The Committee undertakes an annual effectiveness review. This review forms part of the Board Evaluation process with Directors being asked to complete parts of the questionnaire relating to the Committees of which they were members. The findings of the review were considered by the Committee at its January 2021 meeting. On the basis of the evaluation, the feedback was that the performance of the Committee continues to be effective. Details of Committee membership and meeting attendance can be found on page 86.
As the most senior risk committee in the Group, the Committee interacts with other related risk committees, including the executive Group Risk Committee. These interactions assist with the agenda planning process, where matters considered by the Group Risk Committee are reviewed to ensure escalation of all relevant matters to the Committee.
Q. How is the Committee addressing risks associated with climate change which the Group will face? A. Climate change is a top issue for the Group and the Committee. The Committee continues to increase its focus on climate risk, ensuring that the Group’s risk management capabilities are developed at pace. This helps ensure a proactive response overall, and allows the Committee to closely monitor impacts for both the Group and its customers, together with delivery of climate change commitments by the Group.
Macroeconomic factors including the impact from the UK’s exit from the EU.
The treatment of customers in financial difficulty where increased focus is required.
The Group’s management of conduct risks, plus issues associated with customers in financial difficulty and customer vulnerability.
During 2020, the Committee has considered reports on the ongoing activity to improve the way we support customers experiencing financial difficulties as well as the heightened risks the increased volume of these customers are facing as a result of the pandemic. The Committee also recognises the importance of the Group’s strategy for both customers in financial difficulty and recently bereaved customers, in delivering good outcomes for those most vulnerable, against a backdrop of continued regulatory focus.
Conclusion: While the Committee has observed that considerable changes have been made to improve the treatment of customers in financial difficulty, there will be increased emphasis throughout 2021 to enhance and improve customer outcomes.
The Committee continues to focus on ensuring the Group has an effective framework for managing complaints including root cause analysis to establish lessons learned and help prevent similar issues in the future.
Climate risk Climate change, sustainability and the impact to the Group and on our customers.
Following its specific request, the Committee considered regular detailed updates regarding the Group’s climate risk management and key developments. The Group is committed to delivering the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and is working to ensure compliance with regulatory expectations by end 2021, as well as wider stakeholder requirements. Accordingly, the Committee continues to ensure that the Group’s risk management capabilities are developing at pace, and that it is adopting a proactive response to the challenges, risks and opportunities arising from climate change.
Conclusion: The Committee is satisfied with the progress made in 2020. The Committee will continue to closely monitor climate change and sustainability risks, looking at the impact on both the Group and our customers, and the delivery of TCFD and other commitments.
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Risks and external threats to the Commercial credit portfolio performance, including pandemic related impacts, together with sectors potentially exposed to the impact of EU exit and climate risks.
The Committee reviewed pandemic impacts and emerging risks across a range of sectors considered more vulnerable, including non-essential retail, passenger transport, travel agents and hotels. Other sector concentrations also considered were automotives and commercial real estate (including Office and Retail commercial real estate), sectors also impacted by the pandemic and structural changes. Sectors potentially exposed to the impacts of the UK’s exit from the EU have been identified with credit appetite being adjusted where appropriate.
Conclusion: The Committee was satisfied that appropriate lending controls and monitoring were in place to control risks across the Retail lending portfolios, and that actions taken to manage economic risks were proportionate.
The three lines of defence have worked together to identify improvements to the Group’s approach to risk management. Following pilot activity, this new approach (One RCSA) is being adopted across the Group through a phased plan. The Committee supports the revised approach, the required cultural change to ensure successful adoption, as well as the Group’s plans for implementation. In light of the pandemic, the Committee gave direction to continue with the implementation, while recognising that potential pressures on key business resource may require adjustments to the plan.
Conclusion: All aspects of the 2020 plan for One RCSA have been delivered. The Committee supports the 2021 plans for capturing the remaining highest risks to customers and the business, and will continue to review progress on embedding the cultural change and improving the risk and control environment.
Conclusion: The Committee takes the operational resilience of the Group’s services very seriously and has drawn valuable insight from the discussions this year. The Committee considers that governance of operational resilience risk is robust and that activities in plan will ensure the ongoing resilience of key services to the Group’s customers.
Data risk continues to be an area of significant regulatory and media attention. The Group has developed a data management strategy to provide the common framework and direction required to improve data management across the Group. The Committee is supportive of this strategy which includes uplifting data quality, simplifying data architecture and enhancing data governance, in order to mature data capability and deliver a data-first culture, facilitated by a simplified modern IT architecture. The Committee acknowledges the need for continued investment in managing risks relating to the ethical use of data, in particular, advanced analytics and artificial intelligence together with continued monitoring of regulatory developments.
People risk Ensuring the Group has the right capabilities and culture as we continue to build the Bank of the Future.
Throughout 2020, there has been heightened attention on the People risk profile in view of the longevity of the pandemic and the impacts on colleagues. The Group recognises the increased demands and outside pressures on colleagues, as a result of the pandemic, and there has been significant focus on colleague wellbeing and resilience in light of prolonged periods of home working. Particular consideration is given to critical populations and high performing individuals to support the Group’s core commitments and the retention risk of certain groups of SMEs is being closely monitored. A strategy for Reimagined ways of working is being developed, and the Committee will continue to oversee these developments, monitoring closely the impacts on colleague sentiment and engagement.
Conclusion: The Committee is satisfied that the People risk profile is being managed effectively. The Committee ensures the necessary risk oversight as the Group manages the impact of the pandemic, monitors retention, develops new ways of working and develops plans to build the right skills and capabilities for the future.
Risks associated with the extensive current and future Group strategic change agenda, recognising challenges faced in ensuring both successful delivery and embedding of change.
The Group has further matured its ability to define, measure and report execution risk. The articulation and quantification of this risk continues to be managed through consolidated reporting of the execution risk dashboard and its related Board Risk Appetite Metrics, as well as through the implementation of the change and execution risk and control library across the Group. The Committee considers change and execution risk management within other linked risk types, such as operational resilience and supplier risks; and when investment activities are discussed. A focus this year has been effective and efficient reprioritisation of change activity during the pandemic, where execution risks were proactively managed and enhanced control monitoring was put in place. This ensured safe, prioritised change activity in 2020.
Conclusion: Change and execution risk has been managed within appetite and will remain an area of attention for the Committee as the Group moves into its next phase of strategic change.
As the Group further evolves its change delivery approach, control of these risks will continue to mature, particularly as risk libraries embed within business areas. The Committee will further consider the interconnectedness of change risk appetite with areas such as technology risk, supplier risk and operational resilience to support strategic change activities.
The uncertainty regarding the practical implications could affect the outlook for the UK and global economy.
The key risks for the Group, including volatility and possible discontinuities in financial markets, impact on our customers’ trading performance, financial position and credit profile, and ability to continue to operate in line with current practice across borders, have continued to be closely monitored. When reviewing the possible impacts, while noting the Group’s strong UK focus and UK-centric strategy, the Committee has given particular consideration to the treatment of its EU based clients and customers where continuity of certain aspects of its business has not been permitted.
Conclusion: The UK’s ongoing negotiations, the Group’s EU exit contingency plans and risk mitigation responses have been closely monitored by the Committee via specific regular updates, covering both operational status and external developments.
The Committee considered the challenging and evolving nature of the fraud risk environment influenced by factors such as the pandemic, Government-backed lending schemes and the continuing growth of Authorised Push Payment (APP) scams.
The Committee acknowledged that the Group reduced its market share of fraud, measured against published industry numbers. With regards to the Government-backed lending schemes, the Committee takes the Group’s responsibilities with respect to fraud detection very seriously, and noted that fraud within these lending schemes was within risk appetite and aligned with market share. The Committee acknowledged the continued investment in fraud defences and tools, and the work being done with industry bodies to reduce the impact of fraud on customers.
The Committee acknowledged the Group’s continued efforts to fight financial crime and to develop its intelligence capability to ensure that the programme is intelligence-led.
Conclusion: The Committee noted satisfaction with the standard of compliance documented in the Money Laundering Reporting Officer report and acknowledged the action plans in place across the Group to further enhance the Group’s position. The Committee noted the conclusion of the investigations into Baltic money laundering and FinCEN files.
Managing regulatory risk within the Group with a significant amount of highly complex and interdependent regulatory interactions managed during 2020, which will continue to require management into 2021. This is in addition to continuing to fulfil regulatory obligations against a backdrop of industry wide challenges faced as a result of the pandemic and EU exit.
The Committee has provided effective oversight and ensured effective controls are in place to comply with existing regulatory obligations, including greater consideration of these at an individual legal entity level. The Committee considered regular updates on emerging regulatory and legal risks and continued to closely monitor a number of significant regulatory change and oversight programmes to ensure successful execution such as IBOR Transition, CRDIV, BCBS 239, EU exit and customers in financial difficulty. In addition, the Committee has focused on understanding and oversighting activities undertaken by the Group in response to the pandemic and EU exit.
Conclusion: The Group places significant focus on complex regulatory changes, as well as ensuring effective horizon scanning of upcoming trends and evolving risks. The Committee has discussed the topics raised, and will continue to closely monitor compliance with regulatory requirements, including ring-fencing, in 2021. Regulatory risk will remain a priority area of focus for the Committee in 2021.
Significance to the Group of strategic risk, strategic choices and ability to effectively respond to material changes in internal and external factors.
Strategic and emerging risks are significant sources of risk to the Group. The Committee recognised this in 2019, elevating strategic risk to a principal risk type. Work has continued through 2020 to refine the Group’s definitions and enhance the framework for managing strategic and emerging risk. This will continue to be an area of focus in 2021.
The unprecedented events of 2020 have highlighted interconnectivity as a key factor in the acceleration or amplification of risks. The Committee has considered this, together with emerging trends influencing our strategic themes and potential consequences of the Group’s strategic decisions.
Being a responsible business is at the core of our purpose to Help Britain Prosper
Committee composition, skills, experience and operation The Committee is composed of Non-Executive Directors ensuring a broad spread of differing perspectives, insight and experience with representatives from Group Internal Audit and the Chief Operating Office attending meetings as appropriate. The Committee met on four occasions in 2020. Details of Committee membership and meeting attendance can be found on page 86.
Key activities in 2020 Charitable Foundations: The Group’s independent Charitable Foundations do critical work to tackle disadvantage across the UK and are often the first responders in a crisis. The Committee: met with Paul Streets, Chief Executive Officer of the Lloyds Bank Foundation for England and Wales, to discuss how the Group’s support for the Charitable Foundations could be magnified at this time spent time discussing how the Group planned to provide a broader societal response to the pandemic crisis considered the current work on Digital Skills alongside the Mental Health initiatives as core responses in the crisis phase
Q. How do you feel the Group has responded to the unprecedented demands on it during the pandemic? A. The Group moved quickly to support colleagues so that they could work safely to serve customers with emergency loans and repayment holidays to tide them over the very difficult period. That support will continue to be vital as hopefully the situation gradually improves through the year and customers look to put their finances back on an even keel, and plan for the future.
Q. This is your last year chairing the Responsible Business Committee (the 'Committee'). What are your reflections on the last five years? A. Being a responsible business has long been core to the Group’s work, and, since the financial crash a decade or more ago, the Group has renewed its focus on its purpose, to Help Britain Prosper. In this year’s discussions about the Group’s strategic response to the Group’s Society of the Future ambitions, it’s been great to see issues such as Inclusion & Diversity, helping vulnerable customers, responding to climate change and supporting regional growth through SME lending, digital skills provision, and housing investment, being put at the heart of the Group’s plans.
Q, What are the Committee’s priorities for next year? A. The Committee will seek to ensure that the Helping Britain Recover commitments are fully embedded into business plans, that these plans stay flexible to respond to changing needs and that they are actually delivering real impact for the individuals, businesses and communities who need our support the most.
Inclusion and diversity: The Committee received updates on: proposed actions to enable the Group to respond to the issues raised by the Black Lives Matter movement, including key insights from our Black colleagues the development of the Race Action plan, supporting the setting of a 3% target of Black senior leaders by 2025 our aim to have more women in senior roles and the representation of colleagues from Black, Asian and Minority Ethnic backgrounds at all levels
Helping Britain Prosper Plan: Regular updates have been provided on performance against the metrics within the Helping Britain Prosper Plan, on which a report is provided on pages 17 and 20 to 31 and further detail is provided in our 2020 Lloyds Banking Group ESG Report.
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No final dividend was paid in respect of 2019, and no interim dividends have been paid during 2020. Further information on dividends is shown in note 43 on page 291 and is incorporated by reference.
Robin Budenberg has been appointed to the Board since the 2020 AGM and will therefore stand for election at the forthcoming AGM. Sara Weller will retire at the AGM. In the interests of good governance and in accordance with the provisions of the UK Corporate Governance Code 2018, all other Directors will retire, and those wishing to serve again will submit themselves for re-election at the forthcoming AGM.
Biographies of current Directors are set out on pages 82 to 83. Details of the Directors seeking election or re-election at the AGM are set out in the Notice of Meeting.
Board composition changes Changes to the composition of the Board since 1 January 2020 up to the date of this report are shown in the table below: Joined the Board Left the Board
As announced in December 2020, António Horta-Osório will step down as a Director of the Company and as Group Chief Executive on 30 April 2021, to be succeeded by Charlie Nunn, who will as announced in November 2020, and subject to regulatory approval, join the Group in August 2021 as a Director of the Company and as Group Chief Executive. As announced in January 2021, Sara Weller will retire at the forthcoming AGM.
Directors’ indemnities The Directors of the Company, including the former Directors who retired during the year and since year end, have entered into individual deeds of indemnity with the Company which constituted ‘qualifying third-party indemnity provisions’ for the purposes of the Companies Act 2006. The deeds indemnify the Directors to the maximum extent permitted by law and remain in force. The deeds were in force during the whole of the financial year or from the date of appointment in respect of the Director appointed during 2020. Deeds for existing Directors are available for inspection at the Company’s registered office.
The Company has also granted deeds of indemnity by deed poll and by way of entering into individual deeds, which constitute ‘qualifying thirdparty indemnity provisions’ to the Directors of the Group’s subsidiary companies, including to former Directors who retired during the year and since the year end, and to Group colleagues subject to the provisions of the Senior Managers and Certification Regime. Such deeds were in force during the financial year ended 31 December 2020 and remain in force as at the date of this report.
Power of Directors in relation to shares The Board manages the business of the Company under the powers set out in the articles of association, which include the Directors’ ability to issue or buyback shares. The Directors were granted authorities to issue and allot shares and to buyback shares at the 2020 AGM. Shareholders will be asked to renew these authorities at the 2021 AGM. The authority in respect of purchase of the Company’s ordinary shares is limited to 7,044,210,261 ordinary shares, equivalent to 10 per cent of the issued ordinary share capital of the Company as at the latest practicable date prior to publication of the 2020 AGM circular.
Directors have a duty to notify the Chair and Group Company Secretary as soon as they become aware of actual or potential conflict situations. Changes to commitments of all Directors are approved by the Board and a register of potential conflicts and time commitments is regularly reviewed and authorised by the Board to ensure the authorisation status remains appropriate.
As at 31 December 2020, the Company had been notified by its substantial shareholders under Rule 5 of the DTR of the following interests in the Company’s shares: Interest in shares
The 2021 Strategic Review which sets out the Group's customer and business strategy for the year ahead
In particular, the assessment included consideration of the impact from the pandemic, the UK’s recovery thereafter and the UK’s exit from the EU on the economy and regulatory agenda, and included the volatility experienced in interest rate markets.
Group, divisional and business unit operating plans are produced and subject to rigorous stress testing on an annual basis. The planning process takes account of the Group’s business objectives, the risks taken to seek to meet those objectives and the controls in place to mitigate those risks to remain within the Group’s overall risk appetite.
The divisional teams develop their operating plans based on the Board’s objectives ensuring that they are in line with the Group’s strategy and risk appetite
The scenarios used for stress testing are designed to be severe but plausible, and take account of the availability and likely effectiveness of mitigating actions that could be taken by management to avoid or reduce the impact or occurrence of the underlying risks. In considering the likely effectiveness of such actions, the conclusions of the Board’s regular monitoring and review of risk and internal control systems, as discussed on page 95, is taken into account. Further information on stress testing and reverse stress testing is provided on pages 152 to 153
The final operating plan, Risk Division assessment and the results of the stress testing are presented to the Board for approval. Once approved, the operating plan drives detailed divisional and Group targets for the following year
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The principal risks, including the Group’s objectives, policies and processes for managing credit, capital, liquidity and funding, are provided in the risk management section on pages 144 to 204
The Group’s approach to stress testing and reverse stress testing, including both regulatory and internal stresses, is described on pages 152 to 153
Based upon this assessment, the Directors have a reasonable expectation that the Company and the Group will be able to continue in operation and meet its liabilities as they fall due over the next three years to 31 December 2023.
Going concern The going concern of the Company and the Group is dependent on successfully funding their respective balance sheets and maintaining adequate levels of capital. In order to satisfy themselves that the Company and the Group have adequate resources to continue to operate for the foreseeable future, the Directors have considered the implications of the COVID-19 pandemic upon the Group’s performance and projected funding and capital positions and also taken into account the impact of further stress scenarios as well as a number of other key dependencies which are set out in the risk management section under principal risks and uncertainties: funding and liquidity on page 57 and pages 183 to 187 and capital position on pages 188 to 196. Additionally, the Directors have considered the capital and funding projections of the Company and Group. Accordingly, the Directors conclude that the Company and the Group have adequate resources to continue in operational existence for a period of at least 12 months from the date of the approval of the financial statements and therefore it is appropriate to continue to adopt the going concern basis in preparing the accounts.
Methodology The Group follows the principles of the Greenhouse Gas (GHG) Protocol Corporate Accounting and Reporting Standard to calculate Scope 1, 2 and 3 emissions from our worldwide operations. The reporting period is 1 October 2019 to 30 September 2020, which is different to that of our Directors’ report (January to December 2020). This is in line with the regulations in that the majority of the emissions reporting year falls within the period of the Directors’ Report. Emissions are reported based on the operational control approach.
GHG emissions (CO2e) per £m of underlying income (Market Based)* 4.7 5.6 6.2
GHG emissions (CO2e) per £m of underlying income (Location Based) – expanded scope** 7.9 9.9 10.6 * Intensities have been restated for 2017-2018 and 2018-2019 to reflect changes to emissions data only, replacing estimated data with actuals; underlying income figures for those years have not changed.
