10 April 2017
Capita plc
(the "Company")
Annual Financial Report
In compliance with Disclosure and Transparency Rule 4.1, the
Company announces the publication of its Annual Financial Report
for the year ended 31 December 2016.
Pursuant to Listing Rule 9.6.1, a copy of this document has been
submitted to the National Storage Mechanism and will shortly be
available for inspection at http://www.hemscott.com/nsm.do. The
document is also available on the Company's website:
www.capita.com.
Additional Information
A condensed set of the Company's financial statements and
information on important events that have occurred during the
financial year and their impact on the financial statements, were
included in the preliminary results announcement released on
2 March 2017. That information,
together with the information set out below, which is extracted
from the Annual Report and Accounts 2016, is provided in accordance
with Disclosure and Transparency Rule 6.3.5. This information
should be read in conjunction with the Company's preliminary
results announcement. This announcement is not a substitute for
reading the full Annual Report and Accounts 2016.
Risk management
Capita is not a risk averse business and seeks to leverage
growth from its appetite to risk. But given the importance and
sensitivity of its work to its clients, key risks are
identified and managed through its comprehensive Risk
Management Framework. This is designed to bring management action
to bear on uncomfortable or critical risk issues and trends,
but also where there is sufficient ‘gap’ between our residual risk
level and our appetite, to identify and act on opportunities
arising, thus making for profitable growth.
A key feature of Capita’s historic growth has been its ever
changing size and complexity. Each new sector and jurisdiction
brings new considerations and the overall risk environment, within
which we operate, continues to develop.
Our Risk Management Framework facilitates business management to
identify and manage their risks with a methodology which seeks
to sit alongside routine management practices rather than
entirely separate. This approach, undertaken in reference to 22
risk categories, and the appetite thresholds is reconfirmed on an
annual basis by the Board. The reporting of the residual risk
profiles is fed into governance at every level of the
business for assessment and challenge.
To provide a ‘top down’ assessment of risks to the overall
Group, we further operate a set of 12 Corporate Risks
which are higher level articulations of the key risks
which the Board can track. Four of these represent areas which, if
crystallising to a significant degree, could have an immediate,
material detrimental impact on the corporate health of Capita.
Eight are risks which can hamper profitable growth. These Corporate
Risks are reviewed and confirmed by the Board annually and hence
help populate our Principal risks on page 50.
Our risk appetite
In our Risk Management Framework we define risk appetite as the
degree of risk the Group is prepared to accept in the pursuit of
its objectives before specific action is deemed necessary to reduce
it. In determining this, Capita reconciles two thresholds:
-
A risk tolerance: defined as the bearable level of variation
Capita is willing to accept around specific objectives.
-
A risk critical limit/concern: defined as the maximum risk
Capita can bear and remain effective in delivering its
strategy.
Capita has established the tolerance and critical limit/concern
risk appetite to help the business to understand the relative
significance of any of the business risks faced and better
prioritise risk monitoring and control activities. Specifically,
risk appetite helps determine the degree of control that needs to
be applied to a particular area of risk. To focus risk reporting,
emphasis is clearly given to the reporting of risks that are
categorised at uncomfortable or critical limit to ensure
appropriate action is being taken.
Principal risk categories
Corporate risks to the objectives of
Capita plc
We operate a total of 22 risk categories within the risk
management framework which are kept under regular review. In
accordance with provision C.2.1 of the 2014 revised Code, the
Directors confirm that they have carried out a robust assessment of
the principal risks facing the Group, including those that would
threaten its business model, future performance, solvency or
liquidity.
The Board also operates 12 corporate risks which represent the
principal risks to the objectives of Capita plc (our ‘top down’
risks). Our risk governance process maps the output of the 22
categories (‘bottom up’ risks) against these corporate risks and
thus ensures these are monitored on an ongoing basis across
all levels of the business.
1. Significant failures in internal
systems of control
Description
A material failure in Capita’s business processes may result in
unanticipated financial loss or reputation damage.
2016 Mitigation and Outlook
Capita operates a framework of internal control designed to
minimise the risk of unanticipated operational failure, financial
loss or damage to our reputation.
Like any major business, risk incidents and control breakdowns
can lead to isolated issues – for example fraud incidents and
operational risk incidents. Whilst 2016 has seen a number of these
limited incidents, they remained well below a level of materiality
which would cause a concern to the Board. We continue to seek that
business management are actively engaged in maintaining an
appropriate control environment, supported by risk functions led by
the Group risk and compliance Director, with independent assurance
from Group internal audit. In some businesses there is also use of
external certifications and agreed upon procedure reviews to assure
the control frameworks.
2. Lack of corporate financial
stability
Description
The effective management of its financial exposures and access
to finance is central to preserving Capita’s profitability.
