Back to Regulatory news service

Annual Report and Accounts 2016

Posted:
9/8/2016

RNS Number : 6994G
Released 13:47 09-Aug-2016
IG Group Holdings plc
9 August 2016

IG Group Holdings Plc ("the Company"), a global leader in online trading, announces that its Annual Report and Accounts for the year ended 31 May 2016 (“Annual Report”) has been published on the Company’s website www.iggroup.com.

In compliance with Listing Rule 9.6.1, the Annual Report has been submitted to the National Storage Mechanism and will shortly be available for inspection at:

www.Hemscott.com/nsm.do

Printed copies of the Annual Report will be posted to those shareholders who have requested it on 19 August 2016.

Additional information

In compliance with DTR 6.3.5, the following information is extracted from the  Company’s 2016 Annual Report and Accounts (page references are to pages in the Annual Report) and should be read in conjunction with the Company's Full Year 2016 results announcement issued on 19 July 2016 which can be found at www.iggroup.com.  Together these constitute the information required by DTR.6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This information is not a substitute for reading the Company’s 2016 Annual Report and Accounts in full.

The principal risks set out below are extracted from pages 46 to 53 of the 2016 Annual Report and Accounts and are repeated here solely for the purpose of complying with DTR 6.3.5.

Principal risks

The Directors have carried out a robust assessment of the principal risks facing the Company. This is a continual process particularly in the regulatory environment under which we operate. We prepare an ICAAP, ILAA and Recovery and Resolution Plan each year all of which focus on the risks we face, stress-testing of our business model and projections to ensure the business is solvent, liquid and viable. Our principal risks and the mitigation actions taken are detailed below:

Key Risk

Mitigating actions

REGULATORY RISK

 

Regulatory risk is one of our most significant risks and we look at it from three different angles:

Change risk
is the risk that one of our regulators introduces new regulations or the regulatory environment itself changes impacting on the way we operate our business.

Expansion risk
is the risk that policy and regulation in jurisdictions where we do not currently operate remain onerous and closed to our business model.

Breach risk
is the risk that we breach a regulation that applies to our business, leading to a client or market detriment, sanctions, fines, reputational damage or, in extreme situations, loss of license.

  • We engage with regulators and policymakers in the jurisdictions we operate or intend to expand our product offering into, as part of policy consultations and by investing in public relations programmes ensuring we have access to up-to-date information on regulatory change.
  • We participate in discussions with regulators that are considering changing their regulations in order to allow retail derivative trading.
  • Our compliance, legal and risk teams provide a robust line of defence, ensuring that our processes and controls are effective in ensuring compliance with regulatory obligations.
  • We work closely with our regulators to ensure that we operate to the highest regulatory standards and can adapt quickly to regulatory change.
  • We are committed to engaging proactively with regulators and industry bodies, continuing to support changes which promote protection for clients and greater clarity of the risks they face.

OPERATIONAL AND INFORMATION TECHNOLOGY (IT) RISK

 

This is the risk of financial loss, disruption or damage to our reputation due to inadequate or failed internal processes and IT systems.

These risks can also arise from human error or external events that we cannot influence.

Cyber risk is a constant threat in the modern online environment.

The reliability of our client trading platforms is key to delivering our strategy.

  • We have designed and implemented a system of internal controls to manage operational risk in line with the Risk Appetite Statement and Risk Management Framework.
  • We run a complete disaster recovery solution to ensure we provide clients with a consistent and uninterrupted level of service.
  • We operate a fully functional secondary site with real-time replication of all systems across the two locations and fully independent power supplies. We support these systems with on-going business continuity planning and regular testing.
  • We invest significantly in the technology infrastructure to ensure that these platforms are operationally stable, with system access being centrally controlled.
  • Our investment supports the resilience and reliability of the platform, ensuring low levels of latency, maintaining and testing system capability under significant load and conducting penetration testing.
  • The Executive Risk Committee reviews our Key Risk Indicators on a monthly basis, a process which includes monitoring levels of core system uptime and deal latency.
  • We have a dedicated team which has implemented a robust, multi-layered system, providing round-the-clock monitoring and intruder-prevention controls.

 

MARKET RISK

 

This is the risk that the fair value of financial assets and financial liabilities will change due to movements in market prices.

IG takes market risk in order to facilitate real-time client dealing and as such, taking market risk is inherent to delivering quality service to clients.

