Leeds Building Society Annual Report and Accounts 2021
Annual Report and
Accounts 2021
Leeds Building Society | Annual Report and Accounts 2021
Contents
Strategic Report 2
Chair’s Welcome 2
Chief Executive Officer’s Highlights 4
Business Model and Strategy 8
Climate Change 39
Principal Risks 64
Viability Statement 75
Financial Review 77
Governance 88
The Board of Directors 88
The Executive Committee 94
Corporate Governance Report 95
Nominations Committee Report 119
Audit Committee Report 126
Risk Management Report 136
Directors’ Remuneration Report 144
Directors’ Report 159
Financial Statements 162
Independent Auditor’s Report 162
Income Statements 172
Statements of Comprehensive Income 173
Statements of Financial Position 174
Statements of Changes in Members’ Interest 175
Statements of Cash Flows 176
Notes to the Accounts 177
Other Information 241
Annual Business Statement 241
Country by Country Reporting 243
Glossary of Terms 244
1. CACI’s CSDB, Stock, December 2020 to November 2021, latest data available. 2. Overall customer satisfaction in a survey of 3,283 members from January to December 2021. 3. Your Voice colleague survey,
1,312 respondents in May 2021
2021: How we performed
£22.5bn
(2020: £20.6bn)
Total assets of
86%
(2020: 86%)
We’re committed
to being a great
place to work
Colleague engagement
3
Common Equity Tier 1 Capital
38.0%
(2020: 36.3%)
Reserves available to protect
us from future problems
£4.4bn
(2020: £2.5bn)
We helped 43,000 more
people have the home
they want including
20,000 first time buyers
Gross residential lending of
93%
(2020: 93%)
We have an ongoing
commitment to be
customer focused
in everything we do
Customer satisfaction
2
An annual benefit to all
our savers of £71.5m
0.79%
to our savers
compared to the rest of the
market average of 0.29%¹
Paid an average interest rate of
£163.7m
(2020: £80.7m)
Profit before tax
£15.3bn
(2020: £14.2bn)
We helped 41,500
more people save
for their future
Savings balances
Chair’s Welcome
Year ended 31 December 2021
It has been an eventful 12 months since my last
report, when I set out the principles adopted
by the Board to guide the Society’s decision
making through the pandemic.
These were: protecting the health, safety
and wellbeing of colleagues and members;
preserving our financial security; and safely
maintaining service to our members.
I am pleased to report that adhering to these
principles, together with the outstanding efforts
of colleagues, led to an excellent performance by
the Society.
Performance
Over 2021 more normality began to return to
daily life and the recovery of the economy was
much better than might have been anticipated,
with an extremely strong housing market,
continued very low interest rates, and the return
of intense competition. However, COVID-19
developments since are a stark reminder of the
continued fragility and uncertainty the pandemic
has caused.
As the economy stabilised and the housing
market rebounded, we were keen to return to
supporting borrowers, particularly those seeking
to take their first step on to the housing ladder.
Whilst maintaining prudent lending standards
appropriate to the conditions, we were pleased
to achieve a record year for lending.
We also remained focused on borrowers facing
financial difficulties, and are pleased the vast
majority of those who required mortgage
payment deferrals during the height of the
pandemic were able subsequently to resume
normal repayments.
We’ve not lost sight of the impact of continued
low interest rates on savers and have used our
financial strength to protect them, consistently
paying above average savings rates. We
maintained branch opening throughout the
pandemic and our colleagues conscientiously
deliver a professional and personal service to our
members.
The Society achieved an exceptionally strong
financial performance in 2021 but, as a mutual,
maximising profit is not an objective. In relation
to profits, our aim over the long term is to
optimise the delivery of benefits to members
whilst generating sufficient profit to keep the
Society secure, maintain our capacity to grow
the business and invest for the future.
Leeds Building Society was established nearly
150 years ago, primarily to provide the means for
members to buy their own homes, as well as
offering a safe place for their savings. That
purpose remains as relevant today as it ever was.
Throughout the last century and a half, the
Society’s obligation has always been to consider
not just the interests of today’s members but
also to invest to ensure we can serve the needs
of future generations.
