Final Results for the year ended 31 December 2017

MORTGAGE ADVICE BUREAU (HOLDINGS) PLC

("MAB" or "the Group")

20 March 2018

Final Results for the year ended 31 December 2017

Mortgage Advice Bureau (Holdings) PLC (AIM: MAB1.L) is pleased to announce its final results for the year ended 31 December 2017.

Financial highlights

●	Ninth consecutive year of strong revenue and profit growth
●	Revenue up 17% to £108.8m (2016: £92.8m)
●	Gross profit up 17% to £25.9m (2016: £22.1m)
●	Gross margin maintained at 23.8% (2016: 23.9%)
●	Overheads ratio of 10.9% (2016: 11.1%)
●	Reported profit before tax of £14.5m (2016: £15.2m1)
●	Profit before exceptional gain and tax up 16% to £14.5m (2016: £12.5m2)
●	Profit margin before exceptional gain and tax maintained at 13.4% (2016: 13.5%2)
●	Basic EPS of 23.8p (2016: 25.6p1)
●	Adjusted EPS up 17% to 23.8p (2016: 20.3p2)
●	Continued high operating profit to headline cash conversion3 of 120% (2016: 128%)
●	Continued high operating profit to adjusted cash conversion4 of 109% (2016: 111%)
●	Proposed final dividend of 11.9p making proposed total ordinary dividends for the year of 21.4p (2016: 18.3p), up 17% (payout ratio of 90%)
●	Strong financial position with significant surplus on regulatory capital requirement
●	Total cash balances of £22.6m (31 Dec 2016: £18.7m)
●	Unrestricted cash balances of £13.2m (31 Dec 2016: £10.8m)

Operational highlights

●	Average number of Advisers in 2017 up 14% to 1,008 (2016: 888)
●	Adviser numbers up 13% to 1,078 at 31 December 2017 (2016: 950)
●	Revenue per Adviser up 3%5
●	Market share up 13% to 4.6% (2016: 4.1%)
●	Gross mortgage completions up 18.5% to £11.9bn (2016: £10.0bn)

Post period end

●	Adviser numbers have increased to 1,096 at 16 March 2018
●	Stephen Smith joins MAB Board as a Non-Executive Director
●	MAB receives 'Best Mortgage Broker' award at Mortgage Strategy 2018 Awards

 

 

	2017	2016	Change
Revenue	£108.8m	£92.8m	+17%
Gross profit	£25.9m	£22.1m	+17%
Gross profit margin	23.8%	23.9%
Profit before tax	£14.5m	£15.2m1
Profit before exceptional gain and tax	£14.5m	£12.5m2	+16%
PBT margin	13.4%	13.5%2
Adjusted EPS	23.8p	20.3p2	+17%
Basic EPS	23.8p	25.6p1
Proposed final dividend per share	11.9p	10.5p	+13%
Proposed total ordinary dividends per share	21.4p	18.3p	+17%
Operating profit to headline cash conversion2	120%	128%
Operating profit to adjusted cash conversion3	109%	111%

¹ Includes exceptional gain of £2.7m profit on disposal of 49% stake in Capital Private Finance Limited in 2016.

²  Excludes exceptional gain of £2.7m profit on disposal of 49% stake in Capital Private Finance Limited in 2016.

³  Headline cash conversion is cash generated from operating activities adjusted for movements in non-trading items including loans to Appointed Representative firms ("ARs") and loans to associates totalling £0.7m in 2017 (2016: £0.4m) as a percentage of operating profit. 

⁴ Adjusted cash conversion is headline cash conversion adjusted for increases in restricted cash balances of £1.5m in 2017 (2016: £2.1m) and additional cash balances (2017: £nil; 2016: £nil) held due to the timing of the weekly AR commission payment in relation to the period end, as a percentage of operating profit.

⁵ Based on Average number of Advisers

Peter Brodnicki, Chief Executive commented: 

"I am delighted to report another set of excellent results.  Strong growth in revenue, up 17% to £108.8m has translated into strong growth in adjusted EPS up 17% to 23.8p.  Accordingly, the Board is pleased to propose the payment of an increased final dividend of 11.9p per share, making total proposed ordinary dividends for the year of 21.4p, up 17% on the prior year.

