We recognise that our colleagues are critical to the success of our transformation and are therefore making our biggest ever investment in our people.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2018 15
The meetings were primarily aligned to results and included discussions on strategic progress and financial and operational performance. Feedback from meetings is passed directly to senior management
We recognise the importance of supporting communities beyond our own banking services, and over five years we have invested £5 million to support the Credit Unions sector. We signpost to local credit unions when we cannot support customers’ borrowing needs
Gender diversity We remain committed to having women fill 40 per cent of our senior management roles by 2020 and have been included in The Times ‘Top 50 employers for women’ in 2018, for the seventh year running. This year we continued sponsoring Women of the Future Ambassadors, connecting successful women with female students, and launched our Sponsoring Leaders programme, enabling women in senior roles to champion the potential of women in more junior roles. The promotion rate for the 100 colleagues who completed the programme in 2018 was around five times that of non-participants. From January 2019, the Group will be included in the Bloomberg Gender-Equality Index for the first time.
Helping Britain Prosper Plan, page 20 1 Certain Group Policies and internal standards and guidelines are not published externally.
Credit The risk that parties with whom we have contracted, fail to meet their financial obligations (both on and off balance sheet).
Implementation of compliance and legal risk management policies and procedures to ensure appropriate controls and processes are in place to comply with legislation, rules and regulation
The Insurance business is exposed indirectly to equity risk through the value of future management charges on policyholder funds. Credit spread risk within the Insurance business primarily arises from bonds and loans used to back annuities
Banking net interest margin (%) 2.93 2.86 1 Excludes reverse repos of £40.5 billion (31 December 2017: £16.8 billion).
Jakob joined the Group in 2004 having spent six years with McKinsey & Company, in their London office. Prior to McKinsey, Jakob spent time with Goldman Sachs and Oliver Wyman.
Revised Group governance arrangements and Group restructure to comply with ring-fencing Following the financial crisis, UK legislation was passed to better protect customers and the day-to-day banking services they rely on. The new rules mean large UK banks must separate personal banking services such as current and savings accounts from risks in other parts of the business, like investment banking. This is called ring-fencing. Banks have taken different approaches on how they implement these rules with effect from 1 January 2019.
The Company Secretary advises the Board on various matters including governance and ensures good information flows and comprehensive practical support is provided to Directors. He maintains the Group’s Corporate Governance Framework and organises Directors’ induction and training. The Company Secretary communicates with shareholders as appropriate and ensures due regard is paid to their interests. Both the appointment and removal of the Company Secretary is a matter for the Board as a whole.
A2. Division of responsibilities There is clear division of responsibility at the head of the Company, as noted above. As documented in the Group’s Corporate Governance Framework there is clear separation between the role of the Chairman, who is responsible for the leadership and effectiveness of the Board, and the Chief Executive, who is responsible for the running of the Company’s business.
No Executive Director has either taken up more than one Non-Executive Director role at a FTSE100 company or taken up the Chairmanship of such a company.
Reviewing whether NonExecutive Directors were demonstrably independent and free from relationships and other circumstances that could affect their judgement
Q: What are you looking to bring to the Board / What excites you about your role with Lloyds?
The Committee considered the most critical assumptions underlying the calculation of the defined benefit liabilities, including those in respect of the discount rate, inflation and mortality.
The Committee was satisfied that management had used appropriate assumptions that reflected the Group’s most recent experience and were consistent with market data and other information.
People risk The Committee recognises the importance of People risk management to ensure the Group has the right capabilities and culture as we build the Bank of the Future.
The Committee continued to focus on the People risk profile, recognising the challenges faced in successfully delivering the Group strategic and extensive regulatory change agenda. The Group recognises the increasing demands on colleagues and is monitoring colleague wellbeing and engagement as well as developing colleague skills to achieve capability enhancement for a digital era. Particular consideration is given to critical and high performing individuals. The Group has made significant progress in evolving and refining the compliance control environment for the Senior Manager and Certification Regime (SMCR). The delivery of the SMCR extension will remain a focus for 2019.
I had great pleasure in attending the regional launch of our Digital Academy in Manchester in December. Improving digital skills, is a key plank of Britain’s plan to increase productivity, and the Academy works with local organisations and national partners to deliver a range of training, including basic skills (like preparing a CV) as well as more advanced activity, and is accessible to all members of the community.
