Sancus Lending Group Limited

(formerly GLI Finance Limited)

 

Final Results for the Year Ended 31 December 2021

 

HIGHLIGHTS

 

Rory Mepham, Chief Executive Officer of Sancus Lending Group Limited, commented:

 

"Since my appointment as CEO in June 2021, I have prioritised the turnaround of the Group's financial performance. 2021 was the start of a transitional period for the Company. We have rebranded, strengthened the management team, invested in technology and expanded our presence in the UK and Ireland. We have also undertaken a thorough review of the loan book and, where required, provisioned accordingly.

 

Our plan is to return the Group to profitability by growing the Groups loans under management while ensuring that our credit and other processes are best in class. We will also broaden our funder base and improve funding terms. The business will continue to focus on expanding the Group's presence in the UK and Ireland together with rebuilding its loan book in the Offshore markets of Jersey, Guernsey and Gibraltar.

 

We started 2022 with a clear strategy to return the business to profitability, and a management team committed to achieving that."

 

Strategic and Operational Highlights

 

·      Change of name to Sancus Lending Group Limited, announced on 11 May 2021, reflecting the Group's continued focus on property lending in residential development and bridge financing;

·      Appointment of Rory Mepham as CEO and Steve Smith as Chairman;

·      Significant investment in the sales and credit teams at the end of 2021 and into 2022, to support and drive growth over the coming years;

·      Focus on the maintenance of robust institutional grade credit processes, smooth loan execution, active loan management, data integrity and a proactive approach to loans that become stressed or distressed;

·      Geographic focus remains unchanged, with the UK and Ireland the key areas of growth for the business whilst the Offshore markets currently remain the Group's largest market. Core Sancus revenue growth was 6% in FY21, with UK revenue up 131%;

·      Impressive growth of 60% on new facilities written; from £50m to £80m year on year, and a strong pipeline in the Group's key growth markets for FY22 and beyond;

·      Loan book at year end £142m (2020: £171m) as a result of large Offshore loan repayments; and

·      Positive shift in the residential property market presents the Group with a favourable outlook and an opportunity to focus on the right strategic steps to support growth in coming years.

 

 

Financial Headlines

 

·      Group revenue for the year was £9.0m (2020: £10.9m) with the reduction in Sancus Loans Limited representing a decrease of £2m;

·      Group loss for the year was £10.3m (2020: loss £14.5m);

·      £6.4m of operating losses relates to expected credit losses under IFRS9 and represents a realistic view on delinquent or defaulted loans, virtually all of which were written in or prior to 2018; and

·      Increase in operating expenses to £6.2m (FY20: £5.6m) reflects investment in sales and credit teams.

 

 

Enquires:

 

Sancus Lending Group Limited	via Instinctif Partners
Rory Mepham, CEO
Nominated Adviser and Broker
Liberum Capital Limited	+44 (0)203 100 2000
Chris Clarke
Lauren Kettle
Public Relations Adviser
Instinctif Partners
Tim Linacre	+44 (0) 7949 939 237

 

CHAIRMAN'S STATEMENT

 

Introduction

 

I was delighted to take on the role of Chairman of the Group on 31 August 2021, having joined Sancus in May 2021, and am looking forward to the challenge ahead.

 

A number of key events took place prior to my appointment. The successful fund raise at the end of 2020 was the first step in what the Board believes will be a structured change programme which will reposition the Group for growth. Our target markets continue to present compelling opportunities and coupled with the reduced appetite amongst traditional balance sheet lenders, we are optimistic this will increase the potential to write high quality new business.  

 

2021 was a busy year. The Group was rebranded as Sancus Lending Group Limited (from GLI Finance Limited) on 11 May 2021, the change reflecting the Group's continued focus on lending for residential property development and bridge financing purposes.

 

There have also been a number of changes to our senior executive team, with new appointments expected to drive Group development and growth, which are outlined more fully below.

 

As part of a wider review of the business and the expansion of the credit and recoveries teams, we carried out a detailed review of the Group's loan book in June 2021, resulting in impairments of £3m. Whilst we have seen some improvement in the quality of the loan book as the worst effects of the pandemic reduced, we have made an additional £3.4m provision in the second half of the year which we believe draws a line under recent losses. Virtually all of the provisions relate to loans written in or before 2018.

 

Finally, after a five-year tenure our auditor, Deloitte LLP stood down and have been replaced by Moore Stephens following a tender process.

 

Our People

 

There were a number of personnel changes during 2021. Following the resignation of Andy Whelan, Rory Mepham assumed the role of Interim CEO on 30 June 2021 and was then confirmed as CEO on 23 November 2021. Rory joined the business in January 2021 with initial responsibility for funding and origination and has extensive experience in corporate finance, capital raising, debt finance, fund management and development. During his transition, Rory was supported by Dan Walker who originally joined the Group in 2018, and was appointed as Deputy CEO in June 2021. Dan subsequently left the Group on 31 January 2022, and we thank him for his contribution. On 8 March 2022 James Waghorn was appointed as Chief Investment Officer and together with Rory and Emma Stubbs, our Chief Financial Officer, completes our Executive Management Team. James has over 14 year's experience in the UK and European real estate market and has extensive experience across the corporate real estate, investment and property development sectors.

 

On 31 August 2021, Patrick Firth stepped down after sixteen years with the Group and I would like to thank Patrick for his invaluable contribution during this time.

 

As Rory sets out in more detail in his report, the Group has invested in rebuilding and reinforcing the team and our headcount has increased from 25 at the end of 2021 to 36 as at 30 March 2022. The new resource will largely be focussed on expansion in our growth markets UK and Ireland but will also reinforce our credit and management focus as we deliver new business in the coming years.

 

Dividend and Shareholders

 

As part of its wider strategic review of the business, the Board has decided to withdraw its previous dividend policy as the business plan requires the reinvestment of surplus resources in order to deliver the planned growth objectives. The Company last declared a dividend in 2016 and thereafter adopted a policy consistent with prudent capital and liquidity management, recognising the need to provide the time and funding necessary for the various platforms in which the Group was invested to reach their potential. This followed the transitioning of the business from an investment company to a trading company, when historically it was earning positive cashflows from CLO investments which enabled the business to pay dividends. The Board's decision to formally withdraw its previous dividend policy is therefore consistent with the approach that has been adopted over recent years, to reinvest surplus resources for growth. As such, the Group does not intend to declare a dividend for the year. The Board intends to revisit this policy at the appropriate time, should the profitability and cash flow profile of the business support the reinstatement of a dividend.

 

On behalf of the Board, I would like to thank shareholders for their continuing support and patience. We certainly do not  underestimate the scale and challenge ahead, but with the continuing support of shareholders and all of our stakeholders and in the belief that we have the strategy, the systems and the personnel to put the business onto a firmer footing, I look forward to reporting more positive developments in the coming period. 

 

Steve Smith

Chairman

 

 

CHIEF EXECUTIVE OFFICER'S REVIEW

 

Outlook

 

Since my appointment as CEO in June 2021, I have prioritised planning the turnaround of the Group's financial performance. A return to Group profitability relies on successfully growing loans under management whilst widening its range of funders, improving funding terms and adopting institutional grade processes in all areas. The business is focused on expanding the Group's presence in the UK and Ireland, together with rebuilding its loans under management in the Offshore markets of Jersey, Guernsey and Gibraltar.

 

The business has written in excess of £1.2 billion of loans since inception and as at 31 December 2021 the Group loan book stood at £142m. Sancus is targeting significant growth of loans under management over the coming years. Assembling the  team, having the right structure, effective institutional management systems and becoming increasingly technology enabled is necessary to achieve increased scale. The investment in these areas is underway and will continue in 2022. 

 

The perennial imbalance between supply and demand for housing continues to offer a favourable landscape for the Group's anticipated growth in its target markets. Banks having retrenched from both SME and development financing further provides attractive opportunities for alternative lenders. We continue to track the geopolitical situation closely and note the potential for further supply chain disruption and inflationary risks in the construction sector.

 

The successful delivery of Sancus's growth objectives will be driven by the four key pillars of the Group's business: Origination, Loan Management, Funding and Finance & Operations.

 

Origination

 

Originating sufficient lending volumes across the target jurisdictions and product types will provide the business with the scale and diversification it needs to deliver sustainable profitable growth. Significant investment has been made in recruiting experienced business development team members in each of our markets during 2021, an initiative which will continue in 2022.

 

In the 15 months to March 2022, we took the total business development heads from 8.5 to 15, with a particular focus on our sales activity in the UK with business development heads in this region going from 2 to 8 over the last 15 months. The new team members come from experienced backgrounds in the industry and bring with them a large pool of potential sources of new business. Team members will be incentivised to deliver quality new business with a focus on the business earning an appropriate return for where a given loan sits on the risk / return spectrum.

 

Whilst it is possible that further hiring will be required in the future, we consider that this recruitment drive provides the team that can substantially deliver against the Group's required targets. The Board will remain alert to market dynamics and future opportunities as they present themselves and will look to add to the team in line with business requirements.

 

As part of the risk management process, no members of the credit committee have an origination function. This ensures an appropriate separation between the origination and credit functions.

 

We have seen growth in new loan facilities written during the year with £80m written during FY21 against £50m for FY20. Loan deployments saw a 10% increase from £69m at the end of 2020 to £76m for 2022. We have a strong pipeline for 2022.

 

Arrangement fees and commitments fees are received on the full value of loan facility written and therefore a key metric in monitoring the performance of our sales team. We continue to see significant demand for development finance and are increasing our presence in the bridging market with a couple of key hires.

 

We envisage origination growth in the UK and Ireland in 2022 and the years beyond and is a key area of investment for the Group. We further anticipate that the Offshore business (including the Channel Islands and Gibraltar) will continue to offer lending opportunities and we are confident that our businesses in those jurisdictions are well placed to execute against those opportunities as they arise.

 

During the year, we have placed a greater emphasis on diversifying and growing our origination channels to include a wider variety of brokers, other introducers, and a greater range of marketing tools utilised in a targeted fashion. We have also established a working group to explore the extent to which technology may be able to support our growth in origination.

 

Loan Management

 

Scaling the business successfully necessitates a focus on the maintenance of robust institutional grade credit processes, smooth loan execution, active loan management, data integrity and a proactive approach to loans that become stressed or distressed.

 

·      Maintaining a high-quality credit process whilst scaling the quantity of new loans is a priority. During 2021 our experienced credit team has been supplemented by new members with a track record in the property sector and qualifications as Chartered Surveyors. We have standardised our approach across all jurisdictions including valuation, legal title, borrower, market due diligence and monitoring surveyor standards.

