Annual Report and Accounts 2017
RNS Number : 8119N
Released: 13:53 11-Aug-2017
IG Group Holdings plc
11 August 2017
IG Group Holdings Plc (“IG”, "the Company"), a global leader in online trading, announces that its Annual Report and Accounts for the year ended 31 May 2017 (“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:
Printed copies of the Annual Report will be posted on 18 August 2017 to those shareholders who have requested it.
In compliance with DTR 6.3.5, the following information is extracted from the Company’s Annual Report (page references are to pages in the Annual Report) and should be read in conjunction with the Company's Full Year 2017 results announcement issued on 18 July 2017 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 Annual Report in full.
The principal risks set out below are extracted from pages 37 to 41 of the Annual Report and are repeated here solely for the purpose of complying with DTR 6.3.5.
IG’s Risk Taxonomy categorises the principal risks faced by the firm into five areas: the risks inherent in the regulatory environment, the risks inherent in the commercial environment, business model risk, operational risk and conduct risk. The major risks identified within each of these areas are summarised in the table below, and overleaf we provide an overview of how IG seeks to manage them.
Principal risk areas
Regulatory environment risk
The risk that the regulatory environment in which the Group operates changes in a way that has an adverse effect on the Group’s business or operations.
The risk that the Group’s performance is affected by failure to adopt or implement an effective business strategy, through competitors offering more attractive products/services or prolonged adverse market conditions.
Strategic management risk
Market conditions risk
Business model risk
The risk faced by the Group arising from the nature of its business and its business model.
Capital adequacy risk
The risk of loss resulting from inadequate or failed internal processes, people activities, systems or external events.
The risk that the Group is unable to attract and retain the staff it requires to operate its business successfully.
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.
Markets and financial crime
Regulatory environment risk
IG operates in a highly regulated environment which is continually evolving. IG defines regulatory environment risk as the risk that the regulatory environment in any of the jurisdictions in which the Group currently operates, or may wish to operate in, changes in a way that has an adverse effect on the Group’s business or operations, through reduction in revenue, increases in costs or increases in capital and liquidity requirements.
The Group operates to the highest regulatory standards and leads the industry in the way in which it deals with its clients. The Group maintains a strong relationship with its key regulators and an active dialogue with them to keep abreast of impending regulatory developments. In the last year, there has been a series of significant regulatory proposals, particularly from UK and other European Union country regulators, to impose restrictions on the provision of leveraged products to retail clients. The proposals have included a range of measures from leverage restrictions, requirements for additional risk warnings, restrictions and bans on marketing, and outright bans on the provision of CFDs and binary options. The timeframes for the final rules from some of the consultation processes are uncertain.
The Group has responded to all relevant consultations, with each of the regulatory proposals analysed in depth. A comprehensive analysis has been presented to regulators through a series of detailed response documents and consultation meetings. The Group has engaged with a broad range of interested parties to explain its stance on the issues raised. Where applicable, in addition to the comprehensive analysis in support of the firm’s position on each issue, IG has put forward alternative rule changes that it considers would be more likely to achieve the outcomes that regulators are seeking to achieve.
The Board has been actively involved in overseeing the formation and execution of IG’s response to these proposals, receiving regular updates from the Executive Committee advising on the regulatory and legal position and appropriate response strategy.
Within regulatory environment risk, the Group also includes the risk of significant adverse changes in the way in which the Group itself, or the Group’s business, is subject to taxation. Examples of the tax risk faced by the business include the risk of the imposition of a financial transactions tax, which could severely impact the economics of trading, and the risk that the basis under which the Group is taxed, in any of the jurisdictions in which it operates, changes adversely.
The Group defines commercial risk as the risk that the Group’s performance is affected by a failure to adopt or implement an effective business strategy, by new or existing competitors offering more attractive products or services, or by a prolonged period of adverse market conditions.