This year, our overall location based carbon emissions were 244,407 tCO2e; a 15 per cent decrease since 2017, and 57 per cent against our 2009 baseline. Reductions achieved are attributable to our Environmental Action Plan (EAP), launched in 2010, which has delivered a reduction in gas and electricity consumption through an extensive energy management programme, alongside decarbonisation of the UK electricity grid.
Delivery through collective success We believe it is important that all our colleagues share in the collective success of the Group when we deliver at our best. Therefore for 2019, significant changes are being made to the Group’s performance management framework. Our new approach, which we are calling Your Best, is a simpler approach to performance management, with a stronger emphasis on teamwork and a greater focus on personal growth, skills and development. This is highly relevant to all colleagues in this fast changing economy.
2019 Annual General Meeting Together with my Committee members, I look forward to hearing your views on the remuneration arrangements outlined in this report, and to welcoming you to the 2019 AGM where I hope you will support the resolution relating to remuneration.
How our reward emphasises long term performance and is aligned to our strategic priorities Financial targets that form the basis of the outcomes for both short term and long term awards are directly linked to the Group’s Four Year Operating Plan.
6 In addition, Nick Prettejohn held 400 6.475 per cent preference shares at 1 January 2018 and 31 December 2018.
As per the diagram on page 84 illustrating how share based remuneration is delivered to our Executive Directors, shares are deferred for up to seven years and clawback provisions can be implemented for up to ten years. Deferred bonus awards and long term incentive awards that are yet to vest are not currently included within the total shareholding for Executive Directors. Based on the number of outstanding bonus deferrals and number of in-flight long term incentive awards granted to each Executive Director, a post-employment shareholding requirement could be achieved until a formal policy is implemented.
The maximum Group Ownership Share award for Executive Directors is 300 per cent of salary (unchanged from 2018). Awards in 2019 are being made as follows: GCE: 300 per cent of base salary CFO: No award COO: 275 per cent of base salary
Advice provided to the Committee: Mercer is the appointed advisor to the Committee, following a competitive tender process in 2016 and was retained during the year. The Committee is of the view that Mercer provides independent remuneration advice to the Committee and does not have any connections with the Group that may impair its independence. The broader Mercer company provides unrelated advice on accounting and investments. Mercer is a founding member and signatory to the UK Remuneration Consultants Code of Conduct which governs standards in the areas of transparency, integrity, objectivity, confidentiality, competence and due care, details of which can be found at www.remunerationconsultantsgroup.com. During the year, Mercer attended Committee meetings upon invitation and provided advice and support in areas such as market and best practice, regulatory and governance developments, drafting the remuneration report, and benchmarking pay and performance. Fees payable for the provision of Remuneration Committee services in 2018 were £89,870, based on time and materials.
Operation Benefits may include those currently provided and disclosed in the annual report on remuneration.
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.
4 Threshold RWAs reflect the proportion of significant investments and deferred tax assets that are permitted to be risk-weighted instead of deducted from common equity tier 1 (CET1) capital. Significant investments primarily arise from the investment in the Group’s Insurance business.
– Group vulnerability strategy and associated actions being developed throughout the transformation programme. – Digital principles are being agreed across the Group, primarily aimed at preventing material conduct residual risk and giving customers an optimal, informative and fair buying journey to mitigate the increased risks. – Technology risks, including those related to machine learning, are escalated and discussed through governance to ensure ongoing monitoring of any emerging unintended consequences. – Emerging customer risks, including those pertaining to vulnerable customers, are managed through customer segmentation strategy governance throughout the change lifecycle.
– Working closely with industry bodies to understand and manage the impact of benchmark transition in other geographies. – Transition project established and the appointment of an IBOR Transition Director as accountable executive. – Working with our customers to ensure they understand the risks or outcomes they might face from transition. – Establish a clear client communication strategy for all new IBOR linked products. Consider appropriate client communications for legacy contracts as the market end-state position evolves. – Implement an internal communication strategy and ensure that all relevant staff are aware and have the tools and training required.
