingly aware of the need to save, in particular for retirement. Consequentially, there has been a rise in demand for longer term savings products such as SIPPs and ISAs and that demand is expected to continue. Affordability is also a consideration for companies, which are increasingly shifting from DB pension schemes to DC pension schemes, the cost of the latter being more predictable and affordable.
Customers are becoming increasingly technologically aware, which is driving them and their assets to flow from non-platform to online platform businesses such as that operated by AJ Bell. The investment platform market continues to grow and is expected to continue to outpace the growth of the wider UK savings and investment market.
Whilst these changes have increased demand across the platform market for pension and other long term savings products, there can be no guarantee that such trends will continue.
The growth of the investment platform market has led to increased focus from the FCA and ongoing review of the market, which may create an increasingly stringent regulatory regime for AJ Bell to comply with. AJ Bell's compliance with changes in regulation have to an extent, and may in the future, lead to increased operating and administrative costs. Recent and on-going regulatory change and reviews include MiFID II, GDPR, the Retirement Outcomes Review, the Investment Platform Market Study and the FCA's Senior Managers & Certification Regime.
In June 2018, the FCA published its final findings in connection with its Retirement Outcomes Review, which looked at how the retirement income market has evolved since the pension freedoms were introduced in 2015. Alongside this, the FCA published a consultation paper setting out a package of proposed remedies for the potential consumer harm and emerging issues it has identified. The potential changes suggested by the FCA range from increased provision of information and warnings to a cap on drawdown charges and requiring providers to have three default drawdown 'investment pathways' for consumers. A list of the potential changes is provided in Part 4 (Regulation) of this Registration Document. The Directors believe that the adoption of these measures would promote competition and thereby provide AJ Bell with opportunities to increase demand for its products; however, there can be no assurance that this will be the case.
The FCA published its interim Investment Platform Market Study in July 2018. The report noted that the market was working well in many respects for both advised and non-advised consumers. The FCA identified areas where it was concerned that competition in the market was not working well and it is continuing to consult on remedies for these areas. The FCA's consultation on remedies notably focused on:
The FCA expects to publish its final report and recommendations in the first quarter of 2019 and AJ Bell will continue to liaise with the FCA about the study in advance of the publication of the final report. The Directors believe that the Investment Platform Market Study and any adopted remedies will increase the confidence and credibility of the platform market in the UK and help to provide fair outcomes for customers.
As discussed in paragraph 6.3.1 below, the Group is subject to Capital Requirements Directive (CRD) IV on a consolidated basis. The Group is required to maintain adequate financial resources, including capital and liquidity resources, to ensure there is no significant risk that its liabilities cannot be met as they fall due. The regulatory capital requirements for AJ Bell are reviewed periodically by the FCA. Past routine reviews have resulted in an increase in the Group's overall regulatory capital requirements. The capital requirement assessment is linked to the size of the business and, accordingly, as the business increases in size the Group may be required to allocate additional capital against such capital requirements and dedicate time to complying with any new requirements and liaising with the FCA.
Despite the GDPR having been finalised over two years ago, the uncertainty surrounding the interpretation and enforcement of the GDPR and Data Protection Act 2018 requires AJ Bell to constantly monitor updated guidance and decisions and react quickly to reassess the risk of processing personal data and ensure compliance.
The outcome of such reviews and any resulting regulatory changes, though difficult to predict, could have an impact on the Group's results of operation. New regulations and compliance with evolving existing regulation could make it more expensive for AJ Bell to conduct its business, lead to changes in the business model, increase AJ Bell's regulatory capital requirements or subject AJ Bell to greater regulatory scrutiny.
The Group maintains a highly competitive pricing structure across its investment platforms. AJ Bell's income is derived from a number of diversified revenue streams comprising both recurring and non-recurring charges.
A change to one type of charge would affect the Group's results as a whole. Subject to market pricing sensitivities, AJ Bell has the flexibility to alter the mix of its pricing to reflect market demand and maintain profitability. AJ Bell's last significant product pricing changes for the Platform took effect in FY2017. This led to a rebalancing of AJ Bell's income with a greater emphasis on its recurring income streams and better alignment of the charges to customers with the underlying cost of operating the products. For example, at this time AJ Bell introduced ad valorem custody charges for AJ Bell Youinvest, with a basic annual charge of 0.25% for amount invested in shares, with a cap of £100 for SIPPs and £30 for ISA or Dealing accounts, together with tiered rates for investments in funds.
The Group experiences some seasonality in AUA inflows, with a spike in SIPP contributions leading up to the end of the UK fiscal tax year on 5 April and an increase in ISA subscriptions before and after the tax year end. The effect of this seasonality on the Group's results of operations is tempered by ad-valorem revenues that are charged from when the assets are registered onto the Platform, thereby increasing monthly recurring revenues. The Group's overall pricing structure is well diversified, with a mixture of recurring and transactional revenues and charges which enable it to continue to operate profitably in different macroeconomic conditions as demonstrated in prior years. AJ Bell may be required in the future to reduce its charges as a result of market pressures outside its control to maintain its competitive position in the investment platform market. Any such downward pricing pressure may have an effect on the Group's results of operation.
One of AJ Bell's key performance indicators is revenue margin expressed as revenue per £ of average AUA. Average AUA is calculated as the average of the opening and closing AUA in each quarter averaged over the financial year. Revenue per AUA is a comparator used by the platform market to show, at a basic level, how much money a company makes for each pound the customer invests through their platform. Revenue per £ AUA is therefore a key positional statistic, as it allows comparison across all businesses, regardless of pricing structure or type of asset, and in many cases, can be derived from a company's audited annual report and accounts. Revenue per AUA is therefore often used as proxy for actual prices paid by customers and used to evaluate platform market participants and pricing. In its Investment Platform Market Study, the FCA found that platform retail revenue per £ AUA varies significantly between platforms ranging from 22 bps to 54 bps in 2016.
| FY2016 | FY2017 | FY2018 | |
|---|---|---|---|
| Revenue per £ AUA | |||
| Group revenue (£000) | 64,466 | 75,576 | 89,691 |
| Average AUA (£m) | 28,472 | 35,851 | 42,734 |
| Revenue per £ AUA (basis points or bps) | 22.6 | 21.1 | 21.0 |
The Group's revenue per £ AUA is low when compared to its major competitors. This aligns with AJ Bell's strategy to offer its platform customers highly competitive pricing, whilst maintaining a high quality service and an easy to use platform. The Group is highly cash generative, showing it can perform and compete on a relatively low revenue margin.
The FY2018 revenue margin, at 21.0 bps, was lower than the revenue margin, of 21.1 bps and 22.6 bps, for FY2017 and FY2016, respectively. This trend is partly explained by the fact that certain recurring revenue generated by fixed ad valorem charges are capped and also that transactional monetary charges do not necessarily, by design, increase as AUA increases. Therefore, whilst revenue per £ AUA shows the overall net result of AJ Bell's pricing structure, it is not a direct relationship as certain income streams do not grow proportionally to the amount of AUA held by AJ Bell. In addition the Group's share of interest income is included in revenue. Retained interest income is driven by the amount of client cash in AUA, interest rates, LIBOR, macroeconomic factors and rates paid to customers.
While AJ Bell is currently operating profitably at a lower revenue margin than its major competitors, there can be no guarantee that it will be able to maintain such a margin in the future. If the revenue per £ AUA decreases, the Group's profitability may be impacted; equally, if the revenue per £ AUA increases, AJ Bell may lose its competitive positioning and attract fewer new customers.
Sales and distribution costs primarily relate to business development and marketing expenditure attributable to AJ Bell's products. The Group's key products, AJ Bell Investcentre and AJ Bell Youinvest, are also allocated individual marketing and distribution budgets.
Sales and distribution costs amounted to £7.7 million in FY2018, representing an increase of 10.0% from £7.0 million in FY2017. Staff costs represents the largest expense within sales and distribution costs and accounted for most of the year on year increase.
AJ Bell's sales and distribution strategy focuses on organic growth of its products through the activities of the AJ Bell Investcentre Business Development team, online targeted advertising and marketing, public relations and sponsorship.
Platform consumers typically place a high value on the trustworthiness of a brand, as noted in the Investment Platform Market Study where it was found to be the most important non-price attribute. An important part of AJ Bell's development is its publicity strategy which has helped to make AJ Bell a more visible brand. There are three key elements to AJ Bell's publicity strategy: public relations, sponsorship and TV advertising.
The public relations approach is critical and focuses on getting AJ Bell's investment and product experts into the public eye through TV, radio and press appearances. It has daily market comment, written by the Shares journalists, and its subject matter experts make regular appearances on high profile money and news programmes and regularly discuss current pensions or investment news stories and provide responses to political or regulatory announcements. The impact is cumulative with the aim of having the AJ Bell brand name present and attached to financial and industry expertise.
Alongside public relations, AJ Bell participates in some high profile sports sponsorship activities. It has sponsored (and in some cases continues to sponsor), the AJ Bell London Triathlon, the AJ Bell World Triathlon Leeds, the AJ Bell World Squash Championships, the AJ Bell Stadium, home to the Sale Sharks, the Premiership rugby union club, and others. These are not high monetary value deals but are structured to get the biggest impact for the amount spent and to promote AJ Bell as a trustworthy brand.
In addition to its online advertising activities, AJ Bell has also carried out a limited amount of press, TV and radio advertising.
While AJ Bell's historical approach has helped to acquire new customers and consequently increase AUA, which has positively impacted its revenues, there can be no guarantee of the future success of such investment in marketing activities. Should the success of AJ Bell's marketing strategy slow, or should it fail to continue to generate the new customers at the same historic rate, the cost per acquisition of new customers will rise and it could have an effect of AJ Bell's operating results.
Technology costs primarily relate to investment in the infrastructure and product development to support the growth in the business. The ongoing investment also ensures the platform is able to adapt to regulatory changes, facilitate the addition of new products and to ensure a robust, scalable operating system.
Technology costs amounted to £15.4 million in FY2018, representing an increase of 21.2% from £12.7 million in FY2017. Staff costs represents the largest expense within technology costs and accounted for most of the year on year increase.
AJ Bell completed a re-platforming exercise in 2014 when it migrated its two flagship platform propositions to its new technology platform. The aim of the re-platforming exercise was to facilitate the scaling of the business to support anticipated future growth and was funded by AJ Bell's existing reserves. This has allowed the Technology Services function to focus on enhancing the platform propositions, delivering operational efficiencies across the business and towards AJ Bell's aim to be the easiest platform to use.
The increase in Technology Services costs has predominantly related to investment in the infrastructure to support the growth in the business and on enhancements to the platform propositions, for example the launch of LISAs and AJ Bell managed portfolio services, and improvements in platform functionality to make the Platform easier to use by customers and advisers. The ability of AJ Bell to scale and keep pace with software and infrastructure investment requirements and innovation may impact on its ability to remain competitive within its markets.
Operational and support costs relate primarily to the maintenance of AJ Bell's customer services, property and support costs.
Operational and support costs amounted to £36.6 million in FY2018, representing an increase of 7.3% from £34.1 million in FY2017. Staff costs represents the largest expense within technology costs and accounted for most of the year on year increase.
AJ Bell invests sufficient resources in its staff and the systems operated by them to maintain the high quality of its customer service. The Group relocated the Tunbridge Wells operations to its Manchester and London offices during 2018 as part of implementing the Group's target operating model. This aims to enhance operational efficiencies across the business.
AJ Bell has continued to trade in line with the Directors' expectations, despite the recent market volatility, and AJ Bell's business model and market position remain fundamentally strong.
In the advised market AJ Bell continues to attract new business from financial advisers looking for a stable, cost effective platform with high quality service to support their business.
In the D2C market AJ Bell has seen demand from DIY investors looking for help to manage their portfolios, using AJ Bell investment content and easy to use investment solutions.
Over the medium term, the Directors expect revenue per £AUA to remain relatively stable and operating profit to improve. As highlighted in paragraph 3.1 of this Part 5 (Operating and Financial Review), inflows from defined benefit pension schemes fell back from the peak seen in FY2017.
One-off costs relating to the initial public offering of, £1.8 million have been incurred in FY2018 and a further £1.3 million to £1.8 million of costs in FY2019. The Directors anticipate there will also be an incremental cost increase of approximately £1.0 million per annum as a consequence of the Group's ongoing compliance obligations as a premium listed public company.
The table below presents the Group's audited consolidated results of operations for FY2016, FY2017 and FY2018. It has been extracted without material adjustment from the historical financial information set out in Part 6 (Historical Financial Information) of this Registration Document.
| FY2016 | FY2017 | FY2018 | |||
|---|---|---|---|---|---|
| (£ thousands) | |||||
| Revenue | 64,466 | 75,576 | 89,691 | ||
| Administrative expenses | (47,717) | (53,800) | (61,435) | ||
| Operating profit | 16,749 | 21,776 | 28,256 | ||
| Investment income | 73 | 3 | 128 | ||
| Finance costs | (43) | (82) | (25) | ||
| Profit before tax | 16,779 | 21,697 | 28,359 | ||
| Taxation | (3,466) | (4,223) | (5,713) | ||
| Profit for the year | 13,313 | 17,474 | 22,646 | ||
The following table sets out a breakdown of the Group's consolidated revenue, analysed between recurring and transactional income streams, for the periods indicated:
| FY2016 | FY2017 | FY2018 | |
|---|---|---|---|
| (£ thousands) | |||
| ad valorem charges | 29,636 | 37,160 | 47,890 |
| fixed charges | 22,525 | 24,219 | 25,212 |
| Recurring revenues | 52,161 | 61,379 | 73,102 |
| Transactional revenues | 12,305 | 14,197 | 16,589 |
| Total | 64,466 | 75,576 | 89,691 |
| By distribution channel: | |||
| Advised | 34,214 | 42,460 | 50,393 |
| Direct to consumer | 14,406 | 17,660 | 24,467 |
| Non-platform | 15,846 | 15,456 | 14,831 |
| Total | 64,466 | 75,576 | 89,691 |
Recurring ad valorem revenue includes custodial charges on client assets, retained interest margin and annual management charges, charged either quarterly or monthly, in arrears.
For FY2017, recurring ad valorem revenue was £37.2 million, representing an increase of 25.7% from £29.6 million in FY2016. This increase reflects a combination of the increase in AUA, higher cash balances retained by customers and changes in the pricing structure in October 2016 for both AJ Bell Investcentre and AJ Bell Youinvest, which led to a rebalancing of AJ Bell's income with a greater emphasis on its recurring income streams and to better align the charges to customers with the underlying costs.
For FY2018, recurring ad valorem revenue was £47.9 million, representing an increase of 28.8% from £37.2 million in FY2017. This increase was due to an increase in AUA for both AJ Bell Investcentre and AJ Bell Youinvest and a higher rate earned and retained on cash following the Bank of England's decision to increase UK base rate in November 2017 and August 2018
Recurring monetary charges principally include annual administration charges, drawdown, property and off-panel charges, and are typically charged quarterly or annually.
For FY2017, recurring revenue from fixed charges was £24.2 million, representing an increase of 7.6% from £22.5 million in FY2016. This increase reflected the growth in platform customer numbers.
For FY2018, recurring revenue from fixed charges was £25.2 million, representing an increase of 4.1% from £24.2 million in FY2017. This increase was principally due to the growth in platform customer numbers.
Transactional revenues include dealing fees, foreign exchange commissions, transfer fees and drawdown fees.
For FY2017, revenue from transactional charges was £14.2 million, representing an increase of 15.4% from £12.3 million in FY2016. This increase was principally due to increased customer numbers and higher dealing volumes.
For FY2018, revenue from transactional charges was £16.6 million, representing an increase of 16.9% from £14.2 million in FY2017. This increase was principally due to increased customer numbers and higher dealing volumes.
Revenue growth from each of the platform propositions is driven by the Platform AUA and has grown in line with total AUA. Non-Platform revenue relates to non-core products and provides stable revenue streams and a positive contribution for ongoing investment in the platform propositions.
The majority of revenue for both advised and D2C platform propositions is recurring ad valorem in nature.
The revenue mix of each distribution channel has been stable, albeit with different revenue components, namely:
The year-on-year movements in revenues derived from the advised, D2C and non-platform channels reflects the explanations for movements in recurring revenues and transactional revenues, as described in paragraph 5.2(a) and 5.2(b) above.
The following table sets out a breakdown of the Group's consolidated administrative expenses for the periods indicated:
| FY2016 | FY2017 | FY2018 | |
|---|---|---|---|
| (£ thousands) | |||
| 6,551 | 6,976 | 7,711 | |
| 11,354 | 12,675 | 15,379 | |
| 29,812 | 34,149 | 36,576 | |
| — | — | 1,769 | |
| 47,717 | 53,800 | 61,435 | |
* Exceptional costs relate to non-recurring initial public offering costs only.
| Selected cost categories included in analysis above | |||
|---|---|---|---|
| Staff costs | 25,170 | 28,210 | 32,629 |
| Establishment costs | 2,827 | 4,254 | 2,670 |
| Depreciation & amortisation charges | 2,086 | 2,057 | 1,971 |
| Average number of employees | 607 | 656 | 758 |
(i) Sales & distribution costs
For FY2017, sales & distribution costs were £7.0 million, representing an increase of 6.1%, from £6.6 million in FY2016. This reflects AJ Bell's' continued investment and commitment to improving AJ Bell's brand awareness through public relations, sponsorship and advertising and increased marketing of the AJ Bell Investcentre and AJ Bell Youinvest products.
For FY2018, sales & distribution costs were £7.7 million, representing an increase of 10.0% from £7.0 million in FY2017. This increase was principally due to AJ Bell's' continued investment and commitment to improving AJ Bell's brand awareness through public relations, sponsorship and advertising and increased marketing of the AJ Bell Investcentre and AJ Bell Youinvest products.
For FY2017 technology costs were £12.7 million, representing an increase of 11.4%, from £11.4 million in FY2016. This represents the continued investment in AJ Bell's infrastructure and product development to support the growth in the business.
For FY2018, technology costs were £15.4 million, representing an increase of 21.3%, from £12.7 million in FY2017. This increase was principally due to the continued investment in AJ Bell's infrastructure and product development to support the growth in the business.
For FY2017 operational and support costs were £34.1 million, representing an increase of 14.4%, from £29.8 million in FY2016. This was predominantly due to an increase in staff to support the growth in the business and the higher property costs of the larger premises at Exchange Quay.
For FY2018, operational and support costs were £36.6 million, representing an increase of 7.3% from £34.1 million in FY2017. This was due predominantly due to an increase in staff to support the growth in the business.
Staff costs, which comprise short-term employee benefits, social security costs, retirement benefit costs and termination benefits, represent the largest expense for AJ Bell. AJ Bell is committed to fairly rewarding its staff and aims to be one of the best companies to work for.
For FY2017, staff costs were £28.2 million, representing an increase of 11.9%, from £25.2 million in FY2016. This increase was principally due to an increase in employees, inflationary salary increases and higher bonus award payments.
For FY2018, staff costs were £32.6 million, representing an increase of 15.6% from £28.2 million in FY2017. This increase was principally due to an increase in employees and inflationary salary increases.
The average number of staff in FY2017 of 656 represents an increase of 8% from FY2016, when the average number of staff was 607. The increase in staff numbers predominately related to operational and support, together with technology services, reflecting the continued investment in the business to maintain a first class service and to become the easiest platform to use.
The average number of employees rose to 758 in FY2018 reflecting both the growth in the business and the additional head count required whilst undertaking the relocation of core operating functions from Tunbridge Wells to Manchester.
Staff costs include termination benefits of £342,000 in FY2018 and £541,000 in FY2017 in respect of the relocation, announced in FY2017, of a number of core operating functions from Tunbridge Wells to Manchester in FY2018 and the closing of the Tunbridge Wells office. A provision for £170,000 remained outstanding at 30 September 2018 for staff that will be made redundant by 31 March 2019.
For FY2017, establishment costs were £4.3 million, representing an increase of 53.6% from £2.8 million in FY2016. This increase principally reflected the uplift in rent and rates and certain 'one-off' relocation costs associated with AJ Bell's relocation from its former Manchester office to its current head office located at 4 Exchange Quay, Salford Quays, Manchester.
For FY2018, establishment costs were £2.7 million, representing a reduction of 37.2% from £4.3 million in FY2017. This reduction was principally due to 'one off' costs associated with the former Manchester office relocation occurring in FY2017.
For FY2017, depreciation and amortisation costs were £2.1 million, consistent with FY2016. The depreciation charge relates to property, plant and equipment and the amortisation charge relating to the key operating system and computer software.
For FY2018, depreciation and amortisation costs were £2.0 million, which was marginally lower than the charge for FY2017 (£2.1 million). Depreciation of property, plant and equipment was £0.4 million higher due to the expenditure incurred as part of the planned relocation of the Tunbridge Wells operations to Manchester. Amortisation charges were £0.5 million lower, principally due to the extension of the useful life of the key operating system from 10 years to 13 years.
Operating profit is derived from AJ Bell's continuing operations and represents profit before investment income, finance cost and tax.
The following table sets forth a breakdown of the Group's consolidated operating profit for the periods indicated:
| FY2016 | FY2017 | FY2018 | |
|---|---|---|---|
| (£ thousands) | |||
| Operating profit | 16,749 | 21,776 | 28,256 |
| Operating profit margin | 26.0% | 28.7% | 31.5% |
The Group's operating profit and operating profit margin have increased in both FY2017 and FY2018, reflecting the underlying growth in the customer base and the efficiency of the operating model. The growth in both years was enhanced by favourable trading conditions, with high customer dealing activity and increased asset balances on which ad valorem charges are levied.
The Group earns a small amount of income from interest received on its corporate cash balances.
For FY2017, interest income reduced to £3,000 from £73,000 in FY2016. This decrease reflected a cut in the UK base rate in November 2016 from 0.5% to 0.25%, which in turn reduced the rate earned by the Group.
For FY2018, interest income was £128,000 compared with £3,000 in FY2017. This increase was due to an increase in the Bank of England base rate in November 2017 and August 2018 which in turn increased the rate earned by the Group.
The Group incurs small amounts of finance costs in respect of its finance leases, hire purchase contracts and other finance costs.
For FY2017, finance costs were £82,000 compared with £43,000 in FY2016 primarily due to additional interest incurred on legacy borrowings inherited as part of the acquisition of the investment management business in 2016.
For FY2018, finance costs were £25,000, representing a decrease of 70% from £82,000 in FY2017. The decrease is principally due to the nature of the finance costs incurred in FY2017; including 'one off' other interest of £46,000 and the repayment of the legacy borrowing. The reduction was offset by an increase of £9,000 due to a new hire purchase contract taken on during 2018.
AJ Bell's activities are undertaken in the UK and its taxation comprises UK corporation tax. The following table sets out a breakdown of the Group's corporation tax charge and effective tax rate for the periods indicated:
| FY2016 | FY2017 | FY2018 | ||
|---|---|---|---|---|
| (£ thousands) | ||||
| Profit before taxation | 16,779 | 21,697 | 28,359 | |
| Corporation tax charge | (3,466) | (4,223) | (5,713) | |
| Profit after taxation | 13,313 | 17,474 | 22,646 | |
| Effective tax rate | 20.7% | 19.5% | 20.1% |
For FY2017, the corporation tax charge was £4.2 million, representing an increase of 21.8% from £3.5 million in FY2016. This increase was primarily due to an increase in profit before tax of 29.3%, which was partially offset by a reduction in the rate of corporation tax from 20% to 19% on 1 April 2016.