·      Standardisation of the loan execution process has been implemented across the Group, including documentation, conditions precedent, conditions subsequent and closing checklists. We have also implemented a new workflow process to expediate the time between the loan credit approval and loan drawdown and exploring how we can better utilise technology to better manage certain elements. The business is both actively engaging with external suppliers of software packages together with continuing to invest our own loan management system. The required investment in terms of possible subscription charges and additional technology staff has been budgeted in our forecasts.

·      Greater emphasis has been placed on actively managing loans once the initial drawdown has been made. This has been particularly important during a time when various market related pressures such as cost inflation, are impacting our borrowers. Active management is helping us to deal with issues before they become problems.

·      Where loans unavoidably become delinquent or defaulted Sancus is adopting a proactive approach to minimise the risk of loss. The period of time during which loans become stressed can lead to further strain on loan covenants, so decisive action is often required without compromising on the integrity of decision making.

·      Due consideration is always afforded to the interests of all stakeholders in a given loan.

·      Further investment has been made in recruiting experienced loan management team members in each of our markets during 2021, and this will continue in 2022.

 

The Sancus asset backed lending loan book decreased by 17% since the end of 2020 from £171m to £142m. This decrease was driven by some large Offshore loan repayments in the period and the knock-on effect of Covid-19 on loan closures, and masks promising improvements in the UK and Irish business, where we saw new facilities written in these two businesses combined of £60m in 2021, a 76% increase from £34m in 2020. We have a strong pipeline and expect to see an increase in the loan book by the end of 2022. At the year end, the asset backed loan book comprised Offshore at £96m (Dec 2021: £147m) UK at £29m (Dec 2021: £15m) and Ireland at £17m (Dec 2021: £9m).

 

Under the leadership of the Senior Management Team, a detailed evaluation of the Group's loan book has been completed. Particular focus has been on reviewing historic loans that are either delinquent or defaulted. As a result of this exercise, the Group is reporting an increase in expected credit loss provisions of £6.4m for the financial year (FY20: £4.7m). Virtually all of the provisions made relate to legacy loans written in 2018 or before. For all of these positions, the new senior management team have put together deliverable workout strategies, and these are now underway. These strategies have been shared in a transparent manner with our funding sources and feedback has been incorporated into our plans. The seasoned property professionals within the new Sancus team have proven track records in the Groups markets and will continue to be involved in working hard to recover value for all participants in these positions.

 

 

Funding

 

We continue to focus on growing the funding capacity of the business on improved terms. Additionally, we are seeking to work with a diversified mix of funders, both private and institutional, to match funders with the loans meeting their varied risk and rewards criteria. Currently, the Group continues to be supported by four sources of funding:

 

·      Co-Funders

·      Loan Note program

·      Institutional funders

·      Proprietary Capital

 

Co Funders remain our largest funding channel, with the majority of the loan book in the Channel Islands and Gibraltar being co-funded, though its share reduced in the year from 64% of the total to 50% as a result of large loan repayments. We continue to nurture relationships with the Co-Funder base, typically being Offshore private individuals and family offices.  In addition to the large pool of Co-Funders that have been working with Sancus for a number of years, the business is actively seeking to widen its net and has recruited team members in its Offshore team to be exclusively focused on targeting and building relationships with potential new Co-Funders.

 

During the year we have continued to launch further loan notes through Amberton Asset Management with the successful launch of Loan Note 7, raising £16.7 million. Loan Note 7 matures on 10 May 2024 and has a coupon of 7% p.a. (payable quarterly), with Sancus providing a 10% first loss guarantee. On 31 January 2022 Sancus Loan Note 8 launched with £2.0m of assets and a target of £20 million. Loan Note 8 has a term of five years and a coupon of 5% p.a. (payable quarterly), with Sancus providing a 20% first loss guarantee. As the business matures it is planned to increase the regularity and widen the variety of Loan Note products.

 

Sancus has a secured institutional funding line from the Honeycomb Investment Trust ("HIT"), which is managed by Pollen Street Capital and is designed to be complementary to our Co-Funder base and Loan Notes. As announced on 4 December 2020 the HIT credit facility was increased to £75m from £45m and the term was extended to 28 January 2024. At 31 December 2021 the total drawn was £49.9m (31 December 2020: £45.0m). The HIT facility continues to be strategic for the business and is generally utilized in relation to funding development loans.

 

Sancus has additionally secured a forward flow bridge funding arrangement with a global private equity backed debt acquisition business and continues to explore additional long term financing lines that could sit alongside our syndicated lending approach.

 

The availability, cost and flexibility of funding is key to achieving our growth ambitions and we are reviewing the capital position of the business with a view to ensuring it is best placed to grow funding capacity on improved terms. Over the course of 2021 the loan book funded by institutional funding increased by 22% with the majority of the UK and Irish loan book funded by this channel. We will seek to increase this along with the loan notes over time.

 

Own capital has fluctuated around £7m/£8m over the course of the year inline with our strategy to increase our Return on Tangible Assets ("ROTA").

 

 

Finance & Operations

 

A focus on operational efficiencies within Finance and Operations to be driven by technology wherever possible is underway, linking into the technology strategy noted above. Continued focus and improvement on Corporate Governance, Compliance and Risk via way of policy and procedures to ensure the business is well set for future growth plans.

 

Effective compliance and corporate governance remains a priority for the Board. This is critical to ensuring that only well-considered risks are taken, and expected returns emerge as planned.

 

Sancus has developed, and continues to evolve, its own proprietary loan managements system ("LMS") for the administration of loans. A comprehensive review of the LMS system and our wider Technology strategy has been carried out during the year and further steps will be undertaken in 2022.

 

As highlighted above, we have made a number of recent hires across the business, in particular to bolster our Funding and Origination capabilities in the markets in which we are active. At the end of December 2021, the Group headcount was 35 (31 December 2020: 25) with the largest increase in the Sales and Credit teams and as we build our presence across the UK and Ireland, we expect this to increase over time. 

 

A key milestone at the end of 2020 was the successful new equity raise as well as restructuring our debt (Bonds and ZDPs) and increasing and extending the term of our facility with HIT. This transaction had the full support of our largest shareholder Somerston Group who participated in both the equity raise and new bond issue. With the ZDP's intended to play a long-term part the Group's finance strategy, given the current maturity date of 5 December 2022, we intend to engage with the ZDP holders in due course in order to seek their support at this critical time in the Group's turnaround and as it embarks on a redefined growth strategy.

 

Realising value from the legacy FinTech Ventures Investments remains a target for the management team. Monitoring and governance of FinTech Ventures is ongoing and we continue to assist our investee platforms with their strategy. Unfortunately, the profitability of many of these companies have failed to meet expectations within an acceptable timeframe and their ability to raise additional capital without proving concept is severely constrained. It remains a challenging market for many of the FinTech platforms.

 

Strategic KPIs

 

The Board have agreed the following KPI's with the senior management team. These have been selected based on their link to the successful delivery of our strategy and the executive management team will be monitored against these throughout the year. The composition of KPI's are further monitored by the Board on a regular basis and upon their successful delivery are designed to create shareholder value.

 

·      Revenue growth.

·      Growing loans under management.

·      Reducing cost of funding.

·      Become a capital efficient business.

·      Increasing operating profits - by increasing gross margin and reducing costs.

·      Return on Equity.

·      Ensuring a risk based approach is taken on all decision making.

 

Summary of Financial Performance

 

Our full year 2021 financial results have been overshadowed by the ongoing impact of Covid-19 as we saw a reduction in our loan book and revenue as delays to loan completions impacted the results. This resulted in revenue of £9.0m for the year compared to £10.9m last year.

 

2021 was the start of what we expect will be a transitional period for the Group, where we saw the Group rebrand, a number of changes to senior management and continued expansion of our presence in the UK and Ireland. From the delays we saw over the last few years on development sites and following a full review of our loan books, we have seen an increase in IFRS 9 provisions in the year of £6.4m. Coupled with an increase in operating costs as we have started to build out the team for our growth plans, this has resulted in an overall loss for the year of £10.3m for the year (2020: loss of £14.5m).

 

Although headline revenue showed a decrease, Note 3 Segmental Reporting sets out the results by Offshore, UK and Ireland and we can start to see revenue growth in our growth target markets, with the UK revenue up by 132% over the course of 2021.

 

Ireland results are relatively flat (revenue up 6%) against last year however strict Covid-19 restrictions in Ireland during 2021 did cause some delays to loan closures. However, we have seen a good start to 2022 and with most restrictions now largely lifted and further resources allocated to Ireland we expect 2022 to show a good growth story.

 

We have seen Offshore revenue decrease by 12% in the year, partly due to some large exit fees which were received in 2020 but also a reduction in administration fees as we saw the loan book in this region decrease over the last few years. The Offshore team has been rebuilt over the course of 2021 and into 2022 following some changes in senior management and they are focussed on building the loan book over the next few years.

 

Operating costs in the year were £6.2m (2020: £5.6m) with a breakdown shown in Note 7. The increase we have seen this year is largely around employment costs where we have started to build out the UK and Irish operations as well as building up the credit team in particular. We have also been through a period of change in senior management during the year which has contributed to the increase in these costs.

 

Following a thorough review of the loan book we have seen an increase in the expected credit loss provisions (IFRS 9) of £6.4m in the year (2020: £4.7m). This brings the total loan and debtor provision balance to £13.5m. The majority of this provision figure relates to loans written in or before 2018. As disclosed in Note 22 the total loan and debtor provision balance is £13.5m at 31 December 2021 (2020: £7.9m). On a total loan and debtor exposure including first loss positions within HIT and the loan notes this represents 15.7% (2020: 7.0%).

 

The Group's net assets have reduced in the year from £29.5m at 31 December 2020 to £19.1m as a result of the operating loss in the year which includes an increase in the expected credit loss provision of £6.4m.

 

Goodwill remains at £22.9m, which relates to the carrying amount of goodwill arising on the acquisition of Sancus Jersey and Sancus Gibraltar. This is assessed by the Board for impairment on an annual basis or sooner if there has been any indication of impairment. A full impairment review of the carrying amount of goodwill was reported in the June 2021 interim accounts. The resultant value in use calculation indicated that no impairment of goodwill was required in either Sancus Jersey or Sancus Gibraltar. Following on from this review the Board have considered whether there have been any further indicative events of impairment since June 2021, and they have concluded there have not. The next full impairment review will take place in the 2022 Interim Report.

 

Group cash remains healthy. Within the £12.4m of cash and cash equivalents balance at 31 December 2021, £4.9m relates to Group operational cash with £7.5m within Sancus Loans Limited.

 

On balance sheet loans (excluding those loans in Sancus Loans Limited) were £11.6m before IFRS 9 provisions at 31 December 2021 compared to £11.8m at 31 December 2020. During the year a provision of £6.4m has been made against loans and loan debtors. Sancus Loans Limited had loans of £49.9m at 31 December 2021 (31 December 2021: £45.0m).