As part of a multi-year improvement
programme, we made significant investments in
2021, in technology, in our people, in our branch
network, in upgrading our data centres, and in
further strengthening our operational resilience.
These are all aimed at ensuring the Society
meets the changing needs of its members and
intermediary partners, and remains competitive.
The times we are living through illustrate clearly
the interconnectedness of all elements of
society and remind us of the Society’s obligation
to play its part in addressing challenges
confronting us all.
On climate change we are working to reduce
our environmental impact as a business and
analysing and reporting how we do this, as well
as innovating to support our members to cut
their own carbon footprint. We continue to make
progress on equality, diversity and inclusion but
recognise we have a great deal more to do. And
at the heart of our community engagement is
our partnership with national charity Dementia
UK, enabling it to reach more people needing
help, as demand for its services grows.
Board changes
In 2021 we further strengthened the Board with
new appointments which broaden not only skills
and experience in key areas but also the diversity
of our thinking. The latter was a particular
focus of our independent board effectiveness
review which is covered in more detail in the
Nominations Committee Report on page 119.
I am delighted that Rob Howse, our Chief Operating Officer, joined the Board
as an executive director. Rob joined the Society in 2019 and his extensive
experience of technology transformation and operational resilience equips
him ideally to lead our ambitious IT and change agenda.
We also welcomed Anita Tadayon as an independent non-executive director.
Anita is currently Global Portfolio & Digital Product Roadmap & Lifecycle
Director at BT Group and brings 15 years’ experience in senior transformation
and operations roles with major consumer brands, including Sky and Centrica,
as well as having led successful transformation and change delivery projects
for local and central government and primary care trusts.
In recognition of his broadened responsibilities Andrew Greenwood, formerly
Chief Risk Officer, was appointed as Deputy Chief Executive Officer.
To maintain continuity after a period of significant Board change, we
asked David Fisher to serve beyond the normal nine year maximum. David
continues to make an outstanding contribution to the Board and maintains
his independence of thought, and I am grateful to him for agreeing to extend
his service until the end of 2022. He is succeeded as Chair of the Board Risk
Committee by Neil Fuller (subject to regulatory approval), who was appointed
as a non-executive director in December 2020.
Sadly, the pandemic has prevented us from meeting members face to face for
our past two AGMs and I look forward to a time when we can safely return to an
in-person meeting. We hope we will be able to do this in 2022 but will of course
be guided by the need to safeguard the welfare of colleagues and members. In
any event, we welcome members’ questions or comments relating to Board
matters at any time – email these to agm@leedsbuildingsociety.co.uk marked
‘For the attention of Iain Cornish’.
Outlook
While the impact of the pandemic will stay with us for a long time, our focus
remains on our core purpose to bring home ownership within reach of more
people, as well as offering long term value to our savers, operating always with
an appropriate degree of prudence.
More competition has entered our markets as the economy has recovered.
Consequently, we do not expect the current elevated levels of profitability to
continue, but we do expect to maintain both an exceptional level of financial
strength and our capacity to invest for our future when it is in the interests of
current and future members.
Members can draw confidence from the fact the Society has continued to
show great resilience in the most testing of times, underpinned by the mutual
values of shared strength and co-operation.
Finally, I would like once again to thank all my colleagues for their outstanding
efforts in serving members, intermediary partners and other stakeholders,
and for supporting each other throughout the course of another highly
demanding year.
Iain Cornish
Chair
24 February 2022
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3
Chief Executive Officer’s Highlights
Year ended 31 December 2021
As I look back on another challenging year for us all, I want to begin by restating
my thanks to our members and colleagues for their continued support.
In 2021 we became more accustomed to the changing circumstances and
behaviours dictated by the pandemic and a degree of normality returned.
However, the end of the crisis is not yet in sight and the uncertainty this causes
has dragged on. Despite this, the housing market’s powerful bounce back from
summer 2020 onwards carried on through last year, leading to some of the
busiest months in our long history.
Our remarkable people have remained focused on members’ needs throughout,
delivering an extraordinary performance as we continued to move forwards
together guided by our three corporate priorities.
Safely keeping operating for the benefit of our members
In an exceptional year, our support for the housing market surpassed all
previous Society records with our biggest year ever for mortgage applications,
as we delivered on our purpose and helped to put home ownership within reach
of more people than ever before.