 "MAB continues to deliver on its strategy in all market conditions whilst maintaining a strong financial position.  Our mortgage completions increased by 18.5% and our market share increased by 13%. Achievements across the business continue to be recognised by a number of industry awards, including being named Best Mortgage Broker at the 2018 Mortgage Strategy Awards.

"We are focused on delivering sustainable long-term growth and providing the best possible solutions and outcomes for our customers.  We plan to continue growing our market share and mortgage completions, whilst leading the evolution of intermediary distribution that we expect to see over the next five years."

Outlook

UK Finance's estimate for gross mortgage lending in 2017 of £258bn, implies market growth of 5% since 2016.  UK Finance recently increased its estimate for gross mortgage lending in 2018 to £260bn, as well as publishing a first estimate for 2019 of £271bn.  Gross mortgage lending is therefore expected to be relatively flat for 2018 and show a 4% increase for 2019. 

Adviser numbers have increased since the year end to 1,096 at 16 March 2018. We remain confident about our planned growth in adviser numbers in 2018 and beyond, both organically and from new ARs. 

We are confident that our strategy, driven by our customers and their changing expectations, will continue to drive growth in MAB's market share year on year and deliver attractive returns to investors.  The Board's expectations for the year remain unchanged.

For further information please contact:

Mortgage Advice Bureau (Holdings) Plc	Tel: +44 (0) 1332 525007
Peter Brodnicki  - Chief Executive
David Preece  - Chief Operating Officer
Lucy Tilley -  Finance Director

Zeus Capital                                                                                Tel:  +44 (0)20 3829 5000

Martin Green

Nicholas How

Pippa Underwood

 

Canaccord Genuity                                                                       Tel: +44 (0)20 7523 8350

 

Andrew Buchanan

Richard Andrews

Media Enquiries:

[email protected]

Analyst presentation

There will be an analyst presentation to discuss the results at 08:30am today at Canaccord Genuity Limited, 88 Wood Street, London, EC2V 7QR. 

Those analysts wishing to attend are asked to contact [email protected]

Copies of this final results announcement are available at investor.mortgageadvicebureau.com 

Chief Executive's Review

I am delighted to report another period of strong revenue and profit growth, with our market share increasing by 13% to 4.6% (2016: 4.1%) and our mortgage completions increasing by 18.5% to £11.9bn. Our fintech developments are progressing well and serve to enhance our high-quality business model.  Our strategy remains focused on securing further growth through technology, lead generation and specialisation which will increase our market share and the number of mortgage completions in all market conditions, enabling us to continue to deliver strong returns to our investors.

We are just over a year into our three-year plan that is focused on building solutions for the future; this will ensure MAB is able to maintain and build upon its leading position in the intermediary sector. We continue to invest in our core business model with our plans for 2020 and beyond designed to secure sustainable long-term growth whilst continuing to deliver strong results in the meantime.

Market environment

Activity overall in the housing market has remained steady over the last year and was not noticeably affected by the general election in early June.  The current house purchase market remains predominantly comprised of those moving home due to non-discretionary lifestyle factors, first time buyers and serious investors.  The residential remortgage market has seen 14% growth by loan value on 2016, mostly ahead of the widely anticipated increase in the Bank of England base rate and with strong competition amongst lenders for new business.

Despite increases in first time buyer transactions, housing transaction volumes overall have remained relatively flat as the number of amateur landlords has reduced.  Mortgage transactions by both volume and value have increased by 4% and 5% respectively in 2017 driven by both remortgages and first time buyers.  UK Finance predicts a relatively flat market for gross mortgage lending for 2018, with a 4% increase for 2019 as the Government continues to manage the UK's exit from the EU. UK Finance also predict that housing transactions will remain flat over the next two years.  Intermediary market share¹ has remained broadly stable at just over 70%.  MAB and its ARs growth is not directly reliant on increasing housing transactions, property prices, or intermediary market share as our continued year on year growth demonstrates.