 

The Group's liabilities consist of the Bond of £12.5m which has a quarterly coupon of 7% p.a. and matures on 31 December 2025; and ZDPs of £10.6m with a coupon of 8% and payable on 5 December 2022. The HIT credit facility was increased to £75m from £45m on 4 December 2020 and at 31 December 2021 was £49.9m (£52.5m including IOM loans) ((31 December 2020: £45.0m (£45.6m including IOM loans)). The Directors are considering their options regarding the ZDPs inline with the growth strategy of the business as noted above.

 

 

Going Concern

The Directors have considered the going concern basis in the preparation of the financial statements as supported by the Director's assessment of the Company's and Group's ability to pay its debts as they fall due and have assessed the current position and the principal risks facing the business with a view to assessing the prospects of the Company.

 

Liabilities which fall due in the next 12 months include the final capital entitlement of the Company's ZDP shares, which are repayable on 5 December 2022 at £11.3m.

 

As part of the Group's growth plan the Company is considering its options regarding this liability which may include re-financing, part repayment and/or extension of the ZDPs and an equity raise. This will require consultation with the relevant stakeholders, including ordinary shareholders and ZDP shareholders and regulatory approvals and consents. Accordingly, there can be no certainty that the proposals will proceed.

 

These factors and assumptions constitute a material uncertainty that may cast significant doubt over the Company's ability to continue as a going concern, such that it may be unable to realise its assets and discharge its liabilities in the normal course of business. The Directors expect that if they are able to action the mitigations in accordance with the plan outlined above, the material uncertainty will be extinguished. The Directors are therefore of the opinion that the Company will have adequate financial resources to continue in operation and meet its liabilities as they fall due for the foreseeable future and continue to adopt the going concern basis in preparing the financial statements.

 

Outlook

 

The Group has been through a substantial period of change with a new chief executive and other new members of the senior executive team now in place. This new senior executive team have a clearly defined strategy to return the business to profitability. The road map to achieving this goal has been clearly communicated to the whole team and all members of the Sancus team are clear on the vision for the business together with understanding the role that they have to play in delivering this target. While a great deal of hard work lies ahead, I am certain the team are up to the challenge and are excited about the future.

 

I want to thank all shareholders for their support during this period of change and over the preceding year. We are enthusiastic about the opportunities that lie ahead of us and look forward to delivering profitability. 

 

Rory Mepham

Chief Executive Officer

 

 

 

PRINCIPAL RISKS, UNCERTAINTIES AND RELATED INTERNAL CONTROLS

 

The Group aims to carefully manage the risks which are inherent across its business activities in order to deliver an appropriate risk adjusted commercial return. The principal risks which the Group has consciously accepted in the pursuit of value creation are liquidity risk, regulatory and compliance risk, market risk, credit risk, strategic risk, and investment risk. With regard to the FinTech activities, exposure to investment risk is a factor of the strategic, liquidity, credit and operational risks assumed by the platforms in which the Group is invested.

 

This section on the Group's Principal Risks should be read together with the sections on the Group's Governance Framework, the operation of the Audit and Risk Committee, as well as Note 22 which describes the sensitivity of the Group's financial results to its Financial Risk exposures. These sections explain how these risks are being managed, monitored and governed.

 

The table below describes the Group's assessment of the principal risks being those which have the potential to have a significant impact on the Group's business model, future performance, solvency or liquidity.

 

Principal Risks	Internal controls mitigating Risks	Current Rating of Risks
Group
1. Capital and liquidity Risk		Medium
Sancus's own funding is sourced primarily from the ZDP shares and the Corporate Bond (as detailed in Note 17).   Expansion of lending and investment activities will be constrained to the extent of retained profits unless further sources of funding are secured.	Sancus has a Treasury Committee which meets once a month to manage its capital and liquidity position, and forecasts over several years to predict longer term funding requirements.   Management of each of the operating companies balance their lending and funding and proposals to advance lending are typically contingent on sufficient funding having been secured in advance.   The business seeks to maintain a material liquidity buffer at all times.	Completion of the fundraising and liability management exercise in December 2021 has significantly improved the Group's capital and liquidity position.   Management at Group and subsidiary level are focussed on raising additional on and off balance sheet funding in order to grow lending activities and support funding commitments.
2. Regulatory and Compliance Risk		Low
As a Financial Services business, compliance with regulation is considered paramount within the Group, particularly with regard to Anti Money Laundering (AML) regulations which are critically important.   The Company has chosen to comply with the provisions of the QCA Corporate Governance Code.	All entities have developed and implemented appropriate policies and procedures relating to regulatory compliance and Anti Money Laundering.   The Group Compliance Committee monitors these risks, and forthcoming regulations, with appropriate reporting from the various Heads of Compliance and Money Laundering Reporting Officers.  Further reviews of AML compliance are carried out by independent third parties where appropriate.   The Company has an appointed NOMAD, Liberum, with whom it liaises regularly, to ensure compliance with the AIM rules, including the Market Abuse Regulations.   Boards receive quarterly reports from Compliance Officers and where appropriate, Money Laundering Reporting Officers on compliance monitoring plans and any breaches identified.	The compliance framework as described is considered to be operating effectively.   The Group is mindful of the conflicts in Russia and Ukraine and have carried out a check of our clients against various sanction lists in relation to Russia and have not identified any individual or entity of any concern. Additionally, we subscribe to WorldCheck for standard AML checking purposes with all clients set up for ongoing monitoring, which provides any real-time negative information, that include updated sanctions.
3. Market risk		Low
The primary market risks are considered to be interest rate and foreign exchange risk.  Given the nature of the business operations, with relatively short term lending and currencies on lending opportunities being matched (or hedged) the exposure is considered to have limited impact on its position as a Going Concern.   Foreign exchange risk primarily arises from the USD and Euro investments in the FinTech portfolio and Euro loans held in the Irish lending book.	Exposures to these risks are monitored regularly by the Sancus Treasury Committee and reported to the Board on a quarterly basis.   These risks are identified and assessed at the time of entering into new transactions.	More information on the sensitivity to these risks is contained in Note 22.   Covid-19 could cause interest rate and foreign exchange fluctuations although the impact of this we believe is likely to be minimal as loans have fixed rates and are short term. Co-Funders might look elsewhere to investment; however, we believe this to be a minimal risk as our lending model enables investors to receive attractive risk adjusted returns on asset backed lending.
4. Credit Risk		Medium
The Group has direct credit exposures through its on balance sheet lending and credit support. Indirect credit risk (potential losses to Co-Funders) could impact further business development.	Each operational entity has its own credit policies and procedures which are the subject of at least annual review by operating entity Boards.   The respective Credit Committees take all credit decisions, monitor credit exposures on an ongoing basis and manage recoveries situations. Following Covid-19 tighter lending criteria has been implemented.	The IFRS 9 provision increased substantially during the year.  However, the credit performance across the Group remains resilient with actual losses incurred being less than 1% of loans advanced.    See Note 22 (5) for further details.          Covid-19 created downside risk through potential delays in loan repayments and reduced recoveries.  We believe the risk of this going forward has reduced.
Sancus
5. Operational Risk - Execution of the Sancus strategy		Medium
Approximately 80% of Sancus's capital has been deployed into the Sancus Group. There is a risk that the planned growth of these businesses will not be realised primarily as a result of sub optimal levels of loan origination and funding.	The Board and Executive Committee of Sancus Group recognise the challenge of building the business to meet the financial targets and actively manage all aspects of the business on an ongoing basis. Plans and budgets are in place and performance against these is monitored regularly by the management team and the Executive Committee.   There continues to be strong demand from both Borrowers and Co-Funders for the lending products offered across the business, and the risk adjusted returns available to Co-Funders.	By its nature, this risk remains an on-going area of focus for the Board, particularly with respect to business development in the UK and Ireland.   The emergence of Covid-19 created downside risk on new loan origination levels although we believe this risk has now reduced.   IT capabilities for Sancus were further enhanced during 2021, providing Co-Funders with online interactive services and creating operational efficiencies.
FinTech Ventures
6. Investment risk - Platform Valuations		Low
Across the majority of the FinTech portfolio, the growth rates historically have been slower than originally anticipated and the business models have proved more capital intensive.    Many of the FinTech platforms require additional capital to fund their ongoing growth to enable them to reach profitability. There remains a risk that some platforms may not be successful in the longer term, either as a result of lack of loan funding, lack of working capital funding or difficulties in establishing a competitive position in their chosen markets	The Group has board seats or board observer rights on most investee company boards and thus is able to participate in the strategic discussions and monitor the progress on each platform.   The Group regularly monitors the  progress of each business, with regular review of financial and KPI reporting.   Period end valuations are conducted for all investments in platforms. These are based on a variety of factors including the pricing for any recent relevant capital transactions by the respective platform or using an appropriate valuation methodology such as a discounted cash flow model. The forecasts provided by management of the platforms are often challenged, and where considered appropriate, adjustments are made and sensitivity analysis is included as part of the valuation work.	As a result of the platforms taking longer to reach profitability, and given that several are seeking additional capital, the Board has valued our holding of the FinTech portfolio at £0.5m at the end of 2021.   The valuations are also subject to a number of material estimation uncertainties, refer to Note 22 (4). .

 

SOCIAL RESPONSIBLITY

 

Our ESG journey at Sancus

 

At Sancus, we are committed to taking environmental, social and governance ("ESG") factors seriously. We recognise our responsibility to incorporate sustainability throughout the operations of our business, be custodians of the environment and practice good stewardship of our stakeholders' interests. We are now taking steps to improve our approach to managing these factors.

 

Q1 2022 has been focused on starting to define our ESG strategy. Having now established an internal ESG focus group we will also draw on external industry experts as required.

 

It is essential that we understand what ESG factors are most important to our stakeholders, such that we can focus our strategy around improving our approach to these material issues. We are well on our way to completing a materiality assessment and intend to engage with stakeholders in the coming period.

 

Our approach to ESG will be to breakdown the topics into People, Planet and Prosperity. Starting by ascertaining which factors are material to our business, establish our baseline, set objectives & goals, assess the gap between goals and baseline, establish a roadmap, set KPIs and report on progress.

 

We are committed to providing an ESG report, focusing on our progress in the 2022 Annual Report.

 

 

CORPORATE GOVERNANCE

 

Board of Directors and Executive Management Team

 

Introduction

 

The Board recognises the importance of a strong corporate governance culture.

 

The composition of the Board is the subject of ongoing review. Somerston Group had the right to nominate a candidate for appointment to the Board and took up this right in 2019 with the appointment of Nick Wakefield. On the 8 March 2022 it was announced that Nick Wakefield has been replaced by Tracy Clarke (bio noted below).