2 – Grey fleet refers to colleague and hired road vehicles being used for a business purpose. Emissions in tonnes CO2e in line with the GHG Protocol Corporate Standard (2004). We are reporting to the revised Scope 2 guidance, disclosing a market-based figure in addition to the location-based figure.
The measure and report Scope 1, 2, 3 emissions is provided in the Lloyds Banking Group Reporting Criteria statement available online at www.lloydsbankinggroup.com/who-we-are/ responsible-business.html
Scope 3 emissions reported are disclosed in line with our legacy target, per the expanded to include additional elements within the group’s own operations including emissions from waste, colleague commuting and additional elements of business travel (including taxis, tube, well to tank emissions of business travel and hotels). We have also disclosed legacy scope numbers to allow fairer comparison to numbers previously disclosed and to demonstrate performance versus our previous targets. Indicator is subject to Limited ISAE3000 (revised) assurance by Deloitte LLP for the 2020 Annual Responsible Business Reporting. Deloitte’s 2020 assurance statement and the 2020 Reporting Criteria are available online at www.lloydsbankinggroup.com/who-we-are/ responsible-business.html
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and 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 and the Directors’ remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. 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.
A copy of the financial statements is placed on our website at www.lloydsbankinggroup.com/investors. The Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The management report contained in the strategic report and the Directors’ report includes a fair review of the development and performance of the business and the position of the Company and the Group together with a description of the principal risks and uncertainties they face.
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As we move into the next phase of the Group’s strategy, we recognise more than ever the need to incentivise and retain critical talent while maintaining a direct alignment to the experience of our shareholders and responding to the broader societal challenges we face.
In this unprecedented year, we continue to strive for a simple reward package with clear alignment to our purpose that rewards and drives the right behaviours and outcomes. Stuart Sinclair Chair, Remuneration Committee 2020. This outcome is in no way reflective of the hard work, commitment and sacrifice our colleagues have made throughout the year to keep our business running and help our customers.
The Remuneration Committee acknowledges that colleague reward was considerably affected by external factors in 2020 and intends that for fairness, just as colleague awards absorbed the impact of the fall in profitability, they should participate in any recovery in profitability in 2021.
Our wider workforce Measured against our core principle of ensuring there is fairness in our remuneration structure, the Remuneration Committee has paid particular regard to the impact its decisions have had for all colleagues. We made an above inflation pay award to our lowest paid colleagues in April 2020, and paid a one-off £250 cash recognition award to nearly 40,000 predominantly customer-facing colleagues in July 2020. This means for almost half of our colleagues, their total remuneration has stayed flat from 2019 to 2020 despite the absence of any bonus pool.
For the April 2021 pay review, the average pay award for our lowest-paid colleagues will be 1.7 per cent and up to 2.2 per cent again, above inflation. There are no increases for Executive Directors.
To recognise further the considerable role that all colleagues have played in supporting customers in 2020, and the part they will play in delivering the next phase of the Group’s strategy, every permanent eligible colleague across the Group will receive a £400 share award. These free shares that vest after three years ensure that each and every colleague has a personal interest in the longer-term success of the Group.
There is no LTSP award for the Group Chief Executive as he will leave the Group in April 2021. In setting the award size for the Chief Financial Officer, the Remuneration Committee considered the award range for normal performance of 125 per cent to 150 per cent (see page 132) and considered an award of 125 per cent was appropriate to reflect Group and individual contribution in 2020 (see page 122) alongside the need to incentivise delivery of the next phase of strategy aligned to long-term shareholder returns. A further adjustment of 40 per cent was applied to scale the award in line with the overall budget for LTSP awards, resulting in a final award of 75 per cent of salary for the Chief Financial Officer. This adjustment ensures there is a consistent approach applied for all recipients of LTSP awards and supports a ‘one team’ ethos across the Group’s senior management team.
The Remuneration Committee has been mindful that in-flight awards made under the Group Ownership Share plan for performance in 2019 to 2020 remain in place (and will run until the end of 2022) and the Committee has confirmed that there has not been, nor will be, any softening of the performance measures for these awards despite the unprecedented impact of external events and economic volatility. Under these circumstances, we believe that re-alignment of these targets would compromise the alignment of these awards with the interests of our shareholders.
Responding to shareholder feedback and the challenges ahead In addition to our deliberate efforts to support and reward our colleagues during this unprecedented time, 2020 has also marked the first year of implementation of our updated Directors’ Remuneration Policy. We welcomed receiving majority votes in support of both the Policy and Long Term Share Plan, though recognise that there were a significant number of votes opposing both these resolutions. As a result, we have consulted widely on the changes we are making to the implementation of the approved Policy in 2021 and thank those shareholders and proxy agencies that we have met for their feedback.
Underlying profit of £2.2bn was below the threshold required under our GPS plan rules and so has resulted in no GPS (bonus) pool being payable in respect of 2020 full year performance.
Group balanced scorecard performance: Despite the challenging economic conditions and the resulting impact on our financial measures, our Group balanced scorecard reflects an otherwise resilient performance with the score being marginally down on the prior year score of 3.20. Further details can be found on page 121.
Base Salary To support the recruitment and retention of Executive Directors of the calibre required to develop and deliver the Group's strategic priorities.
Base salary reflects the role of the individual, taking account of market competitiveness, responsibilities and experience, and pay in the Group as a whole.
Our remuneration package The below summarises the different remuneration elements for Executive Directors.
Directors’ remuneration report continued 1. THE NEW LONG TERM SHARE PLAN
When considering the use of discretion in conjunction with the balanced scorecard assessment, the Committee will consider the following key questions: Do the Group’s financial results and capital position adequately reflect risk, conduct and any other non-financial considerations?
These same questions are repeated at vesting to ensure that performance has been sustainable, and nothing has subsequently arisen that would give a different outcome if known at the point of award.
During 2020 we engaged with shareholders representing more than 60 per cent of our register, which has provided us with a thorough indication of the main areas of concern to reflect on. We value the opinions of all our stakeholders and thank all our shareholders, regulators, Unions and others for their input and collaboration. As a result we have made some key changes to how we intend to implement the Policy in 2021 and beyond that seek to address these concerns and continue to support our aim of delivering a simple reward package with clear alignment to the Group’s purpose. The main concerns related to the new Long Term Share Plan and also a simpler performance assessment approach with clear alignment to reward outcomes.
We know that most shareholders would like to see further simplification of the balanced scorecard and the way in which variable pay awards are decided, with greater weighting to financial performance.
Financial (50%) Delivery of core financial measures is key to the sustainability of our business and to delivering long-term shareholder value. We have therefore increased the weighting for Financial measures from 33 per cent to 50 per cent and each of the three simple measures chosen for 2021 will have their own individual weighting for additional transparency on pay for performance alignment.
3 LTIP and dividend equivalent figures for 2019 have been adjusted to reflect the share price on the date of vesting (6 March) 49.48 pence instead of the average price 59.34 pence reported in the 2019 report.
The EFRBS was subject to performance conditions and it provided for a percentage of the Group Chief Executive's base salary or reference salary in the 12 months before retirement or leaving. No additional benefit is due in the event of early retirement. The rate of pension accrued in each year depended on, share price conditions being met. In March 2019, the Group Chief Executive asked that his defined benefit pension be based on a percentage of his pensionable salary in 2014. The total pension due is now fixed at 6 per cent of his 2014 reference salary of £1,220,000, or £73,200.
There are no other Executive Directors with defined benefit pension entitlements.
Measurement of performance against balanced scorecard objectives Regardless of the Group’s performance against 2020 balanced scorecard objectives, no GPS awards will be payable to colleagues or Executive Directors as per step 1, but in the interest of transparency, the 2020 balanced scorecard performance assessment is disclosed below. Individual awards for Executive Directors would have been determined through the assessment of individual performance using the Group balanced scorecard for the Group Chief Executive, or Divisional balanced scorecards for the Chief Financial Officer and Chief Operating Officer in conjunction with an assessment of their personal contribution and proactive management of any risk and conduct issues. A score of 1 – 5 is attributed to each scorecard measure based on its performance relative to target, resulting in an overall score ranging from a minimum of 1 to a maximum of 5, and hence with 3 being classed as ‘at target’.
STEP 2 1. Underlying profit 2. Balanced scorecard assessment 3. Risk and conduct considerations
Statutory Profit after tax: Statutory measure of Group profitability after costs incl. tax £4,677m £1,387m 1 The most significant impact is seen in the impairment charge of £4.3billion, which includes £2.9billion not in budget.
Investment Performance: Measures the Group’s investment portfolio through 3 lenses of Benefits, Cost and Delivery 11 8 3 The Investment Performance measure was impacted by the Group’s decision to re-prioritise the investment portfolio and divert resources to support the response to the pandemic.
Segmented Customer Index: Measures customer experience and account growth amongst our targeted segments 4.0 5.0 5 Service NPS scores amongst our targeted customer segments were up, at 30.7 vs. target of 28.6.
Total FCA Complaints per ‘000 customers: Reportable complaints per ‘000 customers excluding PPI cases 2.64 2.47 5 Total FCA Complaints were 2.47 per ‘000 customers, well ahead of the 2.64 per ‘000 target and reflecting an 8.9% reduction year on year.
Colleague and conduct measures Weighting 33% We believe colleagues are critical to the delivery of the Group’s long-term strategy and measures to understand how our colleagues are feeling about working for the Group and our commitments to invest in our colleagues and their development have been chosen in support of strategy to transform our ways of working.
Ensuring the way we operate is aligned with the Group’s low-risk appetite, as well as in line with the Group’s cultural aspiration, values and behaviours is key to our long-term success. The inclusion of conduct metrics in the performance assessment supports this.
Measure Target performance Actual performance Performance score Performance commentary Total block score
Colleague Culture & Engagement survey: Combined culture and engagement score incorporating results from our Colleague Survey and the Banking Standards Board survey 71 74 5 Significant increase in Colleague Culture & Engagement survey scores to 74 vs. 69 in 2019, ahead of the UK average for high performing companies.
Board Risk Appetite: Comprehensive suite of metrics across all key risk categories including credit, people and operational resilience 6% Red metrics 9% Red 2 Board Risk Appetite was reported with 8 out of 89 (9%) Red metrics vs. target of 6%.
Change Execution Risk: Designed to ensure that the Group executes its broad change transformation programme safely
The Group Chief Executive’s balanced scorecard assessment for 2020 reflects the Group's scorecard for which he has overall accountability.
Improvement in colleague engagement scores, up significantly year on year, reflecting the support provided to colleagues working in branches and offices, and the significant number working remotely
Continued strong cost discipline, despite the unprecedented economic challenges created by the pandemic, with costs £111m below budget, maintaining market leading operating model efficiency
Leadership of culture change initiatives, driving simplification and greater business ownership of risk management
Juan Colombás retired as an Executive Director on the 18th September 2020 and retired from the Group. Employees taking retirement are treated as ‘good leavers’ under the Company’s Group Performance Share Plan (GPS Plan) Rules.
As part of Juan Colombás’ buyout of retirement benefits from his employment with Santander, the Group agreed to make an unfunded promise of a lump-sum payment of £718,996 at a defined Normal Retirement Age (‘NRA’) of 65. The deed of terms between the Group and Juan provides that where his service ends before NRA for any reason other than Ill-Health Retirement, Dismissal for Cause or Voluntary Resignation, that the entitlement to the lump-sum payment continues and will be paid at NRA.
In accordance with retirement provisions, Juan has maintained outstanding deferred Group Performance Share awards under the 2017 GPS Plan (124,370 Shares) and under the 2018 GPS Plan (501,341 Shares) which continue to be released on their scheduled release dates, subject to the relevant terms (including post-vesting retention periods, malus and, where applicable, clawback and to deductions for national insurance and income tax).
His outstanding 2018 and 2019 Executive GOS awards will be time pro-rated to his retirement date (2018 becomes 3,490,027 Shares and 2019 becomes 2,573,717 Shares). The awards remain subject to the performance measures which apply to the relevant awards and will continue to vest at the normal vesting dates and be released on their scheduled release dates, subject to the relevant terms (including post-vesting retention periods, malus and, where applicable, clawback and to deductions for national insurance and income tax).
No other payment for loss of office were made in 2020.
Payments made to Juan Colombás related to his retirement from the Group and not for loss of office.
External appointments António Horta-Osório – During the year ended 31 December 2020, the Group Chief Executive served as a Non- Executive Director of Exor, Fundacao Champalimaud, Stichting INPAR Management/Enable and Sociedade Francisco Manuel dos Santos. The Group Chief Executive is entitled to retain the fees, which were £317, 989 in total.
No other Executive Director served as a Non-Executive Director in 2020.
Salaries and performance-based compensation2 £m 1 In response to the PRA request in March 2020 to cancel capital distributions, the final 2019 dividend was cancelled and accordingly this value has been restated from £2,375m as previously reported. The Board also took the decision not to make quarterly or interim dividend payments during 2020 in line with the PRA request, however has agreed a final dividend for 2020 of 0.57 pence per share in line with the revised PRA guidance issued in December 2020.
Historical TSR Performance Growth in the value of a hypothetical £100 holding since 31 December 2010 (to 31 December 2020)
António Horta-Osório – 62% 71% 54% 57% 77% 77% 67.60% – –
António Horta-Osório 0% 0% 54% 97% 94.18% 55% 66.30% 68.70% 49.7% 33.75%
António Horta-Osório 0% 0% 25.30% 30% 30% 0% 0% 0% 0% 0%
Notes: J E Daniels served as Group Chief Executive until 28 February 2011; António Horta-Osório was appointed Group Chief Executive from 1 March 2011. António Horta-Osório declined to take a bonus in 2011 and independently requested that he be withdrawn from consideration for a Group Performance Share award in 2019 and 2020. There are no GPS awards for 2020 performance.
Sara Weller CBE 372,988 – – – – 372,988 n/a7 n/a
Remuneration Policy) due to vest, will be reduced to reflect the period from the start of the Performance Period to 18 September 2020, date of leaving. 4 Appointed 1 October 2020. 5 In addition, Nick Prettejohn held 400 (6.475 per cent) preference shares at 1 January 2020 and 31 December 2020.
Juan Colombás 1 The shares awarded in March 2017 vested on 6 March 2020. The closing market price of the Group's ordinary shares on that date was 45.68 pence. Shares vested are subject to a further two-year holding period. Remaining shares will vest over a period of 4 years and are subject to holding periods.
3 All GOS have performance periods ending 31 December at the end of the three-year period. Awards were made in the form of conditional rights to free shares. 4 In 2020, awards (in the form of conditional rights to free shares) were made with a value of 250 per cent of salary for António Horta-Osório (8,281,379 shares with a face value of £4,093,453) and 237.5 per cent for William Chalmers (4,927,191 shares with a face value of £2,435,491). No award was made to Juan Colombás. The share price used to calculate face value was 49.429 pence, the average mid market closing share price over the five days prior to grant (27 February to 4 March 2020). As regulations prohibit the payment of dividend on such awards, the number of shares awarded has been determined by applying a share price adjusted to exclude the value of estimated future dividends (38.3175 pence).
7 William Chalmers joined the Group on 3 June 2019 and was appointed as Chief Financial Officer on 1 August 2019 on the retirement of George Culmer. He was granted deferred cash of £2,046,097 and deferred share awards over 4,086,632 Shares, to replace unvested awards from his former employer, Morgan Stanley, that were forfeited as a result of him joining the Group. The deferred cash and the number of Shares over which the deferred share awards were granted was calculated using the USD:GBP exchange rate of 1.2664 and the respective mid-market closing prices of William Chalmers' previous employer and the Group on 3 June 2019 (57.05 pence) resulting in a face value of the awards of £4,377,521. The award is subject to vesting terms in line with those forfeited as set out above, and is on materially the same terms as the Executive Group Ownership Share (GOS), including the discretions as summarised on page 93 of the 2017 Annual Report, but as the award is a buy-out it is not subject to performance conditions and is not subject to time pro-rating in a good leaver circumstances. The award is subject to malus and clawback on the same terms as GOS awards, and in addition is subject to clawback in the event of resignation within one year of grant. The value of the award is not pensionable.
9 The number of Shares in respect of the 2018 and 2019 GOS Awards are stated in full and will be reduced to reflect the period from the start of the Performance Period to the date of leaving (18 September 2020) at the point of vest in accordance with the appropriate plan rules.
11 Part of GPS is deferred into shares. The face value of the share awards in respect of GPS granted in March 2019 was £942,160 (1,494,258 shares) for António Horta-Osório; £421,473 and (668,453 shares) for Juan Colombás. The share price used to calculate the face value is the average price over the five days prior to grant (27 February to 5 March 2019), which was 63.052 pence. The second tranche of this award vested on 6 March 2020. The closing market price of the Group’s ordinary shares on that date was 45.68 pence. 50 per cent of the final tranche is subject to a one year holding period.
In addition to the Group’s shareholding requirements, shares vesting are subject to holding periods in line with regulatory requirements. For the year ending 31 December 2020, the Group Chief Executive continued to meet his shareholding requirements, as detailed within the illustration below. The Chief Financial Officer currently holds 153 per cent of his salary in shares and has until 2 June 2022 to achieve the requirement. At the time of his departure in September 2020 the Chief Operating Officer, Juan Colombás held 531 per cent of his salary in shares.
The Group does not operate a formal post-employment shareholding policy. Existing reward structures and the Long Term Share Plan under the proposed new Policy have been designed in line with regulatory requirements and ensure that a substantial proportion of variable reward for Executive Directors and other senior employees takes the form of shares deferred and held over a period of up to eight years. These structures already ensure that Executive Directors continue to meet our shareholding requirements for a minimum of two years after leaving the Group.
William Chalmers 1 Calculated using the average share price for the period 1 January 2020 to 31 December 2020 (35.79 pence). Includes ordinary shares acquired through the vesting of the deferred Group Performance Share plan, Fixed Share Awards as the shares have no performance conditions; American Deposit Receipts (ADRs) with each one ADR equating to four shares, Executive Share Awards which have vested but have not been exercised; shares held in the Share Incentive Plan (SIP) Trust, i.e. Free, Partnership, Matching and Dividend shares which are no longer subject to forfeiture, as defined in the SIP Rules. Shares held by Connected Persons, as defined by the Companies Act, but broadly meaning spouse or partner and children, may also be included.