The Group seeks to mitigate its strategic management risk through the Board’s regular, thorough review and challenge of the Group’s strategy and the performance of the various strategic initiatives taken. The Board holds an annual strategy day to consider and agree the strategic priorities for the business. The Board also considers specific strategic actions and initiatives during its normal schedule of Board meetings.
The Group’s strategy will be reviewed again in the context of the outcome of the various regulatory consultation papers discussed above.
The Group operates in a highly competitive environment, including from some unregulated and illegal operators. The Group seeks to mitigate competitor risk by maintaining a clear distinction in the market in terms of product, service and ethics, and by closely monitoring the activity and performance of its competitors, including detailed comparison of the terms of the product offers.
IG regards itself as the leader in its market, and given the Group’s strong ethical values, unlike some of its competitors, the Group does not deploy questionable practices that can be commercially attractive to clients (such as offering excessive leverage). However, the Group seeks to ensure that its product offering remains attractive, taking into account the other benefits that the Group offers its clients, including brand, strength of technology and client service quality. This allows the business to provide a competitive offering overall and manage competitor risk without compromising the Group’s values.
The Group’s trading revenue reflects the transaction fees paid by clients less the transaction costs incurred in hedging market exposures. The extent of client trading activity and the number of active clients in any period are the key determinants of revenue in that period. The ability to attract new clients and the willingness of clients to trade depends upon the level of opportunities clients perceive are available to them in the markets. The Group’s revenue is therefore partly dependent upon market conditions.
The Group seeks to mitigate market conditions risk through detailed review of daily revenue analysis, monthly financial information and other Key Performance Indicators (KPIs), and regular reforecasts of its expected financial performance reflecting the latest and expected market conditions. The Group uses these forecasts to determine actions necessary to manage performance in the context of market conditions.
The Group updates its investors and market analysts on its revenue performance on a regular basis, including quarterly updates and pre-close statements, and engages with investors and market analysts to manage the risk that the impact of market conditions is reflected in performance expectations.
Business model risk
IG defines business model risk as the risks faced by the Group arising from the nature of its business and its business model, including market risk, credit risk, liquidity risk and capital adequacy risk.
Market risk (audited)
IG takes market risk for the purpose of facilitating instant execution of client trades. The business manages this market risk by internalising client flow (allowing clients’ trades to offset each other) and hedging when the residual exposures reach defined limits. The Group’s real-time market position-monitoring system allows it to monitor its market exposure against its market risk limits continuously. If exposures exceed pre-determined limits, hedging is undertaken to bring the exposure back to the limit.
IG has a Market Risk Policy which sets out how the business manages its market risk exposures. The Market Risk Policy incorporates a methodology for setting market position limits, consistent with the Group’s risk appetite, for each financial market in which the Group’s clients can trade, as well as certain groups of markets or assets which the business considers to be correlated. These limits are determined with reference to the expected liquidity and volatility of the underlying financial product or asset class, and represent the maximum long and short client exposure the Group will hold without hedging the net client exposure.
The Group sets its market risk limits with the objective of achieving the optimal trade-off between allowing clients’ trades to be internalised, the cost of hedging and the variability of daily revenue. The Group seeks to manage its market risk so that its trading revenue predominantly reflects client transaction fees net of hedging costs, and is not driven by market risk gains or losses.
The market risk that arises as a result of offering binary contracts, options and guaranteed stops for clients is difficult or not cost-effective to hedge, and there is often no direct underlying market which can be utilised in setting the price which the Group quotes. The Group normally undertakes no hedging for these markets, but can hedge specific positions if considered necessary. The Group aims to reduce the volatility of revenue from these markets by offering a large number of different trading opportunities, the results of which should, to some extent, offset each other irrespective of the underlying market outcome.
The Group monitors its market risk exposures on a real-time basis as well as through regular stress-testing and scenario-testing to analyse the impact of potential stress events, and takes action to reduce its risk exposures and those of its clients as appropriate.