  • This is managed on a real-time basis, monitoring all client positions against market risk limits set by the Board for ‘operational efficiency’.
  • We hedge most of our residual market risk exposure, not taking proprietary positions based on an expectation of market movements. However, not all net client exposures are hedged and therefore the Group may have a residual net position in any of the financial markets in which it offers products up to the market risk limit.
  • We invest in technology that enables real-time and constant monitoring of our market exposure. If exposures exceed our pre-agreed limits, our risk-management policy requires the positions hedged to bring the exposure back into line with these limits.

 

CREDIT RISK

 

This is the risk that a counterparty fails to perform its obligations, resulting in financial loss to the Group. The principal sources of credit risk are from financial institutions and individual clients.

Individual client credit risk can arise where there are significant, sudden movements in the market, due to high general market volatility or specific volatility relating to an instrument in which the client has an open position. This can lead to a client’s deposited funds being insufficient to cover trading losses.

Financial institutions credit risk

  • All financial institutions are subject to ongoing credit review.
  • Exposure limits are set and approved by the Executive Risk Committee.
  • We regularly monitor key metrics, including balances held and changes in short-term and long-term credit ratings.

Individual client credit risk

  • Only clients that pass certain suitability criteria are accepted.
  • We run training programmes to educate clients in aspects of trading and risk management, as well as encouraging them to collateralise their accounts to an appropriate level.
  • We conduct a pre-deal credit check on every client order.
  • We operate a number of risk management tools for clients to manage their exposures, including: guaranteed and non-guaranteed stops, limit orders, extended trading hours, trading via mobile platforms.
  • Our overall credit risk exposure is managed through real-time monitoring of client positions via our ‘close-out monitor’ (COM) and through the use of tiered margining.
  • The COM is an automated process whereby accounts which have fallen below the liquidation threshold are automatically identified and closed.
  • We only grant credit against unrealised losses for a very small number of generally long-standing clients, with credit terms such that any losses arising are payable immediately on the closure of transactions.

COMPETITOR RISK

 

This is the risk that the market proposition of our competitors is more compelling, leading to a loss of clients and revenue for the Group. Additionally, this is a risk that the actions of our competitors affects the way that our regulators view our industry.

  • We recognise that we operate in a highly competitive industry and the emergence of smaller firms domiciled in less regulated environments brings a variety of risks.
  • We continuously monitor our competitor activity, pricing and operations including through Investment Trends surveys.
  • We monitor the potential impact of key innovation from our competitors as well as poor competitor activity which may have consequences with our regulators.

LIQUIDITY RISK

 

This is the risk that we will be unable to meet payment obligations as they fall due.

  • Due to the very short-term nature of our financial assets and liabilities, we do not have any material mismatches in our liquidity maturity profiles. Short-term liquidity ‘gaps’ can arise, due to our commitment to segregate all client funds.
  • Total available liquidity is monitored on a daily basis, including the committed unsecured banking facilities.
  • Daily stress tests are carried out and the level of committed unsecured bank facilities is validated by stress testing our three year liquidity forecast.

 

CONDUCT RISK

 

This is the risk that the Group’s conduct poses to the achievement of fair outcomes for consumers or to the sound, stable, resilient and transparent operation of the financial markets.

  • Our Group conduct risk strategy puts consumer and market outcomes at the heart of the business. All client calls are recorded and our compliance team monitor these on a regular basis.
  • Training is being rolled out to fully embed the conduct risk strategy into the current business practices and culture of the Group.
  • We evaluate suitability and only offer access to products where knowledge and wealth considerations have been evaluated.

REPUTATIONAL RISK

 

This is the risk of damage to the perception of the Group by public opinion, its customers, investors or any other interested party.

  • We actively monitor steps and changes being made by regulators and the industry ensuring that the Group remains compliant. This includes ongoing training for all employees.

 

  • We have a dedicated investor relation team dealing with shareholders, journalists and the members of the public on all matters that may affect the reputation of the Group.
  • We continue to embed a culture and tone from the top of doing the right thing for our clients, our staff and our industry.

PEOPLE RISK

 

This is the risk that the Group has an incorrect level and mix of people to execute its business strategy, combined with the inability to attract, develop, motivate and retain talented employees. 

  • We regularly review the Group’s resource requirements, talent mapping and succession planning including the most appropriate locations to deploy our staff.
  • We operate a remuneration system which is linked to revenue performance and a bi-annual appraisal system to provide regular assessment of individual performance and identification of training and development needs.
  • Benchmarking of remuneration packages of all employees is undertaken annually.
  • The Group invites all employees to participate in the annual employee survey to gauge employees’ satisfaction and feedback on improvements.
  • We continue to invest in the development of our people with tailored training to meet their needs.