2 The Chief Financial Officer has until 2 June 2022 to achieve the requirement.
Directors’ remuneration report continued 2020 Group Ownership share performance measures (for awards made in March 2020) (audited) Meeting threshold performance will result in 25 per cent vesting of each metric, relative to each weighting.
FCA total reportable complaints and Financial Ombudsman Service (FOS) change rate
Cost:income ratio Set relative to 2022 targets Threshold: 46.4% Maximum: 43.9%
Non-Executive Directors may receive more than one of the above fees.
1 Reflects the increase in base salary from 1 January 2020 against which the award is determined. 2 Adjusted for movements in colleagues numbers and other impacts to ensure a like-for-like comparison. Salary increases effective 1 April 2020. 3 The Remuneration Committee set a policy at the start of 2020 that if Underlying Profit was 20 per cent below target, no GPS awards would be payable. The threshold was not met and therefore there are no GPS awards for 2020 performance. 4 Lloyds Banking Group is not a contracting entity but considered this population to be appropriate for purposes of a 'All employees' calculation.
Chief Executive Officer pay ratio The Remuneration Committee views pay ratios as a useful reference point to inform policy setting, but also takes into consideration a number of other factors. The table below shows the ratios of the Group Chief Executive’s total remuneration to the remuneration of colleagues since 2017. The change in the pay ratios for 2020 is explained in more detail below.
Due to operational constraints, the calculation of the colleague Pension Input Figure excludes inflationary adjustments for those on the defined benefit scheme. The omission of this factor does not materially affect the outcome of the ratio and/or distort the validity of the valuation.
All other data has been calculated in line with the methodology for the single total figure of remuneration for the Group Chief Executive.
The median ratio has decreased 26 per cent year-on-year. The reduction can be attributed to the decision not to make awards under the Group Performance Share Plan; the reduction in the performance of vesting LTIP; reduced performance in the vesting of the 2018 Group Ownership plan compared to 2017 and the reduction in the Group Chief Executive's pension allowance from 33 per cent to 15 per cent of salary.
For the majority of colleagues, year-on-year changes in remuneration are principally driven by pay increases and the impacts of Group performance and collective adjustment which has resulted in a reduction in the bonus pool. The Group has a commitment to pay progression and a continued focus on ensuring higher pay awards for colleagues who are lower paid, or paid lower within their pay range. We are committed to reducing the pay gap between executives and wider colleagues and continue to remain focused on addressing the gap from the bottom up and not just from the top down. To support, the Group has a commitment to pay progression and a continued focus on ensuring higher pay awards for colleagues who are lower paid, or paid lower within their pay range.
We believe our approach to pay progression has contributed to the reduction of the 2020 median pay ratio and supports reducing the gap between executive and wider colleague pay over time.
Fixed Share Award Awards remain unchanged from 2020 as follows: Current Group Chief Executive: £1,050,000 Chief Financial Officer: £504,000
Incoming Group Chief Executive Fixed Share Award: £1,050,000 no change compared to current incumbent.
Pension Pension allowances for all Executive Directors is set at 15 per cent of base salary. Any new Executive Director appointments in 2021 will also attract a maximum allowance of 15 per cent of base salary, this include the incoming Group Chief Executive.
Over 50,000 colleagues participate in the Group’s Defined Contribution (DC) Pension scheme where the maximum opportunity for the workforce is 15 per cent of base salary. Executive Directors employer pension contributions are therefore aligned with those available to the majority of the workforce.
In addition to the DC arrangement, the Group currently has almost 14,000 active members in defined benefit plans, with the effective cost of employer contributions into these arrangements being 38 per cent of salary.
Benefits Benefits remain unchanged from 2020. Executive Directors receive a flexible benefit allowance in line with colleagues, (4 per cent of base salary).
Individual maximum opportunities for Executive Directors remain unchanged from 2020 at 140 per cent of base salary for the current and incoming Group Chief Executive and 100 per cent for other Executive Directors.
The 2020 Directors’ Remuneration Policy was approved at the 2020 AGM in May. The Group proposes to operate the policy in the following way for 2021. No decisions have been reached on how the current Group Chief Executive will be treated for variable remuneration during 2021 (prior to departure), and this will be communicated in the normal course of business during 2021.
The Remuneration Committee concluded that the Group’s score of 3.13 (out of 5) and specifically the performance of non-financial and strategic components within the scorecard which remain strong, supported making awards at the lower end of the range for normal expected performance (125 – 150 per cent of salary for Executive Directors). However, the Remuneration Committee considers that restraint should be shown in any reward for 2020 performance, and therefore has reduced the award recommended for the Chief Financial Officer from 125 per cent of salary to 75 per cent of salary. This reduction of 40 per cent is consistent with awards made to other members of senior management and applies in addition to the 50 per cent discount applied in setting the policy maximum when converting from the old LTIP to the new LTSP awards. There is no award for the Group Chief Executive.
In deciding to make this reduction in award size, the Group’s share price was considered, as well as the following three questions: Do the Group’s financial results and capital position adequately reflect risk, conduct and any other non-financial considerations, including ESG?
The Committee concluded that the Group’s strong capital position, positive reputation through 2020 and the support for customers and businesses during 2020 supported the making of awards. Risk was well managed and there was a material reduction in conductrelated costs. The Committee noted that there was still work to do toward achieving the Group’s gender and diversity goals, but felt comfortable that these were reflected in stretch targets in the 2021 balanced scorecard.
Underpins The underpins that will apply to the 2021 LTSP awards are: CET 1 ratio – Group CET1 ratio above the guided management target each year, including all regulatory buffers
Awards will not be subject to further performance conditions however vesting will be subject to three underpins thresholds applicable for the first three years from grant. Each year the Remuneration Committee will monitor the Group’s progress in relation to the underpins. An assessment will be made at the end of the three year period to determine whether the underpins have been successfully maintained over the three years and to what extent the LTSP award should vest. The Remuneration Committee also will retain the right to consider other factors and apply discretion prior to making a decision on vesting.
Pre-vest test In conjunction with the assessment of performance against the underpins, the Remuneration Committee will consider the three core questions above to satisfy itself that the performance considered in the pre-grant test has been sustainable. The Remuneration Committee will retain the right to consider other factors and apply general discretion in making a decision on the vesting of awards. This approach helps to avoid any potential unintended outcomes that might arise from the application of formulaic performance criteria in the underpins and ensure that there is a fair outcome. The Committee will explain its reasons for applying discretion in either direction, or for not doing so
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 133 2021 Group Performance Scorecard The performance measures for determining any 2021 Group performance share awards and 2022 long term share plan awards for the Executive Directors are shown in the table below.
Quantitative financial measures make up 50 per cent of the scorecard, with the remaining 50 per cent made up of strategic measures assessed by the Remuneration Committee using quantitative inputs. When determining the final outcome, the Remuneration Committee may consider any personal or business area objectives and whether there has been effective, consistent and proactive risk management and conduct outcomes across all dimensions.
Performance Adjustment Performance adjustment is determined by the Remuneration Committee and/or Board Risk Committee and may result in a reduction of up to 100 per cent variable remuneration opportunity for the relevant period. It can be applied on a collective or individual basis. When considering collective adjustment, the Remuneration Committee and Board Risk Committee regarding any adjustments required to balanced scorecards or the overall GPS and/or LTSP outcome to reflect in-year or prior year risk matters.
Judgement on individual performance adjustment is informed by taking into account the severity of the issue, the individual’s proximity to the issue and the individual’s behaviour in relation to the issue. Individual adjustment may be applied through adjustments to balanced scorecard assessments and/or through reducing the variable remuneration outcome.
The application of clawback will generally be considered when: there is reasonable evidence of employee misbehaviour or material error; or there is material failure of risk management at a Group, business area, division and/or business unit level.
Remuneration Committee The Committee comprises of six Non-Executive Directors from a wide background to provide a balanced and independent view on remuneration matters. Lord Blackwell retired from the Board and the Committee on 1 January 2021. Anita Frew retired from the Board and the Committee on 21 May 2020. Stuart Sinclair has been Chair of the Committee since 1 September 2018 and has been a member of the Committee since January 2016. For further details of Committee membership and attendance at meetings, please see page 86.
The purpose of the Committee is to set the remuneration for all Executive Directors and the Chair, including pension rights and any compensation payments. It recommends and monitors the level and structure of remuneration for senior management and material risk takers. It also considers, agrees and recommends to the Board an overall remuneration policy and philosophy for the Group that is aligned with its long-term business strategy, its business objectives, its risk appetite, purpose and values and the long-term interests of the Group, and recognises the interests of relevant stakeholders, including the wider workforce. The Committee's operation is designed to ensure that no conflicts of interest arise, and in particular, the Committee ensures that no individual is present when matters relating to their own remuneration are discussed.
How the Remuneration Committee spent its time in 2020 and compliance with the 2018 Corporate Governance Code
The search for a new Chief Executive has been a significant focus for the Remuneration Committee.
Each component of the package for the new Group Chief Executive, Charlie Nunn, have been set in accordance with the approved Policy and as announced on 30 November 2020 will include a basic salary of £1,125,000 and a Fixed Share Award of £1,050,000. The pension contribution has also been set at 15 per cent of salary, in line with the majority of the workforce. He will be eligible for a maximum Group Performance Share award of 140 per cent of basic salary and has agreed to limit the maximum award under the LTSP to 150 per cent.
Remuneration Committee supported making awards under the new Long Term Share Plan (LTSP) introduced at the AGM in May 2020.
Measured against our core principle of ensuring there is fairness in our remuneration structure, the Remuneration Committee has paid particular regard to the impact its decisions have had for all colleagues.
We made an above inflation pay award to our lowest paid colleagues in April 2020, and paid a one-off £250 cash recognition award to nearly 40,000 predominantly customer-facing colleagues in July 2020. This means that, on average, the total remuneration of the lowest paid colleagues has stayed flat from 2019 to 2020.
The Remuneration Committee set a policy at the start of 2020 that if Underlying Profit (UP) was 20 per cent below target, no GPS awards would be payable.
Following extensive and productive discussions additional clarity has been provided in the 2020 Directors Remuneration Report regarding the 50 per cent discount applied to the Long Term Share Plan (LTSP), as well as detail regarding our proposed simplified balanced scorecard for 2021.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 135
Base salary Purpose and link to strategy To support the recruitment and retention of Executive Directors of the calibre required to develop and deliver the Group’s strategic priorities. Base salary reflects the role of the individual, taking account of market competitiveness, responsibilities and experience, and pay in the Group as a whole.
Maximum Potential The maximum allowance for all Executive Directors is 15 per cent of base salary. All future appointments as Executive Directors will also attract a maximum allowance of 15 per cent of base salary in line with the majority of the workforce. Maximum allowance may be increased or decreased in order to remain aligned.
Benefits Purpose and link to strategy To provide flexible benefits as part of a competitive remuneration package.
Group Performance Share Plan Purpose and link to strategy To incentivise and reward the achievement of the Group’s annual financial and strategic targets whilst supporting the delivery of longterm superior and sustainable returns.
Maximum potential The maximum Group Performance Share opportunities are 140 per cent of base salary for the Group Chief Executive and 100 per cent of base salary for other Executive Directors.
Long Term Share Plan Purpose and link to strategy Long term variable reward opportunity to align executive management incentives and behaviours to the Group’s objectives of delivering long-term superior and sustainable returns. The Long Term Share Plan will incentives stewardship over a long time horizon and promote good governance through a simple alignment with the interest of shareholders.
No further performance conditions will apply. However vesting will be subject to the underpins and Remuneration Committee discretion as described on page 132.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 137
(which currently require that at least 60 per cent of total variable remuneration is deferred for seven years with pro rata vesting between the third and seventh year, and at least 50 per cent of total variable remuneration is paid in shares or other equity linked instruments subject to a holding period in line with current regulatory requirements).
Chairman and Non-Executive Director fees Purpose and link to strategy To provide an appropriate reward to attract and retain a high-calibre individual with the relevant skills, knowledge and experience
The Chair receives an all-inclusive fee, which is reviewed periodically plus benefits including life insurance, car allowance, medical insurance and transportation. The Committee retains the right to provide additional benefits depending on individual circumstances. Non-Executive Directors are paid a basic fee plus additional fees for the chairmanship/membership of committees and for membership of Group companies/ boards/non-board level committees.
Additional fees are also paid to the senior independent director and to the deputy chair to reflect additional responsibilities. Any increases normally take effect from 1 January of a given year.
The Chair and the Non-Executive Directors are not entitled to receive any payment for loss of office (other than in the case of the Chair’s fees for the six month notice period) and are not entitled to participate in the Group’s bonus, share plan or pension arrangements. Non-Executive Directors are reimbursed for expenses incurred in the course of their duties, such as travel and accommodation expenses, on a grossed-up basis (where applicable).
This section discloses the remuneration awards made by the Group to Material Risk Takers (MRTs) in respect of the 2020 performance year. Additional information summarising the Group’s remuneration policies, structure and governance is also provided. These disclosures should be read in conjunction with the disclosures for Executive Directors contained in the Directors’ Remuneration Report (DRR) on pages 115 to 137 and the Directors’ Remuneration Policy (DRP) on pages 115 to 123 of the 2019 Annual Report. Together these disclosures comply with the requirements of Article 450 of the Capital Requirements Regulation (EU) No. 575/2013 (CRR).
The remuneration principles and practices detailed in the DRR apply to MRTs and non-MRTs in the same way as to Executive Directors (other than where stated in this disclosure).
Approved persons performing significant influence functions (SIFs) and/ or all colleagues performing a senior management function
Link between pay and performance The Group’s approach to reward is intended to provide a clear link between remuneration and delivery of its key strategic objectives, supporting the aim of becoming the best bank for customers, and through that, for shareholders. To this end, the performance management process has been developed, with the close participation of the Group’s Risk team, to ensure there is a clear alignment between award outcomes and individual performance, growth and development, whilst also reflecting divisional achievement.
Applies to: – Senior Management, Executive Directors, members/attendees of the Group Chief Executive and their respective direct reports
Fees Non-Executive Director fees are reviewed periodically by the Board. Further information on fees can be found on page 128 of the DRR and page 123 of the DRP.
The fixed share award can be amended or withdrawn in the following circumstances: – to reflect a change in role; – to reflect a Group leave policy (e.g. parental leave or sickness absence); – termination of employment with the Group; – if the award would be inconsistent with any applicable legal, regulatory or tax requirements or market practice.
Applies to: – Senior Management, Executive Directors, members/attendees of the Group Executive Committee and their respective direct reports
Further information on the GPS plan can be found on page 136 of the DRR as well as page 117 of the DRP.
Further detail of the awards made in 2021 can be found on page 132
Applies to: – Senior Management, Executive Directors, members/attendees of the Group Executive Committee and their respective direct reports1
Guaranteed variable remuneration Guarantees, such as sign-on awards, may only be offered in exceptional circumstances to new hires for the first year of service and in accordance with regulatory requirements.
– Approved Persons performing SIFs and/ or all colleagues performing a Senior Management Function
All other MRTs and non-MRTs: 25 per cent to 100 per cent of the aggregate of base salary and fixed share award depending on grade.
Applies to: – Senior Management, Executive Directors, members/attendees of the GEC and their respective direct reports
– Other MRTs – Non-MRTs 1 Eligibility based on seniority, grade and role. 2 Requirement based on seniority and grade.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 141
Number of Material Risk Takers paid €1 million1,2 or more 2020 Material Risk
2 Values for Long Term Share Plan awards based on face value at grant. An EBA discount factor has not been applied to awards made in 2021 in respect of performance year 2020. 3 Total number of Material Risk Takers earning more than €1m has decreased from 43 in 2019 to 17 in 2020. 4 2020 and 2019 data has been calculated using methodology consistent with EBA guidelines.
Table 4 Total outstanding deferred variable remuneration Remuneration £m Total outstanding deferred variable remuneration at 31 December 2020
Lloyds Banking Group Annual Report and Accounts 2020 143 2020 CAPTURED BY LLOYDS BANKING GROUP COLLEAGUES
Risk management All narrative and quantative tables are unaudited unless otherwise stated. The audited information is required to comply with the requirements of relevant International Financial Reporting standards.
The Group’s approach to risk 144 Emerging risks 147 Risk governance 150 Capital stress testing 152 Full analysis of risk categories 153
Risk management is at the heart of Helping Britain Recover and building the UK's preferred financial partner.
Each principal risk category is described and managed using the following standard headings: definition, exposures, measurement, mitigation and monitoring.
To meet ring-fencing requirements, core UK retail financial services and ancillary retail activities are ring-fenced from other activities of the Group. The Group's enterprise risk management framework (ERMF) and Group risk appetite apply across the Group and are supplemented by risk management frameworks and risk appetites for the sub-groups to meet sub-group specific needs. In each case these operate within the Group parameters. The Group’s corporate governance framework applies across Lloyds Banking Group plc, Lloyds Bank plc, Bank of Scotland plc and HBOS plc. It is tailored where needed to meet the entity specific needs of Lloyds Bank plc and Bank of Scotland plc, and supplementary corporate governance frameworks are in place to address sub-group specific requirements of the other sub-groups (Lloyds Bank Corporate Markets, Insurance and Lloyds Banking Group Equity Investments).
The Group’s ERMF is structured to align with the industry-accepted internal control framework standards.
Role of the Board and senior management Key responsibilities of the Board and senior management include: approval of the ERMF and Board risk appetite approval of Group-wide risk principles and policies the cascade of delegated authority (for example to Board sub- committees and the Group Chief Executive)
Group risk appetite includes the following areas: Climate: the Group takes action to identify, manage and mitigate its climate risk and support the Group and its customers in transitioning to a low carbon economy
Credit: the Group has a conservative and well balanced credit portfolio through the economic cycle, generating an appropriate return on equity, in line with the Group’s target return on equity in aggregate
Funding and liquidity: the Group maintains a prudent liquidity profile and a balance sheet structure that limits its reliance on potentially volatile sources of funding
Change/execution: the Group has limited appetite for negative impacts on customers, colleagues, or the Group as a result of change activity
Operational resilience: the Group has a limited appetite for disruption to services to customers and stakeholders from significant unexpected events
Operational: the Group has robust controls in place to manage operational losses, reputational events and regulatory breaches. It identifies and assesses emerging risks and acts to mitigate these
Regulatory and legal: the Group interprets and complies with all relevant regulation and all applicable laws (including codes of conduct which could have legal implications) and/or legal obligations
Line managers are directly accountable for identifying and managing risks in their individual businesses, ensuring that business decisions strike an appropriate balance between risk and reward and are consistent with the Group’s risk appetite.