Credit risk (audited)
IG faces the risk that either a client or a financial counterparty fails to meet their obligations to IG, resulting in a financial loss.
As a result of offering leveraged trading products, IG accepts that client credit losses can arise as a cost of its business model. Client credit risk principally arises when a client’s total funds deposited with the Group are insufficient to cover any trading losses incurred. In addition, a small number of clients are granted credit limits to cover running losses on open trades and margin requirements.
Client credit risk is managed through the application of the firm’s Client Credit Risk Policy.
The business sets margin requirements that reflect the market price risk for each instrument, and uses tiered margining so that larger positions are subject to proportionately higher margin requirements. The business offers training and education to clients covering all aspects of trading and risk management, which encourages them to collateralise their accounts at an appropriate level in excess of the minimum requirement. In addition to cash, the Group also accepts collateral in the form of shares from clients with a share dealing account.
The business further mitigates client credit risk through the real-time monitoring of client positions via the close-out monitor (COM), and by giving clients the ability to set a level at which an individual deal will be closed (the ‘stop’ level or ‘guaranteed stop’ level). We also require less experienced clients to use limited risk accounts, while offering the option of a limited risk account to all other clients.
The COM is an automated liquidation process which automatically identifies accounts that have broken the liquidation threshold. Where client losses are such that their total equity falls below the specified liquidation level, positions will be liquidated, resulting in reduced credit risk exposure for the Group.
Clients placing trades with guaranteed stop levels pay a small premium in the event that the stop is triggered. With a guaranteed stop, the maximum loss is known at the point of trade. The Group’s limited risk account combines this trade-by-trade protection with the assurance that a client can never lose more than the total amount of equity they hold in their account.
The COM, client-initiated ‘stops’ and limited risk accounts all result in the transfer of an element of the market risk from the client to the Group. This market risk arises following the closure of a client position, as the Group (subject to the market risk limits discussed above) may hold a corresponding hedging position that will, assuming sufficient market liquidity, be unwound.
IG has significant financial exposure to a number of financial institutions, owing to the placement of financial assets at banks and the hedging of market risk in the wholesale markets, which requires the Group to place margin with its hedging brokers.
Financial institution credit risk is managed through the application of the Group’s Counterparty Credit Management Policy. Financial institution counterparties are subject to a credit review when a new relationship is entered into, and this is updated semi-annually (or more frequently as required, eg upon changes to the financial institution’s corporate structure). Proposed maximum exposure limits for these financial institutions, reflecting their credit rating and systemic position, are reviewed and approved by the Executive Risk Committee.
The Group actively manages the credit exposure to each of its broking counterparties, settling or recalling balances at each broker on a daily basis in line with the collateral requirements. As part of its management of concentration risk, the Group is also committed to maintaining multiple brokers for each asset class.
The Group is responsible under various regulatory regimes for the stewardship of client monies. These responsibilities include the appointment of and periodic review of institutions with which client money is deposited. The Group’s general policy is that all financial institution counterparties holding client money accounts must have minimum short and long-term ratings of A-2 and A- respectively, although in some operating jurisdictions where accounts are maintained to provide local banking facilities for clients, it can be problematic to find a banking counterparty satisfying these minimum ratings requirements. In such cases the Group may use a locally systemically important institution. These criteria also apply for the Group’s own bank accounts held with financial institutions.
In addition, the majority of deposits are made on an overnight or breakable term basis which enables the Group to react immediately to any deterioration in credit quality, and deposits of an unbreakable nature or requiring notice are only held with a subset of counterparties which have been approved by the Executive Risk Committee.
Liquidity risk (audited)
Liquidity risk is the risk that the Group is unable to meet its financial obligations as they fall due.
The Group’s approach to managing liquidity is to ensure it has sufficient liquidity to meet its broker margin requirements and other financial liabilities when due, under both normal circumstances and stressed conditions. These liquidity requirements must be met from the Group’s own liquidity resources, as client money cannot be used for its operations.