That record-breaking performance was just one reason 2021 was a landmark year
for the Society, with continued strong support for customers less well served by
the wider market.
This included a record 20,000 first time buyers, who are fundamental to the
housing market, and accounted for more than one in three of all our new
mortgages. In backing the Government’s new First Homes initiative,
we were proud to be the first lender to receive and complete
applications under the scheme and enable these new
members to realise their homeowning dreams.
We maintained our strong performance in shared
ownership lending as part of our affordable housing
activity, rewarded for the sixth consecutive year
with the title of Best Shared Ownership Mortgage
Lender in What Mortgage’s 2021 awards, among
other plaudits.
As the Government’s national pandemic support
tapered off, we continued to work with members
at risk of financial difficulty, helping borrowers
who took mortgage payment deferrals to exit
that scheme, and backed the industry-wide
repossession moratorium at the end of 2021,
as well as further extending our waiver of arrears
fees into 2022.
Our fantastic people are key to our
ongoing success and every day
demonstrate how mutual support
and co-operation make a difference
“
“
Another 2021 landmark was the opening of our new Leeds Central branch,
showing our commitment to the Society’s branch network and the personal
face-to-face attention so many of our members value.
The hard work to maintain branch services for members and boost phone
capacity during pandemic disruption was just one example of our colleagues’
dedication to excellent service.
We know great service comes from skilled and committed colleagues and I’m
delighted our colleague engagement scores remain at a record high of 86%,
with record customer satisfaction scores of 93% and 4 star Trustpilot rating.
We’re proud to have been named a Best Companies 3 star employer, thanks
to our fantastic people, and as we exit the most critical months of the
pandemic we’ve been supporting colleagues as they find the right
work-life balance.
Having learned from the changes we made to keep the Society running
smoothly through these unique times, we’re developing our approach
to a hybrid working model in the modern, collaborative space of our new
headquarters, to deliver greater resilience and the best outcomes for our
people, the business and our members.
Our investment to make sure the
Society is fit for the future, and keep
on improving service for members and
intermediaries, included bolstering
the size and skills of key teams, such
as data, IT and underwriting, creating
121 skilled jobs last year.
As well as direct support for members,
we understand the importance of our
intermediary partners to our success
as a lender. To save them even more
time and effort, throughout 2021 we
made additional improvements to
Mortgage Hub, our online platform,
which is now integrated with all major
sourcing systems and the most visible
result of our significant and ongoing
IT investment.
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Keeping the Society financially resilient
The extra capacity and swifter processing
underpinned by Mortgage Hub was welcome as we
handled record numbers of applications to deliver
an exceptionally strong lending performance, which
drove record profits of £163.7 million.
As a mutual, we invest our profits back into the
business for the long term benefit of our membership
as a whole, which includes support for member value,
such as paying above average rates to our savers, as
well as further strengthening our financial security.
This means we’re well placed to withstand economic
shocks and market uncertainty.
These investments will increase our costs in the
short term but are part of a clear and focused
strategy to ensure we are fit for the future at a time
of rapid technological change for us and the financial
services industry. We retain our keen focus on
efficiency and closely monitor our cost to income and
cost to mean asset ratios, which remain among the
best in our sector.
In the historic low interest rate environment, we’ve
used our financial strength to protect our members.
At the half year for 2021 we had the highest average
savings rate of any of our building society peers, as
well as the big six banks and have consistently paid
above the market average to our savings members,
which equates to £71.5 million extra in our savers’
pockets. We responded to December’s Bank Base
Rate rise by holding our standard variable rate (SVR)
to support borrowers and are supporting savers by
increasing our minimum member rate to 0.30%, one
of the highest in the market, in response to the Base
Rate rise announced earlier this month.
2021 was another award-winning year, including a
Fairer Finance Gold Ribbon for savings accounts for
the fourth year running, in recognition of our clarity
in explaining products and our savers’ high levels of
satisfaction. A clutch of industry awards for our Credit
Risk team was recognition for our innovation and best
practice in managing our lending.