 

Board of Directors

 

The Company operates a unitary Board Structure, comprised of both Executive and Non-Executive Directors. Biographical details of the Directors can be found below. The terms of Directors' appointments are available from the Company Secretary.

 

On joining the Board, any new director will have received an induction through face to face meetings with existing directors, senior management and the Company Secretary.

 

The Chairman leads the Board and is responsible for its overall effectiveness in directing the Company, its corporate governance responsibilities, and addressing any training or development needs of the directors.

 

Steve Smith - Independent Non-Executive Director

 

Mr Smith was formerly an Executive Director and the Chief Investment Officer of The British Land Company plc, the FTSE 100 real estate investment trust, with responsibility for the group's property and investment strategy, standing down in 2013. Prior to this, Mr Smith was Global Head of Asset Management and Transactions at AXA Real Estate Investment Managers, where he was responsible for the asset management of a portfolio of assets valued at more than €40 billion on behalf of life funds, listed property vehicles, unit linked and closed end funds. Prior to joining AXA in 1999, Mr Smith was Managing Director at Sun Life Properties for over five years. Over the last decade, Mr Smith has worked extensively in governance related roles for a number of real estate focused organisations. Mr Smith is Chairman of the Board and is a member of the Audit and Risk Committee and Remuneration and Nomination Committee. Mr. Smith was appointed to the Board on 11 May 2021. He is resident in the UK.

 

John Whittle - Independent Non-Executive Director

 

Mr Whittle has a background in large third party Fund Administration. He has worked extensively in high tech service industries and has in-depth experience of strategic development and mergers/acquisitions. He has experience of listed company boards as well as the private equity, property and fund of funds sectors. He is currently a director of Starwood European Real Estate Finance Limited and TRIG (both listed on the main market of the London Stock Exchange) and Chenavari Toro Income Fund Limited (admitted to trading on the Specialist Fund Segment of the London Stock Exchange). Mr Whittle, a Chartered Accountant, has also served as Finance Director of Close Fund Services Limited (responsible for internal finance and client financial reporting), Managing Director of Hugh Symons Group PLC and Finance Director and Deputy MD of Talkland International Limited (now Vodafone Retail).

 

Mr. Whittle was appointed to the Board, the Audit and Risk Committee and the Remuneration and Nomination Committee on 23 September 2016, after having served as an Alternate Director since December 2015. He is resident in Guernsey. Mr Whittle is Chairman of the Audit and Risk Committee, and of the Remuneration and Nomination Committee.

 

Tracy Clarke - Non-Executive Director

 

Ms Clarke is a representative of the Somerston group of companies ("Somerston"), the Company's largest shareholder which has the right to nominate one individual for appointment to the Board. Ms Clarke joined Somerston in 2016 and acts as the group's Chief Operating Officer.  Ms Clarke is also Managing Director of Carlton Management Services Limited, a licensed Jersey trust company business. Prior to joining Somerston, Ms Clarke worked for Deutsche Bank in Jersey and Zurich for  over 10 years, specialising in financial Intermediary and external asset manager business. Ms Clarke is a Fellow of the Institute of Chartered Accountants in England and Wales and holds the CISI Investment Advice Diploma. Ms Clarke was appointed to the Board on 8 March 2022 and is a member of the Company's Audit and Risk Committee and Remuneration and Nomination Committee.

 

Rory Mepham - Executive Director

 

Rory joined Sancus in January 2021, assuming the role of Interim CEO on 1 July 2021 and was then confirmed as CEO and board member on 23 November 2021. Joining Sancus from The Somerston Group where he managed their European real estate platform which includes business in the hotel, retail, land development, student housing and PRS sectors. Rory has over 20 years experience in the UK and European property market. He has spent his career working with institutional capital and has an extensive track record in M&A, corporate finance, capital raising, debt finance, investment management and property development. Rory Holds an MBA from the Cranfield School of Management, a BSc(Hons) in Land Management from the University of Reading and qualified as a member of the Royal Institute of Chartered Surveyors (MRICS).

 

Emma Stubbs - Executive Director

 

Emma joined the Group in November 2013 as Chief Financial Officer and was appointed to the Board on 16 September 2014. Emma is also a Board member of Sancus Group Holdings Limited and a number of the subsidiary entities. Emma was appointed as a Non Executive Director on Funding Options Limited on 24 March 2020. Emma is also a Non-Executive Director of Amberton Limited. Emma is a Fellow member of the Association of Chartered Certified Accountants and qualified with Deloitte in 2004. She graduated from the University of the West of England with a BA Hons degree in Accounting and Finance. Emma is resident in Guernsey.

 

 

Executive Management Team

 

Rory Mepham - Chief Executive Officer

See above.

 

Emma Stubbs - Chief Financial Officer

See above.

 

Dan Walker - Chief Operating Officer (left Company on 31 January 2022)

 

James Waghorn - Chief Investment Officer (joined Executive Management Team on 8 March 2022)

 

James was appointed to the Executive Management Team on 8 March 2022. James has over 14 years experience in the UK and European real estate market. James has extensive experience across the corporate real estate, investment and property development sectors. For the past 6 years James' has led Somerston's land development business, a strategic land and

development focused business with capacity for in excess of 2,350 units within its strategic portfolio. James holds a BSc in Investment and Finance in Property from the University of Reading and is MRICS accredited. James joined Sancus in January 2021.

 

 

GOVERNANCE FRAMEWORK

 

The Board is committed to maintaining high standards of corporate governance throughout the Company's operations and to ensuring that all of its practices are conducted transparently, ethically and efficiently. The Board believes that scrutinising all aspects of the Company's business and reflecting, analysing and improving its procedures will minimise the potential for downside risk and will preserve shareholder value. In compliance with the AIM Rules for Companies, published March 2018, the Company has chosen to comply with the provisions of the QCA Corporate Governance Code (the "QCA Code"). The Company is also mindful of the provisions of the Finance Sector Code of Corporate Governance, as amended by the Guernsey Financial Services Commission in November 2021.

 

The Board believes that applying the principles and reporting against the provisions of the QCA Code accurately reflects the nature, scale and complexity of the business and enables the Board to provide information to shareholders on its activities in accordance with the principles set out in a recognised governance framework. Furthermore, through applying the relevant provisions the Company is better positioned to mitigate downside risk and in doing so, preserve long-term shareholder value. The Company's corporate governance framework has been based on these principles and is designed to deliver the Group's strategy, and the application of such principles to the operation of the Board ensures that its decision-making processes remain focussed on the long-term sustainable success of the Company. 

 

As at 31 December 2021, the Company complied substantially with the relevant provisions of the QCA Code and it is the intention of the Board that the Company will comply with these provisions throughout the year ending 31 December 2022, save with regard to the following:

 

·      The appointment of a Senior Independent Director: Given the size and composition of the Board, the Board does not consider it is necessary to appoint a Senior Independent Director. The Board considers that all the independent Directors have different qualities and areas of expertise on which they may lead where issues arise and to whom concerns can be referred.

 

·      Internal audit function: The Board has considered the need for an internal audit function and is satisfied that the compliance policies, procedures and reporting mechanisms in place throughout the group are sufficient, and that implementing a separate internal audit function would be unnecessary. This requirement is assessed annually by the Audit and Risk Committee. 

 

How we apply the QCA Code

 

The Company has established specific formally constituted committees and implemented certain policies, to ensure that:

 

·      It is led by an effective Board which is collectively responsible for the long-term sustainable success of the Company and establishes a culture whereby the tone is set from the top which is consistent with the objectives, strategy and business model of the Group;

 

·      the Board and its committees have the appropriate balance of skills, experience, independence, and knowledge of the Company to enable them to discharge their respective duties and responsibilities effectively;

 

·      the Board establishes a formal and transparent arrangement for considering how it applies the corporate reporting, risk management, and internal control principles and for maintaining an appropriate relationship with the Company's auditors; and

 

·      there is a dialogue with shareholders based on the mutual understanding and alignment of objectives, conducted primarily through the CEO and the Corporate Broker.

 

Risk management remains a key area of focus during Board meetings.

 

 

Composition and Independence of the Board of Directors

 

The Board of Directors is responsible for ensuring the affairs of the Company are properly managed through formulating, reviewing and approving the Company's strategy, budgets, and corporate actions and that oversight, scrutiny and challenge is applied to Executives responsible for the day-to-day activities of the Group. The Company seeks to deliver long-term growth for shareholders and maintain a flexible, efficient and effective management framework within an entrepreneurial environment.

 

It is important that the Board itself contains the right mix of skills and experience in order to deliver the strategy of the Company. As such, the Board is comprised of:

 

·      Two Independent Non-Executive Directors, one of which serves as the Chairman, who is responsible for leadership of the Board and ensuring its effectiveness on all aspects of its role;

 

·      One Non-Executive Director who, whilst sharing the fiduciary and statutory duties of the independent directors, is also an executive director of the Somerston Group, a significant shareholder of the Company, and therefore not considered independent under the QCA Code; and

 

·      Two Executive Directors, who are also members of the Group's Executive Committee and are therefore not considered independent under the QCA Code.

 

The Board is comprised of individuals holding professional qualifications and experience relevant to the activities of the Company. The time requirement expected from each of the Directors is set out in writing in their respective appointment letters.

 

Liberum Capital has been appointed as the Company's Corporate Broker and Nominated Adviser under the AIM Rules and advises on compliance with the AIM Rules, corporate communications and acts as financial adviser to corporate actions. Additionally, the Company has appointed a professional Company Secretary who assists the Board of Directors in preparing for and running effective board meetings, including the timely dissemination of appropriate information. The Company Secretary provides guidance to the extent required by the Board on certain aspects of the legal and regulatory environment, within which the Company operates.

 

The Board believes that long serving Directors should not be prevented from forming part of the Board or from acting as Chairman and no limit has been imposed on the overall length of service of the Directors. Each Director will retire and seek reappointment at every third annual general meeting, with those serving for nine years or more subject to reappointment annually. The Board meets on at least a quarterly basis during the financial year.

 

The Board has appointed several committees to support it in different areas of the business; each with formal terms of reference, with specific roles as set out below.

 

The Board undertakes an annual evaluation of its own performance, the performance of its formally constituted committees and that of individual Directors. This includes a formal process of self-appraisal reviewing the balance of skills, experience, independence and diversity present on the Board, and individual director performance, contribution and commitment to the Group to ensure that the Board and its committees continue to operate effectively, or to identify areas where action is required. The remainder of the Board is responsible for evaluating the performance of the Chairman. The Chairman also has responsibility for assessing the individual Board members' training requirements. No significant findings were identified in the 2021 evaluation which required further action. 