For FY2018, the corporation tax charge was £5.7 million, representing an increase of 35.7% from £4.2 million in FY2017. This increase was primarily due to an increase in profit before tax of 30.7%.
AJ Bell's interim and final dividends totalled £14.6 million (35.5 pence per share) in respect of FY2018, together with a further special dividend of £8.0 million (19.5 pence per share). Dividends paid in respect of FY2017 and FY2016 amounted to £11.6 million (28.25 pence per share) and £10.5 million (25.75 pence per share) respectively.
Any surplus capital accrued over and above regulatory requirements or other specific needs will be considered by the Board, from time to time and, if appropriate, will be returned to shareholders in an appropriate form and at an appropriate time. The Company intends to announce dividends at the time of publication of its interim and annual results each year.
It is expected that the Company will pay an interim dividend equal to approximately 40% of the prior year's total ordinary dividend payment (excluding any special dividends paid) and a final dividend, or second interim dividend, equal to approximately 65% of AJ Bell's full year profit after tax, less any interim dividends already paid in respect of that financial year.
The Board may, however, revise the Company's dividend policy from time to time in line with the actual results of the Group. The ability of the Company to pay dividends is dependent on a number of factors, including market conditions, prospective investment opportunities and the Group's regulatory and financial requirements as assessed by the Board at the time. As a result, there can be no assurance that the Company will pay dividends or, if a dividend is paid, what the amount of such dividend will be.
The Group is cash generative with 119.6% of profit before tax converted into cash generated from operating activities in FY2018. This compares with 94.9% in FY2017 and 114.0% in FY2016. The level of conversion of profit into cash reflects the Group's short working capital cycle and low levels of capital expenditure following the completion of its re-platforming of its core platform products in 2014.
The Group's principal liquidity requirements are to fund its operating expenses, working capital requirements, dividend payments and capital expenditure. Cash and operational cash flows are the main sources of the Group's liquidity.
The liquidity position of the Group is monitored on a regular basis. As at 30 September 2018, the Group held £49.7 million of cash and cash equivalents, compared with £42.1 million as at 30 September 2017 and £39.5 million as at 30 September 2016.
Save for certain limited obligations under the Group's finance leases in respect of IT and office equipment, the Group does not have any material indebtedness. The Group has no foreseeable requirement for significant long term debt or additional equity funding.
The Group has generated net increases in cash balances during each period. The following table sets forth a breakdown of the main components of the Group's consolidated cash flows for the periods indicated:
| FY2016 | FY2017 | FY2018 | |
|---|---|---|---|
| (£ thousands) | |||
| Net cash flow from operating activities | 15,590 | 16,399 | 28,848 |
| Net cash used in investing activities | (845) | (3,517) | (829) |
| Net cash used in financing activities | (11,553) | (10,254) | (20,462) |
| Net increase in cash and cash equivalents | 3,192 | 2,628 | 7,557 |
| Closing net cash and cash equivalents | 39,510 | 42,138 | 49,695 |
Net cash flow from operating activities was £16.4 million for FY2017, as compared to £15.6 million for FY2016, representing year-on-year increases of 5.1%
Net cash flow from operating activities was £28.8 million for FY2018, as compared to £16.4 million for FY2017, representing year-on-year increases of 75.6%.
These increases primarily reflect increases in operating profit that were partially offset by increases in net working capital. The Group's working capital requirements have been funded through cash generated from business operations, resulting in profit before tax converted into cash generated from operating activities rates of 114.0%, 94.9% and 119.6% in FY2016, FY2017 and FY2018, respectively.
Net cash used in investing activities was £3.5 million for FY2017 as compared with £0.8 million for FY2016. This increase was due to the expenditure of £2.7 million for fitting out the new offices at 4 Exchange Quay, Salford Quay, Manchester.
Net cash used in investing activities was £0.8 million for FY2018 as compared with £3.5 million for FY2017. This reduction was principally due to the nature of the increase in FY2017 including £2.7 million to fit out the new offices.
The principal use of cash flow for financing activities during the period covered by the historical financial information was dividend payments.
Net cash used in financing activities was £10.3 million for FY2017 as compared with £11.6 million for FY2016. This decrease was largely a result of an increase in the FY2016 interim dividend and corresponding reduction in the final declared dividend for FY2016 (which was paid in FY2017).
Net cash used in financing activities was £20.5 million for FY2018 as compared with £10.3 million for FY2017. This increase was due to higher dividend payments and the payment of a special dividend of £8 million in September 2018. Approximately £1.8 million was spent in FY2018 on purchase of own shares, of which £1.4 million was in respect of purchases by the Group's employee benefit trust. The cash purchase of own shares was largely offset by cash proceeds from additional share capital from employee share incentive schemes.
The Group is subject to CRD IV on a consolidated basis. Accordingly, the Group is required to report under the common reporting framework (COREP), a standardised European reporting requirement for capital and risk.
AJ Bell's capital position is determined in accordance with Article 92 of the CRR by comparing its Own Funds with its Pillar 1 capital requirement to determine its surplus capital over the minimum regulatory requirement. Own Funds is the excess of AJ Bell's assets over its liabilities recognised and measured in accordance with Article 92 of CRR.
As at 30 September 2017, the Group had a surplus of £42 million of its Pillar 1 capital requirements, as compared to £36 million as at 30 September 2016, representing a coverage ratio of 470%.
As at 30 September 2018, the Group had a surplus of £43 million of its Pillar 1 capital requirements, as compared to £42 million as at 30 September 2017, representing a coverage ratio of 440%.
| FY2016 | FY2017 | FY2018 | ||
|---|---|---|---|---|
| (£ thousands) | ||||
| Own funds | 45,802 | 53,479 | 56,216 | |
| Pillar 1 requirement | 9,713 | 11,390 | 12,784 | |
| Surplus | 36,089 | 42,089 | 43,432 | |
| Coverage | 472% | 470% | 440% |
The EU Commission is proposing to introduce a new Prudential Regime for ''non-bank like'' investment firms, such as the Company. This will link capital requirements more closely to the risk posed to a firm's clients, its markets and the firm itself. This will be determined by a firm's regulatory permissions and activities. The timing and process for implementing this change is currently uncertain, as is its effect on the Group's regulatory capital requirements.
The Group has a simple balance sheet which largely comprises cash and cash equivalents. As at 30 September 2018, the total cash and cash equivalents, of £49.7 million, represented 78% of the Group's net assets.
The following table sets forth a breakdown of the Group's consolidated statement of financial position, as at 30 September 2018:
| As at 30-Sept 2018 £'000 |
|
|---|---|
| Non-Current Assets | |
| Total non-current assets | 11,589 |
| Current assets Trade and other receivables |
20,075 |
| Cash and cash equivalents | 49,695 |
| Total current assets | 69,770 |
| Total assets | 81,359 |
| Liabilities | |
| Total current liabilities | (15,511) |
| Total non-current liabilities | (1,812) |
| Total liabilities | (17,323) |
| Net assets | 64,036 |
| Total equity | 64,036 |
Operating lease payments represent rentals payable by the Group for its office premises, under non-cancellable operating lease agreements. Office property leases are negotiated for an average term of ten to fifteen years and rentals are fixed for an average of three years.
The Group has future minimum lease payments under non-cancellable operating leases as follows:
| From the second to |
||||
|---|---|---|---|---|
| Within one year |
fifth years inclusive |
After five years |
Total | |
| As at 30 September 2018 | (£ thousands) | |||
| Minimum lease commitments | 1,350 | 6,243 | 12,912 | 20,505 |
The directors anticipate that the adoption of IFRS 16 Leases will result in the recognition of the Group's property operating leases, and the associated liabilities, within the Group's consolidated statement of financial position. The adoption of IFRS 16 is expected to have a material impact on the Group's gross assets and liabilities but not on its net assets disclosed within its consolidated statement of financial position. The Group expects to apply IFRS 16 Leases for the year ending 30 September 2020. For a detailed description of the impact of IFRS 16 Leases on the Group, see Note 2.2 to the historical financial information contained in Part 6 (Historical Financial Information) of this Registration Document.
The Group made donations during FY2016 (£85,279), FY2017 (£109,125), and FY2018 (£139,675), to the AJ Bell Trust, a registered charity of which Andy Bell is a director of the trustee company.
The landlord of the Group's head office at 4 Exchange Quay, Salford Quays, Manchester M5 3EE (Property), Exchange Quay Property Services Limited, is a company controlled by a number of members of the senior management team. The shareholders and directors of this company are Andrew James Bell, Bestfield Investments (an unlimited company of which Fergus John Lyons and other family members are the shareholders and directors), Michael Thomas Summersgill, Charles William Galbraith and Roger John Stott. AJ Bell Limited, as tenant, and the Company, as guarantor, entered into the two leases of the property on 17 August 2016. The leases were entered into on arms' length terms, the parties had separate legal advisers and the Board obtained advice on the lease terms from an independent surveyor. The reason for this structure being adopted was because the Board did not consider the purchase of business premises to be an appropriate use of the Company's capital. Shareholder approval was obtained before the parties entered into the leases. The parties entered into a supplemental lease of additional parts of the Property and a licence for alterations on 24 October 2018.
The Board has overall responsibility for the determination of the Group's risk management objectives, its risk appetite and policies. The risk management framework embodies the policies, procedures and systems that the Group has implemented to identify, manage and mitigate its risks. With risks appetite in mind, the Group has designed an appropriate control environment incorporating senior management arrangements, organisational structures, combined assurance framework, senior management reporting and monitoring systems together with the necessary financial, operational, HR and IT/Projects policies, procedures and systems.
The Group adopts a 'top-down' and 'bottom-up' approach to the identification of risks. The Executive Management Board and the Board have identified the high impact top risks that could impact the ability of the business to meet its strategic objectives, and these are reviewed against the Group's risk appetite statement on an ongoing basis by the Risk and Compliance Committee and the Executive Management Assurance Committee, a sub-committee of the Executive Management Board chaired by the Chief Risk Officer. The high impact top risks are also reviewed as part of the business planning process each year.
For a detailed description of market risk, see Note 25 to the historical financial information contained in Part 6 (Historical Financial Information) of this Registration Document.
In the application of its accounting policies, the Directors are required to make judgements, estimates and assumptions, the two most important being revenue recognition and goodwill, that affect the application of the Group's accounting policies and the reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on the Group's historical experience and other relevant factors. Actual results may differ from the estimates applied.
The Group's critical accounting policies and estimates are set out in Note 3 to the historical financial information contained in Part 6 (Historical Financial Information) of this Registration Document.
Recent and prospective changes in accounting policies are explained in Note 2.2 to the historical financial information contained in Part 6 (Historical Financial Information) of this Registration Document.
15 Canada Square London E14 5GL United Kingdom
KPMG LLP Tel +44 (0) 20 7311 1000 Advisory Fax +44 (0) 20 7311 3311
The Directors AJ Bell Holdings Limited 4 Exchange Quay Salford Quays Manchester M5 3EE
8 November 2018
Ladies and Gentlemen
We report on the financial information set out on pages 92 to 133 of the Registration Document for the periods ended 30 September 2016, 30 September 2017 and 30 September 2018. This financial information has been prepared for inclusion in the registration document dated 8 November 2018 of AJ Bell Holdings Limited on the basis of the accounting policies set out in note 2. This report is required by paragraph 20.1 of Annex I of the Prospectus Directive Regulation and is given for the purpose of complying with that paragraph and for no other purpose.
The Directors of AJ Bell Holdings Limited are responsible for preparing the financial information on the basis of preparation set out in note 2 and in accordance with International Financial Reporting Standards as adopted by the European Union.
It is our responsibility to form an opinion on the financial information and to report our opinion to you.
Save for any responsibility arising item 1.2 of Annex 1 to the Prospectus Directive Regulation to any person as and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with paragraph 23.1 of Annex I of the Prospectus Directive Regulation, consenting to its inclusion in the registration document.
We conducted our work in accordance with Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. Our work included an assessment of evidence relevant to the amounts and disclosures in the financial information. It also included an assessment of the significant estimates and judgments made by those responsible for the preparation of the financial information and whether the accounting policies are appropriate to the entity's circumstances, consistently applied and adequately disclosed.
We planned and performed our work so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial information is free from material misstatement whether caused by fraud or other irregularity or error.
In our opinion, the financial information gives, for the purposes of the registration document dated 8 November 2018, a true and fair view of the state of affairs of AJ Bell Holdings Limited as at 30 September 2016, 30 September 2017 and 30 September 2018 and of its consolidated profits, cash flows recognised gains and losses and changes in equity for the years ended 30 September 2016, 30 September 2017 and 30 September 2018 in accordance with the basis of preparation set out in note 2 and in accordance with International Financial Reporting Standards as adopted by the European Union as described in note 2.
For the purposes of item 1.2 of Annex 1 of the Prospectus Directive Regulation we are responsible for this report as part of the Registration Document and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to effect its impact. This declaration is included in the Registration Document in compliance with paragraph 1.2 of Annex 1 of the Prospectus Directive Regulation.
Yours faithfully
KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (''KPMG International''), a Swiss entity. Registered in England No OC301540 Registered office: 15 Canada Square, London, E14 5GL For full details of our professional regulation please refer to 'Regulatory Information' under 'About/About KPMG' at www.kpmg.com/uk
AJ Bell Group Historical Financial Information 30 September 2016, 2017 and 2018
| Notes | Year ended 30 Sept 2016 |
Year ended 30 Sept 2017 |
Year ended 30 Sept 2018 |
|
|---|---|---|---|---|
| £000 | £000 | £000 | ||
| Revenue | 5 | 64,466 | 75,576 | 89,691 |
| Administrative expenses | (47,717) | (53,800) | (61,435) | |
| Operating profit | 6 | 16,749 | 21,776 | 28,256 |
| Investment income | 73 | 3 | 128 | |
| Finance costs | 8 | (43) | (82) | (25) |
| Profit before tax | 16,779 | 21,697 | 28,359 | |
| Tax expense | 9 | (3,466) | (4,223) | (5,713) |
| Profit for the year | 13,313 | 17,474 | 22,646 | |
| Profit/(loss) for the financial year attributable to: |
||||
| Owners of the parent | 13,440 | 17,571 | 22,646 | |
| Non-controlling interests | (127) | (97) | — | |
| 13,313 | 17,474 | 22,646 | ||
| Earnings per ordinary share: | ||||
| Basic (pence) | 11 | 32.85 | 42.85 | 55.26 |
| Diluted (pence) | 11 | 32.73 | 42.60 | 54.05 |
All income, profit and earnings are in respect of continuing operations.
There were no other components of recognised income or expense in either years and consequently no statement of other comprehensive income has been presented.
| Notes | 30 Sept 2016 |
30 Sept 2017 |
30 Sept 2018 |
|
|---|---|---|---|---|
| Assets | £000 | £000 | £000 | |
| Non-current assets | ||||
| Goodwill | 12 | 3,660 | 3,660 | 3,660 |
| Other intangible assets | 14 | 5,016 | 3,841 | 3,124 |
| Property, plant and equipment | 15 | 1,268 | 3,994 | 4,433 |
| Deferred tax asset | 17 | 49 | 227 | 372 |
| 9,993 | 11,722 | 11,589 | ||
| Current assets Trade and other receivables |
18 | 17,738 | 22,172 | 20,075 |
| Cash and cash equivalents | 19 | 39,510 | 42,138 | 49,695 |
| 57,248 | 64,310 | 69,770 | ||
| Total assets | 67,241 | 76,032 | 81,359 | |
| Current liabilities | ||||
| Trade and other payables | 20 | (9,554) | (10,115) | (11,438) |
| Current tax liabilities | (1,701) | (1,857) | (2,491) | |
| Other financial liabilities | 21 | (75) | (75) | (300) |
| Provisions | 22 | (363) | (1,587) | (1,282) |
| (11,693) | (13,634) | (15,511) | ||
| Non-current liabilities | ||||
| Trade and other payables Other financial liabilities |
20 21 |
(972) (34) |
(178) (68) |
(603) (431) |
| Provisions | 22 | (754) | (790) | (778) |
| (1,760) | (1,036) | (1,812) | ||
| Total liabilities | (13,453) | (14,670) | (17,323) | |
| Net assets | 53,788 | 61,362 | 64,036 | |
| Equity | ||||
| Share capital | 23 | 40 | 40 | 42 |
| Share premium | 2,229 | 2,806 | 4,410 | |
| Own shares | — | — | (1,364) | |
| Retained earnings | 51,918 | 58,516 | 60,948 | |
| Equity attributable to owners of the Company | 54,187 | 61,362 | 64,036 | |
| Non-controlling interests | (399) | — | — | |
| Total equity | 53,788 | 61,362 | 64,036 |
| Balance at 1 October 2015 | Share capital £000 40 |
Share premium £000 1,913 |
Retained earnings £000 50,320 |
Non controlling interests £000 — |
Own shares £000 — |
Total £000 52,273 |
|---|---|---|---|---|---|---|
| Profit / (loss) for the year Transactions with owners, |
— | — | 13,440 | (127) | — | 13,313 |
| recorded directly in equity: Issue of share capital Dividends paid |
— — |
316 — |
— (11,763) |
— — |
— — |
316 (11,763) |
| Equity settled share-based payment transactions Purchase of non-controlling |
— | — | 69 | — | — | 69 |
| interest Total contributions by and |
— | — | — | (484) | — | (484) |
| distributions to owners Deferred tax effect of share |
— | — | (212) | 212 | — | — |
| based payment transactions Tax relief on exercise of share |
— | — | (8) | — | — | (8) |
| options | — | — | 72 | — | — | 72 |
| Total transactions with owners |
— | 316 | (11,842) | (272) | — | (11,798) |
| Balance at 30 September 2016 |
40 | 2,229 | 51,918 | (399) | — | 53,788 |
| Profit / (loss) for the year Transactions with owners, |
— | — | 17,571 | (97) | — | 17,474 |
| recorded directly in equity: Issue of share capital Dividends paid |
— — |
577 — |
— (10,564) |
— — |
— — |
577 (10,564) |
| Equity settled share-based payment transactions |
— | — | 107 | — | — | 107 |
| Purchase of own share capital Purchase of non-controlling interest |
— — |
— — |
(165) (360) |
— 360 |
— — |
(165) |
| Total contributions by and distributions to owners |
— | — | (136) | 136 | — | — |
| Deferred tax effect of share based payment transactions |
— | — | 88 | — | — | 88 |
| Tax relief on exercise of share options |
— | — | 57 | — | — | 57 |
| Total transactions with owners |
— | 577 | (10,973) | 496 | — | (9,990) |
| Balance at 30 September 2017 |
40 | 2,806 | 58,516 | — | — | 61,362 |
| Balance at 1 October 2017 | Share capital £000 40 |
Share premium £000 2,806 |
Retained earnings £000 58,516 |
Non controlling interest £000 — |
Own Shares £000 — |
Total £000 61,362 |
|---|---|---|---|---|---|---|
| Profit for the year Transactions with owners, |
— | — | 22,646 | — | — | 22,646 |
| recorded directly in equity: Issue of share capital Dividends paid Equity settled share-based |
2 — |
1,604 — |
— (20,095) |
— — |
— — |
1,606 (20,095) |
| payment transactions Purchase of own share capital Own shares acquired |
— — — |
— — — |
112 (410) — |
— — — |
— — (1,364) |
112 (410) (1,364) |
| Deferred tax effect of share based payment transactions Tax relief on exercise of share options |
— — |
— — |
51 128 |
— — |
— — |
51 128 |
| Total transactions with owners |
2 | 1,604 | (20,214) | — | (1,364) | (19,972) |
| Balance at 30 September 2018 |
42 | 4,410 | 60,948 | — | (1,364) | 64,036 |
| Notes | 30 Sept 2016 £000 |
30 Sept 2017 £000 |
30 Sept 2018 £000 |
|
|---|---|---|---|---|
| Cash flows from operating activities | ||||
| Profit for the financial year Adjustments for: |
13,313 | 17,474 | 22,646 | |
| Investment income Finance costs |
(73) 43 |
(3) 82 |
(128) 25 |
|
| Income tax expense Depreciation and amortisation Impairment of intangible assets |
3,466 2,086 345 |
4,223 2,057 — |
5,713 1,971 — |
|
| Share-based payment expense Net increase in provisions and other payables |
69 666 |
107 466 |
112 108 |
|
| Loss on disposal of property, plant & equipment (Decrease)/Increase in trade and other receivables |
4 (1,607) |
48 (4,434) |
11 2,137 |
|
| Increase in trade and other payables | 819 | 561 | 1,323 | |
| Cash generated from operations Income tax paid Interest paid |
19,131 (3,498) (43) |
20,581 (4,100) (82) |
33,918 (5,045) (25) |
|
| Net cash flow from operating activities | 15,590 | 16,399 | 28,848 | |
| Cash flows from investing activities Purchase of other intangible assets Purchase of property, plant and equipment Interest received Net cash paid to acquire subsidiary |
14 15 13 |
(115) (604) 73 (199) |
(44) (3,476) 3 — |
(6) (951) 128 — |
| Net cash used in investing activities | (845) | (3,517) | (829) | |
| Cash flows from financing activities Payments of obligations under finance leases Proceeds from issue of share capital Proceeds from settlement of part-paid shares Payments for purchase of own shares Purchase of own shares for employee share schemes |
(106) 316 — — — |
(102) 556 21 (165) — |
(199) 1,292 314 (410) (1,364) |
|
| Dividends paid | 10 | (11,763) | (10,564) | (20,095) |
| Net cash used in financing activities | (11,553) | (10,254) | (20,462) | |
| Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year |
3,192 36,318 |
2,628 39,510 |
7,557 42,138 |
|
| Total cash and cash equivalents at end of year |
39,510 | 42,138 | 49,695 |
AJ Bell Holdings Limited (''the Company'') and its subsidiaries (together the ''Group'') provide investment administration, dealing and custody services.
The Company is incorporated and domiciled in the United Kingdom. The Company's number is 04503206 and its registered office is 4 Exchange Quay, Salford Quays, Manchester M5 3EE.
The consolidated historical financial information has been prepared in accordance with the requirements of the Prospectus Directive regulations and the Listing Rules. The consolidated historical financial information has, for all periods, been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), as endorsed by the European Union (EU), with interpretations issued by the IFRS Interpretations Committee (IFRICs), and those parts of the Companies Act 2006 applicable to Companies reporting under IFRS. The consolidated historical financial information does not constitute statutory accounts.
The financial information has been prepared on the historical cost basis and is presented in sterling, which is the currency of the primary economic environment in which the Group operates, rounded to the nearest thousand.
The accounting policies have been applied consistently to all periods presented in this historical financial information and by all Group entities, unless otherwise stated.
Interpretations and standards which became effective during the year:
The following accounting standards and interpretations that are relevant to the Group became effective during the year:
| Effective from | ||
|---|---|---|
| IAS 7 | Disclosure Initiative | 1 Jan 2017 |
| IAS 12 | Recognition of Deferred Tax Assets for Unrealised Losses (Amendments) |
1 Jan 2017 |
| IFRS 12 | Annual Improvements 2014-2016 Cycle | 1 Jan 2017 |
The above standards have not had a material impact on the financial information of the Group.