Alongside our record lending activity, in 2021 we
also were able to accelerate planned progress with
our transformation projects, despite the pandemic’s
many challenges, so we can look to the future
with confidence.
We successfully completed our head office move to
Sovereign Street, cutting our carbon footprint and
delivering efficiency savings by consolidating three
central Leeds office sites into one.
Having chosen an existing building instead of
constructing a new one, the award-winning
refurbishment improved its EPC rating from D to A,
making our headquarters among the most
energy-efficient buildings in the region.
And after more than 80 years in Albion Street, our
new home offers us modern and flexible space to
accommodate changing ways of working for many
decades to come.
Ensuring meaningful engagement with members
and colleagues
The move has been warmly received by our
Leeds-based office colleagues and the building
provides plenty of room for when they are able to
return in greater numbers.
Our fantastic people are key to our ongoing success
and, even during dispersed working, every day
demonstrate how mutual support and co-operation
make a difference to each other and to our members.
In recognition of their contribution to the Society’s
success, we’ve invested in our colleagues above and
beyond our commitment to the Real Living Wage
by raising our minimum base salary to £10 per hour,
building on our existing Fair Pay Charter.
Colleagues also have welcomed our commitment as
a business to reducing our environmental impact and
striving to find ways to help our members to do
the same.
I’m pleased we were able to achieve carbon net neutral
status for scope 1, 2 and 3 (business travel) emissions,
more than a year ahead of plan. This is just one of the
stretching targets we’d set ourselves, which have
been supported by our move to our new head office.
In addition to progress in cutting the Society’s carbon
footprint, in 2021 we also began to demonstrate
our green values by making direct links between our
products and positive environmental action.
This started with the dedication of a tree for
each child’s savings account opened in branch, in
partnership with the Yorkshire Dales Millennium Trust.
We’ve already added 1,000 new native broadleaf trees
in this important habitat, and dedicated 1,500 more
with the Trust on behalf of our workforce.
We then launched our first green mortgages with
preferential deals for the most energy-efficient
homes, before becoming the first UK lender to offer
a carbon neutral mortgage, offsetting the property’s
carbon footprint for the initial fixed term, giving
the homeowner time to review and save for energy
efficiency improvements.
Housing is responsible for 16% of the UK’s total
emissions, so it’s important as a lender that we play
our part and support our members and this new and
developing market.
Of course, supporting our communities and causes
our members care about are key to our identity as
a mutual.
The second year of our national partnership with
Dementia UK saw the launch of Closer to Home,
improving access to specialist dementia care for
communities across the UK. We launched a fixed
rate bond to benefit the charity and the passion and
generosity of colleagues and members already has
taken total fundraising past £380,000.
We also maintained our successful, long-standing
partnership with Leeds Rhinos and announced our
sponsorship of Leeds 2023, a celebration of the
culture and talent in our home city.
Outlook
Our strong performance as more competition has
returned to the market means our outlook for the
future remains positive. We’ll continue to support all
our members in the low interest rate environment and
expect our net interest margin to remain robust.
Demand in the housing market remains extremely
strong and we’re confident the Society’s segmental
lending strategy, combined with our product
innovation, will enable us to keep successfully
delivering on our purpose to bring home ownership
within reach for more people, for many more
generations to come.
In common with other successful modern businesses,
we work towards a genuine purpose but have the
distinction that our purpose was the very reason we
were founded almost 150 years ago. We’ve been living
up to it ever since.
While that core purpose remains a constant, we’ll
continue to move with the times and innovate, as
we’ve always done, to remain responsive, relevant and
meet the evolving needs of our members.
As a mutual, we never take for granted that our
existence, for nearly a century and a half, is due to our
members. So to close as I started, I’m grateful to you,
our members, for your continued trust and confidence
in our Society.
Richard Fearon
Chief Executive Officer
24 February 2022
Chief Executive Officer’s Highlights continued
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Leeds Building Society | Annual Report and Accounts 2021
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Business Model and Strategy
Year ended 31 December 2021
Progress on 2021 corporate priorities
During the year, we have continued to build the right foundations in order to deliver on our corporate priorities.
The pandemic has rapidly shifted member expectations; as a result, we have been continually developing our
customer experience, propositions and services. Our activity under our corporate priorities is detailed below.