The Group holds liquid assets to enable the funding of broker margin requirements, to ensure that appropriate prudent margins and buffers are held in segregated client money accounts in order to fully protect clients’ funds and assets to support the growth of the business and its need for capital, and to maintain a liquid assets buffer.
The Group manages its liquidity centrally, and key liquidity decisions are discussed at the Executive Committee and Executive Risk Committee.
The Group carries out an Individual Liquidity Adequacy Assessment (‘ILAA’) each year, and while this applies specifically to the Group’s FCA-regulated entities, (as liquidity is centrally managed through these entities), this process provides the context for determining the mitigating actions that would be taken in the event of stressed liquidity conditions for the whole Group.
The Group uses a number of measures for managing day-to-day liquidity risk, including the level of total liquid assets of same-day available cash and forecasted cash requirements.
The Group is required to fund margin payments to brokers on demand. Broker margin requirements are driven by the gross hedging positions held by the Group. The value of these positions and the margin requirements are in turn driven by the number of active clients, the level of client activity, the make-up of the total client exposure, exchange rates, interest rates and the value of instruments.
In addition to its liquid assets the Group mitigates its liquidity risk through maintaining access to committed unsecured bank facilities. The Group regularly stress-tests its liquidity forecasts to validate the appropriate level of facilities it holds, and draws down on the facility at least once during each year to test the process for accessing that liquidity.
The Group produces detailed short-term liquidity forecasts and stress-tests, such that appropriate management actions or liquidity facility draw-down can occur prior to a period of expected liquidity demands.
Capital adequacy risk
The Group seeks to ensure that it has sufficient capital to operate its business successfully and to meet regulatory requirements. The Group manages its capital resources with the objectives of facilitating business growth, maintaining its dividend policy and complying with the regulatory capital resources requirement set by the FCA and other global regulators in jurisdictions in which the Group’s entities operate.
The Group undertakes an annual Internal Capital Adequacy Assessment Process (ICAAP) through which it assesses its capital requirements, including through a series of stress-testing scenarios. The ICAAP document is reviewed and challenged by the Executive Risk Committee and the Board Risk Committee and is then reviewed, challenged and approved by the Board.
The firm monitors its capital resources and capital requirements daily, calculating the credit and market risk requirements based on the exposures at the end of each business day, to assess the total capital requirement and available headroom. The firm maintains an additional internal warning indicator threshold with its Board performance reporting, and breaches, if any, would be escalated to the Board with a recommendation for appropriate remedial action.
IG operates a regulated business and is required to hold sufficient regulatory capital at the Group level, as well as in each individual regulated entity, to cover its risk exposures.
The Group is supervised on a consolidated basis by the UK’s Financial Conduct Authority (FCA). In addition to its two UK FCA-regulated entities, the Group’s operations in Australia, Japan, Singapore, South Africa, United States, Switzerland and Dubai are regulated on an entity basis. Individual capital requirements in each regulated entity are taken into account when managing the Group’s capital resources.
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people activities, systems or external events. IG includes, within operational risk, the risk that the Group is unable to attract and retain the staff it requires to operate its business successfully.
IG recognises that operational risk arises in the execution of all activities undertaken by the Group, and identifies and manages operational risk in four categories: technology risk, people risk, process risk and risk from external events.
The Group continues to develop its operational risk framework to ensure visibility of risks and controls, clear accountability for controls and escalation and reporting mechanisms, through which risk events are identified and managed and appropriate action is taken to improve controls.
The Group is rolling out its Risk and Control Self-Assessment (RCSA) methodology, focused on areas of the business identified as a priority, and has introduced a new operational risk event self-reporting process which provides increased visibility over events and control actions to be taken, which are monitored through a consolidated Control Action List.
IG is heavily dependent on technology to supply its service to clients and to run its internal processes. Technology risk is managed through the Group’s Technology Risk Management Framework, and is overseen by the Group’s Technology Risk Committee. The Group seeks to manage system outage risk through processes for prevention, including capacity assessment and management of single points of failure, processes for detection of emerging system or application hotspots using real-time monitoring systems, and processes for correction with a well-established incident management process embedded in the Group.