Intermediaries previously had limited access to the product switching market, where customers change products with their existing lender. However, the vast majority of lenders now provide intermediaries with full access to their switching products. The UK Finance industry data on gross mortgage lending currently excludes product switches with the same lender, but we expect UK Finance to confirm the size of the product switching market later on this year.  Whilst it is still relatively early to assess the impact of this increased access to product switches, we expect product switches will typically deliver lower overall income per transaction compared to a remortgage, with this mostly offset by switches having a much lower dropout to completion.  In addition, we expect product switches to deliver banked income in a shorter timeframe.

Looking ahead, we expect client fees to become increasingly dependent upon the type and complexity of the mortgage transaction, as well as the delivery channel.  This will lead to a broader spread of client fees on mortgage transactions, which, by their nature, are our lowest margin revenue stream.

Recent RICS² commentary on house prices suggests that on a national level, house prices have resumed a modest growth trajectory.  However, the national figure conceals diverging trends across different parts of the UK, with London and, to a lesser extent, the South East, East Anglia and the North East experiencing pressure on prices, whereas house prices are quite firmly on an upward trend in other areas, including the North West, Northern Ireland and Wales.

¹ excluding Buy-To-Let, where intermediaries have a higher market share, and product switches with the same lender 

² Royal Institution of Chartered Surveyors

Delivering on our strategy

Fintech developments

We continue developing our technology solutions which are at the centre of our plans to further enhance our unique business model.  This will enable us to increase our market share and gross mortgage completions both by delivering what our customers will rightly start to expect and by enabling our AR partners and advisers to continue competing at the highest level.  These fintech developments will play an ever-increasing role in customer acquisition and conversion, as well as retention, by allowing advisers to identify future engagement opportunities with their customers more accurately and efficiently.

We are embracing fintech developments to enhance both face to face advice and our newer fast-growing and highly scalable telephony advice model.  This will enable us to access a wider range of lead sources and provide greater choice to the consumer in how they research, receive advice and transact.  As a result, we believe MAB's proportion of telephone advice is likely to increase, complementing the face to face advice that remains highly valued by consumers. Both these channels will continue to be supported by increasingly streamlined digital processes.

To allow us to capitalise fully upon our fintech developments we will consider investments in selected technology propositions where these can accelerate the development of our customer proposition and lead generation solutions. In addition, we expect our IT capital expenditure and IT costs to increase by a modest amount.

Driving income opportunities

MAB is focused on securing long term sustainable growth and providing the best possible solutions and outcomes to its customers.  Against the backdrop of a changing consumer landscape, we will look to increase the range of services offered to our customers by adopting new developments in technology and working closely with lenders.

One of our key objectives is to maximise protection opportunities by achieving even higher levels and consistency of protection advice.  To help facilitate this we were delighted to appoint Andy Walton to the new role of Proposition Director, Protection last year.

Our plans for direct-to-consumer marketing are progressing well, and we expect to be in a controlled testing phase during Q2 2018. Whilst MAB will use a range of media to target as many channels as possible, we expect to see the degree of digital content grow in line with the increasingly digital solutions that will be bought to all stages of the client journey.  

We invested a further £0.2m in on-line conveyancing business, Sort Group Limited, towards the end of 2017, increasing our ownership from 33.25% to 43.25%.  Every mortgage requires conveyancing and this further investment reflects the importance we place on technology in delivering a seamless and fully integrated end-to-end service for MAB's customers across their entire purchase and remortgage processes.  Our plans with Sort Group Limited include developing a far closer association between conveyancing and mortgages to provide a more seamless service for consumers as well as enhancing lead generation. Sort Group Limited has two main trading subsidiaries, Sort Limited and Sort Legal Limited.  Whilst Sort Limited had a record year and continues to grow strongly, Sort Legal Limited is a major new initiative that brings ownership of legal services into Sort Group Limited, considerably increasing its distribution and capacity. As a result of this, Sort Limited results were offset by the start-up costs in Sort Legal Limited during 2017.

Our joint venture in Australia, MAB Broker Services, is trading in line with our expectations.  We continue to review progress and are in the early stages of implementation of a structure similar to our UK network partner initiative in Australia, having identified potential key partners.

MAB continually looks for where the biggest growth sectors may be for intermediaries in the future.   We believe that lending into retirement represents one of the clear growth opportunities and, as such, are in the early stages of building the foundations of solutions for this market; equity release being one of these solutions, a market which is currently dominated by specialist intermediaries. 