The Chief Risk Officer is accountable for developing and leading an industry-wide recognised Risk function that adds value to the Group by: providing a regular comprehensive view of the Group’s risk profile for both current and emerging key risks, and associated management actions; proposing Group risk appetite to the Board for approval (with input from the business areas and Risk division), and overseeing performance of the Group against risk appetite; developing an effective RMF which meets regulatory requirements for approval by the Board, and overseeing its execution and compliance; and challenging management on emerging risks and providing expert risk and control advice to help management maintain an effective risk and control framework.
Measurement The process for credit risk identification, measurement and control is integrated into the Board-approved framework for credit risk appetite and governance.
Measures such as expected credit loss (ECL), risk-weighted assets, observed credit performance, predicted credit quality (usually from predictive credit scoring models), collateral cover and quality and other credit drivers (such as cash flow, affordability, leverage and indebtedness) are used to enable effective risk measurement across the Group.
Models The performance of all models used in credit risk is monitored in line with the Group’s governance framework – see Model risk on page 159.
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 paid all or part of the interest on the mortgage on behalf of the customer. The Income Support for Mortgage Interest programme changed from a benefit to a government loan, with effect from 6 April 2018. The Group estimates that customers representing approximately £0.4 billion (2017: £1.6 billion) of its mortgage exposures are receiving such support.
Enhanced product governance framework to ensure products continue to offer customers fair value, and consistently meet their needs throughout their product life cycle; reviewed and challenged by Group Product Governance Committee (GPGC).
Enhanced complaints management through effectively responding to, and learning from, root causes of complaint volumes and FoS change rates.
Property insurance risk is a key risk within the General Insurance business, through Home Insurance. Exposures can arise, for example, in extreme weather conditions such as flooding, when property damage claims are higher than expected.
Table 1.29: Minimum requirement for own funds and eligible liabilities An analysis of the Group’s current transitional MREL position is provided below.
Senior unsecured securities issued by Lloyds Banking Group plc 20,213 10,815
3 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 2018 to 31 December 2018). The average of 5.5 per cent compares to 5.3 per cent at the start and 5.5 per cent at the end of the quarter.
Financial assets at fair value through profit or loss 54 – 2,646 2,700 – 5,190 – 150,639 155,829 158,529
For further information on defined benefit pension scheme assets and liabilities please refer to note 35 on page 219.
Other than those disclosed in note 11 to the financial statements, we have not provided non‑audit services to the Group or the parent company in the period from 1 January 2018 to 31 December 2018.
Appointment Following the recommendation of the audit committee, we were appointed by the directors on 21 December 1995 to audit the financial statements for the year ended 31 December 1995 and subsequent financial periods. The period of total uninterrupted engagement is 24 years, covering the years ended 31 December 1995 to 31 December 2018. The audit was tendered in 2014 and we were re‑appointed with effect from 1 January 2016. There will be a mandatory rotation for the 2021 audit.
Consolidated statement of comprehensive income for the year ended 31 December
Issue of ordinary shares 162 – – 162 – – 162
Changes in non‑controlling interests – – – – – (242) (242)
The financial information has been prepared under the historical cost convention, as modified by the revaluation of investment properties, financial assets measured at fair value through other comprehensive income, trading securities and certain other financial assets and liabilities at fair value through profit or loss and all derivative contracts. As stated on page 80, the directors consider that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2018 179
(N) Foreign currency translation Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). Foreign currency transactions are translated into the appropriate functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when recognised in other comprehensive income as qualifying cash flow or net investment hedges. Non‑monetary assets that are measured at fair value are translated using the exchange rate at the date that the fair value was determined. Translation differences on equities and similar non‑monetary items held at fair value through profit and loss are recognised in profit or loss as part of the fair value gain or loss. Translation differences on non‑monetary financial assets measured at fair value through other comprehensive income, such as equity shares, are included in the fair value reserve in equity unless the asset is a hedged item in a fair value hedge.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2018 185
Fees payable for the audit of the Company’s current year annual report 1.5 1.5 1.5
Cash deposits of £4,102 million (2017: £3,507 million) which support the debt securities issued by the structured entities, the term advances related to covered bonds and other legal obligations are held by the Group. Additionally, the Group had certain contractual arrangements to provide liquidity facilities to some of these structured entities. At 31 December 2018 these obligations had not been triggered; the maximum exposure under these facilities was £88 million (2017: £95 million).