Interpretations and standards which have been issued and are not yet effective:
At the date of authorisation of this financial information the following standards and interpretations have been issued but are not yet effective and have not been applied in preparing the financial information.
| Effective from | |
|---|---|
| 1 Jan 2018 | |
| Classification and Measurement of Share Based Payment | 1 Jan 2018 |
| Transactions (Amendment) | |
| 1 Jan 2018 | |
| Leases | 1 Jan 2019 |
| Financial Instruments Revenue from Contracts with Customers |
There are no other standards issued but not yet effective that are expected to have an impact on the Group in the current or future reporting periods and on foreseeable future transactions.
IFRS 9 was issued in 2014 and addresses the classification, measurement and recognition of financial instruments. The standard will replace IAS 39 Financial Instruments: Recognition and Measurement and is effective for accounting periods commencing on or after 1 January 2018. The Group does not intend to adopt this standard early and will therefore apply IFRS 9 from the accounting period commencing 1 October 2018.
The Group has performed a preliminary assessment of the impact of adopting IFRS 9 based on its existing financial instruments. The review concluded that adopting this standard will not result in
any material adjustments to opening equity or the carrying amount of financial assets and liabilities recognised on the statement of financial position. In addition, whilst the Group will adopt a new impairment model, the change to an expected credit loss model will not have a material impact on the financial information.
The number of categories of financial assets under IFRS 9 has been reduced compared to IAS 39 in relation to the classification and measurement of financial assets. The classification is based both on the business model within which the asset is held and the contractual cash flow characteristics of the asset. Financial assets will fall into one of three categories:
The Group is also required to review contractual terms and conditions to determine whether the cash flows arising on these assets are solely payments of principal and interest.
Based on the Group's assessment of the new standard, the change in the classification and measurement of financial assets under IFRS 9 will have no impact on the Group's financial assets, which consist of trade and other receivables and cash and cash equivalents. The cash flows arising on these assets are solely payments of principal and interest and therefore continue to be recognised at amortised cost on transition.
The classification and measurement of financial liabilities remains unchanged from IAS 39 with no impact expected on the Group's financial liabilities on adoption of the new standard.
The Group does not use hedge accounting therefore this element of the standard is not applicable.
IFRS 9 introduces a new expected credit loss impairment model to replace the incurred loss model under IAS 39. Essentially, this means that it is not necessary for a trigger event to have occurred before credit losses are recognised. Instead, the Group always accounts for expected credit losses and changes in those expected credit losses. The amount of expected credit losses should be updated at each reporting date.
The new impairment model will apply to the Group's financial assets that are debt instruments measured at amortised cost.
The Group expects to apply the simplified approach to recognise lifetime expected credit losses for its trade receivables as permitted by IFRS 9. The Group's preliminary calculation of the loss allowance for these assets is expected to be immaterial reflecting the low historic default rates on trade receivables which are short-term and do not contain a significant financing component. Development of the impairment model is still ongoing and will be finalised for application.
In adopting IFRS 9, the Group plans to take advantage of the exemption from having to restate comparative information, instead recognising any differences between the previous and the new carrying amounts in opening equity and reserves.
The International Accounting Standards Board (IASB) has issued amendments to IFRS 2 Sharebased payment in relation to the classification and measurement of share-based payment transactions, effective for accounting periods commencing on or after 1 January 2018.
The amendment is in relation to the effects of vesting conditions on cash-settled share-based payments, the classification of share-based payments with net settlement features for withholding tax obligations and the modification of share-based payment transactions from cash-settled to equity-settled. All of which are not applicable to the Group as all options are equity-settled.
IFRS 15 was issued in 2014 and outlines a single comprehensive model for revenue arising from contracts with customers. It will replace existing revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction contracts and related interpretations. IFRS 15 is effective for periods
commencing on or after 1 January 2018. The Group does not intend to adopt this standard early and will therefore apply IFRS 15 from the accounting period commencing 1 October 2018.
IFRS 15 changes how and when revenue is recognised from contracts with customers and the treatment of the costs of obtaining a contract with a customer. The new standard is based on the principle that revenue is recognised when control of goods or services transfer to the customer.
The Group has conducted a preliminary assessment of the potential impact of the new standard by analysing each revenue stream and associated costs of obtaining contracts. The assessment made by the Group is preliminary as not all transition work requirements have been finalised and therefore may be subject to adjustment. The adoption of IFRS 15 is not expected to have a material financial impact on the Groups' financial information, however it will result in some changes to presentation and disclosure.
The Group intends to adopt IFRS 15 using the cumulative effect method, with the effect of initially applying the standard recognised at the date of initial application, with no restatement of the comparative period.
IFRS 16 was issued in 2016 and represents a significant change in the accounting and reporting of leases for lessees as it provides a single lessee accounting model that replaces the current model where leases are either recognised as operating or finance leases. Accounting requirements for lessors are substantially unchanged from IAS 17 Leases. IFRS 16 is effective for accounting periods commencing on or after 1 January 2019. The Group does not intend to adopt the standard early and therefore expects to apply IFRS 16 for the accounting period commencing 1 October 2019.
On transition to IFRS 16, the Group can choose to apply one of two transition methods:
It is anticipated that the Group will adopt the modified retrospective transition approach, taking advantage of the practical expedient as detailed above.
A preliminary assessment of the impact of adopting this standard has been performed, concluding that the primary impact will be to bring the Group's leasehold properties onto the statement of financial position, recognising both a right-of-lease asset and a lease liability for future lease payments. Whilst there will be a material adjustment to gross assets and liabilities, there is unlikely to be a material impact on net assets at Group level. The right-of use asset will be depreciated over the shorter of the expected life of the asset and the lease term on a straight-line basis, recognised in the income statement. The lease liability will be reduced by the lease payments over the lease term with interest being recognised on the lease liability and charged to the income statement. Depreciation and interest charges will replace the lease costs currently charged to the income statement. Higher interest charges will be recognised in earlier years of the lease as the discount rate unwinds.
The consolidated financial information incorporates the financial information of the Company and entities controlled by the Company (its subsidiaries) made up to 30 September each year. The Group controls an entity when it is exposed to, or it has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The Group reassesses whether it controls an entity if facts and circumstances indicate there are changes to one or more elements of control. The results of a subsidiary undertaking are included in the consolidated financial statements from the date the control commences until the date that control ceases.
All intercompany transactions, balances, income and expenses are eliminated on consolidation.
Non-controlling interests in subsidiaries are identified separately from the Group's equity therein. The Group recognises any non-controlling interest in the acquired entity at the non-controlling interests' proportionate share of the recognised amounts of the acquired entity's identifiable net
assets. Total comprehensive income is attributed to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.
The Group's business activities, together with the factors likely to affect its future development and performance, its financial position and its financial risk management objectives, as well as details of its financial instruments and its policies and processes for managing exposure to interest, credit and liquidity risk are described in note 25. The Group's forecasts and objectives, taking into account a number of potential changes in trading performance, show that the Group should be able to operate at adequate levels of both liquidity and capital for the foreseeable future. The directors have performed a number of stress tests on capital and liquidity and these provide assurance that the Group has sufficient capital to operate under stressed conditions.
Consequently, after making reasonable enquiries, the Directors are satisfied that the Group has sufficient resources to continue in business for the foreseeable future and therefore have continued to adopt the going concern basis in preparing the financial statements.
A business combination is recognised where separate entities or businesses have been acquired by the Group. The acquisition method of accounting is used to account for the business combinations made by the Group. The cost of a business combination is measured at the aggregate of the fair values (at the date of exchange), of assets given, liabilities incurred or assumed and equity instruments issued by the Group in exchange for control of the acquired entity. Where the consideration includes a contingent consideration arrangement, the contingent consideration is measured at its acquisition date fair value and included as part of the cost of the acquisition. Subsequent changes in such fair values are adjusted against the cost of acquisition where they qualify as measurement period adjustments. All other subsequent changes in the fair value of contingent consideration are charged to income statement or other comprehensive income, except for obligations that are classified as equity, which are not re-measured.
Acquisition related costs are expensed as incurred in the income statement, except if related to the issue of debt or equity securities.
Identifiable assets acquired and liabilities and contingent liabilities assumed in the business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the Group's share of the identifiable net assets of the subsidiary acquired, the difference is taken immediately to the income statement.
Goodwill arising on consolidation represents the difference between the consideration transferred and the fair value of net assets acquired of the subsidiary at the date of acquisition. Goodwill is not amortised, but is reviewed at least annually for impairment. Any impairment is recognised immediately through the income statement and is not subsequently reversed.
For the purposes of impairment testing goodwill is allocated to one or more of the Group's cash generating units (CGUs) expecting to benefit from the synergies of the combination. CGUs to which goodwill has been allocated are reviewed annually or more frequently when there is an indication that the goodwill relating to that CGU may have been impaired. If the recoverable amount from the CGU is less than the carrying amount of the assets present on the consolidated statement of financial position forming that CGU, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the assets forming that CGU and then to the assets of the CGU pro-rata on the basis of the carrying amount of each asset in the CGU.
On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
The Group determines and presents operating segments based on the information that is provided internally to the Board, which is the Group's Chief Operating Decision Maker (CODM). In assessing the Group's operating segments the directors have considered the nature of the services provided,
product offerings, customer bases and distribution channels amongst other factors. A description of the services provided is given within note 4.
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for services provided in the normal course of business, net of discounts, VAT and other sales related taxes.
Revenue represents fees receivable from investment administration and dealing and custody services for both client assets and client money. Revenue is recognised when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity, and when specific criteria have been met for each of the Group's activities as described below.
Recurring fixed revenue comprises recurring administration fees and media revenue.
Administration fees include fees charged in relation to the administration services provided by the Group and are recognised in the period to which the service is rendered using the percentage completion method. The extent to which a service is complete is determined by the different work activity profiles of the associated individual service.
Services rendered at the inception of a fixed term contract are recognised over the life of that contract.
Recurring ad-valorem revenue comprises custody fees, retained interest income and investment management fees.
Custody fees include ad-valorem fees charged in relation to the holding of client assets and interest received on client money balances. Custody fees and investment management fees are accrued on a time basis by reference to the principal and where applicable, the effective interest rate.
Transactional revenue comprises dealing fees and pension scheme activity fees.
Transaction-based commissions are recognised when received in accordance with the date of settlement of the underlying transaction.
Other non-recurring fees are recognised in the period to which the service is rendered.
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. Subsequent to initial recognition, the assets are accounted for in accordance with the accounting policy applicable to the asset. The corresponding liability to the lessor is included in the consolidated statement of financial position as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability.
Rental payments under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are recognised as a liability. The aggregate benefit of the incentive is recognised as a reduction of rental expense on a straight-line basis over the lease term.
Assets held under hire purchase contracts are recognised as assets of the Group at their fair value or, of if lower, at the present value of the minimum lease payments each determined at the
inception of the contract. Subsequent to initial recognition, the assets are accounted for in accordance with the accounting policy applicable to the asset. The corresponding liability is included in the consolidated statement of financial position as an obligation under hire purchase contracts. Payments are apportioned between finance charges and reduction of the obligation so as to achieve a constant rate of interest on the remaining balance of the liability.
Investment income comprises the returns generated on corporate cash and cash equivalents. Investment income is recognised in the income statement as it accrues, using the effective interest rate.
Finance costs comprise interest payable and finance charges on finance leases and hire purchase contracts. Finance costs are recognised in the income statement using the effective interest rate method.
The Group makes payments into the personal pension schemes of certain employees as part of their overall remuneration package. Contributions are recognised in the income statement as they are payable.
The Group also contributes to employees' stakeholder pension schemes. The assets of the scheme are held separately from those of the Group in independently administered funds. Any amount charged to the income statement represents the contribution payable to the scheme in respect of the period to which it relates.
Alternatively, the Group will pay contributions to an employee's AJ Bell Youinvest SIPP, if they wish, instead of the stakeholder pension.
The tax expense represents the sum of the current tax payable and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to tax payable or receivable in respect of previous years, using tax rates enacted or substantively enacted at the reporting date.
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised if the temporary difference arises (other than in a business combination) from:
Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that taxable profits will be available in the future, against which deductible temporary differences can be utilised. Recognised and unrecognised deferred tax assets are reassessed at each reporting date.
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.
Revenues, expenses and assets are recognised net of the amount of sales tax except where the sales tax incurred on a purchase of assets or services is not recoverable in whole or in part from the taxation authority.
Where the sales tax is not recoverable in whole or in part from the taxation authority, it is expensed through the income statement, except in the case of a capital asset where the irrecoverable proportion is capitalised as part of the capital cost of that asset.
All property, plant and equipment is stated at cost, which includes directly attributable acquisition costs, less accumulated depreciation and any recognised impairment losses. Depreciation is provided on all property, plant and equipment at rates calculated to write off the cost, less estimated residual value, of each asset evenly using a straight-line method over its estimated useful economic life as follows:
| Leasehold improvements | – Over the life of the lease |
|---|---|
| Office equipment | – 4 years |
| Computer equipment | –3–5 years |
The assets' estimated useful lives, depreciation rates and residual values are reviewed, and adjusted if appropriate at the end of each reporting period. An asset's carrying value is written down immediately to its recoverable amount if its carrying value is greater than the recoverable amount.
Assets held under finance leases and hire purchase contracts are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease.
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement immediately.
Intangible assets comprise computer software, customer contracts and non-contractual customer relationships and the Group's Key Operating System (KOS). These are stated at cost or fair value less amortisation and any recognised impairment loss. Amortisation is provided on all intangible fixed assets excluding goodwill at rates calculated to write off the cost or valuation, less estimated residual value, of each asset evenly using a straight-line method over its estimated useful economic life as follows:
| Computer software | –3–4 years |
|---|---|
| KOS | – 13 years |
| KOS enhancements | – Over the remaining life of the KOS |
| Customer contracts and non-contractual | – 5 – 10 years |
| Customer relationships |
The assets' estimated useful lives, amortisation rates and residual values are reviewed, and adjusted if appropriate at the end of each reporting period. An asset's carrying value is written down immediately to its recoverable amount if its carrying value is greater than the recoverable amount.
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement immediately.
During the year ended 30 September 2018 the useful life of the KOS was reviewed and subsequently extended from 10 years to 13 years to align with the Group's strategy. The planned growth of the business is supported by the KOS and there are no plans in the Group's strategy to make any changes to the target operating model or KOS. The change in the estimated useful life has been applied prospectively from 1 October 2017 therefore the KOS will be amortised on a straight line basis over the remaining useful life of the asset.
The change in accounting estimate of the KOS useful life has resulted in the profit before tax for the Group increasing by £452,000 during the financial year ended 30 September 2018. It will subsequently increase profit before tax by £452,000 in the next two financial years, following which it will reduce profit before tax by £146,000 and £604,000.
An internally-generated asset arising from work performed by the Group is recognised only when the following criteria can be demonstrated:
The amount initially recognised for internally-generated intangible assets is the sum of expenditure incurred from the date when the asset first meets the recognition criteria listed above. Development expenditure that does not meet the criteria is recognised as an expense in the period which it is incurred.
Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.
Expenditure on research activities is recognised as an expense in the period in which it is incurred.
At each reporting date the Group reviews the carrying amount of its tangible and intangible assets to determine whether there is any indication that those assets have suffered impairment. If such an indication exists then the recoverable amount of that particular asset is estimated.
An impairment test is performed for an individual asset unless it belongs to a CGU, in which case the present value of the net future cash flows generated by the CGU is tested. A CGU is the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or of groups of other assets. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired.
The recoverable amount of a tangible or intangible asset is the higher of its fair value less costs to sell and its value-in-use. In assessing its value-in-use, the estimated net future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset or CGU in which the asset sits is estimated to be lower than the carrying value, then the carrying amount is reduced to the recoverable amount. An impairment loss is recognised immediately in the income statement as an expense.
An impairment loss is reversed on tangible and intangible assets only if subsequent external events reverse the effect of the original event which caused the recognition of the impairment. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. An impairment reversal is recognised in the income statement immediately.
Financial assets and liabilities are recognised in the statement of financial position when a member of the Group becomes party to the contractual provisions of the instrument.
All financial assets are classified as loans and receivables.
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. The Group's loans and receivables comprise trade receivables, loans, other receivables and cash and cash equivalents.
Loans and receivables are initially recognised at fair value including any directly attributable costs. They are subsequently measured at amortised cost using the effective interest method, less any impairment. No interest income is recognised on loans and receivables, with the exception of cash and cash equivalents, as all loans and receivables are short-term receivables and the recognition of interest would be immaterial. Financial assets are derecognised when the contractual right to the cash flows from the asset expire.
Trade and other receivables are initially recorded at the fair value of the amount receivable and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. Other receivables also represent client money required to meet settlement obligations.
Cash and cash equivalents include cash in hand, deposits held on call with banks and other shortterm highly liquid investments with original maturities of three months or less. Where appropriate, bank overdrafts are shown within borrowings in current liabilities in the consolidated statement of financial position. For the purposes of the consolidated cash flow statement, cash and cash equivalents are defined as above, net of outstanding bank overdrafts if the Group has the right of set off.
Financial assets are assessed for indicators of impairment at each reporting date. These assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.
For financial assets objective evidence of impairment could include:
For certain categories of financial asset, such as trade receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group's past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period of 30 days, as well as the observable changes in national or local economic conditions that correlate with default on receivables.
The carrying amount of the financial assets is reduced by the use of a provision. When a trade receivable is considered uncollectable, it is written off against the provision. Subsequent recoveries of amounts previously written off are credited against the provision. Changes in the carrying amount of the provision are recognised in the income statement.
Financial liabilities are classified according to the substance of the contractual arrangements entered into. All financial liabilities are classified as other financial liabilities.
The Group's other financial liabilities comprise borrowings, trade and other payables and obligations under finance leases and hire purchase contracts. Other financial liabilities are initially measured at fair value, net of transaction costs. They are subsequently carried at amortised cost using the effective interest rate method. A financial liability is derecognised when, and only when, the Group's obligations are discharged, cancelled or they expire.
Trade payables consist of amounts payable to clients and other counterparties and obligations to pay suppliers for goods and services in the ordinary course of business. Trade and other payables are measured at amortised cost using the effective interest method.
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that the Group will be required to settle that obligation.
The amount recognised as a provision is the directors' best estimate of the consideration required to settle that obligation at the reporting date and is discounted to present value where the effect is material.
The Group issues equity-settled share-based payments to certain employees which are measured at the fair value of the equity instrument at the date of grant.
The total employee expense is recognised on a straight-line basis over the vesting period, based on managements' estimate of shares that will eventually vest. At the end of each reporting period, the entity revises its estimates of the number of share options expected to vest based on the nonmarket vesting conditions. It recognises any revision to original estimates in the income statement, with a corresponding adjustment to equity reserves. Where a grant of equity-settled share-based payments is not subject to vesting conditions, the fair value determined at the grant date is expensed immediately.
Fair value is measured using the Black-Scholes option pricing model. The expected life applied in the model has been adjusted based on management's best estimate for the effects of nontransferability, exercise restrictions and behavioural considerations. As the Company's shares are not listed on a recognised stock exchange and therefore no readily available market price exists for the shares, the share price has been estimated using a generally accepted business valuation method. Share price volatility has been estimated as the average of the volatility applying to a comparable group of listed companies.
Dividend distributions to the Company's shareholders are recognised in the period in which the dividends are paid. Final dividends declared after the reporting period are not included as a liability in the financial information but are disclosed in the notes to the financial information.
The Group applies the guidance provided in IFRIC 21 to levies issued under the Financial Services Compensation Scheme. The interpretation clarifies when an entity recognises a liability for a levy imposed by government in accordance with legislation (other than taxes and fines or other penalties).
The Group has an employee benefit trust, the AJ Bell Employee Benefit Trust, used for the granting of shares to certain employees. AJ Bell Holdings is considered to be the sponsoring employer and so the assets and liabilities of the trust are recognised as those of AJ Bell Holdings Limited.
Shares of AJ Bell Holdings Limited held by the trust are treated as 'own shares' held and shown as a deduction from equity. Subsequent consideration received for the sale of such shares is also
recognised in equity, with any difference between the sales proceeds and original cost being taken to equity.
In the application of the Group's accounting policies, which are described in note 2, the directors are required to make judgements, estimates and assumptions to determine the carrying amounts of certain assets and liabilities. The estimates and associated assumptions are based on the Group's historical experience and other relevant factors. Actual results may differ from the estimates applied.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
The following critical judgements have been made by the directors in applying the Group's accounting policies.
At each reporting date, the Group's non-current assets are reviewed for impairment where there are indicators of impairment or a review is specifically required by IAS 36. As it is not possible to test the Group's assets for impairment on an individual basis, impairment reviews are carried out on a CGU basis. In order to determine an asset's recoverable amount, the directors review the expected future cash flows of the CGU to which the asset is allocated.
There are a number of estimates that management have used to forecast the expected future cash flows of the CGUs that have been reviewed. Key judgements in arriving at these estimates include:
Details of the assumptions and key sensitivities are included at note 12.
The office dilapidations provision of £795,000 represents management's best estimate of the present value of costs which will ultimately be incurred in settling these obligations. If the rate per square foot was to increase by 25%, this would increase the provision by £189,000.
At the reporting end date, a provision of £1.1m is recognised to cover the settlement of a one-off tax liability. There is some uncertainty regarding the amount of the outflow required to settle the obligation; therefore a best estimate has been made by assessing a number of possible outcomes considering the potential areas and time periods at risk and any associated interest. The timings of the outflows are uncertain but the Group expects that settlement will be within the next 12 months.
It is the view of the Directors that the Group has a single operating segment; Investment services in the advised and direct to customer space administering investments in SIPPs, ISAs, LISA and General investment/Dealing accounts. It is considered that a further disaggregation of the single operating segment does not provide a clearer or more accurate view of the reporting within the Group. Details of the Group's revenue, results and assets and liabilities for the reporting segment, are shown within the consolidated income statement and consolidated statement of financial position.
The Group operates in one geographical segment, being the UK.
Due to the nature of its activities, the Group is not reliant on any one customer or group of customers for generation of revenues.
| 2016 £000 |
2017 £000 |
2018 £000 |
|
|---|---|---|---|
| Revenue: | |||
| Recurring – fixed | 22,525 | 24,219 | 25,212 |
| Recurring – ad-valorem | 29,636 | 37,160 | 47,890 |
| Transactional revenue | 12,305 | 14,197 | 16,589 |
| 64,466 | 75,576 | 89,691 |
During the financial year, the directors have reviewed the basis on which revenue is reported within the Group. As a result revenue is now reported as recurring ad-valorem, recurring fixed fees and transactional, including dealing and other fees and charges, as this better reflects the activities and internal reporting of the business. Comparatives have also been adjusted to reflect this.
Recurring ad-valorem fees include custody fees. These recurring charges are derived from the market value of retail customer assets, based on asset mix and portfolio size, and are therefore subject to market and economic risks. The spread of rate charged is variable dependent on portfolio size and asset mix within the portfolio.
Recurring ad-valorem fees also include retained interest income earned on the level of customer cash balances, which are based on customers' asset mix and portfolio size and are therefore subject to market and economic risks. The risk associated with this revenue stream in terms of its nature and uncertainty is discussed further within note 25 Financial Instruments, interest rate risk.