Summary

We are just over a year into our three-year plan that is focused on building solutions for the future; this will ensure MAB is able to maintain and build upon its leading position in the intermediary sector. We continue to invest in our core business model with our plans for 2020 and beyond designed to secure sustainable long-term growth whilst continuing to deliver strong results in the meantime.  From a resource and technology perspective we have been focussed on being ready for GDPR for quite some time, and consider ourselves to be well positioned and prepared for GDPR.

As technology allows us to have more consistent and targeted interaction with our customers and when artificial intelligence/machine learning allows us to identify how different consumer groups behave and the services they require, this will give us opportunities in the medium and long term to identify future new revenue sources and ensure continued and diversified growth.

Having made a number of key strategic investments, MAB continues to consider further investments where there is a close alignment with our strategic objectives.  Whilst our investments to date have been relatively modest in size, we will consider making larger investments to help accelerate the development of our customer proposition, lead generation and distribution.  However, given our strong financial position and prospects for growth, we do not expect any such investment to adversely affect our payout ratio or the future growth in dividends. 

Our plans for the future also include broadening the Executive Board due to the growth and widening range of opportunities for MAB.

Business Review of the year

I am pleased to report further strong growth in revenue of 17% to £108.8m with profit before tax (and exceptional gain in 2016) rising by 16% to £14.5m.  MAB's gross mortgage lending increased by 18.5% to £11.9bn in 2017 (2016: £10.0bn) with the average number of Advisers increasing by 14%.  MAB's overall share of UK new mortgage lending increased by 13% to 4.6% (2016: 4.1%).

Industry data and trends

Mortgage lending activity in 2017 grew by 5% to £258bn (2016: £246bn). UK Finance recently increased its estimate for gross mortgage lending for 2018 to £260bn, as well as publishing a first estimate for 2019 of £271bn; gross mortgage lending growth is therefore expected to be relatively flat for 2018 and show a 4% increase for 2019.  We are confident that our strategy, driven by our customer's future direction of travel, will continue to drive growth in our market share and mortgage completions year on year and deliver attractive returns to investors. 

UK property transactions by volume for 2017 were c. 1% lower than in 2016.  The spike in buy-to-let ("BTL") transactions ahead of the stamp duty changes in April 2016 is evident in the graph below.

 

http://www.rns-pdf.londonstockexchange.com/rns/2130I_2-2018-3-19.pdf

 

Source: HM Revenue and Customs

UK property inflation of 4.8%⁽¹⁾ and an increase in remortgage volumes of 11% and first time buyer transactions of 8% more than offset the slight reduction in UK property transactions and the 10% reduction in BTL transactions, leading to an increase in UK mortgage lending of 5% overall, as illustrated in the graph below.

⁽¹⁾ Land Registry House Price Index

http://www.rns-pdf.londonstockexchange.com/rns/2130I_1-2018-3-19.pdf

 

Source: UK Finance Regulated Mortgage Survey (excludes product transfers with the same lender), Bank of England, UK Finance BTL data (used for further analysis)

UK gross mortgage lending in 2017 for home-owner purchases (including first time buyers) and remortgages grew by 9% and 14% respectively.  UK gross mortgage lending in 2017 for BTL purchases and BTL remortgages reduced by 28% and 4% respectively.

Just over 70% of UK mortgage transactions (excluding BTL, where intermediaries have a higher market share, and product switches with the same lender) were via an intermediary in 2017, which is broadly stable compared to 2016 and MAB expects intermediary market share to remain broadly stable going forward.

Financial review

We measure the development, performance and position of our business against a number of key indicators.

http://www.rns-pdf.londonstockexchange.com/rns/2130I_-2018-3-19.pdf

Revenue

Revenue increased by 17% to £108.8m (2016: £92.8m). A key driver of revenue is the average number of Advisers during the period.  Our business model continues to attract forward thinking ARs who are seeking to expand and grow their own market share. Average adviser numbers increased by 14% to 1,008 (2016: 888) due to a combination of expansion by existing ARs and the recruitment of new ARs.