The most significant economic assumptions included in the model are risk‑free yield and investment volatility.
The Group operates a number of funded and unfunded pension arrangements, the majority, including the three most significant schemes, are funded schemes in the UK. All these schemes are operated as separate legal entities under trust law and are in compliance with the Pensions Act 2004. All of the Group’s funded UK defined benefit pension schemes are managed by a Trustee Board (the Trustee) whose role is to ensure that their Scheme is administered in accordance with the Scheme rules and relevant legislation, and to safeguard the assets in the best interests of all members and beneficiaries. The Trustee is solely responsible for setting investment policy and for agreeing funding requirements with the employer through the funding valuation process. The Board of Trustees must be composed of representatives of the Company and plan participants in accordance with the Scheme’s regulations.
Net amount recognised in the balance sheet 1,146 509 2018 £m 2017 £m
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Preferred securities £m 6.461% Guaranteed Non‑voting Non‑cumulative Perpetual Preferred Securities 600
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2018 231
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Exercised/lapsed (includes entitlements of former key management personnel) (1) (2) (9)
Note 47: Contingent liabilities and commitments continued Residential mortgage repossessions In August 2014, the Northern Ireland High Court handed down judgment in favour of the borrowers in relation to three residential mortgage test cases concerning certain aspects of the Group’s practice with respect to the recalculation of contractual monthly instalments of customers in arrears. The FCA has been actively engaged with the industry in relation to these considerations and has published Guidance on the treatment of customers with mortgage payment shortfalls. The Guidance covers remediation for mortgage customers who may have been affected by the way firms calculate these customers’ monthly mortgage instalments. The Group is implementing the Guidance and has now contacted nearly all affected customers with any remaining customers anticipated to be contacted by the end of March 2019.
Bank and building society certificates of deposit 84 1,021 – 1,105
Gains recognised in the income statement within other income 439 – 439 202 – 202
Liabilities held at fair value through profit or loss – 7,085 11 7,096
Asset‑backed securities: Corporate and other debt securities 4,934 217 5,151 4,250 365 4,615
In addition, securities held as collateral in the form of stock borrowed amounted to £51,202 million (2017: £61,469 million). Of this amount, £49,233 million (2017: £44,432 million) had been resold or repledged as collateral for the Group’s own transactions.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2018 267
Accretion of discounts and amortisation of premiums and issue costs 1,947 1,701 465
Loans and advances to customers 472,498 (10,474) – (10,474) 14 462,038
Financial assets at amortised cost 482,752 (12,748) (419) (13,167) 14 469,599
With the exception of IFRS 17 ‘Insurance Contracts’ and certain other minor amendments as at 19 February 2019 these pronouncements have been endorsed by the EU.
Distributions on other equity instruments, net of tax2 – – – (330) (330) – (330)
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2018 277
Note 1: Basis of preparation and accounting policies The Company has applied International Financial Reporting Standards as adopted by the European Union in its financial statements for the year ended 31 December 2018. IFRS comprises accounting standards prefixed IFRS issued by the International Accounting Standards Board and those prefixed IAS issued by the IASB’s predecessor body as well as interpretations issued by the IFRS Interpretations Committee and its predecessor body. The EU endorsed version of IAS 39 Financial Instruments: Recognition and Measurement relaxes some of the hedge accounting requirements; the Company has not taken advantage of this relaxation, and therefore there is no difference in application to the Company between IFRS as adopted by the EU and IFRS as issued by the IASB.
Financial liabilities: Debt securities in issue – – – 10,886 10,886
My 360 Living Limited 50% Strategic Business Centre, Blue Ridge Park, Thunderhead Ridge, Glasshoughton, West Yorkshire,
Neilson Active Holidays Group Ltd 65.29% Locksview, Brighton Marina, Brighton, BN2 5HA i & Nexinto Ltd 81.65% 2 Chester Row, London, United Kingdom, SW1W 9JH xx & 81.65% xxi 100% xxii
Osprey Aviation Services (UK) Ltd 89.25% Blackwood House, Union Grove Lane, Aberdeen, AB10 6XU xx & 89.25% xxi
RUSSELL INVESTMENT COMPANY PLC 15 Russell Euro Fixed Income Fund 33% Russell Sterling Bond Fund 35%