The Group is exposed to financial market risks and may be
impacted negatively by matters such as loss of economic priced
funding and extreme forex volatility.
2016 Mitigation and Outlook
Capita continually invests in the improvement of its systems and
processes in order to ensure sound financial management.
The Group manages treasury risk through monitoring day to day
liquidity as well as carefully managed funding of our acquisition
strategy. Capita has been able to successfully raise new funds at a
competitive rate throughout the year.
However, 2016 has seen a deterioration of business performance
during the second half of the year. This deterioration has had an
effect on financial performance of the Group and a higher debt
ratio.
The Board has acknowledged the need to bring the debt ratio back
into Capita’s medium-term target ratio of 2x to 2.5x and has
launched a number of initiatives to address this through 2017.
These include the planned sale of the majority of the Asset
Services division and our specialist recruitment businesses. Open
and regular communication with its lending institutions takes
place.
3. Failures in information security
controls
Description
Capita must protect its customer and corporate data and have in
place loss prevention and detection measures.
A significant breach of security could impact the Group’s
ability to operate and deliver against its business objectives.
2016 Mitigation and Outlook
Capita takes measures ranging from physical and logical access
controls to encryption, or equivalent technologies, raising
employee awareness and monitoring of key partners to manage its
information security risks.
2016 has seen heightened ‘cyber risk’ and Capita is not alone in
facing an increase in recorded attacks. However, those attacks have
to date not led to material breaches. Incidents, where they do
occur, are reviewed for root cause analysis and we work with our
business partners and national agencies to promote further
corporate cooperation.
We are investing more resource into the evolving threats and
enhanced regulatory framework. Further investment has been made in
threat intelligence, security management and reviews of our
systems.
4. Legal/regulatory risk
Description
Capita plc is subject to regulation primarily under UK
legislation.
The regimes which apply to the Group’s business include, but are
not limited to: Financial Services, Communication Services, and
Energy Market.
The Group is also subject to generally applicable legislation
including, but not limited to: anti-bribery, consumer protection,
data protection and taxation.
2016 Mitigation and Outlook
The Group’s ability to operate or compete effectively could be
adversely affected by the introduction of new laws, policies or
regulations, changes in the interpretation or application of
existing laws, policies and regulations or the outcome of
regulatory investigations.
The Group manages these risks through active engagement in the
regulatory processes that affect the Group’s business.
The Group actively seeks to identify and meet its regulatory
obligations and to respond to emerging requirements. For example,
in Financial Services: compliance controls and processes are in
place in the Group’s financial services businesses. Interaction
with the relevant regulatory authorities is coordinated between the
businesses compliance team, Group Risk and Legal departments. The
Group maintains appropriate oversight and reporting, supported by
training, to provide assurance that it is compliant with regulatory
requirements.
2016 has seen a number of historic compliance and legal issues
reach, or near, resolution. These include a fine from the Central
Bank of Ireland and the ongoing
enforcement investigation by the FCA into the operation of the
‘Connaught’ Fund in 2008–2009.
We continue to develop our regulatory controls to reflect the
varied regulatory regimes but also in response to the increased
focus by governments and regulators on ‘Corporate Conduct’. For
example, work is underway to position ourselves for the
implementation of the EU Data Protection Regulation, the Criminal
Finances Bill and the requirements of the Prevention of Modern
Slavery Act.
5. Adverse financial/business
performance
Description
Adverse performance against business plans can impact the wider
corporate position and undermine investor confidence. It can also
impact our ability to invest in future growth.
2016 Mitigation and Outlook
Reporting on financial performance is provided on a monthly
basis to executive management and the Board.
2016 has seen a materially lower performance by several Capita
businesses, particularly in the second half of the year. There are
a number of factors for this including a deterioration in business
confidence in a number of our key sectors following the EU
referendum and a series of sector specific issues around our
specialist recruitment business and some IT businesses. Not all of
these were risks that management identified as material in the
first half of 2016 and this has meant that mitigating actions by
management were not as timely as the Board would have planned.
The consequent lower than predicted profits for 2016 are a
result of the combination of these separate issues and this was
disclosed to investors through market announcements in September
and December.
An immediate learning from the second half of 2016 was that the
forecasting processes used within the businesses, ultimately
feeding through to the Group view, were in need of refresh and the
management discipline in their execution required refocussing. This
is likely a result of the rapid growth of the business and
consequent greater number of input reports where lower level
forecast errors/assumptions could roll up to a greater effect than
when the systems and processes were first deployed when Capita was
smaller.
Work in 2017 will focus on how these financial performance risks
can be given greater transparency, through clearer and more timely
disclosure and thus allow for contemporaneous action.