It also has a key role in promoting the implementation of a strategic approach to risk management reflecting the risk appetite and ERMF agreed by the Board that encompasses: overseeing embedding of effective risk management processes transparent, focused risk monitoring and reporting provision of expert and high quality advice and guidance to the Board, executives and management on strategic issues and horizon scanning, including pending regulatory changes a constructive dialogue with the first line through provision of advice, development of common methodologies, understanding, education, training, and development of new risk management tools
Risk and control cycle from identification to reporting To allow senior management to make informed risk decisions, the business follows a continuous risk management approach which includes producing appropriate, accurate and focused risk reporting. The risk and control cycle sets out how this should be approached, with the appropriate controls and processes in place. This cycle, from identification to reporting, ensures consistency and is intended to manage and mitigate the risks impacting the Group.
Identified risks are reported on a monthly basis or as frequently as necessary to the appropriate committee. The extent of the risk is compared to the overall risk appetite as well as specific limits or triggers. When thresholds are breached, committee minutes are clear on the actions and time frames required to resolve the breach and bring risk within tolerances. There is a clear process for escalation of risks and risk events.
All key controls are recorded and assessed on a regular basis, in response to triggers or minimum annually. Control assessments consider both the adequacy of the design and operating effectiveness. Where a control is not effective, the root cause is established and action plans implemented to improve control design or performance. Control Effectiveness against all residual risks is reported and monitored via the monthly Consolidated Risk Report (CRR). The CRR is reviewed and independently challenged by the Risk Division and provided to the Risk Division Executive Committee and Group Risk Committee. On an annual basis, a point in time assessment is made for control effectiveness against each risk category and across sub-groups. The CRR data is the primary source used for this point in time assessment and a year on year comparison on control effectiveness is reported to the Board.
Risk culture Based on the Group’s prudent business model, prudent approach to risk management, and guided by the Board, the senior management articulates the core risk values to which the Group aspires, and sets the tone at the top. Senior Management establishes a strong focus on building and sustaining long-term relationships with customers, through the economic cycle. The Group’s Code of Responsibility reinforces colleagues’ accountability for the risks they take and their responsibility to prioritise their customers’ needs.
Exposure to risk arising from the business activities of the Group
The table below provides a high level guide to how the Group’s business activities are reflected through its risk-weighted assets. Details of the business activities for each division are provided in the Financial Performance Overview on pages 53 to 55.
Banking Insurance and Wealth1 Central items2 Group £bn £bn £bn £bn £bn
Market risk — 2.2 — — 2.2 1 As a separate regulated business, Insurance (excluding Wealth) maintains its own solvency requirements, including appropriate management buffers, and reports directly to the Insurance Board. Insurance does not hold any RWAs as its assets are removed from the Group's regulatory capital calculations. However, in accordance with capital rules part of the Group's equity investment in Insurance is included in the calculation of threshold RWAs, while the remainder is taken as a deduction from common equity tier 1 (CET1) capital.
An aggregate view of the Group’s overall risk profile, key risks and management actions, and performance against risk appetite is reported to and discussed monthly at the Group Risk Committee with regular reporting to the Board Risk Committee and the Board.
The focus on these risks by key stakeholders including businesses, clients, shareholders, governments and regulators is increasing, aligned to the evolving societal, regulatory and political landscape. There also remains a risk that the level and pace of responses taken by the Group are insufficient to mitigate risk. This could lead to campaign groups or other bodies seeking to take action against the Group or the financial services industry for funding organisations that they deem to be contributing to climate change.
– The Group’s risk management approach to climate change is outlined in the Strategic Report (page 20) and reflects its commitment to adopting the framework set out by the Financial Stability Board’s Task Force on Climaterelated Financial Disclosures (TCFD)
– The Group Chief Risk Officer (CRO) alongside the CROs for key legal entities, has assumed responsibility for identifying and managing the risks arising from climate change
– The Group continues to develop its climate risk management framework to ensure all our activities appropriately consider climate-related risks and opportunities and as part of this supports its customers and clients’ transition to a low carbon economy
– The Group is partnering with fintechs to rapidly deploy best in class technology and propositions to targeted domains.
– The Group is building senior technology skills through executive training and consideration of technology knowledge in senior appointments
– The Group is creating a Cloud Centre of Excellence, operating new financial control processes and working closely with the regulator on new technology deployment
– Alignment of the Group’s 2021 Strategy around Helping Britain Recover, with focus on responding to key societal trends and issues
– Continued focus on ensuring the quality of customer outcomes is maintained through robust risk management
People/Ways of working and skills: Successful and sustainable adoption of remote working and new ways of working is pivotal to ensuring customer needs and expectations are met during and after the COVID-19 pandemic. This requires creating a safe physical environment that promotes colleague wellbeing within a workplace that enables all colleagues to work and collaborate effectively together.
– Regular, responsive communications in an evolving landscape provide reassurance to colleagues alongside colleague surveys to gauge sentiment and deployment of mitigants to address concerns
– Effective capacity planning and provision of future skills to fulfil resource requirements and support the Strategic Review 2021 objectives
Cyber: Increases in the volume and sophistication of cyber-attacks alongside the growth in connected devices continues to heighten the potential for cyber-enabled crime. The Group can be impacted directly or through attacks on its supply chain.
Geopolitical tensions increases the risk of the Group being impacted directly or indirectly, by a sophisticated cyber-attack. The capability of organised crime groups is growing rapidly, which along with the commoditisation of cyber crime increases the likelihood that the Group or one of its suppliers will be the target of a sophisticated attack.
– Continued investment in and focus on the Group’s Cyber programme to ensure the confidentiality and integrity of data and the availability of systems. Key areas of focus relate to access controls, network security, disruptive technology and the denial of service capability
– Embedding of the Group Cyber control framework which is aligned to the industry recognised cyber security framework (National Institute of Standards and Technology, NIST)
– Increased business and colleague engagement through education and awareness, phishing testing and cultural indicators. Cyber risk is governed through all key risk committees and reviewed quarterly
Competition: Adoption of technological trends is accelerating with customer preferences changing. There has been considerable growth of new business models such as Buy Now Pay Later.
Further changes to the regulatory landscape, including prudential and capital rules, have the potential to create additional competitive pressures for the Group.
Operational complexity has the potential to restrict our speed of response to market trends.
– The Group continues to transform in order to improve its customer experience by digitising customer journeys and leveraging branches for complex needs, in response to customers’ evolving needs and expectations. During the pandemic, digitised customer journeys have been used at greater scale
– The Group will deepen its insight into customer segments, their perception of brands and what they value
– The Group is responsive to changing customer behaviour/ business models and adjusts its risk management approach as appropriate
– The Group has developed a data management strategy to provide the common framework and direction by uplifting data quality, simplifying data architecture, enhancing data governance and implementing market leading tools to enhance its ability to deliver a data-first culture
– The Group continues to monitor changes in legal and regulatory requirements and maintain close engagement with the regulators; Information Commissioner's Office (ICO), Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) in order to monitor external developments within data risk
Regulatory and legal: The financial sector continues to experience increasing regulation from various bodies, including the Government and regulators.
Following the UK’s exit from the EU, there is uncertainty as to what the future UK legal and regulatory framework will look like, noting the potential for the UK to deviate from the EU’s legal and regulatory system.
– The Group works closely with regulatory authorities and industry bodies to ensure that the Group can identify and respond to the evolving regulatory and legal landscape
– The Group actively implements programmes to deliver legal, regulatory and mandatory change requirements
– Capital and liquidity are reviewed regularly through committees, ensuring compliance with risk appetite and regulatory requirements
Geopolitical: Current geopolitical uncertainties or political upheavals could further impede the global economic recovery, heighten instability and impact markets. The global reach of the COVID-19 pandemic continues to have a profound impact on economies around the world. Terrorist activity including cyber-attacks also has the potential to trigger changes in the economic outlook, market risk pricing and funding conditions.
Additionally, following the UK’s exit from the EU, the long-term implications of the new EU-UK Trade and Cooperation Agreement still bring some uncertainty for the UK’s economic outlook and relationship with the EU. There also remains the possibility of a further referendum on Scottish independence.
– The Group Corporate Treasury tracks market conditions closely and actively manage the Group’s balance sheet
– The Group’s sector strategies and appetite look to help mitigate risks associated with geopolitical shocks. Credit applications and sector reviews include assessment of any relevant geopolitical risk including the UK’s exit from the EU
Risk governance The risk governance structure below is integral to effective risk management across the Group. Risk division is appropriately represented on key committees to ensure that risk management is discussed in these meetings. This structure outlines the flow and escalation of risk information and reporting from business areas and Risk division to Group Executive Committee and Board. Conversely, strategic direction and guidance is cascaded down from the Board and Group Executive Committee.
Board, Executive and Risk Committees The Group’s risk governance structure strengthens risk evaluation and management, while also positioning the Group to manage the changing regulatory environment in an efficient and effective manner.
Assisted by the Board Risk and Audit Committees, the Board approves the Group’s overall governance, risk and control frameworks and risk appetite. Refer to the Corporate Governance section on pages 86 to 97, for further information on Board committees.
Recommends and implements the strategy and plans for delivering the Group’s aspiration to be viewed as a trusted responsible business as part of the purpose of Helping Britain Prosper, reporting to the GEC, GRC, Responsible Business Committee where appropriate on material sustainability related risk and opportunities across the Group; and recommending to the GEC and Responsible Business Committee the Group's Responsible Business Report and Helping Britain Prosper Plan.
In addition, the Strategic Review 2021 Forum provides strategic deep dives across priority areas to support the Group Chief Executive and accountable executives in monitoring strategic progress and challenges in focus areas.
Brings together accountable stakeholders and subject matter experts to ensure that the development and application of fraud and financial crime risk management complies with the Group's Strategic Aims, Group Corporate Responsibility, Group Risk Appetite and Group Fraud and Financial Crime (AML, Anti-bribery and Sanctions) policies. It provides direction and appropriate focus on priorities to enhance the Group's fraud and financial crime risk management capabilities in line with business and customer objectives while aligning to the Group's target operating model.
Group Capital Risk Committee Responsible for providing oversight of all relevant capital matters within the Group, Ring-Fenced Bank and material subsidiaries, including latest capital position and plans, capital risk appetite proposals, Pillar 2 developments (including stress testing), Recovery and Resolution matters and the impact of regulatory reforms and developments specific to capital.
Support the Internal Capital Adequacy Assessment Process (ICAAP) by demonstrating capital adequacy, and meet the requirements of regulatory stress tests that are used to inform the setting of the Prudential Regulation Authority (PRA) and management buffers (see capital risk on pages 188 to 196) of the Group and its separately regulated legal entities
Regulatory stress tests The PRA have launched the 2021 Solvency Stress test which the Group will participate in. Their objective is to update the Bank of England's Financial Policy Committee (FPC) view on how the banking system can support the economy, ensure banks have built up buffers of capital to be drawn on in a stress and input into the PRA’s transition back to its standard approach to capital-setting and shareholder distributions through 2021. Industry level credit risk will be published in July with Bank level results published in December. The scenario requires the bank to show how resilient it is to a severe economic shock in addition to what has been experienced over 2020; House Price Index (HPI) and Commercial Real Estate (CRE) values fall a further 33 per cent and unemployment peaks at 11.9 per cent.
The review and challenge of the Group’s and Ring-Fenced Bank’s detailed stress forecasts, the key assumptions behind these, and the methodology used to translate the economic assumptions into stressed outputs conclude with the appropriate Finance and Risk Directors’ sign-off. The outputs are then presented to GFRC and Board Risk Committee for review and challenge, before being approved by the Board. There is a similar process within LBCM for the governance of the LBCM-specific results.
Ring-Fence Compliance Committee This Committee is designed to provide executive sponsorship and strategic direction to ongoing Perimeter Compliance, the closure and remediation of breaches, monitoring and reporting of new breaches and associated governance and delivery enhancements to the Ring-Fencing Compliance Risk Framework.
Full analysis of risk categories The Group’s risk framework covers all types of risk which affect the Group and could impact on the achievement of its strategic objectives. A detailed description of each category is provided on pages 154 to 204.
Risk categories recognised by the Group are periodically reviewed to ensure that they reflect the Group risk profile in light of internal and external factors, such as the Group strategy and the regulatory environment in which it operates. The only change to the risk categories during 2020 has been the addition of Climate risk.
Page 201 – Cyber and information security – Fraud – Sourcing
Climate risk Definition Climate risk is defined as the risk that the Group experiences losses and/ or reputational damage as a result of climate change, either directly or through its customers. These losses may be realised from physical events, the required adaptation in transitioning to a low carbon economy, or as a consequence of the responses to managing these changes.
Transition risks - associated with the move towards a low carbon economy, e.g. changes to policy, legislation and regulation, technology and changes to customer preferences. Failure to manage these changes and adapt to climate change could then result in legal risks
The Group has identified loans and advances to customers in sectors at increased risk from the impacts of climate change, see page 23.
Other initiatives to further embed climate risk factors into the risk management activities across the Group include: development of a risk mitigation strategy for vehicle finance and home loans in Retail; and further development of the Group's weather modelling capabilities in Insurance, where an assessment of climate-related risks to General Insurance liabilities is integrated into the internal model governance process.
The Group is continuing to develop its climate risk management framework to ensure all activities consider the appropriate climate-related risks and opportunities and the Group’s processes will continue to evolve as it embeds its approach.
Climate risk is monitored in the Group’s risk reporting and more detailed updates are provided regularly to the Group and Ring-Fenced Banks Board Risk Committees regarding the Group’s climate risk management activities and key developments.
Balance sheet linkages The information provided in the table below aims to facilitate the understanding of linkages between banking, trading, and insurance balance sheet items and the positions disclosed in the Group’s market risk disclosures.
Total Trading book1 Non-trading Insurance 2020 £m £m £m £m Primary market risk factor
Financial assets at fair value through profit or loss 171,626 20,234 5,487 145,905
Derivative financial instruments 29,613 21,773 4,729 3,111 Interest rate, foreign exchange, credit spread
Loans and advances to banks 10,746 — 10,651 95 Interest rate
Financial liabilities at fair value through profit or loss 22,646 15,818 6,828 —
Derivative financial instruments 27,313 17,429 6,819 3,065 Interest rate, foreign exchange, credit spread
Debt securities in issue 87,397 — 87,397 — Interest rate, credit spread
The defined benefit pension schemes’ assets and liabilities are included under Other assets and Other liabilities in this table and note 34 on page 277 provides further information.
Derivative assets and liabilities are held by the Group for three main purposes; to provide risk management solutions for clients, to manage portfolio risks arising from client business and to manage and hedge the Group’s own risks. Insurance business assets and liabilities relate to policyholder funds, as well as shareholder invested assets, including annuity funds. The Group recognises the value of
in-force business in respect of Insurance’s long-term life assurance contracts as an asset in the balance sheet (see note 23, page 267).
Mitigation GALCO is responsible for approving and monitoring group market risks, management techniques, market risk measures, behavioural assumptions, and the market risk policy. Various mitigation activities are assessed and undertaken across the Group to manage portfolios and seek to ensure they remain within approved limits. The mitigation actions will vary dependent on exposure but will, in general, look to reduce risk in a cost effective manner by offsetting balance sheet exposures and externalising to the financial markets dependent on market liquidity. The market risk policy is owned by Group Corporate Treasury (GCT) and refreshed annually. The policy is underpinned by supplementary market risk procedures, which define specific market risk management and oversight requirements.
Monitoring GALCO and GMRC regularly review high level market risk exposure as part of the wider risk management framework. They also make recommendations to the Board concerning overall market risk appetite and market risk policy. Exposures at lower levels of delegation are monitored at various intervals according to their volatility, from daily in the case of trading portfolios to monthly or quarterly in the case of less volatile portfolios. Levels of exposures compared to approved limits and triggers are monitored by Risk and appropriate escalation procedures are in place.
Interest rate risk Yield curve risk in the Group’s divisional portfolios, and in the Group’s capital and funding activities arises from the different repricing characteristics of the Group’s non-trading assets, liabilities and off-balance sheet positions.
Basis risk arises from the potential changes in spreads between indices, for example where the bank lends with reference to a central bank rate but funds with reference to LIBOR, and the spread between these two rates widens or tightens.
Foreign exchange risk Economic foreign exchange exposure arises from the Group’s investment in its overseas operations (net investment exposures are disclosed in note 51 on page 314). In addition, the Group incurs foreign exchange risk through non-functional currency flows from services provided by customer-facing divisions, the Group’s debt and capital management programmes and is exposed to volatility in its CET1 ratio, due to the impact of changes in foreign exchange rates on the retranslation of non-sterling- denominated RWAs.
Interest income sensitivity: this measures the 12 month impact on future net interest income arising from various economic scenarios. These include instantaneous 25, 100 and 200 basis point parallel shifts in all yield curves and the five Group economic scenarios. GBP interest rates are modelled with a floor at zero per cent, with negative rate floors modelled for non-GBP currencies where appropriate (product-specific floors apply). These scenarios are reviewed every year and are designed to replicate severe but plausible economic events, capturing risks that would not be evident through the use of parallel shocks alone such as basis risk and steepening or flattening of the yield curve. Additional negative rate scenarios are also used, where floors are removed or lowered, to ensure that this risk is monitored; however these are not measured against the limit framework for the purposes of Risk Appetite.
Group Banking activities: market value sensitivity to a steepening and flattening of the yield curve (audited)
The table below shows the banking book net interest income sensitivity to an instantaneous parallel up and down 25 and 100 basis points change to all interest rates.
Credit default spread risk mainly arises from annuities where policyholders’ future cash flows are guaranteed at retirement. Exposure arises if the market value of the assets, which are mainly corporate bonds and loans, move differently to the liabilities they back. This exposure arises from credit downgrades and defaults
Measurement Current and potential future market risk exposures within Insurance are assessed using a range of techniques including stress, reverse stress and scenario testing, as well as stochastic modelling.