Corporate priority Progress in 2021
Safely keeping the Society operating for the benefit of our members
n
Prioritise the safety and wellbeing of colleagues
and members
n
We maintained a COVID-secure environment throughout our offices
and branch network.
n
We supported colleagues to work from home, whilst also facilitating
regular office days to maintain connections.
n
We supported colleagues’ mental and emotional wellbeing, for
example, through provision of a wellbeing hub, access to mindfulness
training and hosting our first Men’s Mental Wellbeing group
in November.
n
Prepare the Society for the post-crisis world,
ensuring we are future facing
n
We progressed a number of key strategic projects, integral to
improving both our digital and technological capabilities and improving
member and broker experience, including the launch of Lender
Connect, as well as updates to Mortgage Hub (our intermediary portal).
n
We have made significant progress in understanding and reducing our
carbon emissions and climate-related risks. We are now carbon neutral
for scope 1, 2 and 3 (business travel) carbon emissions, a year earlier
than our target, and we have been re-accredited with the Carbon Trust
Standard for Carbon. We have also launched our first ‘green’ mortgage
and savings products during the year.
n
We have continued to review our target operating model to help make
sure our operations are set up to support the needs of current and
future members.
n
Support our members, particularly as they face
financial difficulty
n
During 2021, we continued to focus on meeting customer needs,
including consistently keeping branches open despite the ongoing
pandemic, and branch colleagues provided additional telephony
capacity through a virtual contact centre.
n
Having routinely provided access to mortgage payment deferrals, we
actively supported the majority of customers in their transition back
to normal monthly payments. Recognising the vulnerabilities often
associated with financial hardship, we continued to suspend arrears
fees, whilst tailoring our support to reflect individual circumstances.
n
Keep the business running and seek to enhance
operational resilience
n
We used our learnings from our response to the pandemic to
protect our operations and boost resilience, as demonstrated by
the successful data centre migrations. Our digital proposition has
also progressed, including through our savings pilot with Hargreaves
Lansdown.
n
Appropriately balance savings and mortgage
members’ interests
n
We have remained focused on supporting those less well served by
the wider market by being one of the first mortgage lenders to join
the First Homes scheme and we’ve retained our What Mortgage Best
Shared Ownership Mortgage Lender award for the sixth year running.
n
We have also consistently offered competitive savings rates to savings
members (savings rates were on average 0.50%
1
above the market)
and we have maintained a minimum member savings rate of 15 basis
points during 2021, before the Bank Base Rate increased in December.
1 CACI’s CSDB, Stock, December 2020 to November 2021, latest data available.
Corporate priority Progress in 2021
Keeping the Society financially resilient
n
Maintain a strong capital position
n
Our strong profit performance has increased the capital we need to
support lending and survive future shocks. Common Equity Tier 1
has grown to 38.0% and all of our capital ratios remain significantly in
excess of minimum levels set by our regulators, both under today’s
rules and under upcoming known changes.
n
In March we issued a senior non-preferred debt instrument that will
strengthen our capital for the medium term and increase our resilience
should the economy go through stress in the future.
n
Maintain an effective level of liquidity above internal
and regulatory limits
n
During 2021 we’ve embedded additional tools to help us manage
liquidity dynamically and to respond to future needs in an agile way.
Using these and other tools we’ve maintained a liquidity position
significantly above internal and regulatory limits.
n
After a contraction in savings balances in 2020 (due to COVID-19),
in 2021 we attracted more members and reached record customer
savings balances of £15.3 billion. Our wholesale funding complements
this and we’ve benefitted from access to government funding under
the TFSME.
n
Achieve a resilient level of profitability
n
Our profits have grown as we’ve benefitted from an improvement in
the external economic environment, which reversed some of the credit
and fair value losses experienced in 2020 due to COVID-19. We’ve also
seen our net interest margin widen due to lower funding costs and
higher margins on new mortgages, especially in the first half of the
year. This stands us in good stead for the future, as the average fixed
rate mortgage term has increased and we expect customers will stay
with us for longer.
n
Costs have increased as we’ve invested in our colleagues, systems and
premises for the future, but we’ve kept this at a sustainable level.