 

Regulatory change risks

As the regulatory environment continues to evolve, there are a number of events, policy initiatives and proposals in development that may impact or have already impacted our sector as described below.

 

CHANGE AND IMPACT ON GROUP

IMPACT LEVEL

STATUS AND MITIGATING ACTIONS

UK/EU Referendum – a change to the UK’s membership in the European Union: The Group’s business in continental Europe is offered pursuant to the EU passporting regime for financial services. On 23 June 2016, the UK elected for the UK to leave the European Union. Any change to the UK’s membership status of the European Union could have an impact on how the Group is able to operate in the European Union.

High

We expect there to be a period before any changes are effective, that will allow for alternative options to be considered and implemented. We continue to monitor
developments carefully.

ESMA committee on speculative products: A committee of the European regulator ESMA (European Securities and Markets Authority) has been established to consider the marketing and selling of speculative products (CFDs, forex and binaries) to retail clients across the European Union under MiFID (Markets in Financial Instruments Directive). The intention of the committee is to ensure that there is regulatory convergence across the European Union. Guidelines on the marketing and selling of speculative  products have been issued and we expect further clarifying practices to be issued. We do not consider that our interpretation of MiFID and its requirements is materially different to ESMA’s interpretation. However, any material change in interpretation or the introduction of any new requirements by ESMA in relation to how our industry should market or sell its products across the European Union may have a material impact on our European business.

Medium

We have expended significant efforts throughout the year to understand the many stakeholders’ interests. We continue to monitor developments carefully.

French marketing restrictions and Belgian marketing and product restrictions:
In France, there are proposed measures that would restrict the ability for our products to be advertised electronically to retail clients. A proposed law has been submitted for consideration and the impact will depend on whether the measures are introduced and, if so, the form in which they are introduced.
In Belgium, a regulation has been passed, but is yet to be approved, restricting the types of products that can be offered to retail clients and marketing practices in relation to those products. We believe the proposed restrictions are aimed at providers with a presence in Belgium and therefore will not impact our business.

Medium

We have expended significant efforts throughout the year to understand the many stakeholders’ interests. We continue to monitor developments carefully.

Financial Transactions Tax (FTT) in the European Union: The Enhanced Cooperation FTT effort, involving 10 of the 28 member states, has continued this year. It remains unclear what the ultimate outcome of the Enhanced Cooperation FTT will be. Progress to this point has been extremely slow. There remains the political will within a group of member states for the introduction of an Enhanced Cooperation FTT, although this group has decreased in number since last year. The lack of detail makes the potential impact on our revenue from Europe difficult to assess.

Medium

We continue to monitor developments carefully.

Markets in Financial Instruments II Directive (MiFID II): The MiFID II dossier has continued to develop this year. The MiFID II and Markets in Financial Investments Regulation (MiFIR) Level One texts have been adopted and the majority of the detailed Level Two texts will be finalised shortly. The application of MiFID II will be delayed by one year from January 2017 to January 2018. MiFID II provides new powers to regulators to intervene in certain circumstances and prohibit or restrict the marketing, distribution or sale of financial products. The exercise of these powers in relation to our products by a regulator would have a negative impact on our business. Other than the potential exercise of these powers, we remain of the view that MiFID II is unlikely to pose a threat to our UK and European businesses.

 

Medium

We continue to monitor MiFID II carefully and to take part in industry consultations where appropriate.

European Markets Infrastructure Regulation (EMIR): The main impact of this legislation on our business is increased reporting requirements to trade repositories. In the medium-to-longer term the risk mitigation measures for over the counter trading will increase slightly IG’s margin requirements with some of our hedging brokers.

Low

The remaining rules are close to being finalised. The risk mitigation measures are not expected to impact us until September 2020.

Packaged Retail and Insurance Based Investments Products Regulation (PRIIPS): This will impose an obligation on us from January 2017 to provide our UK and European clients with information about our products in a standardised form. We do not anticipate this having a negative impact on our business.

Low

We are putting together a Key Investor Information Document (“KIID”) which will be provided to UK and European clients from January 2017.

Capital Requirements Directive IV (CRD IV) and Capital Requirements Regulation (CRR): The European Union began implementing these rules from 1 January 2014 and further requirements are to be introduced in the coming years. The most significant changes for IG relate to changes in capital requirements and liquidity requirements that are being phased in. There are also new corporate governance and remuneration obligations that are not expected to have a significant impact.