The total revenue for the Group has been derived from its principal activities undertaken in the UK.
| 2016 £000 |
2017 £000 |
2018 £000 |
|
|---|---|---|---|
| Profit for the financial year has been arrived at after charging: | |||
| Amortisation of intangible assets | 1,550 | 1,219 | 723 |
| Depreciation of property, plant & equipment | 536 | 838 | 1,248 |
| Impairment of intangible assets | 345 | — | — |
| Loss on disposal of property, plant & equipment | 4 | 48 | 11 |
| Operating lease rentals – property | 978 | 2,081 | 1,617 |
| Auditor's remuneration (see below) | 168 | 170 | 811 |
| Staff costs (note 7) | 25,170 | 28,210 | 32,629 |
| Restructuring cost (note 22) | — | 492 | 364 |
| IPO costs | — | — | 1,769 |
IPO related costs relate to professional fees incurred in relation to listing AJ Bell Holdings on the London Stock Exchange. These costs also include the fee for the Reporting Accountant's work disclosed within ''corporate finance services'' within auditor remuneration below.
The analysis of auditor's remuneration is as follows:
| 2016 £000 |
2017 £000 |
2018 £000 |
|
|---|---|---|---|
| Fees payable to the Company's auditor for the audit of | |||
| the Company's annual accounts | 23 | 22 | 56 |
| Fees payable to the Company's auditor and its associates | |||
| for other services to the group: | |||
| Audit of the Company's subsidiaries' accounts, pursuant to | |||
| legislation | 76 | 57 | 63 |
| Audit-related assurance services | 60 | 91 | 81 |
| Other assurance services | 9 | — | 19 |
| Corporate finance services | — | — | 592 |
| 168 | 170 | 811 |
Of the above, audit related services for the year totalled £200,000 (2017: £170,000, 2016: £159,000).
Average number of employees (including executive directors):
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| No. | No. | No. | |
| Operational and support | 478 | 503 | 578 |
| Technology | 74 | 95 | 116 |
| Distribution | 55 | 58 | 64 |
| 607 | 656 | 758 |
Employee benefit expense for the Group:
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| £000 | £000 | £000 | |
| Short-term employee benefits | 21,566 | 23,810 | 27,742 |
| Social security costs | 2,345 | 2,633 | 3,010 |
| Retirement benefit costs | 1,013 | 1,119 | 1,423 |
| Termination benefits | 177 | 541 | 342 |
| Share based payments | 69 | 107 | 112 |
| 25,170 | 28,210 | 32,629 |
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| £000 | £000 | £000 | |
| Interest on bank overdrafts and loans | 23 | 66 | — |
| Interest on obligations under finance leases and hire purchase | 20 | 16 | 25 |
| 43 | 82 | 25 |
| 2016 £000 |
2017 £000 |
2018 £000 |
|---|---|---|
| 3,667 (240) |
4,375 (63) |
5,694 113 |
| 3,427 | 4,312 | 5,807 |
| (16) | ||
| 226 5 |
17 (8) |
(80) 2 |
| 39 | (89) | (94) |
| 3,466 | 4,223 | 5,713 |
| (192) | (98) |
Corporation tax is calculated at 19% of the estimated assessable profit for the year to 30 September 2018 (2017: 19.5%, 2016: 20%)
In addition to the amount charged to the income statement, certain tax amounts have been credited directly to equity as follows:
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| £000 | £000 | £000 | |
| Deferred tax relating to share-based payments (note 17) | 8 | (88) | (51) |
| Current tax relief on exercise of share options | (72) | (57) | (128) |
| (64) | (145) | (179) |
It is expected that the ongoing effective tax rate will remain at a rate approximating to the standard UK Corporation Tax rate in the medium term except for the impact of deferred tax arising from the timing of exercising of share options. The standard UK Corporation Tax rate was reduced to 19% (from 20%) on 1 April 2017 and again to 18% (effective from 1 April 2020), as substantively enacted on 26 October 2015. An additional reduction to 17% (effective 1 April 2020) was substantively enacted on 6 September 2016.
Deferred tax has been recognised at 17% (2017: 17%, 2016: 17%), being the rate at which the deferred tax assets are expected to reverse.
The charge for the year can be reconciled to the profit per the income statement as follows:
| Profit before taxation | 2016 £000 16,779 |
2017 £000 21,697 |
2018 £000 28,359 |
|---|---|---|---|
| Corporation tax at 19% (2017: 19.5%; 2016: 20%) Effect of: |
3,356 | 4,231 | 5,388 |
| Expenses not deductible for tax purposes | 110 | 57 | 338 |
| Effect of the exercise of employee share options | — | (15) | — |
| Change in recognised deductible temporary difference | 9 | 5 | (47) |
| Effect of rate changes to deferred tax | 5 | (2) | 2 |
| Income not taxable | (1) | (6) | — |
| Adjustments in respect of prior periods | (13) | (47) | 32 |
| Taxation charge for the year | 3,466 | 4,223 | 5,713 |
| Effective tax rate | 20.7% | 19.5% | 20.1% |
| 2016 £000 |
2017 £000 |
2018 £000 |
|
|---|---|---|---|
| Amounts recognised as distributions to equity holders: Final dividend of 15.50p (2016: 13.00p, 2015: 16.00p) |
|||
| per share Interim dividend of 14.00p (2017: 12.75p, 2016: 12.75p) |
6,546 | 5,327 | 6,362 |
| per share Special dividend of 19.50p (2017: Nil, 2016: Nil) per share |
5,217 — |
5,237 — |
5,728 8,005 |
| Total dividend paid on equity shares | 11,763 | 10,564 | 20,095 |
| Proposed final dividend of 21.50p (2017: 15.50p, 2016: 13.00p) per share |
5,373 | 6,370 | 8,826 |
The final dividend declared of 21.50p per share is payable on 13 November 2018 to shareholders on the register at close of business on 9 November 2018. The final dividend is subject to approval by the Board on 17 October 2018 and has not been included as a liability within this financial information.
Dividends are payable on all classes of issued, fully or partially paid up ordinary shares, except B, C, D, E and F non-voting shares as disclosed in note 23.
Under an arrangement dated 26 June 2013, the AJ Bell Employee Benefit Trust, which held 168,713 ordinary shares in AJ Bell Holdings Limited at 30 September 2018 (2017: Nil, 2016: Nil), has agreed to waive all dividends. This represents 0.4% of the Company's called up share capital.
Basic earnings per share is calculated by dividing the profit attributable to the owners of the parent company by the weighted average number of ordinary, non-voting ordinary and A and X non-voting ordinary shares, excluding own shares, in issue during the period.
Diluted earnings per share is calculated by adjusting the weighted average number of shares in all classes to assume exercise of all potentially dilutive share options.
| Earnings | 2016 | 2017 | 2018 |
|---|---|---|---|
| £000 | £000 | £000 | |
| Earnings for the purpose of basic and diluted earnings per share being profit attributable to owners of the parent company |
13,440 | 17,571 | 22,646 |
| Number of shares | 2016 | 2017 | 2018 |
| No. | No. | No. | |
| Weighted average number of ordinary shares (for the purpose of basic earnings per share) in issue during the year Effect of potentially dilutive share options |
40,914,184 148,193 |
41,009,036 240,433 |
40,979,963 918,865 |
| Weighted average number of ordinary shares for the purposes of fully diluted earnings per share |
41,062,377 | 41,249,469 | 41,898,828 |
| Earnings per share (pence) | 2016 | 2017 | 2018 |
| Basic | 32.85p | 42.85p | 55.26p |
| Diluted | 32.73p | 42.60p | 54.05p |
| Cost At 1 October |
2016 £000 2,069 |
2017 £000 3,772 |
2018 £000 3,772 |
|---|---|---|---|
| Additions (note 13) | 1,703 | — | — |
| At 30 September | 3,772 | 3,772 | 3,772 |
| Accumulated impairment losses At 1 October and 30 September |
(112) | (112) | (112) |
| Carrying value at 30 September | 3,660 | 3,660 | 3,660 |
The carrying amount of Goodwill relates to the following historic acquisitions which have been allocated to the cash generating unit (CGU) or group of units that are expected to benefit from the business combination:
| CGUs | Goodwill | |
|---|---|---|
| No. | £000 | |
| AJ Bell Securities Limited | 1 | 420 |
| AJ Bell Media Limited | 2 | 1,537 |
| Indexx Markets Limited | 2 | 1,588 |
| AJ Bell Investments LLP | 2 | 115 |
| 3,660 |
On 29 February 2016 the Group's subsidiary AJ Bell Asset Management Limited, acquired the entire share capital of Indexx Markets Limited and its wholly owned subsidiary Allium Capital Limited (now AJ Bell Capital Limited) and Mansard Capital LLP (now AJ Bell Investments LLP).
Following a reorganisation of this sub-group, the trade assets and liabilities of the entities acquired were hived up into AJ Bell Asset Management Limited during the years ended 30 September 2017 and 30 September 2018 (see note 16).
The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired.
The Group has previously identified and tested goodwill for impairment on two CGUs, investment administration and dealing and custody. In recent years the Group has been developing a one business strategy to support the growth of its flagship propositions. This has resulted in the centralisation of the stock broking operation and implementation of the Target Operating Model. As part of this, our two core systems have become more integrated and it is now felt that they can no longer operate independently of each other. Together they form the key operating system that underpins the investment platform used by our customers, which generates the overwhelming majority of the Group's revenue. As a result the directors have reviewed the CGUs and conclude there is a single CGU, the investment platform, which is the smallest group of assets that generate cash inflows from continuing use and that are wholly independent of the cash inflows of other groups.
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| £000 | £000 | £000 | |
| Dealing and custody | 2,054 | 2,054 | — |
| Investment administration | 1,606 | 1,606 | — |
| Investment platform | — | — | 3,660 |
| 3,660 | 3,660 | 3,660 |
The recoverable amount of the assets within each CGU is determined using the value-in-use calculations. In assessing the value-in-use the estimated future cash flows of the CGU are
discounted to their present value using a pre-tax discount rate. Cash flows are based upon the most recent forecasts, approved by the Board, covering a 4 year period and then extrapolated for the remaining useful economic life of the asset using a growth rate of Nil % (2017: Nil%, 2016: Nil%).
The key assumptions for value-in-use calculations are those regarding discount rate, growth rates and expected changes to revenue and costs in the period, as follows:
The directors have made these assumptions based upon past experience and future expectations in the light of anticipated market conditions and the results of streamlining processes through implementation of the target operating model for customer services.
Cash flows have been discounted using a pre-tax discount rate of 5.5% (2017: 5%, 2016: 5%).
The directors have performed sensitivity analysis on their calculations, with key assumptions being revised adversely to reflect the potential for future performance being below expected levels. Changes to revenue are the most sensitive as they would have the greatest impact on future cash flows. However, even with a reduction in revenue of 13% to nil growth for the forecast period, there would be £Nil impact on the carrying value of the assets under the CGU.
Based upon the reviews above, the estimated value-in-use of the investment platform comfortably supports the carrying value of the assets held within and so the directors are satisfied that goodwill is not impaired.
On 29 February 2016 the Group's subsidiary, AJ Bell Asset Management Limited, acquired the entire share capital of Indexx Markets Limited and its wholly owned subsidiary Allium Capital Limited (subsequently renamed AJ Bell Capital Limited) and Mansard Capital LLP (subsequently renamed AJ Bell Investments LLP). This acquisition facilitated the launch of AJ Bell's Management Portfolio Services for advisers and their clients and its own range of funds.
The consideration transferred for the acquisition of Indexx Markets Limited was £149,000, this being made up of £107,000 cash and £42,000 worth of share capital in AJ Bell Asset Management Limited, issued to the Indexx Markets Limited management team. As Indexx Markets Limited held cash and cash equivalent amounts of £7,000 on the date of acquisition, the net cost arising on acquisition was £142,000.
The consideration transferred for the acquisition of AJ Bell Investments LLP was £185,000, this being made up of £143,000 cash and £42,000 worth of share capital in AJ Bell Asset Management Limited, issued to the Investments LLP management team. As AJ Bell Investments LLP held cash and cash equivalent amounts of £44,000 on the date of acquisition, the net cost arising on acquisition was £141,000.
Identifiable assets and liabilities acquired:
| Indexx Markets Limited | AJ Bell Investments LLP | |||||
|---|---|---|---|---|---|---|
| Book value | Fair value Book value |
Fair value | ||||
| £000 | £000 | £000 | £000 | |||
| Trade and other receivables | 160 | 160 | 100 | 100 | ||
| Cash and cash equivalents | 7 | 7 | 44 | 44 | ||
| Trade and other payables | (2,142) | (2,142) | (105) | (105) | ||
| (1,975) | (1,975) | 39 | 39 |
There were no subsequent amendments to the above amounts following the acquisition.
At the date of acquisition AJ Bell Holdings Limited held a 75% share in AJ Bell Asset Management Limited which wholly owned Indexx Markets Limited and AJ Bell Investments LLP, therefore, the non-controlling interest was calculated as 25% of Indexx Markets Limited's and AJ Bell Investments LLP's net assets at acquisition.
Under IFRS 3 the Group chose to value the non-controlling interest's proportionate share of net assets/liabilities of the acquired entities.
| Indexx Markets Limited £000 |
AJ Bell Investments LLP £000 |
|
|---|---|---|
| Net assets/(liabilities) Non-controlling interest |
(1,975) 25% |
39 25% |
| Attributable to non-controlling interest | (494) | 10 |
The profits/losses attributable to the non-controlling interest are shown as one line on the face of the income statement.
Goodwill recognised as a result of the acquisition is shown below:
| Indexx Markets Limited |
AJ Bell Investments LLP |
|
|---|---|---|
| Total cash consideration transferred Less: Fair value of the identifiable net assets/(liabilities) |
£000 107 (1,481) |
£000 143 28 |
| Total goodwill recognised | 1,588 | 115 |
The goodwill is attributable to the skills and technical talent of the assembled workforce allowing the Group to take advantage of the post-RDR landscape in the platform market and develop lowcost investment management solutions for advisers and DIY customers.
Goodwill has been allocated to the cash generating units that derive revenue from the investment platforms that will benefit from the provision of this (note 12).
The due diligence work was predominantly undertaken by the Group's management team, with some supplementary legal support provided by external consultants. In addition to management time, acquisition-related costs of £7,000 were included in administrative expenses in the consolidated income statement for the year ended 30 September 2016.
| Key operating system £000 |
Contractual customer relationships £000 |
Computer software £000 |
Total £000 |
|
|---|---|---|---|---|
| Cost As at 1 October 2015 Additions |
8,657 — |
2,135 — |
6,593 115 |
17,385 115 |
| As at 30 September 2016 Additions Disposals |
8,657 — — |
2,135 — — |
6,708 44 (370) |
17,500 44 (370) |
| As at 30 September 2017 Additions Disposals |
8,657 — — |
2,135 — — |
6,382 6 (1,154) |
17,174 6 (1,154) |
| At 30 September 2018 | 8,657 | 2,135 | 5,234 | 16,026 |
| Amortisation As at 1 October 2015 Charge for the year Impairment |
2,919 1,056 — |
1,516 274 345 |
6,154 220 — |
10,589 1,550 345 |
| As at 30 September 2016 Charge for the year Eliminated on disposal |
3,975 1,057 — |
2,135 — — |
6,374 162 (370) |
12,484 1,219 (370) |
| As at 30 September 2017 Charge for the year Eliminated on disposal |
5,032 604 — |
2,135 — — |
6,166 119 (1,154) |
13,333 723 (1,154) |
| At 30 September 2018 | 5,636 | 2,135 | 5,131 | 12,902 |
| Carrying amount As at 30 September 2016 |
4,682 | — | 334 | 5,016 |
| As at 30 September 2017 | 3,625 | — | 216 | 3,841 |
| As at 30 September 2018 | 3,021 | — | 103 | 3,124 |
The amortisation charge above is recognised within administrative expenses in the income statement.
| Leasehold improvements £000 |
Office equipment £000 |
Assets under construction £000 |
Computer equipment £000 |
Total £000 |
|
|---|---|---|---|---|---|
| Cost | |||||
| As at 1 October 2015 | 677 | 1,405 | — | 2,576 | 4,658 |
| Additions | — | 36 | — | 568 | 604 |
| Disposals | — | (12) | — | (136) | (148) |
| At 30 September 2016 | 677 | 1,429 | — | 3,008 | 5,114 |
| Additions | 1,452 | 762 | 163 | 1,235 | 3,612 |
| Disposals | (548) | (631) | — | (916) | (2,095) |
| At 30 September 2017 | 1,581 | 1,560 | 163 | 3,327 | 6,631 |
| Additions | 161 | 132 | — | 1,405 | 1,698 |
| Disposals | — | (754) | — | (302) | (1,056) |
| Transfers | — | — | (163) | 163 | — |
| At 30 September 2018 | 1,742 | 938 | — | 4,593 | 7,273 |
| Depreciation | |||||
| As at 1 October 2015 | 536 | 1,042 | — | 1,876 | 3,454 |
| Charge for the year | 17 | 170 | — | 349 | 536 |
| Eliminated on disposal | — | (12) | — | (132) | (144) |
| As at 30 September 2016 | 553 | 1,200 | — | 2,093 | 3,846 |
| Charge for the year | 66 | 231 | — | 541 | 838 |
| Eliminated on disposal | (548) | (609) | — | (890) | (2,047) |
| As at 30 September 2017 | 71 | 822 | — | 1,744 | 2,637 |
| Charge for the year | 119 | 279 | — | 850 | 1,248 |
| Eliminated on disposal | — | (746) | — | (299) | (1,045) |
| At 30 September 2018 | 190 | 355 | — | 2,295 | 2,840 |
| Carrying amount | |||||
| As at 30 September 2016 | 124 | 229 | — | 915 | 1,268 |
| As at 30 September 2017 | 1,510 | 738 | 163 | 1,583 | 3,994 |
| As at 30 September 2018 | 1,552 | 583 | — | 2,298 | 4,433 |
The depreciation charge above is recognised within administrative expenses in the income statement.
During the year the Group acquired assets under finance leases and hire purchase contracts of £747,000 (2017: £136,000, 2016: £Nil).
The carrying amount of the Group's office and computer equipment includes an amount of £686,000 (2017:£138,000, 2016: £99,000) in respect of assets held under finance leases and hire purchase contracts.
At the year end, the Group had no commitments (2017: £Nil, 2016: £Nil) to purchase any property, plant and equipment.
The principal subsidiaries of the Company, all of which have been included in the consolidated historical financial information, are as follows:
| Proportion of ownership | |||||
|---|---|---|---|---|---|
| interest and voting rights held | |||||
| Country of | 2016 | 2017 | 2018 | ||
| Name of subsidiary | Principal activity | incorporation | (%) | (%) | (%) |
| AJ Bell Limited* | Investment / Group administration |
England and Wales | 100 | 100 | 100 |
| AJ Bell Trustees Limited | Dormant | England and Wales | 100 | 100 | 100 |
| Ashby London Trustees Limited | Dormant | England and Wales | 100 | 100 | 100 |
| AJ Bell Platinum Limited | Dormant | England and Wales | 100 | 100 | 100 |
| Ashby London Actuarial Services Limited* |
Dormant | England and Wales | 100 | 100 | 100 |
| AJ Bell Management Limited | Investment administration |
England and Wales | 100 | 100 | 100 |
| Sippdeal Trustees Limited | Dormant | England and Wales | 100 | 100 | 100 |
| AJ Bell (PP) Trustees Limited | Dormant | England and Wales | 100 | 100 | 100 |
| Whitehead Trustees Limited Ashby London (PP) Trustees Limited |
Dormant | England and Wales | 100 | 100 | 100 |
| Dormant | England and Wales | 100 | 100 | 100 | |
| Sippdeal Limited | Dormant | England and Wales | 100 | 100 | 100 |
| MSM Media Limited* | Dormant | England and Wales | 100 | 100 | 100 |
| AJ Bell Securities Limited* | Dealing & custody | England and Wales | 100 | 100 | 100 |
| Lawshare Nominees Limited | Dormant | England and Wales | 100 | 100 | 100 |
| AJ Bell EBT Limited* | Dormant | England and Wales | 100 | 100 | 100 |
| AJ Bell Media Limited* | Media | England and Wales | 100 | 100 | 100 |
| MoneyAM Limited | Dormant | England and Wales | 100 | 100 | 100 |
| AJ Bell Asset Management Limited* |
Investment management services |
England and Wales | 75 | 100 | 100 |
| AJ Bell Investments LLP | Investment management services |
England and Wales | 75 | 100 | 100 |
| Indexx Markets Limited | Dormant | England and Wales | 75 | 100 | n/a |
| AJ Bell Capital Limited AJ Bell Digital Savings |
Dormant | England and Wales | 75 | 100 | n/a |
| Limited* | Dormant | England and Wales | n/a | n/a | 100 |
*indicates direct investment of AJ Bell Holdings Limited
The financial statements of AJ Bell EBT Limited have been exempted from audit under s479A of the Companies Act 2006 by way of parent guarantee from AJ Bell Holdings Limited.
During the year end 30 September 2017 the Group acquired the remaining 25% minority interest in AJ Bell Asset Management Limited. Following this transaction, the trade, assets and liabilities of AJ Bell Capital Limited, Indexx Markets Limited and AJ Bell Investments LLP were hived into AJ Bell Asset Management Limited.
Following the reorganisation, AJ Bell Capital Limited and Indexx Markets Limited became dormant subsidiaries and were struck off the register at Companies House during 2018. Since the reporting date Money AM limited, MSM Media Limited and Ashby London Actuarial Services Limited, all of which are dormant were also struck off. AJ Bell Investments LLP is in the process of being struck off.
The registered office of all subsidiaries is 4 Exchange Quay, Salford Quays, Manchester M5 3EE.
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| £000 | £000 | £000 | |
| Deferred tax asset | 159 | 319 | 386 |
| Deferred tax liability | (110) | (92) | (14) |
| Net deferred tax asset | 49 | 227 | 372 |
The movement on the deferred tax account and movement between deferred tax assets and liabilities are as follows:
| Accelerated capital allowances |
Share based payments |
Short-term timing differences |
Losses | Total | |
|---|---|---|---|---|---|
| £000 | £000 | £000 | £000 | £000 | |
| At 1 October 2015 | (4) | 96 | (38) | — | 54 |
| On acquisition | — | — | — | 42 | 42 |
| (Charge)/credit to the income | |||||
| statement | (106) | 38 | 49 | (20) | (39) |
| Charge to equity | — | (8) | — | — | (8) |
| At 30 September 2016 | (110) | 126 | 11 | 22 | 49 |
| Credit to the income statement | 18 | 31 | — | 41 | 90 |
| Credit to equity | — | 88 | — | — | 88 |
| At 30 September 2017 (Charge)/credit to the income |
(92) | 245 | 11 | 63 | 227 |
| statement | 78 | 19 | 11 | (14) | 94 |
| Credit to equity | — | 51 | — | — | 51 |
| At 30 September 2018 | (14) | 315 | 22 | 49 | 372 |
The deferred tax adjustment relating to share-based payments reflects the estimated total future tax relief associated with the cumulative share-based payment benefit arising in respect of share options granted but unexercised as at the reporting date.
Deferred tax assets have been recognised in respect of other temporary differences giving rise to deferred tax assets where it is probable that these amounts will be recovered. As at 30 September 2018, deferred tax assets have not been provided on trading losses of £1,407,326 (2017: £1,914,069, 2016: £1,869,565).