6. Failure to
innovate
Description
It is important that Capita is able to stay at the forefront of
the industry by identifying emerging trends, developing strategies
to exploit competitive opportunities and question the status quo,
striving for continuous improvement in all areas of activity.
Capita continues to monitor and engage with industry, sector and
stakeholder groups on developments in key service and product
areas.
2016 Mitigation and Outlook
Capita has a central futures team, who primarily look to harness
intelligence, insight and new technologies and processes to deliver
real value to our clients, and work alongside sector and capability
experts embedded in business across the Group.
Capita consistently deploys leading edge technologies and
methodologies developed both by external suppliers and partners and
by our own businesses. The Group has a clear transformation
governance framework to provide a consistent process to manage
change within our client organisations. Executive management
continue to develop strategies built on considering a wide range of
possible directions for the business sectors in which we operate,
and the products and services that the Group delivers to its
stakeholders.
7. Increased internal business
complexity
Description
Capita has consistently managed the pace of change, diversity
and increasing scope of our business activities. However, where we
take on major contracts with inherent complexity this increases the
operational risk of failure to manage multiple complex contract
requirements effectively with potentially adverse consequences.
Contract benefits may not be fully realised, costs of service
delivery may increase, or business as usual activities do not
perform in line with expectations.
2016 Mitigation and Outlook
The Congestion Charge, NHS PCSE and RPP are examples of complex
projects which have proved challenging for Capita but where actions
have been taken to react to any shortfalls to client expectations.
These projects prove challenging because of their inherent
complexity and whilst any operational issues are not welcome, there
is often a recognition from the client of the complexity involved.
Given Capita’s appetite for these complex projects remains, lessons
from key projects are folded back into the bidding, planning and
execution phases. A new initiative within our Transformation Team
to better assess the levels of complexity and how best to address
the ‘unknowns’ as well as the ‘knowns’ is designed to help mitigate
risks in this area in 2017.
8. Adverse changes in national,
international political landscape
Description
Capita operates and owns assets in a steadily increasing number
of geographic regions and, as a result, is exposed to a wide range
of political environments. The majority of its operations remain in
the UK.
The political risks associated with operating across a broad
number of jurisdictions and markets could affect the Group’s
ability to manage or retain interests in its business activities
and could have a material adverse effect on the profitability, or,
in extreme cases, viability of one or more of its services.
2016 Mitigation and Outlook
Political risk is managed through diversification of sectors and
operations, continuous monitoring of key UK and international
policies, and focus on the public sector and trade association
relations.
The EU referendum in June presented a shock to many observers
and whilst Capita had been shadowing the developments running up to
the vote, like many firms it could not have predicted the result or
the ensuing political turmoil in the UK.
The main downstream impact of Brexit has been experienced in the
lack of major central government outsourcing contracts coming to
market whilst Departments focus on the Brexit process and the
performance of certain Capita businesses with exposure to sectors
who have faced the most uncertainty after the vote.
Capita will actively track the developments of how the UK exits
the EU and how its businesses remaining in EU jurisdictions (such
as Ireland, Germany and Poland) can leverage opportunity.
We maintain a watching brief on the political landscape in all
of the geographies we operate in and the impact any change of
government will have on our markets.
9. Operational issues leading to
reputational risk
Description
Capita’s reputation, and that of our clients, could be damaged
by a significant adverse event leading to a loss of trust and
confidence amongst our stakeholders.
This could lead to contract retention risks, financial loss, and
in the most significant of circumstances, direct cost of
redress.
The widespread use of social media increases this risk.
2016 Mitigation and Outlook
Capita has a well proven reputational management and response
process. Close links with the business units and a central team
allow for rapid reaction to any
issues. A number of
operational issues across certain businesses and contracts in 2016
have required ongoing support. Group PR work with Group Risk and
other functions to address issues as they are raised.
10. Operational IT
risk
Description
The services that Capita provides to its stakeholders are
reliant on a robust and resilient technical infrastructure.
A failure in the operation of the Group’s key systems or
infrastructure, on which the Group relies, could cause a failure of
service to our clients, impacting contractual obligations and
negatively affecting our brand.
2016 Mitigation and Outlook
Capita makes significant investment in technology infrastructure
to ensure that it continues to support the growth of the business
and has a robust monitoring process of core systems and
services.
Performance issues and management change in our IT Services
Division have frustrated the improvement plans the Board had
planned. The delineation of focus between first class service
delivery to our businesses and also to our external client base has
been, at times, stretching and this is now being addressed through
management changes and remedial actions
The transfer of experienced Capita management to this area from
other businesses within the Group and the commitment of the Board
to address the issues which have come to the fore in 2016 will
deliver better outcomes and provide the growth platform the
businesses require. In the meantime, the Board monitors this area
as one of its critical risks.