Information security is managed by a dedicated information security team. The threat of attacks from outside the Group, such as DDoS and hacking, are managed through several layers of control to provide in-depth defence, including volumetric scrubbing, multiple firewalls, an intrusion detection system and anti-virus scanners to block incoming emails containing malware. The Group undertakes regular penetration tests to detect vulnerabilities, and receives intelligence on emerging threats from an external organisation. Information security risks from inside the Group, such as virus outbreaks and data loss, are managed through several layers of controls, including data loss prevention controls to detect leakage of sensitive data and the application of network policies, end-point protection and proxy servers.
IG is dependent upon attracting and retaining the staff it requires to operate its business successfully, and has an established HR management framework with processes and controls to manage that risk.
The Group’s people strategy has four themes: clarity and measurement, focused on creating clear policies and measurement to shape and track how people are performing; performance and reward, to ensure that people are motivated to deliver high performance; talent and growth, to enable individuals to develop to their full potential; and working environment, to enable teams and the Group as a whole to operate in a constructive and collaborative way.
The Group operates a clear set of controls and a range of indicators to manage, monitor and mitigate people risk. This includes an annual employee engagement survey, performance check-ins, measurement and analysis of employee turnover, talent identification, succession and development planning and internal recruitment. New employees are subject to pre-work checks.
The Group has undertaken a significant programme of work to develop and communicate the Group’s vision and values that is intended to promote a cohesive, positive and progressive culture to support the delivery of the Group’s business objectives.
Within people risk, the Group also identifies the risk of loss intentionally or unintentionally caused by an employee, such as employee error and employee misdeeds, issues relating to employment, including disputes, and risks relating to employment law, health and safety and HR practices. If policies are breached, or employees behave inappropriately, the Group has a disciplinary framework to address and resolve issues.
The Group faces risks related to the design, execution and maintenance of key processes, including process governance, clarity of roles, process design and execution. Process risk also includes record-keeping failures, regulatory compliance failures and reporting failures.
Management are responsible for implementing an appropriate control framework and ensuring that all staff are aware of their responsibilities. It does this through the maintenance of policy and procedure documents, training, risk and control self-assessments that identify key controls and highlight areas for improvement, and the production and review of appropriate management information.
Financial reporting risk is managed by the finance function. The Audit Committee receives papers and presentations from both finance management and External Auditors to allow the Committee to assess the integrity of financial reporting, and to conclude whether the presentation of financial information
externally, including through the Annual Report, is fair, balanced and understandable.
Regulatory compliance and record-keeping risk is managed by the compliance function. Compliance keeps an up-to-date understanding of regulatory requirements and maintains policies to ensure that IG continues to comply with its regulatory obligations, including AML and KYC, account opening and client on-boarding, PEP and sanctions, gifts and hospitality and conflicts of interest. The established compliance monitoring programme is designed to, among other matters, detect any failure of the Group to comply with its regulatory obligations.
External events risk
The Group faces the risk of loss as a result of damage to physical and non-physical property or assets, or the inability to access property or operate its business arising from natural or non-natural external causes.
The protection of property and other assets from external events is managed through a mix of risk avoidance, risk mitigation, operational controls and risk transfer mechanisms. The Group has well-developed security, business continuity and disaster recovery procedures in place, commensurate with the scale and nature of the operations it has in particular locations. The Group’s key operational hubs are supported by appropriate disaster-recovery facilities.
The Group has a global insurance programme in place to cover a number of insurable risks, and reviews this programme annually.
IG recognises and manages the risk that the Group’s conduct may pose to the achievement of fair outcomes for consumers, or to the sound, stable, resilient and transparent operation of the financial markets. The Group has implemented a conduct risk strategy that aims to analyse the conduct risks that may arise, and sets out how those risks are managed and mitigated. It also sets out specific controls used to manage conduct risk. The Group seeks to ensure that all employees are aware of the importance of managing conduct risk through programme conduct risk training and awareness.