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| £000 | £000 | £000 | |
| Trade receivables | 6,287 | 6,248 | 2,203 |
| Prepayments and accrued income | 8,001 | 10,831 | 13,669 |
| Other receivables | 3,450 | 5,093 | 4,203 |
| 17,738 | 22,172 | 20,075 |
The directors consider that the carrying value of trade and other receivables approximates to their fair value. Other receivables represent client money required to meet settlement obligations and are payable on demand.
Trade receivables disclosed above include amounts which are past due at the reporting date but against which the Group has not recognised a provision for impairment as there has been no significant change in credit quality and the amounts are still considered recoverable.
The ageing profile of the Group's trade receivables were as follows:
| 2016 £000 |
2017 £000 |
2018 £000 |
|
|---|---|---|---|
| Neither past due nor impaired | 1,262 | 1,487 | 550 |
| Past due but not impaired: | |||
| 0 to 30 days | 3,189 | 3,758 | 705 |
| 31 to 60 days | 87 | 106 | 188 |
| 61 to 90 days | 82 | 154 | 58 |
| 91 days and over | 1,831 | 1,155 | 1,165 |
| 6,451 | 6,660 | 2,666 | |
| Provision for impairment | (164) | (412) | (463) |
| 6,287 | 6,248 | 2,203 |
The movement in the provision for impairment of trade receivables is as follows:
| 2016 £000 |
2017 £000 |
2018 £000 |
|
|---|---|---|---|
| Balance at the beginning of the year | 208 | 164 | 412 |
| Impairment losses recognised | 40 | 300 | 135 |
| Amounts utilised | — | — | (27) |
| Amounts recovered | (84) | (52) | (57) |
| Balance at the end of the year | 164 | 412 | 463 |
In determining the recoverability of trade receivables the directors considered any change in the credit quality of the trade receivable from the date the credit was initially granted up to the reporting date.
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| £000 | £000 | £000 | |
| Cash and cash equivalents | 39,510 | 42,138 | 49,695 |
All cash held at bank has a maturity date of less than one month.
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| Current payables | £000 | £000 | £000 |
| Trade payables | 1,283 | 817 | 1,052 |
| Accruals and deferred income | 6,568 | 7,514 | 8,093 |
| Social security and other taxes | 1,408 | 1,411 | 1,711 |
| Other payables | 295 | 373 | 582 |
| 9,554 | 10,115 | 11,438 |
Trade payables, accruals and deferred income principally comprise amounts outstanding for trade purchases and ongoing costs. The directors consider that the carrying amount of trade payables approximates to their fair value.
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| Non-current payables | £000 | £000 | £000 |
| Unsecured loan debenture | 848 | — | — |
| Other payables | 124 | 178 | 603 |
| 972 | 178 | 603 |
The unsecured loan debenture, bearing interest at 5% per annum was settled in full on 7 April 2017.
| Obligations under finance leases and hire purchase contracts are payable as follows: |
Minimum lease payments £000 |
Less finance charges £000 |
Present value of lease obligations £000 |
|---|---|---|---|
| 2016 | |||
| Within one year In two to five years |
79 35 |
(4) (1) |
75 34 |
| 114 | (5) | 109 | |
| 2017 | |||
| Within one year | 82 | (7) | 75 |
| In two to five years | 72 | (4) | 68 |
| 154 | (11) | 143 | |
| 2018 | |||
| Within one year | 330 | (30) | 300 |
| In two to five years | 447 | (16) | 431 |
| 777 | (46) | 731 |
It is the Group's policy to lease certain items of office and computer equipment under finance leases and hire purchase contracts. The average contract term is between three and five years. All obligations are denominated in sterling. Interest rates are fixed at the contract date. All leases and hire purchase contracts are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. The fair value of the Group's lease obligations approximates to their carrying amount.
| Office dilapidations £000 |
FSCS levy £000 |
Other provision £000 |
Restructuring costs £000 |
Total £000 |
|
|---|---|---|---|---|---|
| 2016 | |||||
| At 1 October 2015 | 398 | 53 | — | — | 451 |
| Additional provisions | 683 | — | — | — | 683 |
| Provisions used | — | (17) | — | — | (17) |
| At 30 September 2016 | 1,081 | 36 | — | — | 1,117 |
| 2017 | |||||
| At 1 October 2016 | 1,081 | 36 | — | — | 1,117 |
| Additional provisions | — | — | 1,095 | 492 | 1,587 |
| Provisions used | (291) | (36) | — | — | (327) |
| At 30 September 2017 | 790 | — | 1,095 | 492 | 2,377 |
| 2018 | |||||
| At 1 October 2017 | 790 | — | 1,095 | 492 | 2,377 |
| Additional provisions | 80 | — | — | 246 | 326 |
| Provisions used | — | — | — | (568) | (568) |
| Unused provisions | (75) | — | — | — | (75) |
| At 30 September 2018 | 795 | — | 1,095 | 170 | 2,060 |
The dilapidation provisions relate to the former leasehold premises at Trafford House, Manchester, Calverley House, Tunbridge Wells and the current leasehold premises at 4 Exchange Quay, Manchester and 49 Southwark Bridge, London. The Group is contractually obliged to reinstate its leased properties to their original state and layout at the end of the lease term. Whilst it is probable that payments will be required for dilapidations, uncertainty exists with regards to the amount and timing of these payments and the amounts provided represent the directors' best estimate of the present value of costs which will ultimately be incurred in setting these obligations.
The other provision represents cover for the settlement of a one-off tax liability. There is some uncertainty regarding the amount of the outflow required to settle the obligation; therefore a best estimate has been made by assessing a number of different outcomes considering the potential areas and time periods at risk and any associated interest. The timing of the outflows are uncertain but the Group expects that settlement will be within the next 12 months.
The restructuring provision relates to the estimated costs associated with the closure of the Tunbridge Wells office by October 2018 when the lease expires. The provision is based upon a number of key variables for the staff affected, grade and remuneration package and represents the directors' best estimate. As a result there is some uncertainty around the value and timing of the liability.
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| Issued, fully-called and paid: | £ | £ | £ |
| Ordinary shares of 0.1p each | 38,650 | 38,655 | 38,841 |
| Ordinary non-voting shares of 0.1p each | 75 | 75 | 75 |
| A non-voting ordinary shares of 0.1p each | 846 | 955 | 958 |
| B non-voting ordinary shares of 0.1p each | — | — | 159 |
| C non-voting ordinary shares of 0.1p each | 8 | 8 | 188 |
| D non-voting ordinary shares of 0.1p each | — | 10 | 255 |
| E non-voting ordinary shares of 0.1p each | — | — | 919 |
| F non-voting ordinary shares of 0.1p each | — | — | 203 |
| X non-voting ordinary shares of 0.1p each | 774 | 767 | 767 |
| 40,353 | 40,470 | 42,365 | |
| Issued, partly-called and paid: | |||
| A non-voting ordinary shares of 0.1p each | — | — | — |
| X non-voting ordinary shares of 0.1p each | 7 | 7 | 7 |
| 7 | 7 | 7 | |
| 40,360 | 40,477 | 42,372 | |
| 2016 | 2017 | 2018 | |
| Number | Number | Number |
| Issued, fully-called and paid: | |||
|---|---|---|---|
| Ordinary shares of 0.1p each | 38,650,070 | 38,654,846 | 38,840,741 |
| Ordinary non-voting shares of 0.1p each | 75,000 | 75,000 | 75,000 |
| A non-voting ordinary shares of 0.1p each | 846,081 | 955,484 | 957,692 |
| B non-voting ordinary shares of 0.1p each | 167,102 | 158,890 | 158,890 |
| C non-voting ordinary shares of 0.1p each | 201,631 | 194,633 | 188,056 |
| D non-voting ordinary shares of 0.1p each | — | 275,317 | 255,189 |
| E non-voting ordinary shares of 0.1p each | — | — | 919,160 |
| F non-voting ordinary shares of 0.1p each | — | — | 203,500 |
| X non-voting ordinary shares of 0.1p each | 773,994 | 767,465 | 767,465 |
| 40,713,878 | 41,081,635 | 42,365,693 | |
| Issued, partly-called and paid: | |||
| A non-voting ordinary shares of 0.1p each | 295,104 | 325,104 | 260,973 |
| X non-voting ordinary shares of 0.1p each | 322,043 | 318,497 | 318,497 |
| 617,147 | 643,601 | 579,470 | |
| 41,331,025 | 41,725,236 | 42,945,163 |
The following transactions have taken place during year ended 30 September 2018:
| No. of | Premium | ||
|---|---|---|---|
| Transaction type | Share class | shares | £000 |
| New issue under OTB | Ordinary shares of 0.1p each | 49,096 | 350 |
| New issue under OTB | E non-voting ordinary shares of 0.1p each | 931,660 | 391 |
| New issue under OTB | F non-voting ordinary shares of 0.1p each | 203,500 | 85 |
| Exercise of CSOP options | Ordinary shares of 0.1p each | 136,799 | 464 |
| New issue | A non-voting ordinary shares of 0.1p each, | ||
| 0.1% partly-paid | 15,000 | — | |
| Full payment | A non-voting ordinary shares of 0.1p each, | ||
| 0.1% partly-paid | 79,131 | 314 | |
| Repurchase and cancellation | A non-voting ordinary shares of 0.1p each | (76,923) | — |
| Repurchase and cancellation | C non-voting ordinary shares of 0.1p each | (6,577) | — |
| Repurchase and cancellation | D non-voting ordinary shares of 0.1p each | (20,128) | — |
| Repurchase and cancellation | E non-voting ordinary shares of 0.1p each | (12,500) | — |
| 1,604 |
The following transactions have taken place during year ended 30 September 2017:
| No. of | Premium | ||
|---|---|---|---|
| Transaction type | Share class | shares | £000 |
| New issue under OTB | A non-voting ordinary shares of 0.1p each, | ||
| 0.2% partly-paid | 30,000 | — | |
| New issue under OTB | D non-voting ordinary shares of 0.1p each | 275,317 | 55 |
| Exercise of EMI options | A non-voting ordinary shares of 0.1p each | 42,545 | 42 |
| Exercise of CSOP options | Ordinary shares of 0.1p each | 23,011 | 59 |
| New issue | A non-voting ordinary shares of 0.1p each | 76,923 | 400 |
| Full payment | X non-voting ordinary shares of 0.1p each | 4,919 | 21 |
| Repurchase and cancellation | A non-voting ordinary shares of 0.1p each | (6,998) | — |
| Repurchase and cancellation | C non-voting ordinary shares of 0.1p each | (11,308) | — |
| Repurchase and cancellation | Ordinary shares of 0.1p each | (16,927) | — |
| Repurchase and cancellation | X non-voting ordinary shares of 0.1p each | (11,448) | — |
| Repurchase and cancellation | B non-voting ordinary shares of 0.1p each | (8,212) | — |
| 577 |
The following transactions have taken place during year ended 30 September 2016:
| No. of | Premium | ||
|---|---|---|---|
| Transaction type | Share class | shares | £000 |
| Exercise of EMI options | A non-voting ordinary shares of 0.1p each | 64,545 | 56 |
| Full payment | X non-voting ordinary shares of 0.1p each | 6,529 | 26 |
| Exercise of CSOP options | Ordinary shares of 0.1p each | 51,778 | 165 |
| New issue under OTB | A non-voting ordinary shares of 0.1p each, | ||
| 0.2% partly paid | 10,000 | — | |
| New issue | Ordinary shares of 0.1p each | 5,800 | 29 |
| New issue under OTB | C non-voting ordinary shares of 0.1p each | 201,631 | 40 |
| 316 |
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at general meetings of the Company. They are entitled to share in the proceeds on the return of capital, or upon the winding up of the Company in proportion to the number of, and amounts paid on shares held. The shares are non-redeemable.
The ordinary non-voting shares, A non-voting ordinary shares and X non-voting ordinary shares have the same rights as to dividend and on winding-up as to the ordinary shares except they cannot vote at meetings of shareholders.
The holders of B, C, D, E and F non-voting ordinary shares do not have the same rights to a dividend and on winding-up as the ordinary shares and cannot vote at meetings of shareholders.
The Group has an employee benefit trust in order to acquire own shares in the Company to satisfy future share incentive plans. The costs of operating the Trust are borne by the Group but are not material.
During the year ended 30 September 2018 the Group purchased 152,707 ordinary own shares and 16,006 A non- voting shares in exchange for cash consideration of £1,363,504 in order to satisfy further options and awards (2017: Nil 2016: Nil). The Trust waived the right to receive dividends on these shares.
The Group has the following equity settled share based payment arrangements:
Following amendments to the EMI thresholds, the Group ceased to qualify as an eligible participant and the EMI scheme was closed to new entrants in July 2008. The CSOP was created in July 2009 to replace the EMI scheme, and to ensure that equity ownership for all levels of employees within the organisation continued to be facilitated.
All remaining unexercised EMI options were exercised during the year ended 30 September 2017.
The CSOP is an HMRC approved scheme in which the Board, at their discretion, grant options to employees to purchase ordinary shares. Each participating employee can be granted options up to the value of £30,000. Options granted under the CSOP can be exercised between the third and the tenth anniversary after the date of grant and usually lapse if the employee leaves the Group before the option expires in circumstances in which they are considered to be a bad leaver. In the case of a good leaver, the employee is able to exercise options for a limited time after cessation of employment. The expense for share-based payments under the CSOP is recognised over the respective vesting period of these options.
The OTB scheme is an award scheme whereby the Board, at their discretion, offer employees the opportunity to purchase growth shares. Growth shares entitle the holder to participate in the growth in the value of the Group above the base value at the date of the award a certain threshold level, set above current market value of the Group at the time the shares are issued, is met. Growth shares granted under the OTB have different vesting conditions. The vesting condition attached to all growth shares granted is that the threshold level needs to be met and an exit event needs to have occurred. During the year ended 30 September 2017, a number of awards have been granted with an additional employment condition of four or six years after the date of grant. The growth shares that were issued subject to these conditions are subject to buy-back options under which the Group can buy back the shares for their issue price if the employee leaves the Group
before the expiry of the employment condition period. The expense for share-based payments under the OTB is recognised over the expected time to the assumed date that the growth target threshold will be met.
The table below summarises the outstanding options and awards:
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| CSOP and EMI | No. | No. | No. |
| Outstanding at beginning of the year | 529,902 | 566,936 | 526,152 |
| Granted | 113,984 | 104,896 | 35,039 |
| Forfeited | (26,480) | (15,579) | (30,316) |
| Exercised | (50,470) | (130,101) | (136,799) |
| Outstanding at the end of the year | 566,936 | 526,152 | 394,076 |
| Exercisable at the end of the year | 254,438 | 194,900 | 168,066 |
The movement in the weighted average exercise price of share options were as follows:
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| £ | £ | £ | |
| Outstanding at beginning of the year | 2.89 | 3.28 | 4.17 |
| Granted | 5.00 | 5.20 | 6.00 |
| Forfeited | 2.99 | 3.37 | 4.79 |
| Exercised | 3.18 | 1.22 | 3.39 |
| Outstanding at the end of the year | 3.28 | 4.17 | 4.52 |
| Exercisable at the end of the year | 2.94 | 3.48 | 3.56 |
The Company is unlisted; therefore no quoted price is available for its stock.
The lowest exercise price for share options outstanding at the end of the period was 190p (2017: 190p, 2016: 22p) and the highest exercise price was 600p (2017: 520p, 2016: 500p). The weighted average remaining contractual life of share options outstanding at the end of the period was six years (2017: seven years, 2016: five years).
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| OTB Growth Shares | No. | No. | No. |
| Outstanding at beginning of the year | 167,102 | 368,733 | 628,840 |
| Granted | 201,631 | 275,317 | 1,135,160 |
| Repurchased and cancelled | — | (15,210) | (39,205) |
| Outstanding at the end of the year | 368,733 | 628,840 | 1,724,795 |
| Exercisable at the end of the year | — | — | — |
| The movement in the weighted average exercise price of growth shares were as follows: | |||
| 2016 | 2017 | 2018 | |
| £ | £ | £ | |
| Outstanding at beginning of the year | 4.10 | 4.59 | 4.86 |
| Outstanding at beginning of the year | 4.10 | 4.59 | 4.86 |
|---|---|---|---|
| Granted | 5.00 | 5.20 | 6.00 |
| Repurchased and cancelled | — | 4.51 | 5.42 |
| Outstanding at the end of the year | 4.59 | 4.86 | 5.60 |
The lowest base value for growth shares outstanding at the end of the period was 410p (2017: 410p, 2016:410p) and the highest base value was 600p (2017: 520p, 2016: 500p). The weighted average remaining contractual life of growth shares outstanding at the end of the period was 1.4 years (2017: 0.4 years, 2016: 0.6 years).
The fair value of equity-settled share options and awards granted is estimated as at the date of grant using the Black-Scholes method, taking into account the terms and conditions upon which the options were granted. It is recognised that the Black-Scholes model has its limitations when valuing the growth shares which have multiple areas of uncertainty attached. However, the estimated impact of these uncertainties is not deemed material.
The inputs to the Black-Scholes model and assumptions used in the calculations are as follows:
| CSOP Grant date | 10/12/2015 | 15/12/2016 | 13/03/2017 | 07/04/2017 | 12/12/2017 |
|---|---|---|---|---|---|
| Number of shares under option | 113,984 | 93,358 | 5,769 | 5,769 | 35,039 |
| Fair value of share option (£) | 5.00 | 5.20 | 5.20 | 5.20 | 6.00 |
| Exercise price of an option (£) | 5.00 | 5.20 | 5.20 | 5.20 | 6.00 |
| Expected volatility | 25% | 25% | 25% | 25% | 25% |
| Expected dividend yield | 5.10% | 4.95% | 4.95% | 4.95% | 4.71% |
| Risk-free interest rate | 0.81% | 0.24% | 0.24% | 0.22% | 0.51% |
| Expected option life to exercise | |||||
| (months) | 36 | 36 | 36 | 36 | 36 |
Options are exercisable at a price equal to the market value of the Company's shares on the date of grant. As the Company is unlisted, it has no readily available share price and so its share value is calculated using dividend and earnings-based models to determine a range of valuations. The average price indicated by these valuations is assumed to be the approximate market value at the date of grant and is agreed with HMRC prior to the granting of options. The expected life of the options is based on the minimum period between the grant of the option, the earliest possible exercise date and an analysis of the historical exercise data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that historical volatility is indicative of future trends, which may also not necessarily be the case.
| Grant date | 21/12/2015 | 15/12/2016 | 07/04/2017 | |
|---|---|---|---|---|
| Number of shares under option | 201,631 | 261,855 | 13,462 | |
| Fair value of share option (£) | 5.00 | 5.20 | 5.20 | |
| Expected volatility | 25% | 25% | 25% | |
| Expected dividend yield | 5.10% | 4.95% | 4.95% | |
| Risk-free interest rate | 0.59% | 0.15% | 0.22% | |
| Expected option life to exercise (months) | 21 | 19 | 15 | |
| Grant date | 12/12/2017 | 12/12/2017 | 12/12/2017 | 08/01/2018 |
| Number of shares under option | 538,160 | 393,500 | 200,000 | 3,500 |
| Fair value of share option (£) | 6.00 | 6.00 | 6.00 | 6.00 |
| Expected volatility | 25% | 25% | 25% | 25% |
| Expected dividend yield | 4.71% | 4.71% | 4.71% | 4.71% |
| Risk-free interest rate | 0.51% | 0.51% | 0.51% | 0.55% |
The market value of the shares has been based upon a whole company basis and has been provided independently by our tax advisers. The dividend yield, volatility and risk free interest rates are consistent with those used for CSOPs. The expected time is the assumed date that the growth target threshold will be met, based on growth in PBT, using a three year forecast approved by the Board.
The Group recognised the following expense related to equity settled share-based payment transactions:
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| £ | £ | £ | |
| EMI | — | — | — |
| CSOP | 30,040 | 44,903 | 38,282 |
| OTB | 38,617 | 62,102 | 73,857 |
| 68,657 | 107,005 | 112,139 |
| 2016 | 2017 | 2018 |
|---|---|---|
| £ | £ | £ |
The Group's activities expose it to a variety of financial instrument risks; market risk (including interest rate and foreign exchange risk), credit risk and liquidity risk. Information is presented below regarding the exposure to each of these risks, including the procedures for measuring and managing them.
Financial instruments include both financial assets and financial liabilities. Financial assets principally comprise trade and other receivables and cash and cash equivalents. Financial liabilities comprise trade and other payables and obligations under finance leases and hire purchase contracts. The Group does not have any derivative financial instruments.
The Group has identified the financial, business and operational risks arising from its activities and has established policies and procedures to manage these items in accordance with its risk appetite. The Board of Directors has overall responsibility for establishing and overseeing the Group's Risk Management Framework and risk appetite.
The Group's financial risk management policies are intended to ensure that risks are identified, evaluated and subject to ongoing monitoring and mitigation (where appropriate). These policies also serve to set the appropriate control framework and promote a robust risk culture within the business. The Group regularly reviews its financial risk management policies and systems to reflect changes in the business, counterparties, markets and range of financial instruments that it uses.
The Group's Treasury Committee has principal responsibility for monitoring exposure to the risks associated with cash and cash equivalents. Policies and procedures are in place to ensure the management and monitoring of each type of risk. The primary objective of the Group's treasury policy is to manage short-term liquidity requirements whilst maintaining an appropriate level of exposure to other financial risks in accordance with the Group's risk appetite.
Details of the significant accounting policies, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each financial asset and financial liability, are disclosed within note 2 to the consolidated historical financial information.
The financial assets and financial liabilities of the Group are as follows:
| Loans and receivables | ||||
|---|---|---|---|---|
| 2016 | 2017 | 2018 | ||
| Financial assets | £000 | £000 | £000 | |
| Trade receivables | 6,287 | 6,248 | 2,203 | |
| Other receivables | 3,450 | 5,093 | 4,203 | |
| Cash and cash equivalents | 39,510 | 42,138 | 49,695 | |
| 49,247 | 53,479 | 56,101 |
| Financial liabilities | |||
|---|---|---|---|
| 2016 | 2017 | 2018 | |
| Financial liabilities | £000 | £000 | £000 |
| Trade payables | 1,283 | 817 | 1,052 |
| Obligations under finance leases and hire purchase contracts | 109 | 143 | 731 |
| 1,392 | 960 | 1,783 |
The carrying amount of all financial assets and liabilities approximate to their fair value due to their short-term nature.
The Group holds interest bearing assets in the form of cash and cash deposits. Cash at bank earns interest at floating rates based on daily bank deposit rates. Term deposits can also be made for varying periods depending on the immediate cash requirements of the Group, and interest is earned at the respective fixed-term rate. Based on the cash balances at the reporting date, if interest were to move by 0.25% it would change profit before tax by approximately;
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| £000 | £000 | £000 | |
| +25bps (0.25%) | 61 | 64 | 129 |
| – 25bps (0.25%) | (73) | (3) | (89) |
The Group retains a proportion of the interest income generated from the pooling of customer cash balances and as a result, the Group has an indirect exposure to interest rate risk. The cash balances are held with a variety of banks and are placed in a range of fixed term, notice and call deposit accounts with due regard for counterparty credit risk, capacity risk and liquidity risk requirements. The spread of rate retained by the Group is variable dependent on rates received by banks (disclosed to customers at between 0.25% below and 0.60% above the prevailing base rate) and amounts paid away to customers.
The impact of a 0.25% increase or decrease in UK base interest rates on the Group's revenue has been calculated and shown below. This has been modelled on a historical basis for each year separately assuming that the UK base rate was 25bps higher or lower than the actual position at the time.