11. Failure to effectively manage
Group’s talent and human resources
Description
People at Capita are critical to the Group’s ability to meet the
needs of its stakeholders and achieve its goals as a business.
Failure to attract or retain suitable employees across the
business could limit the Group’s ability to deliver its business
plan commitments.
2016 Mitigation and Outlook
Capita’s most valuable asset is its people, and investing in the
training and development of those people, and supporting future
talent development is a Board priority.
Capita champions diversity and develops talent through a number
of activities, including Graduate apprenticeship programmes, a
mentoring scheme, Capita Academy education and a leadership
development programme. The cost reduction actions and restructuring
in Q4 2016 and Q1 2017 will inevitably cause some impact on staff
morale and care will be taken to minimise the potential impact of
this on any service. The Board accepts that such organisational and
people changes raise people and other risks and are closely
monitoring to ensure early identification of any issues arising
during the process.
12. Weaknesses in acquisition and
contracting life cycle
Description
Capita acquisitions and client contracting fail to generate
anticipated revenue growth, synergies and/or cost savings.
2016 Mitigation and Outlook
Capita performs pre-transaction due diligence and closely
monitors actual performance to ensure we are meeting operational
and financial targets.
Any divergence from these plans will result in management action
to improve performance and minimise the risk of service penalties
or financial impact.
Executive management and the Board receive regular reports on
the status of acquisitions and bid and contract activities, with
formal review supported by commercial management and Group internal
audit.
The integration of businesses through 2016 has, in the main,
been well handled with the integration of Capita Europe a good
example of integrating systems and policies in light of differing
regulatory and legal requirements but also maintaining key controls
and growth.
However, lessons learned from less successful contracting and
integration during 2016 have been fed back into the process to
identify improvements for future growth.
Related party transactions
Compensation of key management
personnel
|
2016 |
2015 |
|
£m |
£m |
Short term employment benefits |
11.1 |
11.9 |
Pension |
0.3 |
0.2 |
Share based payments |
0.8 |
6.0 |
Total |
12.2 |
18.1 |
Gains on share options exercised in the year by Capita plc
executive directors were £6.2m (2015: £4.3m) and by key management
personnel £4.5m (2015: £3.2m), totalling £10.7m (2015: £7.5m).
During the year, the Group rendered administrative services to
Smart DCC Ltd, a wholly owned subsidiary which is not consolidated.
The Group received £40.3m (2015: £29.5m) of revenue for these
services. As at the year end the amounts receivable in relation to
these services were £7.6m (2015: £6.0m). The services are procured
by Smart DCC on an arm’s length basis under the DCC licence. The
services are subject to review by Ofgem to ensure that all costs
are economically and efficiently incurred by Smart DCC.
Capita Pension and Life Assurance Scheme is a related party of
the Group. Transactions with the Scheme are disclosed in note 32 –
Employee benefits.
The following companies are substantial shareholders in the
Company and therefore a related party of the Company (in each case,
for the purposes of the Listing Rules of the UK Listing
Authority).
The number of shares held on 17 February
2017 was as below:
Shareholder
No. of shares
% of voting rights
Veritas Asset Management
LLP*
81,163,342
12.17
Woodford Investment Management
LLP 72,080,139
10.80
Invesco Asset
Management
65,536,317
9.82
The Capital Group Companies,
Inc.
60,297,424
9.04
Baillie Gifford & Co
Limited 50,632,716
7.59
BlackRock Inc
38,567,956
5.78
*This includes the holding of Veritas Funds PLC
Responsibility Statement of Directors
in respect of the annual financial statements
The Directors confirm that, to the best of their knowledge:
-
the financial statements prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the Company and the undertakings included in the consolidation
as a whole;
-
the Directors’ report, including content by reference, includes
a fair review of the development and performance of the business
and position of the Issuer and the undertakings included in the
consolidation taken as a whole, together with a description of the
principal risks and uncertainties that they face.
Directors’ statement on the annual
report
The Directors consider the annual report taken as a whole, to be
fair, balanced and understandable and that it provides the
information necessary for the shareholders to assess the Company’s
position and performance, business model and strategy.
On behalf of the Board
Francesca Todd
Group Company Secretary
1 March 2017
Forward-looking statement
The Directors present the annual report for the year ended
31 December 2016 which includes the
strategic report, governance and audited accounts for this year.
Pages 1 to 105 of this annual report comprise a report of the
Directors that has been drawn up and presented in accordance with
English company law and the liabilities of the Directors in
connection with that report shall be subject to the limitations and
restrictions provided by such law. Where we refer in this report to
other reports or material, such as a website address, this has been
done to direct the reader to other sources of Capita plc
information which may be of interest to the reader. Such additional
materials do not form part of the report.
Contact: Francesca Todd,
Group Company Secretary, 020 7202 0641