Low

We have modelled the impact of these changes through to full implementation of requirements in 2020 and do not expect any significant impact to our capital or liquidity positions.

Monetary Authority of Singapore (MAS) regulatory framework for margined derivatives: As previously  reported, in 2013 the MAS confirmed that it would push forward with its proposal to increase margin requirements for non-accredited investors on a forex trade from 2% to 5%, thereby reducing leverage from 50 times to 20 times. Although these rules have not yet been introduced, we consider there is a good possibility they will be introduced in the future. If introduced, it is intended that the rules will not apply to accredited investors, defined by virtue of their wealth or income level.

Low

We believe that the majority of IG’s revenue currently comes from clients who would qualify for accredited investor status. In addition, the use of guaranteed stops enables clients to further manage leverage levels.

Base Erosion and Profit Shifting (BEPS): The Organisation for Economic Cooperation and Development (OECD) has developed proposals to address perceived international tax avoidance by high profile multinationals. The final proposals for each focus area of the BEPS action plan have been agreed. Countries will now implement the proposals and have agreed to continue work on BEPS until 2020. None of the action plans are expected to significantly impact the Group’s tax profile.

Low

We will continue to monitor the impact of the implementation of the BEPS proposals in countries where we operate.

 

Statement of Directors' responsibilities

The following responsibility statement is extracted from the Statement of Directors' Responsibilities on page 101 of the 2016 Annual Report and Accounts and is repeated here solely for the purpose of complying with DTR 6.3.5. The statement relates to the full 2016 Annual Report and Accounts and not the extracted information presented in this announcement or the Full Year Results announcement.

Statement of Directors' responsibilities

The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the Financial Statements in accordance with applicable law and regulations.

The Companies Act 2006 requires the Directors to prepare Financial Statements for each financial year. Under this law, the Directors have prepared the Group and parent company Financial Statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Under company law, the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company, and of the Group’s profit or loss for that financial year. In preparing these Financial Statements, the Directors are required to:

  • Select suitable accounting policies and apply them consistently
  • Make judgements and accounting estimates that are reasonable and prudent
  • State whether applicable IFRSs as adopted by the European Union and IFRSs issued by the IASB have been followed, subject to any material departures disclosed and explained in the Financial Statements
  • Prepare the Financial Statements on a going-concern basis, unless it is inappropriate to presume that the Company will continue in business.

Legislation in the United Kingdom governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.

The Directors are responsible for ensuring that the Group and the Company keeps adequate accounting records. These records must be sufficient to show and explain the Group and the Company’s transactions and disclose the financial position of the Group and the Company with reasonable accuracy at any time. They must also enable the Directors to ensure that the Financial Statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the Group Financial Statements, Article 4 of the IAS Regulation.

The Directors are responsible for safeguarding the assets of the Group and the Company, and for taking reasonable steps to prevent and detect fraud and other irregularities.

The maintenance and integrity of the Group’s website is also the Directors’ responsibility.

Responsibility statement

It is the Directors’ opinion that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group and the Company’s performance, business model and strategy.

Each of the Directors, whose names and functions are listed in the Corporate Governance Report, confirms that, to the best of their knowledge:

  • The Financial Statements, which have been prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Group and the Company and the undertakings included in the consolidation taken as a whole
  • The Strategic Report and the Directors’ Report included within this Annual Report provide a fair review of the business’s development and performance, the Group and the Company’s position and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that the Group and the Company face.

On behalf of the Board:

Peter Hetherington
Chief Executive Officer
19 July 2016

End

For further information, please contact:

IG Group

Kieran McKinney

Head of Investor Relations          020 7573 0026

FTI Consulting

Neil Doyle / Ed Berry      020 3727 1141 / 1046

IG is a global leader in online trading, providing fast and flexible access to over 10,000 financial markets – including shares, indices, forex, commodities and binaries.

Established in 1974 as the world’s first financial spread betting firm, IG’s aim is to become the default choice for active traders globally. It is an award-winning multi-platform trading company, the world’s No.1 provider of CFDs* and a global leader in forex, and it now offers an execution-only stockbroking service in the UK, Australia, Ireland, Germany, Austria and the Netherlands.

It is a member of the FTSE 250, with offices across Europe, Africa, Asia-Pacific, the Middle East and the US, where it offers limited risk derivatives contracts via the Nadex brand.

*Based on revenue excluding FX, published financial statements, September 2015.