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| £000 | £000 | £000 | |
| +25bps (0.25%) | 1,785 | 4,053 | 3,150 |
| – 25bps (0.25%) | (2,854) | (3,395) | (5,119) |
Customer cash balances are not a financial asset of the Group and so are not included in the consolidated statement of financial position.
As at the year end the Group had no significant borrowings and therefore was not exposed to a material interest rate risk related to debt.
The Group is not exposed to significant foreign exchange translation or transaction risk as the Group's activities are primarily within the UK. Foreign exchange risk is therefore considered immaterial.
The Group's exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due, arises principally from its cash balances held with banks and trade and other receivables.
Trade receivables are presented net of allowances within the statement of financial position. An allowance for impairment is made where there is an identified loss event which, based on previous experience is evidence of a reduction in the recoverability of the cash flows. Trade receivables that are not impaired individually are, in addition, assessed for impairment on a collective basis. Details of those trade receivables that are past due but not impaired and any impairments made during the reporting period is shown within note 17.
The Group has implemented procedures that require appropriate credit or alternative checks on potential customers before business is undertaken. This minimises credit risk in this area.
The credit risk on liquid funds, cash and cash equivalents is limited as deposits are held across a number of major banks. The directors continue to monitor the strength of the banks used by the Group. The banks currently used by the Group are Bank of Scotland plc, Barclays Bank plc,
Lloyds Bank plc, HSBC Bank plc, The Royal Bank of Scotland plc, Santander UK plc, Clearstream Banking SA, Close Brothers plc, and Brown Brothers Harriman & Co. Bank of Scotland plc. The Group's principal banker, is 100% owned by Lloyds Banking Group plc. All the other banks currently used by the Group have long-term credit ratings of at least A (Fitch), apart from The Royal Bank of Scotland plc which has a rating of BBB+ (Fitch) and Baa3 (Moody's). Where the services of other banks are used, the Group follows a rigorous due diligence process prior to selection. This results in the Group retaining the ability to further mitigate the counterparty risk on its own behalf and that of its customers.
The Group has no significant concentration of credit risk as exposure is spread over a large number of counterparties and customers. The maximum exposure to credit risk is represented by the carrying amount of each financial asset at the reporting date. In relation to dealing services, the Group operates as agent on behalf of its underlying customers and in accordance with the London Stock Exchange Rules. Any settlement risk during the period between trade date and the ultimate settlement date is substantially mitigated as a result of the Group's agency status, its settlement terms and the delivery versus payment mechanism whereby if a counterparty fails to make payment, the securities would not be delivered to the counterparty.
Therefore any risk exposure is to an adverse movement in the market prices between the time of trade and settlement. Conversely, if a counterparty fails to deliver securities, no payment would be made.
There has been no material change to the Group's exposure to credit risk during the period under review.
This is the risk that the Group may be unable to meet its liabilities as and when they fall due. These liabilities arise from the day-to-day activities of the Group and from its obligations to customers. The Group is a highly cash generative business and maintains sufficient cash and standby banking facilities to fund its foreseeable trading requirements. There has been no change to the Group's exposure to liquidity risk or the manner in which it manages and measures the risk during the period.
The following table shows the undiscounted cash flows relating to non-derivative financial liabilities of the Group based upon the remaining period to the contractual maturity date, at the end of the reporting period:
| Less than 1 month £000 |
1 to 3 months £000 |
3 to 12 months £000 |
1 to 5 years £000 |
Total £000 |
|
|---|---|---|---|---|---|
| 2016 | |||||
| Trade payables | 718 | 51 | 514 | — | 1,283 |
| Obligations under finance leases | — | — | 75 | 34 | 109 |
| 718 | 51 | 589 | 34 | 1,392 | |
| 2017 | |||||
| Trade payables | 701 | — | 116 | — | 817 |
| Obligations under finance leases | — | — | 75 | 68 | 143 |
| 701 | — | 191 | 68 | 960 | |
| 2018 | |||||
| Trade payables Obligations under finance leases |
1,052 | — | — | — | 1,052 |
| and hire purchase agreements | — | — | 300 | 431 | 731 |
| 1,052 | — | 300 | 431 | 1,783 |
The Group's objectives in managing capital are to:
The capital structure of the Group consists of share capital, share premium and retained earnings. At the reporting date the Group had capital of £64,036,000 (2017: £61,362,000, 2016: £53,788,000).
Capital generated from the business is both reinvested in the business to generate future growth and returned to shareholders principally in the form of dividends. The capital adequacy of the business is monitored on a monthly basis and as part of the business planning process by the Board. It is also reviewed before any distributions are made to shareholders to ensure it does not fall below the agreed surplus as outlined in the Group's capital management policy. The liquidity of the business is monitored by management on a daily basis to ensure sufficient funding exists to meet the Group's liabilities as they fall due. The Group is highly cash generative and maintains sufficient cash and standby banking facilities to fund its foreseeable trading requirements.
The Group conducts an Internal Adequacy Assessment Process (''ICAAP''), as required by the Financial Conduct Authority (''FCA'') to assess the appropriate amount of regulatory capital to be held by the Group. Regulatory capital resources for ICAAP are calculated in accordance with published rules. The ICAAP compares regulatory capital resources against regulatory capital requirements as specified by the relevant regulatory authorities.
The Group maintained a surplus of regulatory capital through the period under review. Information under Part Eight (Pillar 3) Disclosure of the Capital Requirements Regulation is available on the Group's website at www.ajbell.co.uk.
The Group manages a number of investment funds (open ended investments) acting as agent of the Authorised Corporate Director. The dominant factor in deciding who controls these entities is determined by the contractual arrangement in place between the Authorised Corporate Director and the Group, rather than voting or similar rights. As the Group directs the investing activities through its investment management agreement with the Corporate Authorised Director, the investment funds are deemed to be structured entities. The investment funds are not consolidated into the Group's financial statements as the Group are judged to act as an agent rather than having control under IFRS 10.
The purpose of the investment funds is to invest capital received from investors in a portfolio of assets in order to generate a return in the form of capital appreciation, income from the assets, or both. The Group's interest in the investment funds is in the form of management fees received for its role as investment adviser. These fees are variable depending on the value of the assets under management.
The funds do not have any debt or borrowings and are financed through the issue of units to investors.
The following table shows the details of unconsolidated structured entities in which the Group has an interest at the reporting date:
| Management | |||||
|---|---|---|---|---|---|
| Annual | charge | ||||
| Number of | Net AUM of | management | receivable | ||
| funds | funds | charge | at 30 Sept | ||
| Year | Type | No. | £m | £000 | £000 |
| 2017 | OEIC | 5 | 48.2 | 29 | — |
| 2018 | OEIC | 6 | 141.1 | 157 | 52 |
The annual management charge is included within ad-valorem fees within revenue in the consolidated income statement.
The annual management charge receivable is included within accrued income in the consolidated statement of financial position.
The maximum exposure to loss relates to future management fees should the market value of the investment funds decrease.
At 30 September 2018, the lease commitments relate to the current leasehold premises at 4 Exchange Quay, Manchester and 29 Southwark Bridge, London.
Future minimum lease payments under non-cancellable operating leases for office properties are as follows:
| 2016 £000 |
2017 £000 |
2018 £000 |
|
|---|---|---|---|
| Within one year | 2,112 | 1,486 | 1,350 |
| In the second and fifth years inclusive | 5,743 | 5,820 | 6,243 |
| After five years | 15,936 | 14,685 | 12,912 |
| 23,791 | 21,991 | 20,505 |
At original inception, office property leases are negotiated for an average term of ten to fifteen years and rentals are fixed for an average of three years.
The Group recognised £1,617,000 as an expense during the year ended 30 September 2018 (2017: £2,081,000, 2016: £978,000).
Transactions between the parent company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed.
Key management personnel is represented by the Board of Directors and the Executive Management Board.
| Short-term employee benefits (excluding NI) Retirement benefit costs Share-based payment Gain on exercise of share options |
2016 £000 2,499 66 27 — |
2017 £000 2,586 61 40 1 |
2018 £000 2,353 54 45 64 |
|---|---|---|---|
| 2,592 | 2,688 | 2,516 |
During the period there were no material transactions or balances between the Group and its key management personnel or members of their close families, other than noted below.
The remuneration expense of the directors is as follows:
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| £000 | £000 | £000 | |
| Short-term employee benefits (excluding NI) | 1,141 | 1,315 | 1,253 |
| Retirement benefit costs | 1 | 4 | 7 |
| Share-based payment | 11 | 19 | 23 |
| Gain on exercise of share options | — | — | 64 |
| 1,153 | 1,338 | 1,347 |
Dividends totalling £5,848,000 were paid in the year (2017: £3,027,000, 2016: £3,375,000) in respect of ordinary shares held by the Company's directors.
Remuneration of the highest paid director:
| 2016 | 2017 | 2018 | |
|---|---|---|---|
| £000 | £000 | £000 | |
| Short-term employee benefits | 720 | 863 | 802 |
During the year, the Group made donations totalling £139,675 (2017: £109,125, 2016: £85,279) to the AJ Bell Trust, a registered charity of which Mr A J Bell is a trustee.
The Group is party to two leases with EQ Property Services Limited for rental of the Head Office premises, 4 Exchange Quay, Salford Quays, Manchester M5 3EE. Mr A J Bell and Mr M T Summersgill are directors and shareholders of both AJ Bell Holdings Limited and EQ Property Services Limited. Mr C Galbraith, Mr R Stott and Mr F Lyons are members of key management personnel and shareholders of AJ Bell Holdings Limited and are directors and shareholders of EQ Property Services Limited. The 15 year lease was signed for rental of the building on 17 August 2016, at a market rate of £1,593,582 per annum. No amount was outstanding at any reporting date.
At the reporting date, there is a debtor of £116,000 outstanding (2017: £Nil, 2016: £Nil) with EQ Property Services Limited.
There have been no material events occurring between the reporting date and the date of approval of this historical financial information.
| Name of subsidiary | Principal activity |
|---|---|
| AJ Bell Limited | Investment/Group administration |
| AJ Bell Management Limited | SIPP and investment administration |
| AJ Bell Securities Limited | Investment dealing, custody and administration |
| AJ Bell Media Limited | Media |
| AJ Bell Asset Management Limited | Investment management services |
| AJ Bell EBT Trustees Limited | EBT Trustee |
Between 1 October 2015 and 30 September 2018, being the period covered by the historical financial information in this Registration Document, there have been the following changes to the Company's issued share capital:
(b) 261,855 D non-voting ordinary shares of £0.001 each (D Shares);
2.1.7 on 20 December 2016 the Company purchased and cancelled 6,998 C Shares;
The issued share capital of the Company as at 5 November 2018 as follows, including the amount unpaid on such shares:
| Nominal | Number | |
|---|---|---|
| unpaid | ||
| Nil | ||
| Nil | ||
| 1,218,665 | 1,218.67 | 260,973 |
| 158,890 | 158.89 | Nil |
| 188,056 | 188.06 | Nil |
| 255,189 | 255.19 | Nil |
| 919,160 | 919.16 | Nil |
| 203,500 | 203.50 | Nil |
| 1,085,962 | 1,085.96 | 302,470 |
| Number 38,846,241 75,000 |
value (£) 38,846.24 75.00 |
The Non-voting Ordinary Shares, A Shares, B Shares, C Shares, D Shares, E Shares, F Shares and X shares are principally held by current and former employees of the Group. The B Shares, C Shares, D Shares, E Shares and F Shares are together the Growth Shares. Each of the Growth Shares participate in value on an exit event, such as a sale or a listing of the Company, or on a solvent winding up of the Company, subject to the value on such an event exceeding the applicable hurdle amount for the class. The Non-voting Ordinary Shares, A Shares and X shares rank pari-passu with the Ordinary Shares save that they do not have voting rights.
As at the date of this Registration Document the following shares are under option in connection with employee share schemes
| Nominal | ||
|---|---|---|
| value | ||
| Share class | Number | (£) |
| Ordinary Shares | 422,576 | 422.58 |
Following the date of this Registration Document, and prior to the intended date of Admission it is the current intention that the Company will undertake a reorganisation of its share capital such that the Company will have a single class of voting ordinary shares and a class of deferred shares (the Share Capital Reorganisation). The Share Capital Reorganisation will include the following steps:
The Deferred Shares will have no rights to attend or vote at meetings of the Company or to participate in any dividend or distribution paid or made by the Company. On a winding-up the Deferred Shares will be entitled to the return of the nominal value paid up on each of them once and only if nominal value plus £25 million per share has been returned to the holders of the new ordinary shares. The Deferred Shares exist in order to give effect to the growth share scheme currently in place while preserving the share capital of the Company. After Admission the Company intends to either buy the Deferred Shares back for nominal value or cancel the Deferred Shares by way of a Court approved reduction of capital.
3.1 The summary in this section relates to the Articles which are intended to be adopted in the event of Admission.
The Articles of the Company shall include provisions to the following effect:
The Articles contain no restriction on the objects of the Company.
The share capital of the Company is represented by an unlimited number of shares having the rights described in the Articles.
Subject to any rights or restrictions attached to any shares, on a show of hands every member who (being an individual) is present in person or by proxy or (being a corporation) is present by a duly authorised representative, not being himself a member entitled to vote, shall have one vote, and on a poll every member shall have one vote for every share of which he is the holder. Votes may be given personally or by proxy.
Subject to the 2006 Act and as set out in the Articles, the Company may by ordinary resolution declare dividends but no dividend shall exceed the amount recommended by the Board. No dividend may be paid otherwise than in accordance with the 2006 Act. The Board may at any time declare and pay such interim dividends as appears to be justified by the position of the Company.
Except as otherwise provided by the rights attached to the shares, all dividends shall be declared and paid according to the amounts paid up on the nominal amount of the shares on which the dividend is paid but no amount paid on a share in advance of calls shall be treated as paid on the share. All dividends shall be apportioned and paid proportionately to the amounts paid up on the nominal amount of the shares during any portion or portions of the period in respect of which the dividend is paid; but, if any share is issued on terms providing that it shall rank for dividend as from a particular date, that share shall rank for dividend accordingly.
Any dividend or other moneys payable in respect of a share may be paid:
* by such other method of payment approved by the Board as the person or persons entitled to the moneys may in writing agree to.
Subject to the provisions of the 2006 Act and the Articles, the Company can issue shares which are required to be redeemed and shares which may be redeemed at the option of the Company or the relevant member.
Whenever the capital of the Company is divided into different classes of shares, the rights attached to any class of the shares in issue may from time to time be varied or abrogated, whether or not the Company is being wound up, with the sanction of a special resolution passed at a separate meeting of holders of the issued shares of the class held in accordance with the Articles (but not otherwise).
The special rights conferred on the holders of any shares or class of shares shall, unless otherwise provided by the Articles or the terms of issue of the shares concerned, be deemed to be varied by a reduction of capital paid up on those shares but shall be deemed not to be varied by the creation or issue of further shares ranking pari passu with them or subsequent to them. The rights conferred on the holders of shares shall be deemed not to be varied by the creation or issue of any further shares ranking in priority to them nor shall any consent or sanction of the holders of shares be required to any variation or abrogation effected by a resolution on which only the holders of shares are entitled to vote.
Subject to the provisions of the 2006 Act and without prejudice to any rights attaching to any existing shares, shares may be issued with such rights or restrictions as the Company may, by ordinary resolution, determine or in the absence of such determination, or as far as any such resolution does not make specific provision, as the Board may determine.
The Board may issue shares as certificated or uncertificated shares, subject to any restrictions on transfers described below.
A share held in certificated form may be transferred by an instrument of transfer in any usual form or in any other form which the Board may approve, which shall be executed by or on behalf of the transferor and, unless the share is fully paid, by or on behalf of the transferee. A share held in uncertificated form may be transferred by means of a relevant system. The transferor shall be deemed to remain the holder of the share until the transferee is entered on the register as its holder.
Every member (other than a person who is not entitled to a certificate under the 2006 Act) is entitled, on becoming a holder of any shares in certificated form and without payment, to a certificate for all shares of each class held by him in certificated form. If a share certificate is worn out, defaced, lost, destroyed or stolen it may be renewed without fee but on such terms as to evidence and indemnity as the Board requires. In the case of loss, theft, or destruction, the person to whom the new certificate is issued may be required to pay any exceptional out of pocket expenses incidental to the investigation of evidence of loss, theft or destruction and the preparation of an appropriate form of indemnity. Every share certificate is sent at the risk of the person entitled thereto.
The Board may, in the case of shares held in certificated form, in its absolute discretion refuse to register the transfer of a share which is not fully paid provided that such discretion may not be exercised in such a way as to prevent dealings in the shares of that class from taking place on an open and proper basis.
The Board may also refuse to register a transfer of any shares held in certificated form unless the instrument of transfer is:
* duly stamped or duly certified or otherwise shown to the satisfaction of the Board to be exempt from stamp duty, lodged at the transfer office or at such other place as the Board may appoint and (save in the case of a transfer by a person to whom no certificate was issued in respect of the shares in question) accompanied by the certificate for the shares to which it relates, and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer and, if the instrument of transfer is executed by some other person on his behalf, the authority of that person so to do;
If the Board refuses to register a transfer of shares held in certificated form, it shall (except in the case of suspected fraud) as soon as practicable and in any event within two months after the date on which the transfer was lodged with the Company send to the transferee notice of the refusal together with its reasons for the refusal.
No fee shall be charged for the registration of any instrument of transfer or other document relating to or affecting the title to any share or for making any entry in the Register affecting the title to any share.
The Company shall be entitled to retain any instrument of transfer which is registered, but (except in the case of suspected fraud) any instrument of transfer which the Board refuses to register shall be returned to the person lodging it when notice of the refusal is given.
For all purposes of the Articles relating to the registration of transfers of shares, the renunciation of the allotment of any shares by the allottee in favour of some other person shall be deemed to be a transfer and the Board shall have the same powers of refusing to give effect to such a renunciation as if it were a transfer.
If a member dies the survivor or survivors where he was a joint holder, and his personal representatives where he was a sole holder or the only survivor of joint holders, shall be the only persons recognised by the Company as having any title to his interest; but nothing contained in the Articles shall release the estate of a deceased member from any liability in respect of any share which had been held (whether solely or jointly) by him.
The holders of the Deferred Shares shall:
Subject to the terms of allotment, the directors may from time to time make calls upon the members in respect of any moneys unpaid on their shares including any premium and each member shall (subject to being given at least 14 clear days' notice specifying where and when payment is to be made) pay to the Company the specified amount called on his shares. If any sum called in respect of a share is not paid before or on the day appointed for payment thereof, the person from whom it is due and payable shall pay interest on the amount unpaid from the day it became due and payable until it is paid. Interest shall be paid at a rate fixed by the terms of allotment of the share or in the notice of the call; or if no rate is fixed, at the appropriate rate per annum from the day appointed for the payment thereof to the time of the actual payment. Directors may at their discretion waive payment of any such interest in whole or in part.
If a member fails to pay any call or instalment of a call on the day appointed for payment of such call or instalment, the directors may serve a notice on him requiring payment of so much of the amount unpaid together with any interest which may have accrued and any expenses which have been incurred by the Company due to the default. The notice shall name the place where payment is to be made and shall state that if the notice is not complied with the shares in respect of which the call was made will be liable to be forfeited.
A forfeited share may be sold, re-allotted or otherwise disposed of on such terms and in such manner as the Board determine and at any time before a sale or disposition the forfeiture may be cancelled on such terms as the directors think fit.
A person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares, but shall, notwithstanding such forfeiture, remain liable to pay to the Company all moneys which at the date of forfeiture were payable by him to the Company in respect of the shares, together with all expenses and interest from the date of forfeiture or surrender until payment, but his liability shall cease if and when the Company receives payment in full of the unpaid amount.
A statutory declaration in writing that the declarant is a director or the secretary of the Company, and that the particular share of the Company has been duly forfeited on a date stated in the declaration, shall be conclusive evidence of the facts therein stated as against all persons claiming to be entitled to the forfeited share.
The Company may give notice to any member or any person whom the Company knows or has reasonable cause to believe (a) to be interested in the Company's shares or (b) to have been so interested at any time in the three years immediately preceding the date on which the notice is issued. The notice may require the person (a) to confirm that fact or (as the case may be) to state whether or not it is the case and (b) if he holds, or has during that time held, any such interest, to give such further information as may be required in accordance with section 793 of the 2006 Act (including particulars of the interest (present or past) and the identity of the persons interested in the shares in question).
If the Company has served a disclosure notice on a member or any other person appearing to be interested in shares referred to in the disclosure notice, and the Company has not received the information required in the disclosure notice within fourteen days after service of the disclosure notice, the directors may determine that the member holding the specified shares shall be subject to restrictions in respect of those shares (including restrictions as to voting, right to transfer the shares and right to receive dividends).
Unless otherwise determined by the Board, the number of directors of the Company shall be not less than two.
The directors may be paid all travelling, hotel and other expenses as they may incur in connection with their attendance at meetings of the Board or of committees of the Board or general meetings or separate meetings of the holders of any class of shares or debentures of the Company or otherwise in connection with the discharge of their duties.
The Board may provide benefits, whether by the payment of gratuities or pensions or by insurance or otherwise, for any director, employee or former employee who has held but no longer holds any office or employment with the Company or with any body corporate which is or has been a subsidiary undertaking or a predecessor in business of the Company or of any subsidiary undertaking, and for any member of his family (including a spouse and a former spouse) or any person who is or was dependent on him and may (as well before as after he ceases to hold such office or employment) contribute to any fund and pay premiums for the purchase or provision of any such benefit. The power conferred by the 2006 Act to make provision for the benefit of persons employed or formerly employed by the Company or any of its subsidiaries, in connection with the cessation or the transfer to any person of the whole or party of the undertaking of the Company or any subsidiary shall be exercised by the Board.
At each annual general meeting all of the directors shall stand for re-election. Any director may be removed from office by ordinary resolution of the Company of which special notice has been given in accordance with section 312 of the 2006 Act. The directors are not subject to a mandatory retirement age.
A director who to his knowledge is in any way directly or indirectly interested in a contract or arrangement or proposed contract or arrangement with the Company shall disclose the nature of his interest at a meeting of the Board.
A director may not vote (or be counted in the quorum) in respect of any resolution of the directors or committee of the directors concerning a contract, arrangement, transaction or proposal to which the Company is or is to be a party and in which he has an interest which (together with any interest of any person connected with him) is, to his knowledge, a material interest (otherwise than by his interest in shares or debentures or other securities of or otherwise in or through the Company). This is subject to certain exceptions including (i) where the contract, arrangements, transaction or proposal concerns general employee privileges or insurance policies for the benefit of directors or (ii) in circumstances where a director acts in a personal capacity in the giving of a guarantee, security or indemnity for the benefit of the Company or any of its subsidiary undertakings.
Any director may act by himself or his firm in a professional capacity for the Company, other than as auditor, and he or his firm shall be entitled to remuneration for professional services as if he were not a director.
Subject to the provisions of the 2006 Act, and provided that he has disclosed to the Board the nature and extent of any interest of his in accordance with the Articles, a director notwithstanding his office:
The directors may authorise, to the fullest extent permitted by law, any matter proposed to them which would otherwise result in a director infringing his duty under the 2006 Act to avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the Company and which may reasonably be regarded as likely to give rise to a conflict of interest.