The Group generates revenue from three core areas, summarised as follows:

Income source	2017	2016	Increase
	£m	£m
Mortgage procuration fees	46.8	39.4	19%
Protection and General Insurance Commission	42.8	36.4	18%
Client Fees	17.5	15.6	12%
Other Income	1.7	1.4	22%
Total	108.8	92.8	17%

MAB's revenue, in terms of proportion, is split as follows:

Income source	2017	2016
Mortgage procuration fees	43%	42%
Protection and General Insurance Commission	39%	39%
Client Fees	16%	17%
Other Income	2%	2%
Total	100%	100%

 

All income sources continued to grow strongly with the average number of Advisers in the year increasing by 14%. We have seen an increase in average revenue per adviser of 3%, demonstrating the anticipated return to growth in productivity following the lull in activity in the housing and mortgage markets surrounding the EU referendum in 2016. 

With MAB's gross mortgage completions increasing by 18.5% in 2017, mortgage procuration fees increased by 19%; and protection and general insurance commission grew by 18%.  Client fees, which are not linked to the mortgage value, grew by 12%, reflecting an increase in remortgaging and product switching where fees are generally lower.  Looking ahead, we expect to see a broader spread of client fees on mortgage transactions, which, by their nature, are our lowest margin revenue stream.

Gross profit margin

Gross profit margin was broadly maintained at 23.8% (2016: 23.9%).  The Group typically receives a slightly reduced margin as its existing ARs grow their revenue organically through increasing their Adviser numbers.  In addition, larger new ARs typically join the Group on lower than average margins due to their existing scale, which therefore impacts upon the Group's gross margin. 

Going forward, we expect to see some further erosion of gross profit margin due to the continued growth of our existing ARs and the addition of new larger ARs.  

Overheads

Overheads as a percentage of revenue were 10.9% (2016: 11.1%).   This reduction in underlying overheads as a percentage of revenue demonstrates the scalable nature of the cost base.  Certain costs, primarily those relating to compliance, which represent approximately 40% of our cost base, are closely correlated to the growth in the number of Advisers, due to the high standards we demand and the requirement to maintain regulatory spans of control.  The remainder of MAB's costs typically rise at a slower rate than revenue which will, in part, counter the expected erosion of gross margin as the business continues to grow. 

As a result of MAB's IT plans, we expect our amortisation on IT capital expenditure and IT costs to increase by a modest amount.

Profit before tax and margin thereon

Profit before tax rose by 16% to £14.5m (2016: £12.5m, excluding an exceptional £2.7m profit on disposal of 49% stake in Capital Private Finance Limited) with the margin thereon being 13.4% (2016: 13.5%). 

Net finance revenue 

Net finance revenues of £0.04m (2016: £0.07m) reflect continued low interest rates. 

Taxation

The effective rate of tax fell to 17.2% (2016: 18.4%), principally due to the tax deduction arising following the exercise of the first tranche of employee share options since IPO.  Going forward we expect our effective tax rate to be marginally below the prevailing UK corporation tax rate subject to the continued availability of tax credits for MAB's research and development expenditure on our continued development of MIDAS Pro, MAB's proprietary software, and further tax deductions arising from the exercise of share options.

Earnings per share and dividend

Adjusted earnings per share rose by 17% to 23.8 pence (2016: 20.3 pence¹).

The Board is pleased to propose a final dividend for the year ended 31 December 2017 of 11.9 pence per share (2016: 10.5 pence per share), amounting to a cash cost of £6.0m.  Following payment of the dividend, the Group will continue to maintain significant surplus regulatory reserves. This proposed final dividend represents circa 90% of the Group's post-tax profits for H2 2017 and reflects our ongoing intention to distribute excess capital.  MAB requires circa 10% of its profit after tax to fund increased regulatory capital and other regular capital expenditure.

The record date for the final dividend is 27 April 2018 and the payment date is 22 May 2018. The ex-dividend date will be 26 April 2018.

Cash flow and cash conversion

The Group's operations produce positive cash flow.  This is reflected in the net cash inflow from operating activities of £14.5m (2016: £13.4m).