 

The Directors remain mindful of the benefits which can flow from increasing the level of diversity represented on the Board including, but not limited to, cultural, gender, experience and background. Such factors will be taken into consideration by the Nomination Committee during any selection process.

 

Executive Management Team

 

As at the year end, the Company's Executive Management Team comprised Rory Mepham (Chief Executive Officer), Emma Stubbs (Chief Financial Officer) and Dan Walker (Chief Operating Officer and UK Managing Director) (together the "Executive Management Team" or "Management"). Management are responsible for the day-to-day management of the Company's operations. The non-executive independent Directors monitor and evaluate the performance of the Management Team on an ongoing basis. Dan Walker left the Company on 31 January 2022 and on 8 March 2022 James Waghorn was appointed to the Executive Management Team as Chief Investment Officer.

 

 

BOARD COMMITTEE STRUCTURE

 

Audit and Risk Committee

The Audit and Risk Committee conducts formal meetings at least twice a year. The Audit and Risk Committee's key duties include:

 

·      monitoring the integrity of the financial statements of the Group, including its annual and half-yearly reports and any other formal announcement relating to its financial performance, reviewing, challenging (where necessary) and reporting to the Board on significant financial reporting issues and judgements which they contain having regard to matters communicated to it by the auditor, and how they were addressed;

·      reviewing the Group's internal financial controls and the Group's internal control and risk management systems;

·      making recommendations to the Board for it to put to the shareholders for their approval in general meeting in relation to the appointment, re-appointment or removal of the external auditor and to recommend the remuneration and terms of engagement of the external auditor;

·      monitoring the external auditor's independence and objectivity and the effectiveness of the audit process, taking into account relevant professional and regulatory requirements;

·      in conjunction with executive management, advise the Board on the overall risk appetite, tolerance and strategy of the Group, current risk exposures and future risk strategy; and

·      keep under review the Group's overall risk assessment processes that inform the Board's decision making, ensuring both qualitative and quantitative metrics are used.

 

The Audit and Risk Committee has three members, two of whom are independent, non-executive directors and one of whom is a non-executive director, and at least one member has recent and relevant financial experience. The current members of the Committee are John Whittle as the Chairman, Steve Smith and Tracy Clarke.  

The Audit and Risk Committee is supported by a risk management and oversight process employed by the Executive Management Team and receives reports twice a year on key risks and developments during the period, or as otherwise required in the case of a material development.

The terms of reference of the Audit and Risk Committee are available from the Company Secretary.

Remuneration and Nomination Committee

The purpose of the Remuneration and Nomination Committee is to determine and agree with the Board the framework or broad policy for the remuneration of the Company's Directors, senior executives, and any bonus-related arrangements in place by the Company as well as to consider the structure, size and composition of the Board. The key duties of the Remuneration and Nomination Committee include:

 

·      determining and agreeing with the Board the framework or broad policy for the remuneration of the Company's Chairman, executive and non-executive directors and such other members of the management as it is designated to consider;

·      reviewing the ongoing appropriateness and relevance of the remuneration policy;

·      reviewing the structure, size and composition of the Board;

·      considering the succession planning for Directors and the Executive Management Team;

·      reviewing the leadership needs of the organisation; and

·      identifying candidates for appointment to the Board. 

 

The Remuneration and Nomination Committee has three members, all of whom are non-executive directors and two are independent. The current members of the committee are John Whittle as the Chairman, Steve Smith and Tracy Clarke.

 

The terms of reference of the Remuneration and Nomination Committee are available from the Company Secretary. 

 

 

Meetings and attendance

The Directors meet on a quarterly basis ('Quarterly' meetings per the table below) and at other unscheduled times ('Other' meetings per the table below) when necessary to assess Group operations and the setting and monitoring of strategy and performance.

                               

The table below, details the attendance of the Board at eligible Board and Committee meetings during the year, noting that certain Directors retired or were appointed during the course of the year as set out below the table:

 

	Board
	Quarterly	Other	Remuneration & Nomination Committee	Audit and Risk Committee
Total number of meetings held during the year	4	19	6	4
Stephen Smith (Chairman)(1)	3 of 3	7 of 7	3 of 3	3 of 3
Patrick Firth (2)	3 of 3	16 of 16	6 of 6	2 of 2
John Whittle	4 of 4	18 of 19	6 of 6	4 of 4
Nicholas Wakefield	4 of 4	18 of 19	6 of 6	4 of 4
Andrew Whelan (3)	2 of 2	12 of 16	n/a	n/a
Emma Stubbs	4 of 4	19 of 19	n/a	n/a
Rory Mepham (4)	1 of 1	1 of 1	n/a	n/a

 

(1)   Stephen Smith was appointed to the Board on 11 May 2021 and appointed as Chairman of the Board on 1 September 2022.

(2)   Patrick Firth resigned as Chairman of the Board on 31 August 2021.

(3)   Andrew Whelan resigned from the Board on 30 June 2021.

(4)   Rory Mepham was appointed to the Board on 23 November 2021.

 

Relations with Stakeholders

The Board's advisers and the Executive Management Team maintain regular dialogue with key shareholders, the feedback from which is reported to the Board and the Chairman. Shareholders who wish to communicate with the Board should contact the Company Secretary in the first instance.

 

The Board also regularly monitors the shareholder profile of the Company. All shareholders have the opportunity to and are encouraged to attend the Company's annual general meeting at which members of the Board are available in person to meet shareholders and answer questions.

 

Whilst the primary duty of the Directors is owed to the Company as a whole, the Board takes into consideration the interests of all key stakeholder groups as part of its decision-making process and particular consideration is given to the impact of any decision on holders of its securities, the Co-Funders to the underlying loan businesses, and providers of the Group's long-term debt capital. The Board also recognises the crucial roles played by those involved throughout the Group's operations who contribute to delivering strategy, including staff and key service providers, to ensure a continued alignment of interests between their activities and those of the Company.

 

 

Terms of Reference of Committees

Committee Terms of Reference are available from the Company Secretary.

 

AUDIT AND RISK COMMITTEE REPORT

 

The Audit and Risk Committee

The Audit and Risk Committee has a formal terms of reference mandate documenting the duties and responsibilities which it has been delegated by the Board. These are available from the Company Secretary.

The Audit and Risk Committee has been in operation throughout the year under review.

 

Chairman and Membership

The Audit and Risk Committee comprises of John Whittle as Chairman, Steve Smith and Tracy Clarke. Only Non-Executive Directors serve on the Audit and Risk Committee and members of the Audit and Risk Committee have no links with the Company's external auditor and are independent of the Executive Management Team. The Audit and Risk Committee meets not less than three times a year in Guernsey and meets the external auditor at least twice a year in Guernsey. The identity of the Chairman of the Audit and Risk Committee is reviewed on an annual basis and the membership of the Audit and Risk Committee, and its terms of reference are kept under review. Regular attendees at the Audit and Risk Committee include the CEO, CFO and CIO.

 

Duties

The Audit and Risk Committee is responsible for monitoring the financial reporting process, including the appropriateness of the Company's accounting policies and the effectiveness of the Company's risk management and internal control systems.

The Committee continues to spend a considerable amount of time reviewing significant risks and areas of judgement. In particular, the Committee conducts detailed reviews and analysis of the valuations prepared by the Executive Management Team of the FinTech Ventures investments, the Subsidiary Goodwill value in use models to assess if any impairment might be required and the Expected Credit Loss model.  These valuations are key elements in the Group's financial statements and the Audit and Risk Committee questions these carefully.

 

External Audit

The Audit and Risk Committee is responsible for overseeing the relationship with the external auditor, including the ongoing assessment of the auditor's independence. The Committee makes recommendations to the Board with regard to the appointment of the external auditor and approves their terms of engagement and fees.  The Committee discusses and agrees the nature and scope of the audit as set out in the audit engagement letter, reviews the results of the audit as described in the auditors' management letter and the ongoing independence and objectivity of the external auditor. Following a tender process, Moore Stephens were appointed as the Company's auditor in 2021, taking over from Deloitte who held this position since 2016.

 

Processes are in place to safeguard the independence of the external auditor, including controls around the use of the external auditor for non-audit services.  The external auditor also provides the Audit and Risk Committee with further assurance as to the procedures that it maintains to preserve objectivity and confirmation that it remains independent.  All non-audit services are pre-approved by the Audit and Risk Committee.   

 

Effectiveness of External Auditor

 

The Committee assessed the effectiveness of the external auditor and the external audit process for 2021 through a number of steps, including:

 

·      agreement of their engagement letter and fees;

·      review of the external audit plan; 

·      meetings with the external auditors;

·      considering the extent of any non-audit services provided by the external auditors;

·      considering the external auditors' fulfilment of the agreed audit plan and variations from it;

·      considering the report from the auditor highlighting any major issues that arose during the course of the audit; and

·      conducting interviews to obtain feedback from the Executive Management Team to evaluate the performance of the audit team.

 

For the audit for the year ended 31 December 2021, the Audit and Risk Committee was satisfied that the audit was effective and that there were no factors which had any bearing on the independence or effectiveness of the external auditor. 

 

 

Financial Reporting

The Audit and Risk Committee reviews, considers and, if thought appropriate, recommends to the Board the approval of the contents of the half yearly report and annual report and audited financial statements together with the external auditor's report thereon. It focuses particularly on compliance with legal requirements, accounting standards and the relevant Listing Rules. The ultimate responsibility for reviewing and approving the half year report and annual report and audited financial statements remains with the Board.

 

The Audit and Risk Committee provides a forum through which the external auditor reports to the Board and the external auditor is invited to attend Audit and Risk Committee meetings at which annual and half yearly financial statements are considered. After discussions with the Executive Management Team and external auditor, the Audit and Risk Committee determined that the key risks of misstatement of the Group's financial statements relate to the valuation of financial assets at fair value through profit or loss, the valuation and recoverability of goodwill, loan impairments and revenue.

 

Freely tradeable market prices are not available for the majority of the Group's financial assets, including the carrying value of goodwill arising on consolidation, which are therefore based on a discounted cash flow basis. Goodwill impairment reviews are carried out annually or sooner where an indicative event of impairment has been identified. The next annual review will coincide with the preparation of the 2022 interim accounts, there having been no indicative event of impairment since the last annual review which coincided with the preparation of the 2021 interim accounts. Full details can be found in Note 2 (h), Note 3 and Note 12 to the financial statements.

 

For the valuations of the FinTech Ventures portfolio, the Executive Management Team provides a detailed valuation report on a quarterly basis. The Executive Management Team has confirmed to the Audit and Risk Committee that the valuation methodology has been applied consistently during the year. The accounting policies are described in detail in Note 2 (f) to the financial statements.