Mitigation Equity and credit spread risks are closely monitored and, where appropriate, asset liability matching is undertaken to mitigate risk. Unit matching is used to reduce the sensitivity of equity movements by matching unit-linked liabilities on a best-estimate view. Hedging strategies are also in place to reduce exposure from unit-linked funds and the with-profit funds.
Trading portfolios Exposures The Group’s trading activity is small relative to its peers and does not engage in any proprietary trading activities. The Group’s trading activity is undertaken solely to meet the financial requirements of commercial and retail customers for foreign exchange, credit and interest rate products. These activities support customer flow and market making activities.
Trading market risk measures are applied to all of the Group’s regulatory trading books and they include daily VaR (see Trading Portfolios: VaR table), sensitivity based measures, and stress testing calculations.
Definition Credit risk is defined as the risk that parties with whom the Group has contracted fail to meet their financial obligations (both on and off- balance sheet).
Credit risk also arises from debt securities and derivatives. The total notional principal amount of interest rate, exchange rate, credit derivative and other contracts outstanding at 31 December 2020 is shown on page 175. The notional principal amount does not, however, represent the Group’s credit risk exposure, which is limited to the current cost of replacing contracts with a positive value to the Group. Such amounts are reflected in note 51 on page 314.
Additionally, credit risk arises from leasing arrangements where the Group is the lessor. Note 2(J) on page 227 provides details on the Group’s approach to the treatment of leases.
The investments held in the Group’s defined benefit pension schemes also expose the Group to credit risk. Note 34 on page 277 provides further information on the defined benefit pension schemes’ assets and liabilities.
Limitations on concentration risk: there are portfolio controls on certain industries, sectors and products to reflect risk appetite as well as individual, customer and bank limit risk tolerances. Credit policies and appetite statements are aligned to the Group’s risk appetite and restrict exposure
Monitoring Trading risk appetite is monitored daily with 1-day 95 per cent VaR and stress testing limits. These limits are complemented with position level action triggers and profit and loss referrals. Risk and position limits are set and managed at both desk and overall trading book levels. They are reviewed at least annually and can be changed as required within the overall Group risk appetite framework.
Lloyds Banking Group Annual Report and Accounts 2020 161 to higher risk countries and potentially vulnerable sectors and asset classes. Note 51 on page 314 provides an analysis of loans and advances to customers by industry (for commercial customers) and product (for retail customers). Exposures are monitored to prevent both an excessive concentration of risk and single name concentrations. These concentration risk controls are not necessarily in the form of a maximum limit on exposure, but may instead require new business in concentrated sectors to fulfil additional minimum policy and/or guideline requirements. The Group’s largest credit limits are regularly monitored by the Board Risk Committee and reported in accordance with regulatory requirements.
Defined country risk management framework: the Board sets a broad maximum country risk appetite. Risk based appetite for all countries is set within the independent Risk division, taking into account economic, financial, political and social factors as well as the approved business and strategic plans of the Group.
Stress testing: the Group’s credit portfolios are subject to regular stress testing. In addition to the Group led, PRA and other regulatory stress tests, exercises focused on individual divisions and portfolios are also performed. For further information on stress testing process, methodology and governance see page 152.
Frequent and robust Credit risk assurance: assurance of credit risk is undertaken by an independent function operating within the Risk division which are part of the Group’s second line of defence. Their primary objective is to provide reasonable and independent assurance and confidence that credit risk is being effectively managed and to ensure that appropriate controls are in place and being adhered to. Group Internal Audit also provides assurance to the Audit Committee on the effectiveness of credit risk management controls across the Group’s activities.
The requirement for collateral and the type to be taken at origination will be based upon the nature of the transaction and the credit quality, size and structure of the borrower. For non-retail exposures if required, the Group will often seek that any collateral include a first charge over land and buildings owned and occupied by the business, a debenture over the assets of a company or limited liability partnership, personal guarantees, limited in amount, from the directors of a company or limited liability partnership and key man insurance. The Group maintains policies setting out which types of collateral valuation are acceptable, maximum loan to value (LTV) ratios and other criteria that are to be considered when reviewing an application. The fundamental business proposition must evidence the ability of the business to generate funds from normal business sources to repay a customer or counterparty’s financial commitment, rather than reliance on the disposal of any security provided.
Refer to note 51 on page 314 for further information on collateral.
In addition, the Group has in place quantitative limits such as maximum limits for individual customer products, the level of borrowing to income and the ratio of borrowing to collateral. Some of these limits relate to internal approval levels and others are policy limits above which the Group will typically reject borrowing applications. The Group also applies certain criteria that are applicable to specific products for example applications for buy-tolet mortgages.
Buy-to-let mortgages within Retail are limited to a maximum loan size of £1,000,000 and 75 per cent LTV. Buy-to-let applications must pass a minimum rental cover ratio of 125 per cent under stressed interest rates, after applicable tax liabilities. Portfolio landlords (customers with four or more
Risk management continued mortgaged buy-to-let properties) are subject to additional controls including evaluation of overall portfolio resilience.
Additional mitigation for Commercial customers Individual credit assessment and independent sanction of customer and bank limits: with the exception of small exposures to SME customers where certain relationship managers have limited delegated sanctioning authority, credit risk in commercial customer portfolios is subject to sanction by the independent Risk division, which considers the strengths and weaknesses of individual transactions, the balance of risk and reward, and how credit risk aligns to the Group and Divisional risk appetite. Exposure to individual counterparties, groups of counterparties or customer risk segments is controlled through a tiered hierarchy of delegated sanctioning authorities and risk based recommended maximum limit parameters. Approval requirements for each decision are based on a number of factors including, but not limited to, the transaction amount, the customer’s aggregate facilities, any risk mitigation in place, credit policy, risk appetite, credit risk ratings and the nature and term of the risk. The Group’s credit risk appetite criteria for counterparty and customer loan Underwriting is generally the same as that for loans intended to be held to maturity. All hard loan/bond Underwriting must be sanctioned by Risk division. A pre-approved credit matrix may be used for ‘best efforts’ underwriting.
Master netting agreements It is credit policy that a Group approved master netting agreement must be used for all derivative and traded product transactions and must be in place prior to trading, with separate documentation required for each Group entity providing facilities. This requirement extends to trades with clients and the counterparties used for the Bank’s own hedging activities, which may also include clearing trades with Central Counterparties (CCPs).
The Group classifies accounts as forborne at the time a customer in financial difficulty is granted a concession. However, where customers have been temporarily impacted by COVID-19, the Group has looked to follow regulator principles and guidance on the granting of concessions resulting from the impact of the pandemic.
Non-performing exposures can be reclassified as Performing Forborne after a minimum 12 month cure period, providing there are no past due amounts or concerns regarding the full repayment of the exposure. A minimum of a further 24 months must pass from the date the forborne exposure was reclassified as Performing Forborne before the account can exit forbearance. If conditions to exit forbearance are not met at the end of this probation period, the exposure shall continue to be identified as forborne until all the conditions are met.
Customers receiving support from UK Government sponsored programmes To assist customers in financial distress, the Group participates in UK Government sponsored programmes for households, including the Income Support for Mortgage Interest programme, under which the Government pays the Group all or part of the interest on the mortgage on behalf of the customer. This is provided as a government loan which the customer must repay.
For retail customers, the Group has provided payment holidays of up to three months across a range of products including mortgages, personal loans, credit cards and motor finance, with extensions available of up to six months in total, should customers request them.
The Group has also supported its retail customers with access to a £500 interest free overdraft facility and access to fixed term savings accounts without charge.
Similarly, the Group is providing significant support for its small business and commercial customers and has provided loans to businesses under the different government schemes, including Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS). The Group has also supported its customers through repayment holidays and its own COVID-19 fund which includes fee-free lending for new overdrafts or overdraft limit increases as well as new or increased invoice discounting and finance facilities. The Group is also offering SME customers a mentoring service to help navigate a path beyond the pandemic.
Overview The Group has continued to actively support its customers during the crisis through a range of flexible options and payment holidays across major products, as well as lending through the various UK Government support schemes
The impairment charge for the year has increased significantly to £4,247 million (2019: £1,291 million). This is due to higher expected credit loss allowances taken predominantly in the first half of the year. These reflected the deterioration in economic outlook as a consequence of the coronavirus pandemic, as well as the charges taken on restructuring cases in the Commercial Business Support Unit (BSU)
Stage 2 loans and advances to customers as a percentage of total lending have increased by 4.3 percentage points to 12.0 per cent at 31 December 2020 (31 December 2019: 7.7 per cent), reflecting the deterioration of the Group’s forward-looking economic assumptions. Of these, 88.9 per cent are up to date (31 December 2019: 78.9 per cent). Stage 2 coverage increased to 4.5 per cent (31 December 2019: 3.7 per cent)
Low risk culture and prudent risk appetite The Group continues to take a prudent approach to credit risk and a through the cycle credit risk appetite, whilst working closely with customers to support them over this challenging period
Although not immune, the Group's credit portfolios are well positioned against an uncertain economic outlook and potential market volatility
Sector and asset class concentrations within the portfolios are closely monitored and controlled, with mitigating actions taken where appropriate. Sector and product caps limit exposure to certain higher risk and vulnerable sectors and asset classes
Financial assets at fair value through other comprehensive income Other Undrawn balances 2020 2019 £m £m £m £m £m £m £m £m
Purchased or originated credit-impaired assets (POCI) are those that have been originated or acquired in a credit impaired state. This includes within the definition of credit impaired the purchase of a financial asset at a deep discount that reflects impaired credit losses.
Group loans and advances to customers and expected credit loss allowances (statutory basis)
Total ECL allowance (drawn and undrawn) 1,584 2,379 1,995 261 6,219 38.3 32.1
Total ECL allowance (drawn and undrawn) 770 1,072 1,452 142 3,436 31.2 42.3
Group ECL allowances (drawn and undrawn) as a % of loans and advances to customers4
Group ECL allowances (drawn and undrawn) as a percentage of loans and advances to customers4
4 Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Credit cards of £67 million, £78 million in Loans and overdrafts and £34 million in Business
Total ECL allowance (drawn and undrawn) 797 1,423 1,922 4,142 34.4 46.4
Up to date 1-30 days past due2 Over 30 days past due Total
The table below shows the Group’s ECL for the upside, base case, downside and severe downside scenarios, with stage allocation based on each specific scenario. ECL applied through individual assessments and post-model adjustments is reported flat against each economic scenario, reflecting the basis on which they are evaluated. A probability-weighted scenario is not shown as this does not reflect the basis on which ECL is reported.
At 31 December 2020 At 31 December 2019 10pp increase in HPI
The table below shows the impact on the Group’s ECL resulting from a 1 percentage point (pp) increase or decrease in the UK unemployment rate. The increase or decrease is presented based on the adjustment phased evenly over the first ten quarters of the base case scenario. An immediate increase or decrease would drive a more material ECL impact as it would be fully reflected in both 12 month and lifetime PDs.
At 31 December 2020 At 31 December 2019 1pp increase in unemployment 1pp decrease in unemployment 1pp increase in unemployment 1pp decrease in unemployment £m £m £m £m
The Group has taken targeted steps across the Retail product offering to implement tighter credit quality controls on key risk indicators such as indebtedness and credit scores to ensure that customers and the bank are protected
The Group has participated fully in the Bounce Back Loan Scheme (BBLS) and the Coronavirus Business Interruption Loan Scheme (CBILS) for Retail Business Banking customers, where government guarantees are in place at 100 per cent and 80 per cent, respectively
Stage 3 loans and advances have remained flat at 1.5 per cent of total loans and advances (31 December 2019: 1.5 per cent, Stage 3 ECL coverage increased to 22.5 per cent (31 December 2019: 19.1 per cent) due to a combination of the UK Mortgages and Motor Finance portfolios where the impact of the coronavirus outbreak on collateral values is expected to result in increased loss given default (LGD), in addition to the impact of changes to collections processes within the credit cards portfolio
UK Mortgages The UK Mortgages portfolio is well positioned with low arrears and a strong Loan to Value (LTV) profile. The Group has actively improved the quality of the portfolio over the years using robust affordability and credit controls, whilst the balances of higher risk portfolios originated prior to 2008 have continued to reduce
Total loans and advances increased to £295.4 billion (31 December 2019: £289.8 billion), with a small reduction in average LTV to 43.5 per cent (31 December 2019: 44.9 per cent). The proportion of balances with an LTV greater than 90 per cent decreased to 0.6 per cent (31 December 2019: 2.5 per cent). The average LTV of new business decreased to 63.9 per cent (31 December 2019: 64.3 per cent)
Stage 3 ECL Coverage increased to 15.6 per cent (31 December 2019: 13.6 per cent) largely due to the revised outlook for house prices across the multiple economic scenarios utilised for IFRS 9 provisioning
Credit cards balances decreased to £15.1 billion (31 December 2019: £18.1 billion) due to reduced levels of customer spend, resulting in a reduction in the volume of customers with highly utilised cards
In addition to increases caused by the weakening economic outlook, Stage 2 loans and advances also increased due to a stricter criteria adopted to trigger movements from Stage 1 to Stage 2. As a result, Stage 2 loans and advances as a percentage of total loans and advances increased to 21.7 per cent (31 December 2019: 9.2 per cent)
Stage 3 ECL coverage increased to 58.8 per cent (31 December 2019: 46.2 per cent). This resulted from a refresh of data used to calculate loss rates that reflects changes in collections policy, some realignment of coverage across stages and a strengthening of coverage given the current environment
Loans and overdrafts Loans and advances for personal current account and the personal loans portfolios decreased to £9.5 billion (31 December 2019: £10.2 billion) due to reduced customer spend and demand for credit
The impairment charge was £739 million for the full year 2020 compared to £445 million for the full year 2019. This increase is primarily due to the weaker outlook within our economic forecasts, increasing both Stage 2 ECL coverage to 22.6 per cent (31 December 2019: 17.1 per cent) and overall ECL coverage to 7.6 per cent (31 December 2019: 4.6 per cent)
The UK Motor Finance portfolio decreased slightly from £16.0 billion for 2019 to £15.2 billion for 2020 due to reduced market activity as a result of the pandemic
The impairment charge increased to £226 million for 2020 compared to £203 million for 2019, due to the weaker outlook within our economic forecasts. ECL coverage increased to 3.3 per cent (31 December 2019: 2.4 per cent)
Stage 2 ECL coverage increased to 7.7 per cent (31 December 2019: 4.5 per cent) and Stage 3 ECL coverage increased to 66.8 per cent (31 Dec 2019: 56.0 per cent) both of which were due principally to the impact on Credit ECL from updates to the Group’s outlook on used car prices. Credit and RV provisioning are aligned in the assumption of an anticipated near-term reduction in car prices, with an expected slow recovery until 2024
Buy-to-let 49,634 49,086 1 Balances include the impact of HBOS related acquisition adjustments.
Mortgages greater than three months in arrears (excluding repossessions, underlying basis)
The stock of repossessions decreased to 343 cases at 31 December 2020 compared to 1,171 cases at 31 December 2019.
For existing interest-only mortgages, a contact strategy is in place during the term of the mortgage to ensure that customers are aware of their obligations to repay the principal upon maturity of the loan.
Treatment strategies are in place to help customers anticipate and plan for repayment of capital at maturity and support those who may have difficulty in repaying the principal amount. A dedicated specialist team supports customers who have passed their contractual maturity date and are unable to fully repay the principal. A range of treatments are offered to customers based on their individual circumstances to create fair and sustainable outcomes.
Average loan to value (%) 34.4 35.7 1 Balances where all interest-only elements have moved past term. Some may subsequently have had a term extension, so are no longer classed as due.
As a percentage of loans and advances, forbearance loans improved to 1.7 per cent at 31 December 2020 (31 December 2019: 1.9 per cent).
Expected credit losses as a % of total loans and advances which are forborne1 £m £m £m £m %
At 31 December 2019 1 Expected credit loss allowance as a percentage of total loans and advances which are forborne is calculated excluding loans in recoveries for Credit cards, Loans and overdrafts (31 December 2020: £75 million; 31 December 2019: £82 million).
At 31 December 20192 1 Expected credit losses as a percentage of total loans and advances which are forborne are calculated excluding loans in recoveries for Credit cards, Loans and overdrafts (31 December 2020: £75 million; 31 December 2019: £82 million).
2 Balances exclude the impact of HBOS and MBNA acquisition related adjustments. 3 In line with FINREP reporting and regulatory guidelines, Retail forborne loans and advances do not include COVID-19 moratoria.
With the exception of certain risk appetite extensions made to accommodate UK Government scheme guidelines, particularly Bounce Back Loans and to a lesser extent, Coronavirus Business Interruption Loans (where government guarantees are in place at 100 per cent and 80 per cent, respectively), lending continues to be in line with the usual approach to credit risk and through the cycle credit risk appetite: credit analysis is undertaken to ensure continued financial viability, notwithstanding any short-term coronavirus related pressure
Although the portfolios were well positioned pre crisis, as expected, deterioration has been seen with downgrades in credit risk ratings observed, although more so in the larger corporates segment, than in the SME book, which remains predominantly a secured portfolio. Risk rating downgrades to sub investment grade or equivalent have, however, been more modest
Significant uncertainties remain, relating to both the coronavirus pandemic and the full impact of the UK's exit from the European Union on the portfolios. Notwithstanding this, the Group will continue to balance prudent risk appetite with ensuring support for financially viable clients on their road to recovery
Impairments The net impairment charge increased to £1,464 million in 2020, compared with £306 million in 2019. The increase largely reflects charges of £809 million following updates to the economic outlook, together with £403 million for a small number of existing Stage 3 large corporate restructuring cases in the Business Support Unit (BSU), where coronavirus has directly hampered the client’s existing recovery strategy. The remaining charge of £252 million was largely as a result of impairments crystallising on a small number of single name charges in the BSU
Commercial Banking UK Direct Real Estate Commercial Banking UK Direct Real Estate gross lending stood at £13.1 billion at 31 December 2020 (net of exposures subject to protection through Significant Risk Transfer securitisations). The Group has a further £1.0 billion of UK Direct Real Estate exposure in Business Banking within the Retail division
Overall performance has remained generally acceptable, although an increase in cases moving to Watchlist has been seen, with some transfers to BSU concentrated in the retail/shopping centres sub sector. This is somewhat to be expected, as overall rent collection has been impacted by COVID-19, particularly in the retail space given the number of closed stores throughout the lockdowns, though the office sub sector has been reasonably resilient. Despite these challenges the portfolio is relatively well positioned and proactively managed with appropriate risk mitigants in place: – Exposures over £1 million continue to be heavily weighted towards investment real estate (c.90 per cent) over development. Of these investment exposures, over 75 per cent have an LTV of less than 60 per cent, with an average LTV of 50 per cent
– C.90 per cent of exposures greater than £5 million have an interest cover ratio of greater than 2.0 times and in SME, LTV at origination has been typically limited to c.55 per cent, given prudent repayment cover criteria (including a notional base rate stress)
– Approximately 65 per cent of exposures over £1 million relate to commercial real estate (with no speculative development lending) with the remainder related to residential real estate. The underlying sub-sector split is diversified with c.13 per cent of exposures secured by Retail assets, with appetite tightened since 2018
– Both investment and development lending is subject to specific credit risk appetite criteria. Development lending criteria includes maximum loan to gross development value and maximum loan to cost, with funding typically only released against completed work, as confirmed by the Group’s monitoring quantity surveyor
Drawn as a % of Group loans and advances £bn £bn £bn %
At 31 December 2020 1 Lending classified using ONS SIC codes at legal entity level. 2 Automotive dealerships includes Black Horse Motor Wholesale lending (within Retail Division).