Headline cash conversion ⁽¹⁾ was:

2017	120%
2016	128%
Adjusted cash conversion (2) was:
2017	109%
2016	111%

The Group's operations are capital light with our most significant ongoing capital investment being in computer equipment.  Only £0.1m of capital expenditure on office and computer equipment was required during the period (2016: £0.3m).  Group policy is not to provide company cars, and, other than on IT as indicated above, no significant capital expenditure is foreseen in the coming year. All development work on MIDAS Pro is treated as revenue expenditure.

The Group had no bank borrowings at 31 December 2017 (2016: £nil) with unrestricted bank balances of £13.2m (31 December 2016: £10.8m).

The Group has a regulatory capital requirement amounting to 2.5% of regulated revenue. At 31 December 2017 this regulatory capital requirement was £2.5m (31 December 2016: £2.1m), with the Group having a surplus of £9.5m.

 

The following table demonstrates how cash generated from operations was applied:

	£m
Unrestricted bank balances at the beginning of the year	10.8
Cash generated from operating activities excluding movements in restricted balances and dividends received from associates	14.8
Issue of shares	0.5
Dividends received from associates	0.4
Dividends paid	(10.7)
Tax paid	(2.2)
Capital expenditure (including new website)	(0.2)
Investments in associates	(0.2)
Unrestricted bank balances at the end of the period	13.2

The Group's treasury strategy is to reduce risk by spreading deposits over a number of institutions rather than to seek marginal improvements in returns.

¹  Excludes the exceptional gain of £2.7m profit on disposal of 49% stake in Capital Private Finance Limited in 2016.

² Headline cash conversion is cash generated from operating activities adjusted for movements in non-trading items including loans to Appointed Representative firms ("ARs") and loans to associates totalling £0.7m in 2017 (2016: £0.4m) as a percentage of operating profit. 

³Adjusted cash conversion is headline cash conversion adjusted for increases in restricted cash balances of £1.5m in 2017 (2016: £2.1m) and additional cash balances (2017: £nil; 2016: £nil) held due to the timing of the weekly AR commission payment in relation to the period end, as a percentage of operating profit.

Outlook

UK Finance's estimate for gross mortgage lending in 2017 of £258bn, implies market growth of 5% since 2016.  UK Finance recently increased its estimate for gross mortgage lending in 2018 to £260bn, as well as publishing a first estimate for 2019 of £271bn.  Gross mortgage lending is therefore expected to be relatively flat for 2018 and show a 4% increase for 2019. 

Adviser numbers have increased since the year end to 1,096 at 16 March 2018. We remain confident about our planned growth in adviser numbers in 2018 and beyond, both organically and from new ARs. 

We are confident that our strategy, driven by our customers and their changing expectations, will continue to drive growth in MAB's market share year on year and deliver attractive returns to investors.  The Board's expectations for the year remain unchanged.

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF MORTGAGE ADVICE BUREAU (HOLDINGS) PLC

 

Opinion

We have audited the financial statements of Mortgage Advice Bureau (Holdings) plc (the "parent company") and its subsidiaries (the 'group') for the year ended 31 December 2017 which comprise the consolidated statement of comprehensive income, the consolidated statement of financial position and the company statement of financial position, the consolidated statement of changes in equity and the company statement of changes in equity, the consolidated statement of cash flows and the notes to the financial statements, including a summary of significant accounting policies.

The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 The Financial Reporting Standard in the United Kingdom and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice).

In our opinion:

•     the financial statements give a true and fair view of the state of the group's and of the parent company's affairs as at 31 December 2017 and of the group's profit for the year then ended;

•     the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;

•     the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and

•     the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

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 and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, 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.

Conclusions relating to going concern

We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:

●	the directors' use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or
●	the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group's or the parent company's ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.

 

Key audit matters

Key audit matters are those matters that, in our professional judgment, 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

 

Key audit matters	Key audit matter description	Audit response
Revenue recognition (Note 3)	Revenue comprises of commissions, client fees and other income. Revenue is processed in the operating system upon receipt of third party reports once transactions have been exchanged or completed and is then accounted for when it is matched with cash received in the bank on a monthly basis. Revenue recognition is considered to be a significant audit risk as it is a key driver of return to investors and there is a risk that there could be misstatement or omission of amounts recorded in the system.	We responded to this risk by performing the following procedures: •     We have checked the effectiveness of the reconciliation between revenue and cash banked. •     We have checked on a sample basis that the third party reports have been properly accounted for in order to verify the completeness of revenue. •     Using third party reports, we have recalculated the majority of the mortgage related fees independently. •     We have performed cut-off tests by verifying back to third party reports. No material misstatements were detected as a result of our testing.