 

The Audit and Risk Committee has assessed the processes around the expected credit loss provisions recorded in respect of the Group's loan assets and reviewed the IFRS 9 model adopted at year-end which had also gone through the credit committee for approval.

 

The accounting policies for revenue recognition are described in detail in Note 2 (o) to the financial statements. The Audit and Risk Committee has reviewed the revenue recognition policies of the Group and has determined that they are in accordance with the accounting standards and have been applied consistently.

 

After due consideration, the Audit and Risk Committee recommends to the Board that the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group and Company's performance, business model and strategy.

 

Non-Audit and audit related fees paid to the External Auditors

 

During 2021 no non-audit fees were paid to Moore Stephens, the external auditors. £15,000 was paid to Moore Stephens for audit related services, being the half year review. There is no perceived threat to auditor independence given the nature of the services provided and the safeguards in place.

 

Risk Management and Internal Control Systems

 

During 2021, management continued to enhance its reporting on risk management to the Board and the Audit and Risk Committee, which cover the operation of the Company and its wholly owned subsidiaries. The Audit and Risk Committee has received and considered these reports on three occasions, which has been the basis for its conclusion below.

 

In addition to the review of risk management reports, and in accordance with the guidance published in the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting by the Financial Reporting Council (the "FRC"), the Audit and Risk Committee has reviewed the Company's internal control procedures and concluded that these are adequate to manage the current risk profile.

 

A robust, ongoing process of Risk Management and Internal Control

The Board and Executive Management Team are responsible for safeguarding the assets of the Group through establishing effective systems of risk management and internal control. This responsibility is shared by the Directors of subsidiary companies, who are similarly responsible for safeguarding the assets of these companies.

 

The Board is also responsible for deciding on whether the nature and extent of risks taken within the Group are within its risk appetite. Such risks have been formally defined, setting the basis for the design and implementation of the Group's internal control framework.

 

On behalf of the Board, the Audit and Risk Committee oversees the Group's risk management and internal control systems. These systems are designed to ensure proper accounting records are maintained and that internal and published financial information is reliable, and that the assets of the Group are safeguarded. Such a system of internal controls can only provide reasonable and not absolute assurance against misstatement or loss.

 

Critical components of the Group's internal control framework include the documented policies which describe how each risk is to be managed and governed and the governance committees established in terms of such policies, which have mandates describing how they should operate, what reports they should receive and how they should govern the management of principal risks. Such policies have been implemented at Company as well as subsidiary levels.

 

On a semi-annual basis, the Executive Management Team review the key risks across the Group to ensure they are being managed within the Company's risk appetite.  Action plans are drawn up if any risks are considered to be outside of the Company's risk appetite and these are monitored on a regular basis until they return to levels back within the risk appetite.  

 

On a semi-annual basis, the Board and/or Audit and Risk Committee receive reports on risk management, the key risks and the exposures outstanding. Also included in these reports are the results of Executive Management Team's risk and issue identification discussions noted above. These meetings also provide the Directors with the opportunity to consider any other issues which management may not have identified and give direction on any additional risk management actions which might be required.

 

Described in the table below are the Group's risk definitions and the primary governance bodies, other than the Board and Audit and Risk Committee which either manage or oversee the management of such risks, at Company and/or subsidiary level.

 

Insurance

The Sancus and subsidiaries insurance programme is subject to annual review each year, with cover generally renewed in April of the following year. A significant amount of Insurance cover is held for Public Indemnity, Directors' and Officers' liability, Cyber, and Crime. Appropriate office and travel insurance is also in place.  

 

 

During 2021, the Committee did not receive any reports relating to whistleblowing across the Group.

 

On behalf of the Audit and Risk Committee

 

 

John Whittle

Chairman

Audit and Risk Committee

 

 

REMUNERATION REPORT

 

Introduction

An ordinary resolution for the approval of the annual remuneration report will be put to the shareholders at the annual general meeting to be held in 2022.

 

Remuneration and Nomination Committee

The Remuneration and Nomination Committee comprises of John Whittle as Chairman, Steve Smith and Tracy Clarke. The key duties include, but are not limited to, agreeing a framework for Director remuneration, ensuring management staff are appropriately incentivised to enhance performance, and reviewing the effectiveness of the remuneration policy on an on-going basis. No Director is involved in determining their own remuneration.

 

Remuneration Policy

In February 2020 the Remuneration Policy was last approved and adopted. The Company is committed to the objective of maximising shareholder return in the longer term. The remuneration policy aims to be competitive, aligned with shareholder interests and relatively simple and transparent. The Board takes into consideration the views of significant shareholders when determining the remuneration of directors.

 

The objective is to put in place a remuneration package that, as a whole:

 

·      aligns the interests of employees with that of shareholders and the success of the Company;

·      is appropriately benchmarked, such that it aids retention and recruitment; and

·      meets applicable legal or regulatory requirements, is tax efficient and simple to implement and administer.

 

The Board is reviewing the Remuneration Policy against these objectives.

 

The Policy is divided into two parts; the first part in relation to the remuneration of the Non-Executive directors of the Company, and the second part in relation to the remuneration of the Executive Directors of the Company.

 

 

Part 1 - Remuneration Policy of Non-Executive Directors

Each Non-Executive Director receives a fixed fee per annum based on their role and responsibility within the Company and the time commitment required. It is not considered appropriate that Non-Executive Directors' remuneration should be performance related and none of the Non-Executive Directors are eligible for pension benefits, share options, long-term incentive schemes or other benefits in respect of their services as Non-Executive directors of the Company. Shares held by the Non-Executive Directors are disclosed in the Annual Report.

 

Pursuant to Article 30.3 of the Company's Articles of Incorporation (the "Articles") the Board may award additional remuneration to any Director engaged in exceptional work at the request of the Board on a time spent basis to compensate for the additional time spent over their expected time commitment.

 

The total remuneration of the Non‑Executive Directors has not exceeded the £300,000 per annum limit (excluding amounts payable in respect of any out-of-pocket expenses pursuant to Article 30.2 or any additional remuneration awarded pursuant to Article 30.3) pursuant to an ordinary resolution passed at the Annual General Meeting of the Company held on 19 May 2016.

 

The Articles provide that Non-Executive Directors retire and offer themselves for re‑election at the first annual general meeting after their appointment and at least every three years thereafter. A Non-Executive Director's appointment may at any time be terminated by and at the discretion of either party upon three months' written notice. A Non-Executive Director's appointment will terminate immediately without notice (or payment in lieu of notice) if such director is not re-appointed at a General Meeting of the Company (if required under the Articles), if such director is removed as a director at a General Meeting of the Company, or if such director resigns or ceases to be a director in accordance with the provisions of the Articles.

 

The terms and conditions of appointment of each Non-Executive Director are available for inspection at the Company's registered office.

 

The last independent remuneration review was carried out in July 2014. The Directors intend to put in place a Long-Term Incentive Plan for Senior Management and an external advisor will be engaged to assist with this during the course of 2022 which will also include a remuneration review.

 

For comparative purposes the table below sets out the Non-Executive Directors' remuneration approved and actually paid for the year to 31 December 2020 as well as proposed for the year ending 31 December 2021 (to be approved at the 2022 AGM). There has been no change to the base fee, other than the fees noted below were reduced by 10% in the third quarter of 2020 as part of the Covid-19 cost saving initiative.

 

 

Director	Role	Base for 2021	Additional fees for 2021	Total fees for 2021	Base for 2020	Additional fees for 2020	Total fees for 2020
Patrick Firth*	Non-Executive Director and Chairman of the Board	£23,333	£10,000 for Chairman of the Board	£33,333	£34,125	£14,625 for Chairman of the Board	£48,750
Steve Smith**	Non-Executive Director and Chairman of the Board	£22,446	£5,000 for Chairman of the Board	£27,446	-	-	-
John Whittle	Non-Executive Director, Chairman of the Audit and Risk Committee and Chairman of the Remuneration Committee	£35,000	£5,000 for Chairman of the ARC and £2,500 for Chairman of Rem & Nom Co	£42,500	£34,125	£4,875 for Chairman of the ARC and £2,438 for Chairman of Rem Co	£41,438
Nicholas Wakefield***	Non-Executive Director	£35,000	Nil	£35,000	£34,125	Nil	£34,125
Total		£115,779	£22,500	£138,279	£102,375	£21,938	£124,313

 

* Pro rata for 2021 as Mr Firth resigned as a Non-Executive Director and Chairman of the Board on 31 August 2021.

** Pro rata for 2021 as Mr Smith was appointed to the Board on 11 May 2021 and succeeded Mr Firth as Board Chairman following his resignation.

*** Pro rata for 2022 as Mr Wakefield was succeeded by Ms Clark on 8 March 2022.

 

 

Part 2 - Remuneration Policy of Executive Directors

 

Base Remuneration

 

For the year ended 31 December 2021, the Executive Directors' base salary from the Company, excluding all reasonable expenses incurred in the course of their duties which were reimbursed by the Company, were as detailed in the table below:

 

	31 December 2021	31 December 2020
Andrew Whelan*	£260,981	£260,981
Rory Mepham**	£220,000	-
Emma Stubbs	£170,000	£163,113
Dan Walker	£200,000	£175,960

 

*Mr Whelan resigned on 30 June 2021, and his contract ended on 28 February 2022.

** Mr Mepham was appointed Interim CEO on 30 June 2021 and permanent CEO on 23 November 2022.

 

In addition to fixed salary payments, in 2021 the Executive Management Team members received pension contributions of £3,278 (Andrew Whelan), £7,045, Rory Mepham, £6,299, (Emma Stubbs) and £7,581 (Dan Walker). (2020: £19,478 (Andrew Whelan), £12,174 (Emma Stubbs), £6,932 (Aaron Le Cornu) and £9,240 (Dan Walker)).

 

 

Long Term Incentives

 

The Board intends to introduce a Long Term Incentive Plan for Senior Management during 2022 and an external advisor will be engaged to assist with this.

 

Discretionary Executive Bonus

 

In the year to 31 December 2021 discretionary bonuses in cash of £125,000, £50,000, £75,000 and £75,000 were paid to Andrew Whelan, Rory Mepham, Emma Stubbs and Dan Walker respectively (Year to 31 December 2020: discretionary bonuses of £125,000, £25,000 and £60,000 were paid to Andrew Whelan, Emma Stubbs and Dan Walker respectively).

 

 

On behalf of the Remuneration Committee

 

John Whittle

Remuneration Committee Chairman

 

 

DIRECTORS' REPORT

 

The Directors submit their Report together with the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Shareholders' Equity, the Consolidated Statement of Cash Flows and the related Notes for the year ended 31 December 2021, which have been prepared in accordance with International Financial Reporting Standards as adopted by the UK, in accordance with any relevant enactment for the time being in force, and are in agreement with the accounting records, which comply with Section 238 of The Companies (Guernsey) Law, 2008.