Environmental risk management Through 2020 the Group has strengthened capacity for identifying, assessing and managing environmental risks across its lending activity. Group-wide credit risk principles require all credit risk to be incurred with regard to environmental legislation and the Group's Code of Responsibility.
Environmental risk is embedded in credit policy and must be assessed at origination and monitored on an ongoing basis throughout the customer lifecycle.
In 2020 the Group has developed and piloted a Climate Risk Assessment tool, and has continued to develop guidance and tools to help Relationship Managers and Credit Officers identify and manage the climate risk associated with its customers. This includes analysing actions being taken by customers to reduce greenhouse gas emissions, reviewing and responding to exposure to physical and transitional risks from climate change; and understanding and managing potential opportunities to support customers in their transition journey. Further detail is provided in the Responsible Business section (see pages 16 to 31).
In 2020, the Group implemented the enhanced requirements of Equator Principles 4. This strengthens the due diligence requirements for signatories to consider the environmental and social risk impacts of projects specifically on human rights, climate change and biodiversity, including aligning climate change risk assessments with the physical and transition risk categories recommended by the Task Force on Climate-related Financial Disclosures.
The risk-based environmental policy was simplified in 2020, to ensure focus on higher risk sectors and transactions. All cases that are identified as higher risk are subject to further review. Where specific or material environmental risks or concerns are identified by the Group's in-house team, cases are referred to environmental risk consultants for an opinion on the adequacy of the mitigants in place or recommendations on managing the environmental risk. The key findings from such due diligence must be factored into credit applications which inform lending decisions.
The Group continues to partner with the Cambridge Institute for Sustainability Leadership to provide high quality training to executives and colleagues focused on risk management, product development and in client-facing roles.
Measurement Liquidity risk is managed through a series of measures, tests and reports that are primarily based on contractual maturities with behavioural overlays as appropriate. Note 51 on page 314 sets out an analysis of assets and liabilities by relevant maturity grouping. The Group undertakes quantitative and qualitative analysis of the behavioural aspects of its assets and liabilities in order to reflect their expected behaviour.
The Group’s funding and liquidity position is underpinned by its significant customer deposit base, and is supported by strong relationships across customer segments. The Group has consistently observed that in aggregate the retail deposit base provides a stable source of funding. Funding concentration by counterparty, currency and tenor is monitored on an ongoing basis and where concentrations do exist, these are managed as part of the planning process and limited by the internal funding and liquidity risk monitoring framework, with analysis regularly provided to senior management.
The Group maintains a Contingency Funding Framework as part of the wider Recovery Plan which is designed to identify emerging liquidity concerns at an early stage, so that mitigating actions can be taken to avoid a more serious crisis developing. Contingency Funding Plan invocation and escalation processes are based on analysis of five major quantitative and qualitative components, comprising assessment of: early warning indicators; prudential and regulatory liquidity risk limits and triggers; stress testing results; event and systemic indicators; and market intelligence.
Funding and liquidity management in 2020 The Group has maintained its strong funding and liquidity position with the loan to deposit ratio falling to 98 per cent (107 per cent as at 31 December 2019). This was largely driven by a £38.9 billion increase in customer deposits given reduced customer spending and customers depositing government lending scheme balances.
The Group’s credit ratings continue to reflect the resilience of the Group's business model and the strength of the balance sheet. In October, Moody's downgraded Lloyds Bank plc from Aa3/Negative to A1/Stable due to the removal of the uplift for government support. This impacted a number of other UK peers and was triggered by the downgrade of the UK sovereign rating a few days earlier given the agency's concerns around the pandemic and the UK's exit from the European Union, but did not impact the standalone rating of the bank. Over the year both S&P and Fitch have affirmed the Group's ratings, albeit with negative outlooks to reflect their concerns over the UK economy.
Financial assets at fair value through other comprehensive income – non-LCR eligible3 0.7 0.1
Debt securities in issue: 1 The Group’s definition of wholesale funding aligns with that used by other international market participants; including bank deposits, debt securities and subordinated liabilities. Excludes balances relating to margins of £5.3 billion (31 December 2019: £4.2 billion). 2019 restated to exclude margins.
Sterling US Dollar Euro Other currencies Total £bn £bn £bn £bn £bn 1 2019 restated to exclude margins.
Covered bonds 1.0 — — — 1.0 1 Private placements include structured bonds.
During 2020, the Group continued to access wholesale funding markets across a variety of currencies and markets. Despite the more challenging funding conditions around the end of the first quarter, the Group saw strong demand in a number of public issuances, and completed £9.9 billion of long-term funding throughout 2020 across the Group's main issuing entities. This was below the Group's guidance (of the lower end of a £10-15 billion range) given the availability of more cost effective funding via the TFSME. In addition, the Group has been active in offering liquidity to investors through buyback and liability management activity, whilst maintaining a prudent approach to managing funding and liquidity with long-term funding buyback volumes of £7.0 billion during 2020. Overall, total wholesale funding volumes totalled £109.4 billion as at 31 December 2020. The Group plans to continue to access wholesale funding markets in 2021. The continued availability of TFSME will limit the overall wholesale funding requirements of Lloyds Bank plc.
Total LCR eligible assets 141.7 130.3 9 1 Based on 12 months rolling average to 31 December. Eligible assets are calculated as an average of month-end observations over the previous 12 months post any liquidity haircuts. 2019 assets have been restated accordingly.
2 Designated multilateral development bank (MDB). 3 Includes Level 2A and Level 2B.
At 31 December 2019 1 Based on 12 months rolling average to 31 December. Eligible assets are calculated as an average of month-end observations over the previous 12 months post any liquidity haircuts. 2019 assets have been restated accordingly.
The banking business also has a significant amount of non-LCR eligible liquid assets which are eligible for use in a range of central bank or similar facilities, including the Bank of England's Term Funding Scheme with additional incentives for SMEs (TFSME). Future use of such facilities will be based on prudent liquidity management and economic considerations, having regard for external market conditions.
Encumbered assets This disclosure provides further detail on the availability of assets that could be used to support potential future funding requirements of the Group.
Cash and balances at central banks — — — — 66,248 — 7,009 73,257 73,257
Financial assets at fair value through profit or loss 47 6,245 6,292 — 1,424 — 163,910 165,334 171,626
Loans and advances to customers 28,089 4,901 32,990 116,858 13,069 191,456 144,470 348,995 498,843
Financial assets at fair value through other comprehensive income — 6,655 6,655 — 20,589 — 359 20,948 27,603
Cash and balances at central banks — — — — 49,270 — 5,860 55,130 55,130
Derivative financial instruments — — — — — — 26,369 26,369 26,369
Financial assets at amortised cost: Loans and advances to banks — 1 1 — 1,858 3,851 4,065 9,774 9,775
Loans and advances to customers 40,480 7,109 47,589 133,732 14,087 171,370 128,210 313,667 494,988
Financial assets at fair value through other comprehensive income — 7,617 7,617 — 16,919 — 556 17,475 25,092 1 Assets regarded by the Group to be readily realisable in the normal course of business, to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, and are not subject to any restrictions on their use for these purposes.
Exposures A capital risk exposure arises when the Group has insufficient capital resources to support its strategic objectives and plans, and to meet both regulatory and external stakeholder requirements and expectations. This could arise due to a depletion of the Group’s capital resources as a result of the crystallisation of any of the risks to which it is exposed, or through a significant increase in risk-weighted assets as a result of rule changes or economic deterioration. Alternatively a shortage of capital could arise from an increase in the minimum requirements for capital, leverage or MREL either at Group, Ring-Fenced Bank (RFB) sub-group or regulated entity level. The Group’s capital management approach is focused on maintaining sufficient and appropriate capital resources across all regulated levels of its structure in order to prevent such exposures while optimising value for shareholders.
Measurement The Group maintains capital levels across all regulated entities commensurate with a prudent level of solvency to achieve financial resilience and market confidence. To support this, capital risk appetite is calibrated by taking into consideration both an internal view of the amount of capital to hold as well as external regulatory requirements.
The UK left the EU on 31 January 2020 but remained subject to changes to EU capital regulation until the end of the transition period on 31 December 2020. Under temporary transitional powers (TTP) granted to the PRA, EU capital rules that existed on 31 December 2020 will continue to generally apply until 31 March 2022. This is subject to revision following any significant changes introduced by UK regulators, including changes which implement the remaining parts of CRR II that are not yet in force.
Additional minimum requirements under Pillar 2A are set by the PRA as a firm-specific Individual Capital Requirement (ICR) reflecting a point in time estimate, which may change over time, of the minimum amount of capital to cover risks that are not fully covered by Pillar 1, such as credit concentration and operational risk, and those risks not covered at all by Pillar 1, such as pensions and interest rate risk in the banking book (IRRBB). During the year the PRA reduced the Group’s total Pillar 2A capital requirement from c.4.6 per cent to c.3.8 per cent of risk-weighted assets at 31 December 2020, of which c.2.1 per cent of risk-weighted assets must be met by CET1 capital.
Although the Group is not currently classified as a global systemically important institution (G-SII) under the Capital Requirements Directive, it has been classified as an ‘other’ systemically important institution (O-SII) by the PRA.
The countercyclical capital buffer (CCYB) is time-varying and is designed to require banks to hold additional capital to remove or reduce the build-up of systemic risk in times of credit boom, providing additional loss absorbing capacity and acting as an incentive for banks to constrain further credit growth. The amount of the buffer is determined by reference to buffer rates applied by the Bank of England’s Financial Policy Committee (FPC) for the individual countries where the Group has relevant credit exposures. The CCYB rate for the UK is currently set at 0 per cent as a result of the measures introduced by UK regulators during the first half of 2020 in response to the coronavirus pandemic. Given the Group’s UK focused business model, the overall countercyclical capital buffer at 31 December 2020 for the Group was around 0 per cent of risk-weighted assets. In December 2020, the FPC confirmed that it expects the UK CCYB rate to remain at 0 per cent until at least Q4 2021 and due to the usual 12-month implementation lag, any subsequent increase would not take effect until Q4 2022 at the earliest. The FPC also noted that the eventual pace of return to a standard 2 per cent UK CCYB rate will depend on banks’ ability to rebuild capital while continuing to support households and businesses.
All buffers are required to be met with CET1 capital. Usage of the PRA Buffer would trigger a dialogue between the Group and the PRA to agree what action is required whereas a breach of the combined buffer (all other regulatory buffers, as referenced above) would give rise to mandatory restrictions upon any discretionary capital distributions. As part of the regulatory response to the coronavirus pandemic the PRA has communicated its expectation that banks' capital and liquidity buffers can be drawn down as necessary to support the real economy through the shock and that sufficient time will be made available to restore buffers in a gradual manner.
The minimum leverage ratio requirement under the UK Leverage Ratio Framework is 3.25 per cent. This is supplemented by a time-varying countercyclical leverage buffer (CCLB) which is determined by multiplying the leverage exposure measure by 35 per cent of the countercyclical capital buffer (CCYB) rate. As at 31 December 2020 the CCLB for the Group was 0 per cent. An additional leverage ratio buffer (ALRB) of 0.7 per cent applies to the RFB sub-group and is determined by multiplying the RFB sub-group leverage exposure measure by 35 per cent of the O-SII buffer. This equates to 0.6 per cent of the total leverage exposure measure at Group level.
The Group is also able to manage the demand for capital through management actions including adjusting its lending strategy, risk hedging strategies and through business disposals.
Capital policies and procedures are well established and subject to independent oversight.
Target capital ratios The Board’s view of the ongoing level of CET1 capital required by the Group to grow the business, meet regulatory requirements and cover uncertainties continues to be around 12.5 per cent plus a management buffer of around 1 per cent.
In addition the PRA has noted its intent to provide a further update on distributions ahead of the 2021 half-year results for the large UK banks. It is expected that the PRA will take account of the outcome of the first stage of the BoE 2021 solvency stress test exercise in informing its approach to half-year distributions. Ahead of the update banks may accrue for (on an appropriately prudent basis) but not pay out any dividends. The Group will update the market on any potential interim dividend with the half year results, following receipt of this update from the regulator.
Surplus capital represents capital over and above the amount management wish to retain to grow the business, meet regulatory requirements and cover uncertainties. The amount of required capital may vary from time to time depending on circumstances and by its nature there can be no guarantee that any return of surplus capital will be made.
Distributable reserves are determined as required by the Companies Act 2006 by reference to a company’s individual financial statements. At 31 December 2020 Lloyds Banking Group plc (‘the Company’) had accumulated distributable reserves of approximately £10 billion. Substantially all of the Company’s merger reserve is available for distribution under UK company law as a result of transactions undertaken to recapitalise the Company in 2009.
Lloyds Banking Group plc acts as a holding company which also issues capital and other securities to capitalise and fund the activities of the Group. The profitability of the holding company, and its ability to sustain dividend payments, is therefore dependent upon the continued receipt of dividends and interest from its main operating subsidiaries, including Lloyds Bank plc (the Ring-Fenced Bank), Lloyds Bank Corporate Markets plc (the non-ringfenced bank), LBG Equity Investments Limited and Scottish Widows Group Limited (the insurance business). The principal operating subsidiary is Lloyds Bank plc which, at 31 December 2020, had a consolidated CET1 capital ratio of 15.5 per cent (31 December 2019: 14.3 per cent). A number of Group subsidiaries, principally those with banking and insurance activities, are subject to regulatory capital requirements which require minimum amounts of capital to be maintained relative to their size and risk. The Group actively manages the capital of its subsidiaries, which includes monitoring the regulatory capital ratios for its banking and insurance subsidiaries and, on a consolidated basis, the RFB sub-group against approved risk appetite levels. The Group operates a formal capital management policy which requires all subsidiary entities, subject to agreement by their governing bodies, to remit surplus capital to their parent companies.
Minimum requirement for own funds and eligible liabilities (MREL) In 2015, the Financial Stability Board established an international standard for the total loss absorbing capacity (TLAC) of global systemically important banks (G-SIBs). The standard, which first applied from 1 January 2019, is designed to enhance the resilience of the global financial system by ensuring that failing G-SIBs have sufficient capital to absorb losses and recapitalise under resolution, whilst continuing to provide critical banking services.
As the Group is not classified as a G-SIB it is not directly subject to the CRR II MREL.
Applying the Bank of England’s MREL SoP to current minimum capital requirements, the Group’s MREL from 1 January 2020, excluding regulatory capital and leverage buffers, is the higher of 2 times Pillar 1 plus Pillar 2A, equivalent to 19.8 per cent of risk-weighted assets, or 6.5 per cent of the UK leverage ratio exposure measure.
In addition, CET1 capital cannot be used to meet both MREL and capital or leverage buffers.
The BoE has commenced a review of the current MREL framework and expects to consult on proposed changes during the year with a view to setting final end-state requirements for 1 January 2022.
Analysis of capital position The Group’s CET1 capital ratio increased to 16.2 per cent after the accrual for ordinary dividends (31 December 2019: 13.8 per cent on a pro forma basis), amounting to a capital build for the year of 242 basis points (263 basis points prior to the accrual for the full year ordinary dividend).
Excluding the impact of the revised capital treatment for intangible software assets of 51 basis points and the reversal of the full year 2019 ordinary dividend accrual of 83 basis points, the capital build for the year prior to the accrual for the current full year ordinary dividend was 129 basis points, reflecting the following: banking business capital build before impairment charge of 192 basis points, which was largely offset by the impairment charge for the year of 174 basis points the application of IFRS 9 transitional arrangements for capital, which have provided an in-year benefit amounting to 83 basis points in the form of relief against the impact of the increase in the impairment charge a net increase of 28 basis points resulting from the reduction in underlying risk-weighted assets and excess expected losses as well as favourable market and other movements, partially offset by pension contributions (equivalent to 46 basis points) made during the year
Excluding the application of the IFRS 9 transitional arrangements for capital the Group's CET1 capital ratio after ordinary dividends would be 15.0 per cent (31 December 2019: 13.4 per cent on a pro forma basis).
The Group's transitional minimum requirement for own funds and eligible liabilities (MREL), after ordinary dividends, increased to 36.4 per cent (31 December 2019: 32.6 per cent on a pro forma basis), reflecting the increase in transitional total capital and an increase in senior unsecured securities driven by net new issuance.
The UK leverage ratio, after ordinary dividends, increased from 5.2 per cent on a pro forma basis to 5.8 per cent, largely reflecting the increase in the fully loaded tier 1 capital position, partially offset by the increase in the leverage exposure measure reflecting movements in securities financing transactions and off-balance sheet items.
Capital resources An analysis of the Group’s capital position as at 31 December 2020 is presented in the following section on both a transitional arrangements basis and a fully loaded basis in respect of legacy capital securities subject to current grandfathering provisions. In addition the Group’s capital position under both bases reflects the application of the separate transitional arrangements for IFRS 9.