n
We moved into our new head office building in May, which reduced
our three Leeds city centre locations to a single site. This will save
costs, facilitate more colleague collaboration and reduce our carbon
footprint.
n
Balance the risk-reward equation in lending choices
n
We have continued to support customers to have the homes they want
(we have helped a record 20,000 first time buyers buy their first home),
including those less well served by the wider market. For example, we
maintained support for the shared ownership sector, our specialist
segment, throughout the pandemic.
n
We’ve also re-entered market segments in 2021 that we’d paused due
to COVID-19. This has allowed us to serve a wider range of borrowers,
whilst staying within agreed risk thresholds and generating a fair return
that has contributed to our profit performance.
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Business Model and Strategy continued
Corporate priority Progress in 2021
Informing and engaging colleagues and customers
n
Ensure colleagues remain informed and engaged
n
In 2021 we maintained strong colleague engagement at 86%, with
continued support for colleagues and communities during the year as
well as communications that have enabled colleagues to stay informed
2
.
We were also accredited as a 3 star organisation by Best Companies.
For further details see the People section on pages 15 to 18.
n
Keep our members and brokers informed and
maintain trust and customer satisfaction across
all channels
n
We have continued to gain an understanding of members’ and our
wider stakeholders’ needs during the pandemic, through a number of
engagement surveys.
n
Despite significant demand for our services and a contact centre
headcount gap of around 20% for much of the year, we maintained
our record level of customer satisfaction during 2021 at 93%, and we
retained our 4 star Trustpilot rating.
n
We have been re-accredited with the Fairer Finance Gold Ribbon for
our savings products, which recognises the good customer service
we have offered to savers, our transparency and how well we handle
complaints. We have also been recognised as a top ‘ethical business’ by
Ethical Consumer, being ranked fourth in its review of savings providers
on behalf of Which?.
n
Provide a robust service to our intermediary partners
n
2021 saw Broker NPS increase by 10 points compared to 2020, to 56,
due to the very well-received deployment of Mortgage Hub.
The Society’s strategy and business model
organisation we are owned by our members, and we act in the best interest of our members and wider
stakeholders, over the long term.
We last reviewed our purpose in 2012. In light of the increasing social issues that our members and the
communities in which we operate face, we have refreshed our purpose and our priorities to deliver against this,
to ensure we remain focused on how we create social value for our stakeholders both now and in the future.
In order to shape our new purpose we have consulted a number of stakeholders, including colleagues, members
and the Board, to understand what is important to them. This review concluded that the reason the Society
was founded remains as relevant today as it did 147 years ago – to help people own a home of their own, which
remains increasingly difficult for many given the housing needs of a growing UK population and the structural
issues in the property market.
In response to that, our new purpose is: “Putting home ownership within reach of more people – generation
after generation”.
2 Colleague Your Voice survey, May 2021 – 90% of respondents agreed to the question: “I feel I get the information I need about changes in priorities and broader goals in
order to do my job well”.
Our new
purpose
Home ownership has always been an important focus for our business, as we believe more people should have
the security of owning their home. We currently help thousands of people onto and up the housing ladder each
year – however, we can and should do more to increase our efforts to be part of the solution to today’s housing
crisis, by focusing on our founders’ intention of helping people into homes of their own.
We have simplified our strategic drivers to make it clear how we will deliver on our purpose – through a ‘More
responsive model’ that adapts to the changing environment, ‘Close-the-gap innovation’ which will deliver more
opportunities to help people onto and up the housing ladder and ‘Step-up savings’ to make the Society not just
a place for great savings rates but much more beyond that. The aim of our new strategic drivers is
to drive our purpose – and to truly live up to our responsible business ambitions and deliver real value for
our members.
Strategic drivers: What we’ll deliver
Behaviours: How we’ll deliver it
More responsive model – it’s our
responsibility to serve members and society
for generations. We will build foundations that
are strong and responsive to the changing
context we will face.
Close-the-gap innovation – there are too
many barriers to people getting the home they
deserve. We will be relentless in partnering
and creating solutions to help people
onto and up the ladder of home ownership.
Step-up savings – savers are the lifeblood of
our business. For them we will create
experiences that are straightforward and
human no matter the channel, and ensure
that when people save with us they save
with purpose.