 

 

 

 

Key audit matters	Key audit matter description	Audit response
Clawback provision (Note 19)	The clawback provision relates to the estimated value of repaying commission received up front on life assurance policies that may lapse in a period of up to four years following inception of the policies. The clawback provision is considered to be a significant audit risk due to the management judgement and estimation applied in calculating the provision. The provision is determined using a model which uses a number of factors including the total unearned commission at the point of calculation, the age profile of the commission received, the group's share of any clawback, likely future lapse rates, lapse rate history, and the success of the in-house team that focuses on preventing lapses and/or generating new income at the point of a lapse.	•     We have reviewed the methodology applied by management in determining the claw back provision. •     Lapse rates, recoveries and unearned indemnity commission values used in calculating the claw back provision have been agreed to system reports, third party data and historical data. •     Where management applied judgements, we have performed a sensitivity analysis.   No material misstatements were detected as a result of our testing.

 

 

Our application of materiality

We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements.

Based on our professional judgement, we determined materiality for the group to be £700,000 (2016: £790,000) which represents 5% of profit before tax. We have used profit before tax as a benchmark given the importance of profit as a measure for shareholders in assessing the performance of the Group. We have then set the performance materiality at 75% (2016:75%) due to few identified misstatements in the past.

We determined materiality for the parent to be £192,000 (2016: £165,000) which represents 5% of net assets. We have used net assets as the parent acts as a holding company only. We have then set the performance materiality at 75% (2016:75%) due no identified misstatements in the past.

We agreed with the audit committee that we would report to the committee all individual audit differences identified during the course of our audit in excess of £14,000 (2016: £16,000) for the group and £4,000 (2016: £3,000) for the parent. We also agreed to report differences below these thresholds that, in our view warranted reporting on qualitative grounds

An overview of the scope of our audit

Our audit approach was scoped by obtaining an understanding of the group's activities, the key functions undertaken by the Board and the overall control environment. Based on this understanding we assessed those aspects of the group's transactions and balances which were most likely to give rise to a material misstatement at a group level.

 

The audit of the group was conducted by BDO LLP directly at group level as the group's accounting system records all transactions as a group with each transaction marked with a company code to enable financial statements to be produced for each subsidiary when required.

The audit of the parent company was conducted by BDO LLP after its financial statements were deconsolidated from the group accounting system,

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.

Opinions on other matters prescribed by the Companies Act 2006

In our opinion, based on the work undertaken in the course of the audit:

●	the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
●	the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.

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 in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:

●	adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or
●	the parent company 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 and the parent company'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 the parent company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the financial statements

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.  Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

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 the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these 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.

 

 

Leigh Treacy (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
London

19 March 2018

 

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

 

 

 

 

 

Consolidated statement of comprehensive income
for the year ended 31 December 2017

 

		Note
				2017 £'000			2016 £'000
Revenue		3		108,847			92,848
Cost of sales		4		(82,945)			(70,700)
Gross profit				25,902			22,148
Administrative expenses				(11,909)			(10,296)
Share of profit of associates		13		500			611
Operating profit				14,493			12,463
Finance income		7		42			73
Exceptional profit on disposal of asset held for sale		13		-			2,690
Profit before tax				14,535			15,226
Tax expense		8		(2,494)			(2,307)
Profit for the year attributable to equity holders of parent company				12,041			12,919
Other comprehensive income
Other comprehensive income to be reclassified to profit or loss in subsequent periods (net of tax):
Net gain on asset held for sale			-			2,152
Transfer to realised profit			-			(2,152)
Net other comprehensive income to be reclassified to profit and loss in subsequent periods net of tax			-			-
Other comprehensive income			-			-
Total comprehensive income attributable to equity holders of parent company			12,041			12,919
Earnings per share attributable to the owners of the parent company
Basic		9		23.8p			25.6p
Diluted		9		23.2p			25.2p

 

 

The notes that follow form part of these financial statements.