Adjustment for own credit 81 26 81 26 less: deductions from common equity tier 1
Deconsolidation of instruments issued by insurance entities1 (1,892) (1,796) (1,892) (1,796)
Adjustments for transitional limit and non-eligible instruments 1,474 2,278 (1,346) (2,204)
2 Preference shares, preferred securities and other subordinated liabilities are categorised as subordinated liabilities in the balance sheet. 3 Includes an adjustment applied to reserves to reflect the application of the IFRS 9 transitional arrangements for capital.
IFRS 9 transitional adjustment to retained earnings 1,529 — — 1,529
Fair value through other comprehensive income reserve (90) — — (90)
Excess of expected losses over impairment provisions and value adjustments 243 — — 243
Movements in other equity, subordinated liabilities, other tier 2 items and related adjustments — (552) (940) (1,492)
CET1 capital resources have increased by £5,078 million over the year, primarily reflecting: underlying banking business profits (pre impairment charge) with the impairment charge partially offset through the increase in IFRS 9 transitional relief the reversal of the brought forward foreseeable dividend accrual following the cancellation of the 2019 full year ordinary dividend dividends received from the Insurance business following payment of their 2019 full year ordinary dividend the introduction of the revised capital treatment of intangible software assets the reduction in excess expected losses following the increase in offsetting IFRS 9 expected credit losses a reduction in the amount of significant investments deducted from capital as a result of the increase in the underlying capital base
offset in part by pensions contributions made during the year, an increase in deferred tax assets and other movements
Other eligible liabilities issued by Lloyds Banking Group plc3 26,946 23,554
During 2020, the Group issued externally £4.9 billion (sterling equivalent at point of issuance) of senior unsecured securities from Lloyds Banking Group plc which, while not included in total capital, are eligible to meet MREL.
Total MREL resources increased by £7.6 billion, largely reflecting the increase in total capital resources and the increase in senior unsecured securities driven by net new issuance.
Risk-weighted assets as at 31 December 2019 135,594 24,420 160,014 5,877 1,790 25,482 193,163
2 Counterparty credit risk includes movements in contributions to the default funds of central counterparties and movements in credit valuation adjustment risk. 3 Threshold risk-weighted assets reflect the element of significant investments and deferred tax assets that are permitted to be risk-weighted instead of being deducted from CET1 capital. Significant investments primarily arise from investments in the Group’s Insurance business.
Credit risk, risk-weighted assets: Asset size reduction of £9.3 billion includes lower levels of retail unsecured lending and reductions in non-government related commercial lending, together with continued optimisation in Commercial Banking and the exit of equity investments
Asset quality increase of £2.8 billion includes the impact of credit migration and model calibrations, partially offset by the benefit from House Price Index increases during 2020
Methodology and policy increase of £1.7 billion reflects the full implementation of the new securitisation framework on 1 January 2020 and the recognition of the revised capital treatment of intangible software assets, partially offset by the impact of revisions to the SME scalar
Leverage ratio Analysis of leverage movements The Group’s fully loaded UK leverage ratio increased to 5.8 per cent during the period, primarily driven by the increase in tier 1 capital. The leverage exposure measure increased by £11.7 billion during the period, largely reflecting the increase in the SFT and off-balance sheet exposure measures. Following a direction received from the PRA the Group is permitted to exclude lending under the UK Government’s Bounce Back Loan Scheme (BBLS) from the leverage exposure measure.
The derivatives exposure measure, representing derivative financial instruments per the balance sheet net of deconsolidation and derivatives adjustments, reduced by £2.1 billion during the period, largely as a result of a reduction in the regulatory potential future exposure add-on following trade compressions through central counterparties.
The SFT exposure measure, representing SFT assets per the balance sheet net of deconsolidation and other SFT adjustments, increased by £7.8 billion during the period, primarily reflecting an increase in volumes.
Off-balance sheet items increased by £7.7 billion during the period, largely reflecting new residential mortgage offers placed and an increase in corporate facilities.
2 The average UK leverage ratio is based on the average of the month end tier 1 capital position and average exposure measure over the quarter (1 October 2020 to 31 December 2020). The average of 5.6 per cent compares to 5.6 per cent at the start and 5.8 per cent at the end of the quarter.
3 Includes adjustments to exclude lending under the UK Government’s Bounce Back Loan Scheme (BBLS) and the accelerated implementation for the netting of regular-way purchases and sales awaiting settlement in accordance with CRR Article 500d.
Application of IFRS 9 on a full impact basis for capital and leverage
The Group applies the full extent of the IFRS 9 transitional arrangements for capital as set out under CRR Article 473a (as amended via the CRR 'Quick Fix' revisions published in June 2020). Specifically, the Group has opted to apply both paragraphs 2 and 4 of CRR Article 473a (static and dynamic relief) and in addition to apply a 100 per cent risk weight to the consequential Standardised credit risk exposure add-back as permitted under paragraph 7a of the revisions.
Stress testing The Group undertakes a wide-ranging programme of stress testing providing a comprehensive view of the potential impacts arising from the risks to which the Group and its key legal entities are exposed. One of the most important uses of stress testing is to assess the resilience of the operational and strategic plans of the Group and its legal entities to adverse economic conditions and other key vulnerabilities. As part of this programme the Group conducted a macroeconomic stress test of the operating plan in the second half of the year which shows that the Group's capital position is resilient to a further severe economic shock over and above the stress in the current economic environment.
The Group also participates in stress tests run by the Bank of England. The forthcoming 2021 solvency stress test aims to update and refine the desktop analysis undertaken by the Bank during 2020. Though it follows a different approach, it will require the Group to show how resilient it is to a severe economic shock in addition to what has been experienced over 2020 (HPI and CRE values are assumed to fall a further 33 per cent and unemployment peaks at 11.9 per cent).
Scottish Widows Limited (SW Ltd) holds the only with-profit fund managed by the Group. Each insurance company within the Group is regulated by the PRA.
Longevity and persistency are key risks within the life and pensions business. Longevity risk arises from the annuity portfolios where policyholders’ future cash flows are guaranteed at retirement and increases in life expectancy, beyond current assumptions, will increase the cost of annuities. Longevity risk exposures are expected to increase with the Insurance business growth in the annuity market. Persistency assumptions are set to give a best estimate, however customer behaviour may result in increased cancellations or cessation of contributions.
Definition Change/execution risk is defined as the risk that, in delivering its change agenda, the Group fails to ensure compliance with laws and regulation, maintain effective customer service and availability, and/or operation within the Group’s risk appetite.
Exposures Change/execution risks arise when the Group undertakes activities which require products, processes, people, systems or controls to change. These changes can be as a result of external drivers (for example, a new piece of regulation that requires the Group to put in place a new process or reporting) and internal drivers (such as the strategic transformation that is outlined in the Group's Strategic Review 2021).
Measurement The Group currently measures change/execution risk against a defined risk appetite metric which is a combination of leading, quality and delivery indicators across the investment portfolio. These indicators are reported through defined internal governance structures in the form of a monthly execution risk dashboard. An associated measure, based on the aggregate performance of the dashboard is included in the Group balanced scorecard.
Monitoring Change/execution risks from across the Group are monitored and reported through to Board and Group Governance Committees in accordance with the Group's enterprise risk management framework and aligned to the Group's Strategic Review 2021 activities. Risk exposures are discussed monthly through established governance through to Group Transformation Risk Committee with upwards reporting to Board Risk and Executive Committees. In addition, oversight, challenge and reporting are completed at Risk Division level to provide oversight management of risks and the effectiveness of controls, recommending follow up remedial action if required. All material change/execution risk events are escalated in accordance with the formal Group Operational Risk policy and Change policy.
Conduct risks can impact directly or indirectly on the Group's customers and could materialise from a number of areas across the Group, including: Business and strategic planning that does not sufficiently consider customer needs
Ineffective development, management and monitoring of products, their distribution (including the sales process) and post- sales service (including the management of customers in financial difficulties)
There is a high level of scrutiny regarding financial institutions' treatment of customers, including those in vulnerable circumstances, from regulatory bodies, the media, politicians and consumer groups. The COVID-19 pandemic has magnified existing challenges, and brought new challenges for customers, affecting health, income and relationships. The Group continues to apply significant focus to its treatment of customers in financial difficulties and ensuring fair outcomes.
The Group is also exposed to the risk of engaging in or failing to manage conduct which could constitute market abuse, undermine the integrity of a market in which it is active, distort competition or create conflicts of interest.
The evolving COVID-19 situation means increased uncertainty surrounding the future, which poses the risk that increasingly more customers face difficulties, become vulnerable and/or struggle to manage their existing commitments.
Cultural transformation: achieving a values-led culture through a focus on behaviours to ensure the Group is transforming its culture for success in a digital world. This is supported by strong direction and tone from senior executives and the Board
Continuous embedding of the customer vulnerability framework aligned with the FCA guidance on fair treatment of vulnerable customers launched in January 2021. Development and continued oversight of the implementation of the vulnerability strategy continues through the Group Customer Vulnerability Committee (GCVC) operating at a senior level to prioritise change, drive implementation and ensure consistency across the Group
Enhanced complaints management through effectively responding to, and learning from, root causes of complaint volumes and Financial Ombudsman Service (FOS) change rates
Review and oversight of thematic conduct agenda items at senior committees, ensuring holistic consideration of key Group-wide conduct risks
Robust recruitment and training, with a continued focus on how the Group manages colleagues’ performance with clear customer accountabilities
Monitoring and testing of customer outcomes to ensure the Group delivers fair outcomes for customers throughout the product and service lifecycle, and make continuous improvements to products, services and processes
Continued focus on proactive identification and mitigation of conduct risk in the Group's Strategic Review 2021
Adapting quickly to the evolving COVID-19 situation, being swift to offer the new to market products (BBILs, CBILs) and new regulatory requirements (payment holidays). The Group also continued to support customers in challenging times by adapting support, proactively contacting vulnerable customers, and using insight to understand who may become vulnerable and what their needs could be
GCFC acts as the guardian of customer experience and has responsibility for monitoring and reviewing plans and actions to improve it, providing oversight of customer outcomes and customer experience and providing challenge to divisions to make changes to support the delivery of the Group's vision and foster a customer-centric culture.
A number of activities support the close monitoring of conduct risk including: The use of CRAMs across the Group, with a clear escalation route to Board
Data risk Definition Data risk is defined as the risk of the Group failing to effectively govern, manage and control its data (including data processed by third party suppliers), leading to unethical decisions, poor customer outcomes, loss of value to the Group and mistrust.
When data quality (accuracy, completeness, consistency, uniqueness, validity and timeliness) is not managed, resulting in data used in systems, processes and products not being fit for the intended purpose
When data records are not created, retained, protected, destroyed, or retrieved appropriately
When critical data mapping and data information standards are not followed impacting compliance, traceability and understanding of data
Monitoring Data risk is governed through Group and Sub-Group committees and significant issues are escalated to Group Risk Committee, in accordance with the Group’s enterprise risk management framework. Risk exposures are discussed at Group and Sub-Group committees, where oversight, challenge and reporting are completed to assess the effectiveness of controls and agree remedial actions. All material data risk events are escalated in accordance with the Group Operational Risk policy and Data risk policies and where personal data is concerned, the Group Data Protection Officer. In addition, Group-wide data risk issues and the top data risks that Group faces are discussed at Data Cross Divisional Committee and Group Data Committee.
Design and monitoring of data risk appetite metrics, including key risk indicators and key performance indicators
The Group’s Code of Responsibility embodies its values and reflects its commitment to operating responsibly and ethically both at a business and an individual level. All colleagues are required to adhere to the code in all aspects of their roles.
Effective implementation of the ERMF mutually reinforces and is reinforced by the Group’s risk culture, which is embedded in its approach to recruitment, selection, training, performance management and reward.
Definition Operational resilience risk is defined as the risk that the Group fails to design resilience into business operations, underlying infrastructure and controls (people, process, technology) so that it is able to withstand external or internal events which could impact the continuation of operations, and fails to respond in a way which meets customer and stakeholder expectations and needs when the continuity of operations is compromised.
Operational resilience and damage to physical assets including: terrorist acts, other acts of war or hostility, geopolitical, pandemic or other such events
Operational risk: being unable to safely provide customers with business services
Conduct risk: an operational resilience failure may render the Group liable to fines from the FCA for poor conduct
Market risk: the Group being unable to provide key services could have ramifications for the wider market and could impact share price
Exposures The Group’s management of material people risks is critical to its capacity to deliver against its strategic objectives, particularly in the context of increasing volumes of organisational, political and external market change and increasing digitisation. The Group is exposed to the following key people risks: Failure to recruit, develop and retain colleagues, including ineffective management of succession planning or failure to identify appropriate talent pipeline
For emerging risks relating to people risk and ways of working, please refer to page 148.
Measurement People risk is measured through a series of quantitative and qualitative indicators, aligned to key sources of people risk for the Group such as succession, retention, colleague engagement and wellbeing. In addition to risk appetite measures and limits, people risks and controls are monitored on a monthly basis via the Group’s risk governance framework and reporting structures.
Continued focus on the Group’s culture and inclusivity strategy by developing and delivering initiatives that reinforce the appropriate behaviours which generate the best possible long-term outcomes for customers and colleagues
Managing organisational capability and capacity through divisional people strategies to ensure there are the right skills and resources to meet customers’ needs and deliver the Group's strategic plan
Maintaining effective remuneration arrangements to ensure they promote an appropriate culture and colleague behaviours that meet customer needs and regulatory expectations
Strategic Review 2021 considers the changing risk management requirements, adapting the change delivery model to be more agile and develop the people skills and capabilities needed to be a Bank of the Future. The Group continues to review and invest in its control environment to ensure it addresses the risks it faces. Risks are reported and discussed at local governance forums and escalated to executive management and Board as appropriate. The Group employs a range of risk management strategies, including: avoidance, mitigation, transfer (including insurance) and acceptance. Where there is a reliance on third-party suppliers to provide services, the Group’s sourcing policy ensures that outsourcing initiatives follow a defined process including due diligence, risk evaluation and ongoing assurance.
During the COVID-19 pandemic, business continuity plans have proved resilient, with particular attention applied to heightened risks in the supply chain.
People: the Group acknowledges the risks associated to the failure to maintain appropriately skilled and available colleagues. The Group continues to optimise its approach to ensure that where applicable, colleagues are capable of supporting a critical business process. Key controls and processes are regularly reported to committee(s) and alignment to the Strategic Review 2021 is closely monitored.
Sourcing: the threat landscape associated with third-party suppliers and the critical services they provide continues to receive a significant amount of regulatory attention. The Group acknowledges the importance of demonstrating control and responsibility for those critical business services which could cause significant harm to the Group's customers.
Monitoring Monitoring and reporting of operational resilience risk is undertaken at Board, Group, entity and divisional committees. Each committee monitors key risks, control effectiveness, key risk and control indicators, events, operational losses, risk appetite metrics and the results of independent testing conducted by the Risk division and/or Group Internal Audit.
The Group maintains a formal approach to operational resilience risk event escalation, whereby material events are identified, captured and escalated. Root causes are determined, and action plans put in place to ensure an optimum level of control to keep customers and the business safe, reduce costs, and improve efficiency.
Exposures The principal operational risks to the Group which could result in customer detriment, unfair customer outcomes, financial loss, disruption and/or reputational damage are: A cyber-attack
Measurement Operational risk is managed across the Group through an operational risk framework and operational risk policies. The operational risk framework includes a risk and control self-assessment process, risk impact likelihood matrix, key risk and control indicators, risk appetite, a robust operational event management and escalation process, scenario analysis and an operational losses process.
Operational risk losses and scenario analysis is used to inform the Internal Capital Adequacy Assessment Process (ICAAP). The Group calculates its minimum (Pillar I) operational risk capital requirements using The Standardised Approach (TSA). Pillar II is calculated using internal and external loss data and extreme but plausible scenarios that may occur in the next 12 months.
Mitigation The Group continues to focus on changing risk management requirements, adapting the change delivery model to be more agile and developing the people skills and capabilities needed to be a Bank of the Future. Risks are reported and discussed at local governance forums and escalated to executive management and Board as appropriate to ensure the correct level of visibility and engagement. The Group employs a range of risk management strategies, including: avoidance, mitigation, transfer (including insurance) and acceptance. Where there is a reliance on third-party suppliers to provide services, the Group’s sourcing policy ensures that outsourcing initiatives follow a defined process including due diligence, risk evaluation and ongoing assurance.
The Group adopts a risk-based approach to mitigate the internal and external fraud risks it faces, reflecting the current and emerging fraud risks within the market. Fraud risk appetite metrics holistically cover the impacts of fraud in terms of losses to the Group, costs of fraud systems and operations, and customer experience of actual and attempted fraud. Oversight of the appropriateness and performance of these metrics is undertaken regularly through business area and Group-level committees. This approach drives a continual programme of prioritised enhancements to the Group’s technology and process and people related controls; with an emphasis on preventative controls supported by real time detective controls wherever feasible. Group-wide policies and operational control frameworks are maintained and designed to provide customer confidence, protect the Group’s commercial interests and reputation, comply with legal requirements and meet regulatory requirements. The Group’s fraud awareness programme remains a key component of its fraud control environment, and awareness of fraud risk is supported by mandatory training for all colleagues. This is further strengthened by material annual investment into both technology and the personal development needs of colleagues. The Group also plays an active role with other financial institutions, industry bodies, and enforcement agencies in identifying and combatting fraud
The Group has adopted policies and procedures designed to detect and prevent the use of its banking network for money laundering, terrorist financing, bribery, tax evasion, human trafficking, modern-day slavery and wildlife trafficking, and activities prohibited by legal and regulatory sanctions. Against a background of complex and detailed laws and regulations, and of continued criminal and terrorist activity, the Group regularly reviews and assesses its policies, procedures and organisational arrangements to keep them current, effective and consistent across markets and jurisdictions. The Group requires mandatory training on these topics for all employees. Specifically, the anti-money laundering procedures include ‘know-your-customer’ requirements, transaction monitoring technologies, reporting of suspicions of money laundering or terrorist financing to the applicable regulatory authorities, and interaction between the Group’s Financial Intelligence Unit and external agencies and other financial institutions. The Anti-Bribery Policy prohibits the payment, offer, acceptance or request of a bribe, including ‘facilitation payments’ by any employee or agent and provides a confidential reporting service for anonymous reporting of suspected or actual bribery activity. The Sanctions and the Related Prohibitions Policy sets out a framework of controls for compliance with legal and regulatory sanctions
– Co-sponsorship the National Economic Crime Centre (NECC) Fusion Cell, which was established in response to the changing economic crime threat related to COVID-19
Monitoring Monitoring and reporting of operational risk is undertaken at Board, Group, entity and divisional committees. Each committee monitors key risks, control effectiveness, key risk and control indicators, events, operational losses, risk appetite metrics and the results of independent testing conducted by the Risk Division and/or Group Internal Audit.