Authorisation of a matter is effective only if (i) the matter has been proposed to the directors at a meeting of the directors or for the authorisation of the directors by resolution in writing and in accordance with the Board's normal procedures or in such other manner as the Board may approve, (ii) any requirement as to quorum at the meeting of the directors at which the matter is considered is met without counting the director in question and any other interested director; and (iii) the matter has been agreed to without the director in question and any other interested Director voting or would have been agreed to if their votes had not been counted.
An interest of a person connected with a director shall be treated as an interest of the director. Section 252 of the 2006 Act shall determine whether a person is connected with a director.
The directors may exercise all the powers of the Company to borrow money and to give guarantees, hypothecate, mortgage, charge or pledge the assets, property and undertaking of the Company or any part thereof and to issue debentures and other securities whether outright or as collateral security for any debt, liability or obligation of the Company or of any third party.
An annual general meeting shall be held at such time and place as the Board may determine. The Board may call general meetings and, on the requisition of members pursuant to the provisions of the 2006 Act, shall forthwith convene a general meeting. If there are not sufficient directors capable of acting to call a general meeting, any director may call a general meeting. If there is no director able to act, any two members may call a general meeting for the purpose of appointing directors.
No business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business. A quorum is two members present in person or by proxy and entitled to vote upon the business to be transacted at the meeting.
An annual general meeting shall be called by at least 21 days' clear notice in writing. A meeting of the Company other than an annual general meeting shall be called by not less than 14 days' clear notice. The notice shall specify the place, the day and the time of the meeting and the general nature of that business. A notice calling an annual general meeting shall specify the meeting as such and a notice for the passing of a special resolution shall specify the intention to propose the resolution as a special resolution and the terms of the resolution. Every member entitled to attend and vote is entitled to appoint one or more proxies to attend, vote and speak instead of him and that a proxy need not be a member.
The accidental omission to give notice of a meeting, or to send an instrument of proxy or invitation to appoint a proxy as provided by the Articles, to any person entitled to receive notice, or the non-receipt of notice of a meeting or instrument of proxy or invitation to appoint a proxy by such a person, shall not invalidate the proceedings at that meeting.
Every notice of meeting shall state with reasonable prominence that a member entitled to attend and vote is entitled to appoint one or more proxies to attend, vote and speak instead of him and that a proxy need not be a member.
Save as provided in the Articles, a copy of the annual accounts of the Company together with a copy of the auditors' report and the directors' report thereon and any other documents required to accompany or to be annexed to them shall, not less than 21 clear days before the date of the general meeting at which copies of those documents are to be laid, be sent to every member and to every debenture holder of the Company and to every other person who is entitled to receive notices from the Company of general meetings.
Copies of the documents referred to in the Articles need not be sent to (a) a person who is not entitled to receive notices of general meetings or of whose address the Company is unaware; or (b) more than one of the joint holders of shares or debentures in respect of those shares or debentures, provided that any member or debenture holder to whom a copy of such documents has not been sent shall be entitled to receive a copy free of charge on application at the registered office.
The Company may send a summary financial statement to any of the persons otherwise entitled to be sent copies of the documents referred to in the Articles instead of or in addition to those documents and, where it does so, the statement shall be delivered or sent to such person not less than 21 clear days before the general meeting at which copies of those documents are to be laid.
If the Company is wound up, the liquidator may, with the sanction of a special resolution of the Company and any other sanction required by the 2006 Act, divide among the members in specie the whole or any part of the assets of the Company and may, for that purpose, value any assets and determine how the division shall be carried out as between the members or different classes of members. The liquidator may, with the applicable sanction, vest the whole or any part of the assets in trustees upon such trusts for the benefit of the members as he with the applicable sanction determines, but no member shall be compelled to accept any assets upon which there is a liability.
The Company shall be entitled to sell at the best price reasonably obtainable any member's shares or the shares to which a person is entitled by virtue of transmission on death or bankruptcy or otherwise by operation of law if:
If at any time during or after the said period of twelve years further shares have been issued in right of those held at the commencement of that period or of any issued in right during that period and, since the date of issue, the requirements of the Articles have been satisfied in respect of such further shares, the Company may also sell the further shares.
To give effect to such a sale the Board may authorise any person to execute an instrument of transfer or otherwise effect the transfer of the shares to be sold. If the shares concerned are in uncertificated form, in accordance with the CREST Regulations, the Company may issue a written notification to the operator requiring conversion of the shares into certificated form. The purchaser shall not be bound to see to the application of the purchase moneys and the title of the transferee to the shares shall not be affected by any irregularity in or invalidity of the proceedings relating to the sale. The net proceeds of sale shall belong to the Company which shall be obliged to account to the former member or other person previously entitled to the shares for an amount equal to the net proceeds, which shall be a debt of the Company, and shall enter the name of such former member or other person in the books of the Company as a creditor for such amount. No trust shall be created and no interest shall be payable in respect of the debt, and the Company shall not be required to account for any money earned on the net proceeds, which may be employed in the business of the Company or invested in such investments for the benefit of the Company as the Board may from time to time determine.
Other than as provided by the City Code and Chapter 28 of the 2006 Act, there are no rules or provisions relating to mandatory bids and/or squeeze-out and sell-out rules that apply to the shares or the Company.
The City Code is issued and administered by the Takeover Panel. At the date of this document the Company, as a private limited company, is not subject to the City Code. Upon re-registration as a public company or (if earlier) publication of a prospectus, the Company will be subject to the City Code and therefore its Shareholders will be entitled to the protections afforded by the City Code.
Rule 9 of the City Code provides that, except with the consent of the Takeover Panel, when: (a) any person acquires, whether by a series of transactions over a period of time or not, an interest in shares which (taken together with shares in which persons acting in concert with him are interested) carry 30% or more of the voting rights of a company; or (b) any person, together with persons acting in concert with him, is interested in shares which in the aggregate carry not less than 30% of the voting rights of a company but does not hold shares carrying more than 50% of such voting rights and such person, or any person acting in concert with him, acquires an interest in any other shares which increases the percentage of shares carrying voting rights in which him is interested, then, in either case, that person, together with the persons acting in concert with him, is normally required to extend offers in cash, at the highest price paid by him (or any persons acting in concert with him) for shares in the company within the preceding 12 months, to the holders of any class of equity share capital whether voting or non-voting and also to the holders of any other class of transferable securities carrying voting rights.
Under the 2006 Act, if a ''takeover offer'' (as defined in section 974 of the 2006 Act) is made for the shares and the offeror were to acquire, or unconditionally contract to acquire, not less than 90% in value of the shares to which the takeover offer relates (the ''Takeover Offer Shares'') and not less than 90% of the voting rights attached to the Takeover Offer Shares within three months of the last day on which its offer can be accepted, it could acquire compulsorily the remaining 10%. It would do so by sending a notice to outstanding Shareholders telling them that it will acquire compulsorily their Takeover Offer Shares and then, six weeks later, it would execute a transfer of the outstanding Takeover Offer Shares in its favour and pay the consideration to the Company, which would hold the consideration on trust for outstanding Shareholders. The consideration offered to the Shareholders whose Takeover Offer Shares are acquired compulsorily under the 2006 Act must, in general, be the same as the consideration that was available under the takeover offer.
The 2006 Act also gives minority Shareholders a right to be bought out in certain circumstances by an offeror who has made a takeover offer. If a takeover offer related to all the shares and at any time before the end of the period within which the offer could be accepted the offeror held or had agreed to acquire not less than 90% of the shares to which the offer relates, any holder of shares to which the offer related who had not accepted the offer could, by a written communication to the offeror, require it to acquire those shares. The offeror is required to give any Shareholder notice of his right to be bought out within one month of that right arising. The offeror may impose a time limit on the rights of the minority Shareholders to be bought out, but that period cannot end less than three months after the end of the acceptance period. If a Shareholder exercises his or her rights, the offeror is bound to acquire those shares on the terms of the offer or on such other terms as may be agreed.
The Company currently operates a Company Share Option Plan (the CSOP), which is intended to remain in place in the event of Admission. Following Admission, the Company proposes to operate the AJ Bell Holdings Executive Incentive Plan (the EIP) and the AJ Bell Buy As You Earn Plan (the BAYE and, together with the EIP, the Share Plans). Features of the Share Plans are summarised below. Certain provisions which are common to the Share Plans are summarised following the plan specific summaries.
The CSOP is a tax advantaged scheme under Schedule 4 of the Income Tax (Earnings and Pensions) Act 2003.
Any full-time director (working a minimum of 25 hours per week) or any employee of the Company or the Group may be granted an option under the CSOP.
Options to acquire certain ordinary shares in the Company (the CSOP Shares) may be granted during the 42 days beginning on (i) Admission and (ii) following the end of any ''closed period'' or (iii) during any other period when the Board has decided that exceptional circumstances exist which justify the grant of an option. Options granted under the CSOP are personal to the participant and, except on the death of a participant, may not be transferred. No payment is made for the grant of an option. Options granted under the CSOP are not pensionable.
Options can be satisfied by newly issued CSOP Shares, CSOP Shares purchased in the market or by the transfer of treasury CSOP Shares, or if the directors permit an employees' trust or any other person to grant an option, by the transfer of shares by that grantor. CSOP Shares allotted or transferred under the CSOP will rank equally in all respects with all other CSOP Shares then in issue (except for any rights attaching to CSOP Shares by reference to a record date preceding the allotment or transfer of such CSOP Shares).
The price payable for each CSOP Share under an option will be determined by the Board or a duly constituted committee of Directors but it shall not be less than the greater of the market value of a CSOP Share on the date of grant and, in the case of an option which is a right to subscribe for CSOP Shares, the nominal value of a CSOP Share.
The exercise of an option may be conditional on the performance of the Company and the Group and/or of the participant over such period and measured against such objective criteria as determined by the Directors and notified to a participant when the option is granted.
An option granted under the CSOP will normally be exercisable between three years and ten years after the date of grant, subject to any applicable performance conditions being met. Early exercise of options is allowed if a participant dies or otherwise ceases to be employed by a member of the Company's group by reason of permanent incapacity through injury (evidenced to the satisfaction of the Directors) or disability, redundancy or retirement, the optionholder's employer ceasing to be a member of the Group or the transfer of the business that employs the optionholder to a person that is not a member of the Group (''Good Leavers'') and will lapse on the expiry of the specified exercise period. A Good Leaver (other than by reason of death) may exercise within 6 months of cessation of employment. The Company (or other grantor with the approval of the Directors, if not the Company) has discretion to allow early exercise of the options in other leaver circumstances.
Early exercise of options may also be allowed on the occurrence of specified corporate events such as a demerger, reconstruction, voluntary winding-up, and take-over of the Company.
The CSOP is subject to the following limits:
* An option may not be granted on a date if it would result in the total number of shares issued to satisfy options or awards granted under share incentive schemes which remain capable of issue in the prior 10 years, or the period since Admission (whichever is the shorter) exceeding 10% of the issued share capital of the Company, nor if it would result in the total awards under discretionary shares schemes in the same such period exceeding 5% of the issued share capital of the Company; and
* the number of CSOP Shares in respect of which an option is granted to a participant shall be limited so that the aggregate market value of the CSOP Shares which may be acquired on the exercise of the option by the participant, when added to (i) the aggregate market value of CSOP Shares in respect of which options under the CSOP have previously been granted to the participant (and which subsist at the time of the new grant of options under the CSOP) and (ii) the aggregate market value of the CSOP Shares in respect of which rights to acquire such CSOP Shares have been obtained by the participant under any other tax-advantaged Company Share Option Plan of the Company or ''Associated Company'' shall not exceed or further exceed £30,000.
In the event of any variation in the share capital of the Company, the Directors may make such adjustments as they consider appropriate to the number of CSOP Shares under option and/or the price at which they may be acquired.
The Directors may at any time amend the CSOP provided that no such alteration may be made if it would no longer result in the CSOP meeting the requirements of Schedule 4, shall take effect so as to affect the liabilities of any person other than the Company without prior written consent of that other person. The prior approval of the shareholders of the Company must be obtained in the case of any amendment which would make the terms of the CSOP materially more generous or amend eligibility so as to expand the class of potential participants. The Directors must give written notice to any participant affected by any alteration as soon as reasonably practicable after making any such alteration.
The EIP was approved by the Remuneration Committee on 12 September 2018. The EIP is a combined annual bonus and long term incentive plan under which both Annual Awards and Deferred Awards may be granted, referred to together in this summary as Awards.
The EIP will be administered by the Board or by any duly authorised committee of it and references in this summary to the ''Board'' should be read accordingly. Decisions in relation to any participation in the EIP by the Executive Directors will always be taken by the Company's Remuneration Committee.
The relevant employees will be notified of the maximum cash value of their initial Annual Awards and Deferred Awards during October 2018. The actual awards will be made shortly after Admission with the number of shares awarded being based on the offer price to be determined immediately prior to Admission.
All employees (including the Executive Directors) of the Company or any of its subsidiaries are eligible for selection to participate in the EIP, at the discretion of the Board.
Awards under the EIP may be granted in the form of conditional awards of shares, nil-cost options over shares or nominal cost options over shares (that is options to acquire shares for a per share exercise price equal to the nominal value of a share from time to time).
Awards will be granted subject to the satisfaction of a performance condition assessed over one financial year, or such longer period as the Board determines. Any performance condition may be varied or substituted if the Board so determines provided that in the opinion of the Board any varied or substituted performance condition is a fairer measure of performance, no more difficult to satisfy than the original performance condition was at the grant date and is not materially easier to satisfy unless the variation has been approved in advance by shareholders in general meeting.
Following the end of the performance period, the Board will determine the extent to which the performance condition has been satisfied and whether it is appropriate to reduce or increase the extent to which the Annual Award will be released to take account of the underlying performance of the Company and any other factors the Board considers relevant.
An Annual Award will be released (so that the participant is entitled to acquire shares subject to it) on the first dealing day following the assessment of the performance condition.
Following the end of the performance period, the Board will determine the extent to which the performance condition has been satisfied and whether it is appropriate to reduce or increase the extent to which the Deferred Award will be released to take account of the underlying performance of the Company and any other factors the Board considers relevant.
A Deferred Award will be released (so that the participant is entitled to acquire shares subject to it) following the end of a Deferral Period starting on the date on which the performance condition is assessed and ending on:
Deferred Awards will also be subject to a performance underpin. If, during the Deferral Period: (1) there has been a material deterioration in the underlying performance of the Company's group which is significantly greater than any deterioration in the performance of comparator listed financial services companies selected by the Board; or (2) any part of the business for which a participant is responsible has suffered a material failure of risk management, conduct or compliance, the Board may cancel or reduce the Deferred Award.
Deferred Awards granted to Executive Directors of the Company will also be subject to a Holding Period which shall end on such date as the Board shall specify, not being earlier than the fourth anniversary of the end of the performance period. During the Holding Period, the participant may not deal with shares acquired pursuant to the Award other than with the permission of the Board, to satisfy a tax liability relating to the release, to raise funds to pay the exercise price applying to the Deferred Award or in connection with the EIP's malus/ clawback provisions.
An Executive Director of the Company may not be granted awards under the EIP in respect of any financial year over shares with a market value (as determined by the Board) in excess of 200% of base salary, although in exceptional circumstances this may be increased to 250% of base salary. Lower limits apply to the grant of Awards to other participants. In the case of any EIP Award granted before or in connection with Admission, the market value of share for these purposes shall be the offer price to be determined immediately prior to Admission.
The number of shares over which an Annual Award is granted to an Executive Director of the Company in respect of any financial year may not exceed 40% of the aggregate number of shares over which he is granted Awards in respect of that financial year.
The number of shares over which an Annual Award is granted to a participant other than an Executive Director of the Company in respect of any financial year may not exceed 60% of the aggregate number of shares over which he is granted Awards in respect of that financial year.
Awards under the EIP may only ordinarily be granted during the 42 days beginning on: (i) the date on which the EIP was adopted; (ii) Admission; (iii) the day after the announcement of the Company's results for any period; and (iv) the date on which a Directors' Remuneration Policy comes into effect.
Awards may also be granted during any other period when the Board considers that exceptional circumstances exist which justify the grant of an Award. If the Company is prohibited from granting Awards during any of the above periods, it may grant Awards during the period of 42 days starting on the date on which the restriction ceases to apply.
With the consent of the participant, the Board may satisfy an EIP Award with a cash payment calculated by reference to the market value of the shares that the participant would have received had the relevant EIP Award been satisfied with shares.
An EIP Award may be ''net settled'' at the election of the Board by the delivery to the participant of shares with a value equal to the net value of the Award.
The EIP includes malus and clawback provisions which may be applied in respect of an Award in the event of: (1) the participant having participated in or been responsible for conduct which resulted in significant losses to a company in the Company's group; (2) the participant having failed to meet appropriate standards of fitness and propriety; (3) fraud or material dishonesty by the participant; (4) material wrongdoing on the part of the participant; (5) the participant acting in a way which has brought or is likely to bring a company in the Group into material disrepute or which is materially adverse to the interests of any such company; (6) the participant having breached his employment contract in a way which is a potentially fair reason for dismissal; (7) the participant, if he has ceased employment, being found to have breached his employment contract or fiduciary duties in a way which would have prevented the grant or release of the Award had the Company been aware of that breach; (8) an error in determining whether the Award should be made or in determining the size of the Award or in assessing the performance condition; (9) a misstatement by any company in the Company's group of any financial information which was taken into account in determining whether the Award should be made or in determining the size of the Award or in assessing the performance condition; (10) any part of the business for which the participant is or was responsible having suffered a material failure of risk management.
The malus and clawback provisions may be applied:
If the malus and clawback provisions are applied before an Award has been released (or, if it is an option, before it has been exercised), the Award may be cancelled or reduced. If they are applied after an Award has been released (or, if it is an option, after it has been exercised), the clawed back amount may be recovered from the participant.
If a participant ceases employment for any reason within six months of the start of the performance period applying to an Award, the Award will lapse.
If a participant ceases employment due to death, injury, ill-health or disability more than six months after the start of the performance period applying to an award but before the end of the performance period, the Award will lapse in respect of a proportion of the shares subject to it equal to the unexpired portion of the performance period and shall continue and be released on the normal release date in respect of the number of the remaining shares which become releasable by reference to the satisfaction of the performance condition, although the Board may reduce or increase the extent to which the Award is released to take account of the underlying financial performance of the Company and any other factors the Board considers relevant.
If a participant ceases employment more than six months after the start of the performance period applying to an Award but before the end of the performance period other than as a result of death, injury, ill-health or disability, the Award will be released at the normal release date in respect of such number of shares as the Board determines in its absolute discretion.
If a participant ceases employment after the end of the performance period applying to an Award but before the normal release date, the Award shall be released on the normal release date in respect of the number of the shares which become releasable by reference to the satisfaction of the performance condition, although the Board may reduce or increase the extent to which the Award is released to take account of the underlying financial performance of the Company and any other factors the Board considers relevant.
If a participant ceases employment after the end of the performance period applying to an award other than as a result of death, injury, ill-health or disability, the Award will (to the extent not already released) only be released at the normal release date in respect of such number of shares as the Board determines in its absolute discretion.
In the event of a change of control of the Company or other relevant event during the performance period applying to an Award, the number of shares in respect of which the Award becomes capable of release will be calculated by reference to the proportion of the performance period that has expired and the extent to which the performance condition has been satisfied or is expected to be satisfied, although the Board may reduce or increase the extent to which the Award is released to take account of the underlying financial performance of the Company and any other factors the Board considers relevant.
In the event of a change of control of the Company or other relevant event after the end of the performance period applying to an Award, the Award will become capable of release in respect of the number of shares determined by reference to the satisfaction of the performance condition.
Alternatively, the Board may permit Awards to be exchanged for awards of shares in a different company (including the acquiring company).
If there is a variation of share capital of the Company or in the event of a delisting or extraordinary distribution to shareholders of the Company including a demerger or special dividend the Board may release some or all of an Award or may make such adjustments to the number of shares subject to Awards and/or any performance condition applicable to Awards as it considers appropriate.
The BAYE was approved by the Remuneration Committee on 12 September 2018 and is an all-employee share ownership plan which has been designed to meet the requirements of Schedule 2 to the Income Tax (Earnings and Pensions) Act 2003 so that shares can be provided to UK employees under it in a tax-efficient manner.
An award of Free Shares (as defined below) will be made to all employees on the day before Admission, which will be based on the offer price to be determined immediately prior to Admission. The offer will be made to all eligible employees who began their employment on or before the day before the award is made. Employees will be able to opt out of the receipt of the award for at least 25 days after the date of the award. The Free Shares will not be subject to any performance targets, but will have holding and forfeiture periods of three years.
In addition an award of Partnership Shares (as defined below) will be made 15 days prior to the planned Admission date. The Partnership Shares will have a 12 month accumulation period with the shares being purchased at the lower of the offer price to be determined immediately prior to Admission and the price on the date of acquisition. The minimum amount of monthly contributions will be £10 and the maximum £150, with the first deduction from salary being made in December 2018. The Partnership Shares will have to be offered for sale back to the Company if a participant ceases employment with the Group other than because of injury, disability, redundancy, retirement or the sale of the individual's employing company or business out of the Group (each a BAYE Good Leaver Reason) or on death.
Under the BAYE, eligible employees may be: (i) awarded for free up to £3,600 worth shares in the Company (Free Shares) each year; (ii) offered the opportunity to buy shares in the Company using up to a maximum of the lesser of £1,800 and 10 per cent. of the employee's pre-tax salary each year (Partnership Shares); (iii) given up to two shares in the Company for free (Matching Shares) for each Partnership Share bought; and/or (iv) allowed or required to purchase shares in the Company using any dividends received on shares held in the BAYE (Dividend Shares). The Board may increase these limits in the future should the relevant legislation change the maximum levels of participation referred to above.
Awards under the BAYE may only ordinarily be made during the 42 days beginning on: (i) the date on which the BAYE was adopted; (ii) Admission; and (iii) the day after the announcement of the Company's results for any period.
Awards may also be made during any other period when the Board considers that exceptional circumstance exist which justify the making of awards. If the Company is prohibited from making awards during any of these periods, it may make awards during the period of 42 days starting on the date on which the restriction ceases to apply.
The BAYE operates through a UK resident trust (the BAYE Trust). The trustee of the BAYE Trust purchases or subscribes for shares that are awarded to or purchased on behalf of participants in the BAYE. A participant will be the beneficial owner of any shares held on their behalf by the trustee of the BAYE Trust.
Each time that the Board decides to operate the BAYE, all UK resident employees of the Company and its subsidiaries participating in the BAYE must be offered the opportunity to participate. Other employees may be permitted to participate at the Board's discretion. Employees may be required to have satisfied a minimum period of employment (as determined by the Board in line with the relevant legislation) before they can participate.
There will be a holding period of between three and five years (or such other period as may be permitted by the relevant legislation from time to time) during which the participant cannot withdraw the Free Shares from the BAYE Trust unless the participant ceases employment. The precise duration of this holding period will be determined by the Board each time Free Shares are awarded. The Board, in its discretion, may provide that the Free Shares will be forfeited if the participant ceases employment with the Group other than because of a BAYE Good Leaver Reason or on death.
