TIDMCPI
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
GBPm GBPm
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 GBP6.2m (2015: GBP4.3m) and by key management personnel GBP4.5m (2015: GBP3.2m),
totalling GBP10.7m (2015: GBP7.5m).
During the year, the Group rendered administrative services to Smart DCC Ltd, a
wholly owned subsidiary which is not consolidated. The Group received GBP40.3m
(2015: GBP29.5m) of revenue for these services. As at the year end the amounts
receivable in relation to these services were GBP7.6m (2015: GBP6.0m). 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:
1. 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;
2. 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
END
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