The Group manages and monitors the risk of clients failing to understand the functionality of our products and suffering poor outcomes. The Group recognises that some of its products are not appropriate for some consumers and operates a process to identify potential new clients for whom the product may not be appropriate. The Group supports clients with education and training, and offers account types that limit a customer’s risk. Such accounts are mandatory for less experienced and less wealthy clients. Client outcomes are monitored and reported to the Board.
The Group recognises the risk of causing poor market outcomes if proper controls are not in place, for example, to detect instances of market abuse which must then be reported on. Clients may also attempt to use IG to commit fraud or launder money, and the Group has designed its systems, controls and monitoring programmes to mitigate and detect such issues.
The Group recognises the risk that the actions of its staff can result in poor outcomes for clients, or the financial markets. The Group seeks to ensure that its staff are appropriately trained, managed and incentivised to ensure that their behaviour and activities do not inadvertently result in poor outcomes for clients or the markets.
The compliance function operates a compliance monitoring programme and a series of ‘deep dive’ reviews to assess conduct risk in specific areas or processes. The Group also reviews remuneration policies and incentive schemes to ensure that they are appropriate and conducive to good conduct by staff.
Statement of director's responsabilitie
The following responsibility statement is extracted from the Statement of Directors' Responsibilities on page 95 of the Annual Report and is repeated here solely for the purpose of complying with DTR 6.3.5. The statement relates to the full Annual Report and not the extracted information presented in this announcement or the Full Year Results announcement.
The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulation.
Company law requires the Directors to prepare Financial Statements for each financial year. Under that law, the Directors have prepared the Group and 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 profit or loss of the Group and Company for that period. In preparing these Financial Statements, the Directors are required to:
• Select suitable accounting policies and apply them consistently
• State whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the Financial Statements
• Make judgments and accounting estimates that are reasonable and prudent
• Prepare the Financial Statements on a going-concern basis, unless it is inappropriate to presume that the Group and the Company will continue in business
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company’s transactions, and to disclose with reasonable accuracy at any time the financial position of the Group and Company 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, Article 4 of the IAS Regulation.
The Directors are also responsible for safeguarding the assets of the Group and Company, and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.
The Directors consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group and 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 Group and Company Financial Statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group and profit of the Company
• The Directors’ Report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that it faces
In the case of each Director in office at the date the Directors’ Report is approved:
• So far as the Director is aware, there is no relevant audit information of which the Group and Company’s Auditors are unaware
• They have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Group and Company’s Auditors are aware of that information.
On behalf of the Board
Chief Executive Officer
18 July 2017
For further information, please contact:
Director of Investor Relations and Corporate Affairs 020 7573 0026
Neil Doyle / Ed Berry 020 3727 1141 / 1046
IG empowers informed, decisive, adventurous people to access opportunities in over 15,000 financial markets. With a strong focus on innovation and technology, the company puts client needs at the heart of everything it does.
IG’s vision is to be a global leader in retail trading and investments. Established in 1974 as the world’s first financial spread betting firm, it continued leading the way by launching the world’s first online and iPhone trading services.
IG is now an award-winning, multi-platform trading company, the world’s No.1 provider of CFDs* and a global leader in forex. It provides leveraged services with the option of limited-risk guarantees, and offers an execution-only share dealing service in the UK, Australia, Germany, France, Ireland, Austria and the Netherlands. IG has recently launched a range of affordable, fully managed investment portfolios, to provide a comprehensive offering to investors and active traders.
It is a member of the FTSE 250, with offices across Europe, including a Swiss bank, Africa, Asia-Pacific, the Middle East and the US, where it offers on-exchange limited risk derivatives via the Nadex brand.
*Based on revenue excluding FX (from published financial statements, October 2016).