Operational risk events by risk category (losses greater than or equal to £10,000), excluding PPI1
This provides the basis for the Model Governance Policy, which defines the mandatory requirements for models across the Group, including: the scope of models covered by the policy model materiality roles and responsibilities, including ownership, independent oversight and approval key principles and controls regarding data integrity, development, validation, implementation, ongoing maintenance and revalidation, monitoring, and the process for non-compliance
The model owner takes responsibility for ensuring the fitness for purpose of the models and rating systems, supported and challenged by the independent specialist Group function.
Measurement Regulatory and legal risks are measured against a defined risk appetite metric, which is an assessment of material regulatory breaches and material legal incidents.
Mitigation The Group undertakes a range of key mitigating actions to manage regulatory and legal risk. These include the following: The Board has established a Group-wide risk appetite and metric for regulatory and legal risk
The Group has adapted quickly to evolving regulatory expectations during the COVID-19 pandemic and has engaged with regulatory authorities throughout
Definition Strategic risk is defined as the risk which results from: Incorrect assumptions about internal or external operating environments
Failure to respond or the inappropriate strategic response to material changes in the external or internal operating environments
Failure to understand the potential impact of strategic responses and business plans on existing risk types
Exposures The Group faces significant risks due to the changing regulatory and competitive environments in the financial services sector, with an increased pace, scale and complexity of change. Customers, shareholders and employees expectations continue to evolve and current societal trends are likely to be accelerated by the pandemic.
In considering strategic risks, a key focus is the interconnectivity of individual risks and the cumulative effect of different risks on the Group’s overall risk profile.
Further information on strategic risk drivers and their potential risk implications is outlined in the risk overview on pages 58 and 59.
Through 2021, a clear set of strategic risks, mitigants and controls will be embedded to meet divisional, legal entity and Group-wide objectives. The assessment and measurement will be supported by a quantitative risk assessment approach and underpinned by the Group's One Risk and Control Self-Assessment (One RCSA) framework. The Group's quantitative risk assessment will focus specifically on assessing the connectivity of inherent risks, which can magnify their impact and severity.
Mitigation The range of mitigating actions includes: Horizon scanning is conducted across the Group to identify potential threats, risks, emerging issues, opportunities and explore future trends
The Group’s governance framework mandates individual's and committee’s responsibilities and decision making rights, to ensure that strategic risks are appropriately reported and escalated
Monitoring A review of the Group’s strategic risks, which includes the risks to the current strategic review and the mitigating actions, is undertaken on an annual basis and the findings are reported to the Group and Board Risk Committees.
Risks, alongside their control effectiveness, are articulated and reported regularly to Group and Board Risk Committees.
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Financial statements 46. Contingent liabilities, commitments and guarantees 295 47. Structured entities 297 48. Financial instruments 298 49. Transfers of financial assets 311 50. Offsetting of financial assets and liabilities 312 51. Financial risk management 314 52. Consolidated cash flow statement 332 53. Future accounting developments 334
Parent company balance sheet 335 Parent company statement of changes in equity 336 Parent company cash flow statement 337
Independent auditors’ report 206 Consolidated income statement 215 Consolidated statement of comprehensive income 216 Consolidated balance sheet 217 Consolidated statement of changes in equity 219 Consolidated cash flow statement 222
estimates 231 4. Segmental analysis 240 5. Net interest income 245 6. Net fee and commission income 245 7. Net trading income 246 8. Insurance premium income 246 9. Other operating income 247 10. Insurance claims 247 11. Operating expenses 248 12. Auditors’ remuneration 249 14. Tax expense 252 15. Earnings per share 253 16. Financial assets at fair value through profit or loss 253 17. Derivative financial instruments 254
Independent auditors’ report to the members of Lloyds Banking Group plc Report on the audit of the financial statements Opinion In our opinion, the financial statements of Lloyds Banking Group plc (the Group) and parent company financial statements (together, 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 2020 and of the Group’s profit and the Group’s and parent company’s cash flows for the year then ended; – have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006; and – have been prepared in accordance with the requirements of the Companies Act 2006.
Separate opinion in relation to international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union As explained in note 1 to the financial statements, the Group, in addition to applying international accounting standards in conformity with the requirements of the Companies Act 2006, has also applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.
Separate opinion in relation to IFRSs as issued by the IASB As explained in note 1 to the financial statements, the Group, in addition to applying international accounting standards in conformity with the requirements of Companies Act 2006, has also applied international financial reporting standards (IFRSs) as issued by the International Accounting Standards Board (IASB).
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group.
– Overall Group materiality: £300m (2019: £360m) based on 5 per cent of the four-year average adjusted profit before tax for the financial years ended 31 December 2017, 2018, 2019 and 2020, adjusted to remove the effects of certain items which were considered to have a disproportionate impact. – Overall parent company materiality: £300m (2019: £360m) based on 1 per cent of total assets, but limited to the overall Group materiality. – Performance materiality: £220m (Group and parent company).
Capability of the audit in detecting irregularities, including fraud Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined in the Auditors’ responsibilities for the audit of the financial statements section, 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.
Based on our understanding of the Group and industry, we identified that the principal risks of non-compliance with laws and regulations related to breaches of banking laws and regulations such as, but not limited to, regulations relating to consumer credit and unethical and prohibited business practices, and we considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the preparation of the financial statements such as the Companies Act 2006. We evaluated management’s incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting manual journal entries to manipulate financial performance, management bias through judgements and assumptions in significant accounting estimates and significant one-off or unusual transactions. The Group engagement team shared this risk assessment with the component auditors so that they could include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the Group engagement team and/or component auditors included: – Discussions with management and those charged with governance including consideration of known or suspected instances of non-compliance with laws and regulation and fraud.
– Reviewing key correspondence with the FCA and PRA. – Challenging assumptions and judgements made by management in their significant accounting estimates, in particular in relation to the allowance for ECL; insurance actuarial assumptions; the defined benefit obligation; and the valuation of certain level 3 financial instruments (see related key audit matters below). – Identifying and testing journal entries, in particular any manual journal entries posted by unexpected or unusual users, posted with descriptions indicating a higher level of risk, and posted late with a favourable impact on financial performance.
Key audit matters Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the 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) identified by the auditors, 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, and any comments we make on the results of our procedures thereon, 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 Impact of COVID-19 on the audit is a new key audit matter this year. Payment Protection Insurance (PPI), which was a key audit matter last year, is no longer included because of the significant reduction in the amount and the level of estimation uncertainty of the PPI provision by 31 December 2020. This was a result of the Group processing almost all PPI information requests and complaints. The key audit matter in respect of defined benefit obligations has been extended to include harder to value assets within the pensions asset portfolio. Otherwise, the key audit matters below are consistent with last year.
The determination of the allowance for ECL is a judgemental area. A number of judgements and assumptions are outlined in the financial statements, including the definition of significant increases in credit risk, and the application of forward-looking information.
The Group’s economics team develops future economic scenarios. The base case economic scenario is determined through the application of judgement. There is a high level of estimation uncertainty in the base case due to the inherent complexity in forecasting future economic outcomes. The impact of COVID-19 on the economy has significantly increased the level of uncertainty in the base case forecasts. A central adjustment to the allowance of ECL of £400 million has been recognised primarily to reflect the level of uncertainty in the conditioning assumptions used to produce the base case.
The outer scenarios are generated and selected through the use of a statistical model that is conditioned on the base case. The four economic scenarios represent distinct parts of the loss distribution which is developed based on historical experience. The scenarios, together with their weightings, are provided to the Retail and Commercial Banking divisions and act as key assumptions for the calculation of the allowance for ECL.
– The review, challenge and approval of the economic scenarios within the Group’s governance processes.
We found the key controls were designed, implemented and operated effectively, and therefore determined that we could place reliance on these key controls for the purposes of our audit. Where control deficiencies were identified, management identified compensating controls which we tested and were able to place reliance on. We critically assessed the key assumptions adopted in the base case economic scenario by comparing them to our independent view of the economic outlook and market consensus data. We investigated key economic variables outside of our thresholds. We also assessed the risk of bias in the forecasts, as well as the existence of contrary evidence. We independently re-performed the Group’s model and performed testing to evaluate the level of non-linearity captured in the allowance for ECL. We also assessed the appropriateness of the weightings adopted. With respect to the central adjustment of £400m, we evaluated whether the use of a central adjustment was appropriate, the method for measuring the adjustment, the assumptions used in developing the estimate, and assessed the appropriateness of disclosures.
We found key controls that were designed, implemented and operating effectively, and therefore determined that we could place reliance on these key controls for the purposes of our audit. Where control deficiencies were identified, management identified compensating controls which we tested and were able to place reliance on.
We understood and assessed the appropriateness of the impairment models developed and used by management. This included assessing and challenging the appropriateness of key modelling judgements (e.g. criteria used to determine significant increase in credit risk) and quantifying the impact of the use of proxies and simplifications, assessing whether these were appropriate. For selected portfolios, we created our own independent models covering certain parts of the model calculation which enabled us to re-perform management’s calculation and challenge their outputs.
The allowance for ECL relating to ‘good book’ or non-credit impaired loans and advances (referred to as being in Stages 1 and 2) in the Commercial Banking division is determined on a collective basis, with the use of impairment models. These models use a number of key assumptions including probability of default, loss given default and valuation of recoveries. Management also apply judgemental adjustments where they believe the model calculated assumptions and allowances are not appropriate, either due to emerging trends or model limitations. An example of this is adjustments to the impairment model for anticipated increases to account deterioration across the portfolio that have been deferred through the impact of government support schemes. There has been an increase in the use of judgemental adjustments to modelled ECLs in the current year which reflects the fact that the historical data used in the development of the models does not capture all the conditions of the COVID-19 pandemic experienced during 2020.
The allowance for ECL relating to credit impaired loans and advances (referred to herein also as being in Stage 3) in the Commercial Banking division is primarily estimated on an individual basis. Judgement is required to determine when a loan is considered to be credit impaired, and then to estimate the expected future cash flows related to that loan under multiple weighted scenario outcomes.
We understood management’s process and evaluated and tested key controls around the determination of the allowance for ECL. For the Stage 1 and 2 allowance, we focused on: – The identification and assessment of the completeness and accuracy of critical data applied in the ECL calculation; – The accuracy and timeliness of updates to credit risk ratings, which are applied in assessing whether loans have suffered a significant increase in credit risk since initial recognition; – The governance over the ECL determination, including the validation of the ECL methodology, assumptions and inputs, and the annual model performance validation, and; – The review, challenge and approval processes in place to assess the overall reasonableness of the allowance for ECL, alongside other available credit risk related information within the Group.
For the Stage 3 allowance, we focused on: – The controls in place for the identification of credit impaired loans and subsequent transfer of these cases to the credit loss assessment team; and
– The review, challenge and approval processes that are in place to assess the overall reasonableness of the allowance for ECL.
We performed the following procedures over the Stage 1 and 2 allowance for ECL: – We critically assessed whether the methodology applied in the calculation is compliant with IFRS 9; – We tested the formulae applied within the calculation, including the appropriateness, and application of, the quantitative and qualitative criteria used to assess significant increases in credit risk; – We evaluated the accuracy and timing of the information being used to calculate a borrower’s internal credit risk rating; – We assessed whether the most recent internal credit risk rating assessment was performed sufficiently timely to incorporate the recent economic environment; – We critically assessed the impact of identified model limitations and the justification for judgemental adjustments applied by management.
For each risk based sample, as well as an additional haphazardly selected sample of Stage 1 and 2 loans, we independently assessed whether there was evidence indicating a credit impairment event (e.g. a customer experiencing significant financial difficulty or in breach of covenant) and therefore whether they were appropriately categorised. Our testing included consideration of events subsequent to the balance sheet date.
Refer to page 103 (Audit Committee report), page 229 (Note 2: Accounting policies), page 238 (Note 3: Critical accounting judgments and estimates) and pages 247, 267, 273 and 276 (Notes 10, 23, 30 and 31).
Refer to page 103 (Audit Committee report), page 228 (Note 2: Accounting policies), page 238 (Note 3: Critical accounting judgements and estimates) and page 277 (Note 34: Retirement benefit obligations).
Within the pension assets portfolio, the unquoted assets predominantly comprise of Pooled Investment Vehicles (PIVs) valued at £13bn which include harder to value assets. The fair value of these harder to value assets in PIVs is determined based on pricing provided by investment managers.
Refer to page 224 (Note 2: Accounting policies), page 239 (Note 3: Critical accounting judgements and estimates) and pages 253, 298 and 314 (Notes 16, 48 and 51).
Within its portfolio of Level 3 financial instruments, the Group holds two loan portfolios (£9.0bn in Insurance, £1.3bn in Commercial Banking) which are each concentrations of similar, non-traded assets. They are classified as Level 3 instruments as their valuation is subjective and determined using bespoke models which rely on a range of unobservable inputs.
We understood management’s process and evaluated and tested the key controls around the financial instruments’ valuation processes including the independent price verification and valuation governance controls. We found these key controls were designed, implemented and operated effectively, and therefore determined that we could place reliance on these key controls for the purposes of our audit. With the support of our valuations specialists, we performed the following further testing: – Evaluated the appropriateness of management’s valuation methodologies, including the impact of COVID-19, and tested their application. For Insurance, this included building an independent model; – Evaluated and tested key inputs and assumptions, with reference to matters including historic performance, market information and perspectives, servicer and trustee reports and investment prospectuses in Commercial Banking, and market information and credit ratings in Insurance; and
We understood and tested key controls over the designation and ongoing management of hedge accounting relationships, including those over hedge documentation, hedge effectiveness testing and the recording of hedge accounting adjustments. We found these key controls were designed, implemented and operated effectively, and therefore determined that we could place reliance on these key controls for the purposes of our audit. Our other testing included the following: – Examining selected hedge documentation to assess whether it complies with the requirements of IFRS; – Testing the key year-end reconciliations between underlying source systems and the models used to manage hedging relationships; – Independently assessing whether management have captured and monitored all material sources of ineffectiveness, including any impact of the interest rate benchmark reform; – Re-performing a sample of hedge effectiveness calculations; – Re-performing a sample of capacity assessment calculations; and – Testing a sample of manual adjustments posted to record ineffectiveness.
Specifically, we tested foundational controls over: – Approval, recertification and timely removal of access from IT systems; – The completeness and accuracy of the Access Controls Lists from IT platforms that are used by downstream IT security processes; In addition, we tested enhanced controls which act as mitigating controls on any gaps identified in the foundational controls: – The onboarding and management of IT privileged accounts through the privileged access ‘break-glass tool’ (including static IT privileged accounts); and
– The monitoring of security events on IT platforms by the Security Operations Centre.
The UK government has deployed a range of support measures for people and businesses, and the Group has been active in some of these schemes, for example providing payment holidays and in issuing government backed loans.
As at 31 December 2020, two vaccines have received regulatory approval and have begun to be administered to priority groups, such as the elderly. These, and the development of other vaccines, create an expectation that the restrictions will be eased in the foreseeable future. However, there remains significant uncertainty over the successful rollout and efficacy of the vaccines, the future mutation and spread of the virus, the extent and impact of government measures and economic outlook.
Our planning and execution of our audit has given specific consideration to the impact of COVID-19 on the Group. This has included our materiality decreasing by £60m compared to the previous financial year, due to the reduced profitability of the Group.
– Evaluated the adequacy of the disclosures made in the financial statements with respect to the impact of COVID-19.
As a result of these procedures, we concluded that the impact of COVID-19 has been appropriately evaluated and reflected in the preparation of the financial statements.
How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the parent company, the accounting processes and controls, and the industry in which they operate.
Any components which were considered individually financially significant in the context of the Group’s consolidated financial statements were considered full scope components. An individually financially significant component was deemed to be one which either represented more than or equal to 10% of the total assets of the consolidated Group, or represented more than or equal to 10% of the total liabilities of the consolidated Group, or whereby a component had a significant number of balances exceeding performance materiality. We have used appropriate judgement in determining what constitutes a “significant” number. We have also performed risk assessments over the significant and elevated risks identified in our audit plan to identify any additional individually financially significant components.
All remaining components which were neither inconsequential nor individually financially significant were subject to procedures which addressed the risk of material misstatement including testing of entity level controls, information technology general controls and Group and component level analytical review procedures.
We have selected total assets as an appropriate benchmark for parent company materiality. Profit based benchmarks are not considered the most appropriate for parent company materiality as the parent company is not a trading entity. Where the calculated parent company materiality from total assets exceeds the Group overall materiality level, the parent company overall materiality has been restricted to equal the Group overall materiality level.
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was £220m for the Group and parent company financial statements.
Conclusions relating to going concern Our evaluation of the directors’ assessment of the Group’s and the parent company’s ability to continue to adopt the going concern basis of accounting included: – Evaluation of management’s going concern assessment; – Evaluation and testing of the control environment in place over liquidity and capital forecasting to the extent these are relevant to the going concern assessments performed by the Group;
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Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group’s and the parent company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
With respect to the Strategic report and Directors’ report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.
Corporate governance statement The Listing Rules require us to review the directors’ statements in relation to going concern, longer-term viability and that part of the corporate governance statement relating to the parent company’s compliance with the provisions of the UK Corporate Governance Code specified for our review. Our additional responsibilities with respect to the corporate governance statement as other information are described in the Reporting on other information section of this report.
– The directors’ statement as to whether they have a reasonable expectation that the Group and parent company will be able to continue in operation and meet its liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Our review of the directors’ statement regarding the longer-term viability of the Group was substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their statement; checking that the statement is in alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statement is consistent with the financial statements and our knowledge and understanding of the Group and parent company and their environment obtained in the course of the audit.
In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the financial statements and our knowledge obtained during the audit: – The directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information necessary for the members to assess the Group’s and parent company’s position, performance, business model and strategy; – The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and
Responsibilities for the financial statements and the audit Responsibilities of the directors for the financial statements As explained more fully in the Statement of directors’ responsibilities, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report.