 

Principal Activities

The Company was incorporated and domiciled in Guernsey, Channel Islands, as a company limited by shares and with limited liability on 9 June 2005 in accordance with The Companies (Guernsey) Law, 1994 (since superseded by The Companies (Guernsey) Law, 2008). Until 25 March 2015, the Company was Authorised as a Closed-ended Investment Scheme and was subject to the Authorised Closed-ended Investment Scheme Rules 2008 issued by the Guernsey Financial Services Commission ("GFSC"). On 25 March 2015, the Company was registered with the GFSC as a Non-Regulated Financial Services Business, at which point the Company's authorised fund status was revoked. The Company's Ordinary Shares were admitted to the AIM market of the London Stock Exchange on 5 August 2005. The ZDPs were listed and traded on the main market of the London Stock Exchange with effect from 5 October 2015 and following shareholder approval now have a maturity date of 5 December 2022. The Company's 2021 bonds were repaid on 21 December 2021 and a total of £12.575m principal of new bonds (the "New Bonds") were issued on 22 December 2021. The New Bonds are not listed and have an interest rate of 7%.

 

The Company does not have a fixed life and the Articles do not contain any trigger events for a voluntary liquidation of the Company.

 

Following the approval by Shareholders at the Company AGM on 19 May 2016, the Company changed its status from being an investing company for the purpose of the AIM rules to a trading Company. 

 

The Executive Management Team is responsible for the day-to-day management of the Company.

 

The Group

As at 31 December 2021, the Group comprises the Company and the entities disclosed in Note 20 to the financial statements.

 

Directors and Executive Management Team of the Company

A list of the Directors and the Executive Management Team who served the Company during the year and as at 30 March 2022 is set out in this announcement.

 

Results and Dividends

No Dividends were paid during the year (31 December 2020: Nil). 

 

Substantial Shareholdings

As at 31 December 2021, the Company was aware of the following substantial shareholders who held 3% or more of issued share capital of the Company:

 

	Number of Ordinary Shares  held	Percentage of total  ordinary shares  issued held
Somerston Group	200,349,684	40.90%
Philip J Milton & Company plc	86,793,928	17.72%
Investec Wealth and Investment	16,590,873	3.39%
DBH Global Holdings	15,603,285	3.19%
Chelverton Asset Management	14,700,000	3.00%

 

 

Directors' Interests

As at 31 December 2021, the Directors had the following beneficial interests in the Ordinary Shares of the Company:

 

	31 December 2021		31 December 2020
	No. of Ordinary Shares Held	No. of Ordinary Shares Held	No. of Ordinary Shares Held	% of Ordinary Shares
John Whittle	138,052	138,052	138,052	0.03
Nick Wakefield	-	-	-	-
Emma Stubbs	1,380,940	1,380,940	1,380,940	0.28
Steve Smith (Chairman)	-	-	-
Rory Mepham	-	-	-	-

 

 

Statement of Directors' Responsibilities

The Directors are responsible for preparing the financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the United Kingdom (UK), and The Companies (Guernsey) Law, 2008 for each financial period to give a true and fair view of the state of affairs of the Group as at the end of the financial year and of the profit or loss for that period.  International Accounting Standard 1 requires that financial statements present fairly for each financial period the Group's financial position, financial performance and cash flows. This requires faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's "Framework for the preparation and presentation of financial statements".  In virtually all circumstances a fair presentation will be achieved by compliance with all IFRSs as adopted by the UK. 

 

In preparing the financial statements, the Directors are required to:

 

·       Ensure that the financial statements comply with the Memorandum and Articles of Incorporation and IFRSs, as adopted by the United Kingdom;

·       Select suitable accounting policies and apply them consistently;

·       Present information including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

·       Make judgements and estimates that are reasonable and prudent; and

·       Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business.

 

The Directors confirm that they have complied with the above requirements in preparing the financial statements.

 

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements have been properly prepared in accordance with The Companies (Guernsey) Law, 2008. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

The Directors also confirm that the annual report and financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group and Company's performance, business model and strategy.

 

Internal Controls Review

Taking into account the ongoing work of the Audit and Risk Committee in monitoring the risk management and internal control systems on behalf of the Board the Directors have conducted a robust assessment of the principal risks and uncertainties faced by the Group and is satisfied that each of these has been properly identified and is being effectively managed through the operation of appropriate internal controls and risk management systems, within the constraints of the resources of the Group.

 

Statement as to Disclosure of Information to Auditor

The Directors who held office at the date of approval of this Directors' Report confirm that:

 

· There is no relevant audit information of which the Company's auditors is unaware; and

· The Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information.

 

Auditor

Moore Stephens have indicated their willingness to continue in office and a resolution to re-appoint Moore Stephens will be tabled at the forthcoming AGM.

 

Going Concern

The Directors have considered the going concern basis in the preparation of the financial statements as supported by the Director's assessment of the Company's and Group's ability to pay its debts as they fall due and have assessed the current position and the principal risks facing the business with a view to assessing the prospects of the Company.

 

Liabilities which fall due in the next 12 months include the final capital entitlement of the Company's ZDP shares which are  repayable on 5 December 2022 at £11.3m.

 

As part of the Group's growth plan the Company is considering its options regarding this liability which may include re-financing, part repayment and/or extension of the ZDPs and an equity raise. This will require consultation with the relevant stakeholders, including ordinary shareholders and ZDP shareholders and regulatory approvals and consents. Accordingly, there can be no certainty that the proposals will proceed.

 

These factors and assumptions constitute a material uncertainty that may cast significant doubt over the Company's ability to continue as a going concern, such that it may be unable to realise its assets and discharge its liabilities in the normal course of business. The Directors expect that if they are able to action the mitigations in accordance with the plan outlined above, the material uncertainty will be extinguished. The Directors are therefore of the opinion that the Company will have adequate financial resources to continue in operation and meet its liabilities as they fall due for the foreseeable future and continue to adopt the going concern basis in preparing the financial statements.

 

Board Succession

The Board notes the resignation of Patrick Firth in August 2021 and the appointment of Steve Smith who succeeded Mr Firth as Chairman of the Board on his resignation. The Directors remain focussed on ensuring the Board is comprised of individuals with the requisite skills, knowledge, experience and diversity to operate effectively and to meet the future leadership needs of the Company. The Board welcomes the appointment of Ms Tracy Clarke who succeeded Mr Nick Wakefield in March 2022 as the Somerston appointed Board representative. 

 

 

Independent auditor's report to the members of Sancus Lending Group Limited

 

Opinion

 

We have audited the financial statements of Sancus Lending Group Limited (the 'company' or the 'parent company and its subsidiaries together as the 'group') for the year ended 31 December 2021 which comprise of the Consolidated Statement of Comprehensive Income, Consolidated Statement of Financial Position, Consolidated Statement of Cash Flows, the Consolidated Statements of Changes in Equity and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the United Kingdom and, as regards the Group's consolidated financial statements, as applied in accordance with the provisions of the Companies Act 2006.

 

In our opinion:

 

·      the financial statements give a true and fair view of the state of the group's affairs as at 31 December 2021 and of the group's loss for the year then ended;

·      the group financial statements have been properly prepared in accordance with IFRSs as adopted by the United Kingdom; and

·      the Group's financial statements have been prepared in accordance with the requirements of the Companies (Guernsey) Law, 2008.

 

Basis for opinion

 

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the audit of the financial statements section of our report. We are independent of the Group, in accordance with the ethical requirements that are relevant to our audit of the financial statements in Guernsey, including the FRC's Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Material uncertainty related to going concern

 

We draw attention to Note 2(a) in the financial statements, which sets out that the company's ZDP shares are repayable on 5 December 2022 at £11.3 million and that the company is considering its options regarding this liability. As stated in Note 2(a), this indicates that a material uncertainty exists that may cast significant doubt on the company's ability to continue as a going concern. Our opinion is not modified in respect of this matter.

 

In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the Group's consolidated financial statements is appropriate. Our evaluation of the directors' assessment of the entity's ability to continue to adopt the going concern basis of accounting included Review of board and treasury minutes, subsequent year financial forecasts and management's going concern assessment.

 

Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this announcement.

 

Key audit matters

 

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

 

 

The key audit matters that we identified in the current year are:

 