The Board may allow an employee to use pre-tax remuneration to buy Partnership Shares. Once acquired, Partnership Shares may be withdrawn from the BAYE by the participant at any time, although withdrawal may result in the Partnership Shares having to be sold back to the Company and the forfeiture of Matching Shares, as both are described above. Partnership Shares may be purchased shortly after the pre-tax remuneration is withheld from the employee, or the amounts withheld may be accumulated for up to 12 months with the Partnership Shares acquired at the end of the accumulation period.
If there is no accumulation period, the Partnership Shares are acquired for their market value on the acquisition date. If there is an accumulation period, the Board shall decide whether the Partnership Shares are acquired for: (1) the lower of their market value at the beginning of the accumulation period and their market value at the acquisition date; (2) their market value at the beginning of the accumulation period; or (3) their market value at the acquisition date.
In the case of Partnership Shares, if the participant ceases employment with the Group, other than because of a BAYE Good Leaver Reason, within three years of the acquisition date, the Partnership Shares may be required to be offered for sale back to the Company for the lower of the amount paid for them and the market value at the time they are offered for sale.
The Board may, in its discretion, offer Matching Shares free to an employee who has purchased Partnership Shares. There is a holding period of between three and five years (or such other period as may be permitted by the relevant legislation from time to time) during which the participant cannot withdraw the Matching Shares from the BAYE Trust unless the participant ceases employment with the Group. The precise duration of this holding period will be determined by the Board each time Matching Shares are awarded. The Board, in its discretion, may provide that the Matching Shares will be forfeited if the participant ceases employment other than for a BAYE Good Leaver Reason, on death, or if he withdraws the related Partnership Shares.
The Board may allow or require a participant to reinvest the whole or part of any dividends paid on Shares held in the BAYE. Dividend Shares must be held in the BAYE Trust for no less than three years, unless the participant ceases employment.
In the case of Dividend Shares, if the participant ceases employment with the Group, other than because of a BAYE Good Leaver Reason, within three years of the acquisition date the Dividend Shares may be required to be offered for sale back to the Company for the lower of the amount paid for them and the market value at the time they are offered for sale.
In the event of a general offer being made to shareholders (or a similar takeover event taking place), participants will be able to direct the trustee of the BAYE Trust as to how to act in relation to their Shares held in the BAYE. In the event of an internal reorganisation, any shares held in the BAYE Trust on behalf of BAYE participants may be replaced by equivalent shares in a new holding company.
Shares acquired on a variation of share capital of the Company will usually be treated in the same way as the shares acquired or awarded under the BAYE in respect of which the rights were conferred and as if they were acquired or awarded at the same time.
Any shares allotted under the BAYE and held in the BAYE Trust will rank equally with shares of the same class then in issue (except for rights arising by reference to a record date prior to their allotment). In the event of a rights issue, participants will be able to direct the trustee of the BAYE Trust as to how to act in respect of their shares held in the BAYE.
The Share Plans may operate over new issue shares, treasury shares or shares purchased in the market or by transfer of the existing share by, or purchase of existing shares from, the trustee of the AJ Bell employee benefit trust.
The rules of the Share Plans provide that an award may not be granted on a date if it would result in the total number of shares issued to satisfy awards granted under share incentive schemes granted during the shorter of: (1) the period of ten years ending with that date; and (2) the period since Admission to exceed 10% of the issued ordinary share capital of the Company from time to time.
In addition, the rules of the EIP provide that an award may not be granted on a date if it would result in the total number of shares issued to satisfy awards granted under discretionary share incentive schemes granted during the shorter of: (1) the period of ten years ending with that date; and (2) the period since Admission to exceed 5% of the issued ordinary share capital of the Company.
Shares transferred out of treasury to satisfy awards will be treated as new issue shares for so long as this is required under institutional shareholder guidelines.
The Board may, at any time, amend the provisions of the Share Plans in any respect. The prior approval of shareholders at a general meeting of the Company must be obtained in the case of any amendment to the advantage of eligible employees or participants which is made to the provisions relating to eligibility, overall limits and the basis for determining the entitlement to, and the terms of, awards, and, in the case of the EIP, also to individual limits the adjustments that may be made in the event of any variation to the share capital of the Company and/or the rule relating to such prior approval. There are however exceptions from this requirement to obtain shareholder approval for any minor amendment to benefit the administration of the Share Plans, to take account of the provisions of any legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment for any participant or member of the Company's group.
Awards are not transferable other than to the participant's personal representatives in the event of his or her death.
Benefits received under the Share Plans are not pensionable.
The Board may, at any time, establish further plans based on a Share Plan for overseas territories. Any such plan will be similar to the relevant Share Plan but may be modified to take account of local tax, exchange control or securities laws. Any shares made available under such further overseas plans must be treated as counting against the limits on individual and overall participation under the Share Plans.
Fifty nine employees of AJ Bell, who are also Shareholders in the Company (Employee Shareholders) have entered into call option agreements in favour of the Company in respect of certain shares in the Company subscribed by them under the Company's existing ''option to buy shares'' scheme (the Call Options). The Call Options give the Company the right (but not the obligation) to purchase the shares subject to the Call Option if the Employee Shareholder leaves his or her employment with the Group on or before 31 December 2021 or, in the case of Michael Summersgill, on or before 31 December 2023. The Call Options are granted over E shares and F shares but, following completion of the Share Capital Reorganisation, will be effective over ordinary shares.
If the Employee Shareholder leaves his or her employment with the Group having resigned with the prior written consent of the Board or because they die in service, the option price payable by the Company to repurchase each Ordinary Share will be the prevailing market price. If the Employee Shareholder leaves his or her employment with the Group for any other reason (Other Reason), the option price payable by the Company to repurchase each Ordinary Share will be the issue price of that share (as adjusted in the Share Capital Reorganisation to reflect the reorganisation from E shares and F shares into ordinary shares). Following Admission, the intention would be for the Company only to exercise its rights under the Call Options to buyback shares from employees who leave their employment with the Group for an Other Reason.
7.1 The table below sets out the voting rights (within the meaning of the Disclosure Guidance and Transparency Rules) held, directly or indirectly, by any of the Directors and Senior Managers in respect of the share capital of the Company as at 6 November 2018 (being the last practicable date prior to publication of this document):
| As at the date of this document Percentage |
|||
|---|---|---|---|
| Number of Shares |
of issued share capital |
Percentage of voting rights |
|
| Directors | |||
| Les Platts | 70,305 | 0.16% | 0.18% |
| Andy Bell (17) | 12,051,546 | 28.06% | 31.03% |
| Michael Summersgill | 391,995 | 0.91% | 1.01% |
| Laura Carstensen | 12,048 | 0.03% | 0.03% |
| Eamonn Flanagan | 12,048 | 0.03% | 0.03% |
| Simon Turner | 34,414 | 0.08% | 0.09% |
| Senior Managers | |||
| Charles Galbraith | 411,360 | 0.96% | 1.06% |
| Fergus Lyons(18) | 2,431,749 | 5.66% | 6.26% |
| Louis Petherick | 56,000 | 0.13% | 0.14% |
| Bruce Robinson | 80,147 | 0.16% | 0.21% |
| Roger Stott | 121,756 | 0.28% | 0.31% |
| As at the date of this document | |||
|---|---|---|---|
| Percentage | |||
| of issued | Percentage | ||
| Number of | share | of voting | |
| Shares | capital | rights | |
| Invesco Perpetual | 18,732,815 | 43.62% | 48.23% |
| Seneca Investment Managers | 1,450,000 | 3.38% | 3.73% |
17 Of the shares owned by Andy Bell 14,412 Ordinary Shares are held by the A J Bell Trust, a charitable trust of which Andy is a director of the professional trustee company. A further 300,000 Ordinary Shares are owned by the Blythe Family Trust, a discretionary trust of which Andy and his wife are both settlors and trustees, and a further 2 million Ordinary Shares are held by Blythe Investments an unlimited company controlled by Andy and his wife.
18 Shares held by Fergus Lyons and Bestfield Investments, an unlimited company, owned and controlled by Fergus Lyons and his wife Caroline Anne Lyons.
| Former appointments held in the | ||
|---|---|---|
| Name (Directors) Leslie Platts |
Current appointments Leeds Building Society Lancashire County Cricket Club |
previous five years |
| Andy Bell | EQ Property Services Limited Moor Hall Holdings Limited Moor Hall Restaurant Limited Moor Hall Construction Limited Moor Hall Limited Designated Member of Blythe Stables LLP A J Bell Trust Blythe Investments |
Scarisbrick Hall Trust Ken Hovers (Pension Consultants) Limited |
| Michael Summersgill |
EQ Property Services Limited | |
| Laura Carstensen | The Co-operative Bank Plc The Co-operative Bank Holdings Limited Park Group LTIP Trustee Limited Park Group Plc Designated Member of Bryn Yorkin Manor Real Estate LLP |
62 Savernake Road, London NW3 Limited Meditation Designs Limited MLex Limited Blue Banyan Limited Blue Banyan Germany Limited |
| Eamonn Flanagan | JLT Reinsurance Brokers Limited JLT Benefit Solutions Limited JLT Wealth Management Limited JLT Investment Management Limited JLT EB Holdings Limited |
Shore Capital Stockbrokers Limited Shore Capital Markets Limited |
| Simon Turner | Cambridge Dial A Ride Limited | AIB Group (UK) PLC Yorkshire Building Society Trade Doublen AB (Sweden) |
| Senior Managers | ||
| Charles Galbraith | EQ Property Services Limited Auchendrane Estates Limited |
None |
| Fergus Lyons | Sodecon Finance Bestfield Investments EQ Property Services Ltd Islington Regeneration Company Limited |
None |
| Name (Directors) Louis Petherick |
Current appointments None |
Former appointments held in the previous five years None |
|---|---|---|
| Bruce Robinson | None | EQ Property Services Limited |
| Roger Stott | EQ Property Services Limited | None |
9.2.1 Andy Bell (Chief Executive Officer) entered into a service agreement with the Company on 1 November 2018. Mr Bell is entitled to receive an annual salary of £470,000 per annum. Mr Bell's employment is terminable by 6 months' notice given by either party. The Company may, at its discretion, terminate Mr Bell's employment immediately by making a payment to him in lieu of his basic salary. Mr Bell is entitled to private medical insurance. His service agreement includes standard summary termination provisions and post termination restrictive covenants which apply for a period of 6 months following the termination of his employment; and
9.2.2 Michael Summersgill (Chief Financial Officer) entered into a service agreement with the Company on 1 November 2018. Mr Summersgill is entitled to receive an annual salary of £220,000 per annum. Mr Summersgill's employment is terminable by 6 months' notice given by either party. The Company may, at its discretion, terminate Mr Summersgill's employment immediately by making a payment to him in lieu of his basic salary. Mr Summersgill is entitled to private medical insurance. His service agreement includes standard summary termination provisions and post termination restrictive covenants which apply for a period of 6 months following the termination of his employment.
| Location | Tenure |
|---|---|
| 4 Exchange Quay, Salford Quays, Manchester | Leasehold |
| First floor, 49 Southwark, Bridge Road, London SE1 9HH | Leasehold |
Neither the Company nor any member of the Group is a party to (i) any material contract (other than contracts entered into in the ordinary course of business) to which the Company or any member of the Group is a party which has been entered into within the two years immediately preceding the date of this Registration Document; or (ii) any other contract (other than contracts entered into in the ordinary course of business) entered into by any member of the Group which contains obligations or entitlements which are or may be material to AJ Bell as at the date of this Registration Document.
There has been no significant change in the financial or trading position of the Group since 30 September 2018 being the latest date to which the historical financial information in Part 6 (Historical Financial Information) was prepared.
There are no, and there have not been, any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware), during a period covering at least the last 12 months, which may have or have had in the recent past, significant effects on the Company and/or AJ Bell's financial position or profitability.
KPMG LLP, whose office is at 15 Canada Square, Canary Wharf, London, E14 5GL, has provided an Accountant's Report on the historical financial information of the Group for the three years ended 30 September 2018 set out in Part 6 (Historical Financial Information) of this Registration Document.
The financial information contained in this Registration Document which relates to the Company does not constitute full statutory accounts as referred to in section 434(3) of the 2006 Act. Statutory audited accounts of the Company, on which the auditors, KPMG LLP, have given their unqualified report and which contained no statement under section 498(2) or (3) of the 2006 Act, have been delivered to the Registrar of Companies in respect of the three accounting periods ended 30 September 2016, 30 September 2017 and 30 September 2018.
KPMG LLP of 15 Canada Square, Canary Wharf, London, E14 5GL has given and has not withdrawn its written consent to the inclusion in this Registration Document of its report in Part 6 (Historical Financial Information) of this Registration Document and references thereto in the form and context in which they appear and has authorised the contents of those parts of this Registration Document for the purposes of Paragraph 23.1 of Annex 1 of the Prospectus Directive Regulation.
Copies of the following documents may be inspected at the registered office of the Company at 4 Exchange Quay, Salford Quays, Manchester M5 3EE, and at the offices of Pinsent Masons LLP at 30 Crown Place, Earl Street, London EC2A 4ES, during normal business hours on any weekday (Saturdays, Sundays and public holidays excepted) for a period of 28 days from the date of publication of this Registration Document:
Copies of this Registration Document are also available for inspection at the National Storage Mechanism at http://www.morningstar.co.uk/uk/nsm.
For the purposes of 3.2.4 of the Prospectus Rules, this Registration Document will be published and available for a period of 28 days from the date of publication of this Registration Document at www.AJBell.co.uk. This Registration Document will be published in electronic form and be available on the Company's website at www.AJBell.co.uk, subject to certain access restrictions applicable to persons located outside of the UK.
Dated: 8 November 2018
The following definitions apply throughout this Registration Document, unless the context otherwise requires:
| ''2006 Act'' | the Companies Act 2006, as amended |
|---|---|
| ''2010 PD Amending Directive'' | 2010 EU directive (2010/73/EU) which amended the Prospectus Directive |
| ''Admission'' | admission of the shares in the Company to the Official List (premium segment) and to trading on the London Stock Exchange's main market for listed securities in respect of which the Company intends to make applications in due course |
| ''AJBAML'' | AJ Bell Asset Management Limited |
| ''AJ Bell'' or ''Group'' | the Company and its Subsidiaries from time to time |
| ''AJBML'' | AJ Bell Management Limited |
| ''AJBSL'' | AJ Bell Securities Limited |
| ''Articles'' or ''Articles of Association'' |
the articles of association of the Company which are proposed to be adopted in the event of Admission. |
| ''Board'' or ''Directors'' | the board of directors of the Company |
| ''certificated'' or ''in certificated form'' |
a share or other security not in uncertificated form (that is, not in CREST) |
| ''Company'' | AJ Bell Holdings Limited, private company limited by shares, incorporated under the 2006 Act and registered in England and Wales with the registered number 04503206 |
| ''Chairman'' | the chairman of the Board |
| ''City Code'' or ''Code'' | the UK City Code on Takeovers and Mergers, as amended, supplemented or replaced |
| ''CREST'' | the relevant system (as defined in the CREST Regulations) for paperless settlement of sales and purchases of securities and the holding of shares in uncertificated form in respect of which Euroclear is the operator (as defined in the CREST Regulations) |
| ''CREST Regulations'' | the Uncertificated Securities Regulations 2001 (SI2001/3755) |
| ''Data Protection Legislation'' | the Data Protection Act 2018 and GDPR |
| ''Disclosure Guidance and Transparency Rules'' |
the disclosure guidance and transparency rules issued by the FCA under Part VI of FSMA |
| ''EEA'' or ''European Economic Area'' |
together, the EU, Iceland, Norway and Liechtenstein |
| ''EU'' | the European Union, first established by the treaty made at Maastricht on 7 February 1992 |
| ''Euroclear'' | Euroclear UK & Ireland Limited, the operator (as defined in the CREST Regulations) of CREST |
| ''Executive Directors'' | the executive directors of the Company, being Andrew James Bell and Michael Thomas Summersgill |
| ''FCA'' | the UK Financial Conduct Authority |
| ''FCA Remuneration Code'' | the IFRRU Remuneration Code SYSC 19A and SYSC 19F in the FCA Rules |
| ''FCA Rules'' | the FCA Handbook of Rules and Guidance |
| ''FPC'' | Financial Policy Committee |
| ''FSCS'' | the UK Financial Services Compensation Scheme |
| ''FSMA'' | the Financial Services and Markets Act 2000, as amended |
| ''FY2016'' | the financial year of the Group ended 30 September 2016 |
| ''FY2017'' | the financial year of the Group ended 30 September 2017 |
|---|---|
| ''FY2018'' | the financial year of the Group ended 30 September 2018 |
| ''GBST'' | third party supplier of Composer software |
| ''GDPR'' | EU regulation (EU 2016/679) on the protection of natural persons with regard to the processing of personal data and on the free movement of such data |
| ''historical financial information'' | the audited consolidated historical financial information of AJ Bell covering the historical financial period |
| ''historical financial period'' | the period from the start of FY2016 to the end of FY2018 |
| ''IFRS'' | International Financial Reporting Standards as adopted by the EU |
| ''Investment Platform Market Study'' |
the Investment Platform Market Study Interim Report published by the FCA on 18 July 2018 |
| ''JHC'' | third party supplier of Figaro software |
| ''Listing Rules'' | the listing rules of the FCA made under Part VI of FSMA |
| ''London Stock Exchange'' | London Stock Exchange plc |
| ''Member State'' | member state of the EEA |
| ''MiFID'' | Directive 2002/92/EC on markets in financial instruments and related legislation |
| ''MiFID II'' | Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and related legislation |
| ''MLRs'' | the Money Laundering, Terrorist Financing and Transfer of Funds (Information of the Payer) Regulations 2017 |
| ''Non-Executive Directors'' | the non-executive directors of the Company (including the Chairman), being Leslie Michael Platts, Laura Martine Carstensen, Eamonn Flanagan and Simon Turner |
| ''Official List'' | the official list maintained by the UK Listing Authority |
| ''OFT'' | the Office of Fair Trading |
| ''PRA'' or ''Prudential Regulation Authority'' |
the UK Prudential Regulation Authority |
| ''Platform'' | AJ Bell Investcentre and AJ Bell Youinvest |
| ''Products'' | the AJ Bell products and services excluding those provided as part of the Platform, but including the AJ Bell investment funds and managed portfolio services; the AJ Bell Platinum SIPP and SSAS; the white label SIPP administration services provided by AJ Bell (branded to Barclays Smart Investor and Halifax Share Dealing); and the services offered by AJ Bell Securities to institutional investment businesses. |
| ''Prospectus Directive'' | EU Prospectus Directive Regulation (2003/71/EC) and amendments thereto, including any relevant implementing measure |
| ''Prospectus Rules'' | the prospectus rules issued by the FCA under Part VI of FSMA |
| ''Registration Document'' | this document |
| ''Regulated Subsidiaries'' | AJBSL, AJBML and AJBAML and ''Regulated Subsidiary'' shall mean any one of them as the context may require |
| ''Relevant Member State'' | a Member State which has implemented the Prospectus Directive |
| ''Remuneration Committee'' | the remuneration committee of the Board |
| ''Risk and Compliance Committee'' |
the risk and compliance committee of the Board |
|---|---|
| ''RIS'' | any channel recognised as a channel for the dissemination of regulatory information by listed companies, as defined in the Listing Rules |
| ''Senior Managers'' | those persons identified as senior managers of AJ Bell in Part 3 of this Registration Document, being the Executive Directors, Fergus Lyons, Charles Galbraith, Louis Petherick, Roger Stott and Christopher Bruce Robinson |
| ''Share Capital Reorganisation'' | the reorganisation of the share capital of the Company as set out in Paragraph 2.2 of Part 7 (Additional Information) |
| ''Share Dealing Code'' | any statute, order or regulation on dealing in the Company's securities or the Company's share dealing code from time to time |
| ''Shareholders'' | the holders of Shares from time to time |
| ''Subsidiary'' | has the meaning given to it in section 1162 of the 2006 Act and includes group companies included in the consolidated financial statements of the Group from time to time |
| ''Takeover Panel'' or ''Panel'' | the UK Panel on Takeovers and Mergers |
| ''UCITS Directive'' | the Undertakings for Collective Investment in Transferable Securities Directive 2009/65/EC. |
| ''UCITS Scheme'' | a scheme constituted in accordance with the UCITS Directive |
| ''UK'' or ''United Kingdom'' | the United Kingdom of Great Britain and Northern Ireland |
| ''UK Corporate Governance Code'' |
the Principles of Good Governance and Code of Best Practice maintained by the Financial Reporting Council |
| ''UK Listing Authority'' or ''UKLA'' | the FCA in its capacity as competent authority for the purposes of Part VI FSMA |
| ''uncertificated'' or ''in uncertificated form'' |
in relation to a share or other security, title to which is recorded in the relevant register of the share or security concerned as being held in uncertificated form in CREST and title to which, by virtue of the CREST Regulations, may be transferred by means of CREST |
| The following technical terms or Registration Document: |
other abbreviations (or variations of them) are used in this |
|---|---|
| ''ad-valorem'' | according to value |
| ''API'' | application programming interface, a set of programming instructions and standards for accessing a Web-based software application or web tool |
| ''APER'' | the FCA's Statement of Principles and Code of Practice for Approved Persons |
| ''AUA'' | assets under administration |
| ''B2B'' | business-to-business |
| ''CAGR'' | compound annual growth rate, an average growth rate over a period of several years |
| ''CASS'' | the Client Assets Sourcebook in the FCA Rules |
| ''CASS Rules'' | the Custody Rules and the Client Money Rules in the CASS Sourcebook in the FCA Rules |
| ''COBS'' | the Conduct of Business Sourcebook in the FCA Rules |
| ''CRD IV'' | Capital Requirements Directive IV |
| ''CRR'' | Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms |
| ''D2C'' | direct-to-consumer |
| ''DB'' | defined benefit |
| ''DC'' | defined contribution |
| ''EBA'' | European Banking Authority |
| ''ETF'' | exchange traded fund |
| ''Fees'' | the Fees Manual in the FCA Rules |
| ''FOS'' | Financial Ombudsman Service |
| ''GIA'' | General Investment Account |
| ''GDP'' | Gross Domestic Product |
| ''HMRC'' | HM Revenue and Customs |
| ''ICO'' | Information Commissioner's Office |
| ''IDD'' | the Insurance Distribution Directive |
| ''IT'' | information technology |
| ''ISA'' | individual savings account including, where the context allows, JISAs and LISAs |
| ''JISA'' | junior individual savings account |
| ''KPI'' | key performance indicator |
| ''LISA'' | lifetime individual savings account |
| ''OEIC'' | open-ended investment company |
| ''ONS'' | Office of National Statistics |
| ''portfolio'' | a collection of investments that can include any or all asset types |
| ''PRIIPS Regulation'' | Regulation (EU) No 1286/2014 on key information documents for packaged retail and insurance-based investment products |
| ''RDR'' | the FCA's Retail Distribution Review |
| ''SIPP'' | Self Invested Personal Pension |
| ''SMCR'' | the senior managers and certification regime set out in the FCA Rules |
| ''SSAS'' | small self-administered pension scheme |
|---|---|
| ''SREP'' | FCA's Supervisory Review and Evaluation Process |
| ''SYSC'' | Senior Management Arrangements, Systems and Controls Sourcebook in the FCA Rules |
| ''Tax wrapper'' or ''Wrapper'' | an HMRC recognised or approved savings or investment product or service that an investor can ''wrap'' around their investment(s) so that they attract beneficial tax treatment. For example, common tax wrappers are ISAs and pensions (such as SIPPs) |
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