Credit risk – The risk that debtors will default.
A major loss could have a serious effect on group profit. Although loans to insurance broking finance companies can be substantial, we have a claim on the underlying agreements which are considerably smaller. This is an ongoing situation. There has been no change in this risk.
Any losses are likely to come from relatively small debts, therefore these would have little impact on liquidity or solvency. Money is only lent for periods up to one year through regulated introducers who guarantee the loans. Borrowing limits are set based on prudent underwriting principles. Impairment reviews are regularly conducted to identify potential problems early.
Liquidity risk – A lack of funding to finance our business.
If our funding had been halved for the whole of the 2018 year, and there had been no changes in overheads, there would still have been a pre-tax profit of approximately £0.7m. The threat to solvency or own liquidity through a reduction in funding is therefore minimal. This is an ongoing situation. There has been no change in this risk.
Our bankers have supported us since 2002 and last year increased our funding by 50%. They have renewed our facility for another year and have indicated, so far as they are able, that they have no wish to withdraw that support. Other lines of credit have since been opened to us and we have our own resources to draw on.
Cash flow interest rate risk – An increase in bank rate means that loans already made need to be covered by new borrowing at a higher rate.
Loans already made will be effectively charged at a lower margin for part of the borrowing term. In any realistic scenario, liquidity and solvency would not be significantly affected. This is an ongoing situation. There has been no change in this risk although there was a rate increases in the year.
Management is in regular contact with its bankers and routinely reviews the financial situation in the economy. Loans made are relatively short term (no more than twelve months with the average at ten) so any increase is likely to have a fairly short-term impact.
IT risk –Disruption to or failure of our IT systems.
Persistent failures would have an enormous impact on our business and could lead to its collapse. Clearly, this would affect solvency. However, our controls are such that even a minor disruption is very quickly picked up and action taken. We have never had this type of failure. This is an ongoing situation. With our own system being introduced this risk will reduce from previous years.
There are in place robust business continuity procedures and security measures in the event of IT failures or disruption. We have developed our own system which is currently being rolled out for testing This will give more control than we have previously had.
Conduct risk –Any action that leads to customer detriment or has an adverse effect on market stability or effective competition.
Failing to bring conduct risk in line faces regulatory action, fines, and reputational damage, which can harm us for years beyond the event. This is an ongoing risk.
The board sets the minimum standards required and provides oversight to monitor that these risks are managed effectively and escalated where appropriate.
There are rigorous controls in place to ensure risk is minimised in the group. The major areas are:
For selling – Staff have approvals at authorised levels to lend; they obtain financial and other credit information in respect of the borrower and the partner; arrears are reviewed regularly; proper legal documentation is supplied for signing; cash advances are made by the financial controller. On an ongoing basis reviews are carried out as each new tranche of borrowing is requested. Where necessary, authorisation is sought from the head of operations or the CEO.
FCA compliance – this is monitored regularly by use of a worksheet; it is completed by either the head of operations or the CEO depending on the level of compliance required (e.g. the CEO would be responsible for reporting breaches). Compliance is reported to the board at board meetings.
Our core business is lending for insurance premiums and professional fees. This is where most of our resources go. There are, however, opportunities to expand our lending (e.g. school fees, sports clubs, home reports and estate agent fee funding), but these will only be pursued where they fall within our strict underwriting principles and where they are perceived to add value for shareholders.