Audit Matter	Procedures
Impairment of Goodwill   As at 31 December 2021, the Group has recorded goodwill of £22.9m (2020: £22.9m) representing 23.1% (2020: 22%) of group total assets at year end. Discounted cash flow models are prepared by management to assist the Board and the Audit and Risk Committee in determining whether indicators of impairment exist and estimating the recoverable amount of goodwill, based on information available at 30 June 2021. The management believes that there is no further change till 31 December 2021. The risk is explained further in the Strategic report where this is included as a key risk of misstatement. Note 2(h) and Note 3 set out the associated accounting policy and disclosure in respect of critical judgements and key sources of estimation uncertainty, with Note 12 setting out details of the impairment tests and goodwill valuation sensitivities.	We obtained our understanding of how the discounted cash flow forecasts are modelled as part of the Board's processes to identify and recognise impairment. With regards to valuation, we performed the following procedures: We obtained an understanding of the relevant controls over the impairment assessment process;   We have reviewed and checked the key assumptions to the cash flows including revenue growth rates, discount rates, the potential impacts of Covid-19 and future income and expenditure cash flows, and tested for any inconsistencies with our understanding of the group's business model;   We internally performed stress testing on the key assumptions to determine the impact on the recoverable amount of goodwill and whether this would lead to any impairment;   We checked the critical model assumptions related to the cash flow and growth rate assumptions, which were used in the forecast to model the recovery to pre-Covid-19 levels of loan origination, by assessing trends in external sector reports, evaluating the expected cash flows from the loan pipeline and loans originated post impairment test date;   We agreed inputs to supporting evidence where appropriate;   We reviewed the models prepared by management for consistency with the requirements of IAS 36;   We challenged management's assertion that no further impairment triggers exist at the balance sheet date, considering the sources of information to identify such indicators as listed in IAS 36 Impairment of Assets; and     We reviewed the disclosures made per requirements of IAS 36.   Based on our audit work, we concur with management that the goodwill balance was not impaired as at 31 December 2021.   As described in Note 3 to the financial statements, we noted that management have assumed a recovery to pre-Covid-19 levels of loan issuance in 2021 in their forecasts and should this not occur, this could lead to future impairment.   Note 12 to the financial statements describes the underlying sensitivity of the key inputs used.
Impairment and recoverability of loans receivable   As at 31 December 2021. the aggregate value of Sancus loans amounted to £53.24m (2020: £53.22m) representing 54.89% of total assets (2020: 51.7%). The loan portfolio comprises property-backed (Sancus) and Small and Medium-sized Enterprises ("SME") loans (via BMS Finance (UK) Sarl). Through Sancus, the group has direct exposure to loans through co-investment alongside third-party lenders.   The group has also provided a first loss guarantee as part of the Sancus Loan Note structures and has direct investment into loan SPVs including BMS Finance (UK) Sarl. The value of these assets are also supported by the underlying loan book. Management is required to assess loans for impairment, including the application of the expected credit loss ('ECL') model under IFRS 9.   In making this assessment, management makes several significant judgements. These include determining appropriate assumptions for calculating the loss allowance under IFRS9 (including probability of default and loss given default), as well as loan-specific matters including cash flow forecasts and covenant compliance, specifically related to loan to value (LTV) ratio. As a result, errors or deliberate manipulation of these determining factors could result in material misstatement of the financial statements, as such it is considered as a fraud key audit matter. The risk is explained further in the strategic report where this is included as a key risk of misstatement. Note 2(f) and Note 3 set out the associated accounting policy and disclosure in respect of critical judgements and key sources of estimation uncertainty, with Note 22 setting out details of the associated risk factors, including credit risk.	We have performed the following procedures: We have obtained an understanding of significant controls over the loan's impairment process;   Performed a walkthrough of relevant controls in the valuation process to confirm they were appropriately designed and implemented;   We have tested, on a sample basis, inputs used in the 'Loans Monitoring Report', including the accuracy of covenant calculations, such as loan to value ratios, collateral values, and other financial and non-financial information;   We have checked the reasonableness of management's significant judgments relating to the categorisation of loans into the various credit stages required under IFRS 9. We have considered this in relevance to management's definition of a significant increase in credit risk ('SICR') and the definition of default and performed a review of the Loan Monitoring Report to assess evidence of changes in credit risk resulting from factors such as: - exceedances in LTV; - covenant breaches; - delinquencies in payments; or - other signs of financial stress.   We also checked the reasonableness of management's assumptions related to the recoverable value of any non-performing loans in light of available evidence and the underlying collateral;   We have checked the reasonableness of management's assumptions relating to their capital market expectations, such as Covid-19, including any overlays required to compensate for the change in the market environment not reflected in the ECL model;   We have evaluated the reasonableness of management's judgements and estimates in deriving the probability of default (PD), determining the loss given default (LGD) and exposure at default (EAD) for each stage within which loans are classified and their compliance with IFRS 9 requirements;   We tested the numerical accuracy of the ECL calculation based on the above inputs; and   We evaluated the adequacy of disclosures made in the financial statements in light of the requirements of IFRS 7 and IFRS 9.   We have concluded that the overall carrying value of loans is reasonable.   As described in Note 3 to the financial statements, IFRS 9 requires the application of a probability-weighted unbiased estimate in determining the ECL on loans;   there are therefore certain loans where the amounts recovered could be materially different to the estimate at 31 December 2021.   Note 22 to the financial statements describes the underlying sensitivity of the key inputs used
Revenue recognition   The Group's revenue for the year ended 31 December 2021 was £9m (2020: £10.86m) of which £5.39m (2020: £5.53m) sourced from interest income and fees enforced as per lending agreements and £3.62m (2020: £5.33m) was from interest on loans.   We consider revenue as a presumed fraud risk and have directed our tests towards this risk	We have performed the following procedures: We have obtained reports from the Loan Management System ("LMS"), related to interest income and tested on sample basis by recalculating interest income and comparing it with the amounts accounted in the general ledger.   We also performed analytical review to test the reasonableness of interest income.   For fee income, we have verified on sample basis, fee from various contracts and tested for accuracy.   We have concluded that the reported revenue is presented fairly.

 

Our application of materiality

 

We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

 

Group Materiality	£450k
Basis	2% of net assets
Rationale	considered as most appropriate based on the significance of the on balance sheet lending and goodwill balances.
	In determining performance materiality, we considered the following significant judgements:   ·      Our risk assessment, including our assessment of the Group's overall control environment; and ·      No past audit experience with the Group.

 

We have also adopted a lower level of materiality for revenue balances consistent with the prior year audit. We consider revenue to be a critical performance measure for the group as it is expected
to be a key driver for future distributions from profits now the group has further developed its SME and property backed lending business.

 

The lower level materiality applied was £180k (2020: £177k), being approximately 2% (2020: 1.7%) of total revenue. We agreed with the Audit and Risk Committee that this was appropriate as revenue balances are relatively low compared to our overall group materiality set out above, yet there is an increasing focus on these as performance measures.

 

Performance materiality

We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the financial statements as a whole. Group performance materiality was set at 60% of group materiality for the 2021 audit (2020: 60%). In determining performance materiality, we considered the following factors:

·      Our risk assessment, including our assessment of the group's overall control environment and that we consider it appropriate to rely on controls on a key business process;

·      Our past experience of the audit, which has indicated a low number of uncorrected misstatements identified in prior periods; and

·      The potential impact of Covid-19 on the application of control procedures which might increase the possibility of having undetected misstatements.

 

Error reporting threshold

We agreed with the Audit and Risk Committee that we would report to the Committee all audit differences in excess of £23k (2020: £33k), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit and Risk Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

 

An overview of the scope of our audit

 

Our audit was scoped by obtaining an understanding of the group and its environment, including internal control, and assessing the risks of material misstatement for the parent company and its subsidiaries. Audit work to respond to the risks of material misstatement was performed directly by the group audit team for both the parent entity and its subsidiaries. All subsidiaries in the group were subject to full scope audits.

 

Audit work performed for the subsidiaries was executed by the group audit team at levels of materiality applicable to each subsidiary, which in all instances was lower than group materiality and ranged between £4.4k and £1,006k (2020: between £9.7k and £557k).

 

Other information

 

The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor's report thereon.  Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

 

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

 

We have nothing to report in this regard.

 

Matters on which we are required to report by exception

 

In the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors' report.

 

We have nothing to report in respect of the following matters where the Companies (Guernsey) Law, 2008 requires us to report to you if, in our opinion:

 

·      adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or

·      the consolidated financial statements are not in agreement with the accounting records and returns; or

·      certain disclosures of directors' remuneration specified by law are not made; or

·      we have not received all the information and explanations we require for our audit.

 

Responsibilities of directors

 

As explained more fully in the directors' responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the financial statements, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.

 

 

Auditor's responsibilities for the audit of the financial statements

 

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.  A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.

 

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.

 

Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud

 

The objectives of our audit in respect of fraud, are; to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses to those assessed risks; and to respond appropriately to instances of fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both management and those charged with governance of the company.

 

Our approach was as follows:

 

·      We obtained an understanding of the legal and regulatory requirements applicable to the company and considered that the most significant are the Companies (Guernsey) Law, 2008, International Financial Reporting Standards as adopted by the UK, and taxation legislation.

 

·      We obtained an understanding of how the company complies with these requirements by discussions with management and those charged with governance.

 

·      We assessed the risk of material misstatement of the financial statements, including the risk of material misstatement due to fraud and how it might occur, by holding discussions with management and those charged with governance.

 

·      We inquired of management and those charged with governance as to any known instances of non-compliance or suspected non-compliance with laws and regulations.

 

·      Based on this understanding, we designed specific appropriate audit procedures to identify instances of non-compliance with laws and regulations. This included making enquiries of management and those charged with governance and obtaining additional corroborative evidence as required.

 

As part of an audit in accordance with ISAs (UK) we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

·      Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 

·      Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the group's internal control.

 

·      Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.

 

·      Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the group  to cease to continue as a going concern.

 

·      Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

·      Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

 

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

 

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

 

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

 

 

Use of our report

 

The report is made solely to the company's members, as a body, in accordance with Section 262 of the Companies (Guernsey) Law, 2008. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for the report, or for the opinions we have formed.

 

 

Jeff Vincent (Senior Statutory Auditor)

for and on behalf of Moore Stephens Audit and Assurance (Guernsey) Limited

Level 2 Park Place

Park Street

St Peter Port

Guernsey

GY1 3HZ

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2021

 

 

	Notes	2021 £'000	2020 £'000
Revenue	5	9,022	10,861
Cost of sales	6	(6,537)	(6,118)
Gross profit		2,485	4,743
Operating expenses	7	(6,231)	(5,582)
Operating loss before credit losses		(3,746)	(839)
Changes in expected credit losses	22	(6,399)	(4,665)
Incurred losses on financial assets		(90)	-
Operating Loss		(10,235)	(5,504)
FinTech Ventures fair value movement	22	434	(5,996)
Other net losses	8	(557)	(3,032)
Loss for the year before tax		(10,358)	(14,532)
Income tax	18	19	15
Loss for the year after tax		(10,339)	(14,517)
Items that may be reclassified subsequently to profit and loss
Foreign exchange gain/(loss) arising on consolidation		12	(23)
Other comprehensive income/(loss) for the year after tax		12	(23)
Total comprehensive loss for the year		(10,327)	(14,540)
Loss for the year after tax attributable to equity holders of the company		(10,339)	(14,517)
Total comprehensive loss attributable to equity holders of the company		(10,327)	(14,540)
Basic Loss per Ordinary Share	10	(2.16)p	(4.60)p
Diluted Loss per Ordinary Share	10	(2.09)p	(4.19)p

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 31 December 2021

 

ASSETS	Notes	31 December 2021 £'000	31 December 2020 £'000
Non-current assets
Fixed assets	11	660	774
Goodwill	12	22,894	22,894
Other intangible assets	13	53	168
Sancus loans and loan equivalents	22	6,643	3,863
FinTech Ventures investments	22	500	-
Other investments		100	-
Investments in joint ventures and associates	9	500	866
Total non-current assets		31,350	28,565
Current assets
Other assets	14	496	1,015
Sancus loans and loan equivalents	22	46,602	49,369
Trade and other receivables	15	6,075	8,204
Cash and cash equivalents		12,436	15,786
Total current assets		65,609	74,374
Total assets		96,959	102,939
EQUITY
Share premium	16	116,218	116,218
Treasury shares	16	(1,172)	(1,099)
Other reserves		(95,952)	(85,625)
Capital and reserves attributable to equity holders of the Group		19,094	29,494
Total equity		19,094	29,494
LIABILITIES
Non-current liabilities
Borrowings		64,677	69,450
Lease liabilities		364	469
Total non-current liabilities	17	65,041	69,919
Current liabilities
Borrowings		10,532	-
Trade and other payables		1,628	1,638
Tax liabilities		86	118
Provisions		-	1,542
Lease liabilities		212	188
Interest payable		366	-
Other liabilities		-	40
Total current liabilities	17	12,824	3,526
Total liabilities		77,865	73,445
Total equity and liabilities		96,959	102,939