I am curious – seeking out expertise from
different perspectives in the business, and
looking outside for insight and inspiration.
I focus on what matters – doing the things
that will make the biggest difference, and
always doing the right thing for our members
and our Society.
I push forward – making decisions and
creating solutions to barriers.
I have the right conversation – facing into
difficult conversations, and celebrating
great work.
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Our business model
Our purpose is delivered through our simple business
model – providing a safe and rewarding place to save
The Society funds the majority of mortgage lending
with members’ savings, through a range of channels.
We have continued to support savers with our rates
averaging 0.79%
3
during the year. The remainder
is funded from wholesale money markets on
competitive terms, as well as reserves of previous
profits and government-supported funding schemes
aimed at increasing the level of lending across the
market.
We provide residential mortgages in the UK, through
a network of approved mortgage brokers and directly
to members through online and telephone channels,
to help members into homes of their own. We offer
mortgage products across mainstream residential,
buy to let and a range of other segments, such as
shared ownership and interest only.
3 CACI’s CSDB, Stock, December 2020 to November 2021, latest data available
Our strong liquidity position helps to make sure
that there is sufficient cash available to meet the
requirements of savers, investors and other creditors.
Assets are invested conservatively, in a range of
high quality investment instruments and across a
range of counterparties. Environmental, Social and
Governance (ESG) factors are considered when
assessing the creditworthiness of our counterparties
for liquidity investments and, if a counterparty was
judged not to meet these criteria, then the limit may
be rescinded.
We aim to generate sufficient profit through cost
efficiency and management of the net interest
margin, in order to maintain a strong capital position.
As a result, we can continue to invest in the Society
for the benefit of our membership as a whole – for
example by improving customer experience, building
digital capability, maintaining branches and enhancing
the colleague working environment.
Longer term, while we believe that our core product
lines are sustainable into the future, we expect the
markets we operate in to remain fiercely competitive
and we will need to adapt accordingly.
We continue to invest in our mortgage systems to improve efficiency, speed up processing times and improve
customer experience. This will help us to serve the evolving needs of more members, both through how
they choose to do business with us and by providing products relevant to them. We continue to review
opportunities to meet existing and new members’ needs better, including the development of our products
and distribution channels.
Where our funding comes from
n
Savers (via our branch network,
phone, online, post)
n
Wholesale markets
n
Reserves of previous profits
How we use our funding
The Society lends to help members
have the home they want, including:
n
Mainstream residential
n
First time buyers
n
Shared ownership
n
Buy to let
n
Interest only
Why we need to make profit
We are member-owned and do not pay
any shareholder dividends, however we
need to make profit to:
n
Maintain financial strength
n
Invest in the Society for the benefit
of our membership as a whole (for
example, maintaining our branch
network, improving digital capability
and customer experience, enhancing
the colleague working environment)
and to set up the business for future
success
n
Provide benefits for the communities
in which we operate
How we remain financially stable and
operationally resilient
n
By maintaining liquid investments
with strong credit rated institutions
and central banks
n
By making sufficient profit to maintain
a strong capital base
n
By having a prudent lending approach
n
By maintaining a long term strong
credit rating
n
By maintaining a multi-channel
business model
n
Ongoing investment and focus on
operational risk reduction including a
robust cyber strategy
What we need to spend
n
Costs of running the business and
investing to provide the right level of
service in an efficient way
n
Paying our colleagues fairly to attract
and retain talent
n
Paying our fair share of tax
n
Putting money aside for bad debts
A key element of our mutual business model is also providing social value to our stakeholders, and there are
some examples of how we do this on the next page.
The Responsible Business section of this report on pages 21 to 34 demonstrates the value that we have
brought to our stakeholders over recent years. It also sets out our new responsible business strategy and our
aim to drive positive social and environmental impact through what we do, now and into the future.
Business Model and Strategy continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
13
We deliver social value through the provision of…
Members and brokers
A range of mortgages to enable borrowers to achieve the basic societal need of having a home.
Our segmental focus provides access to finance for those less well served by the wider market.
Competitive savings rates on a range of simple products designed to meet the different savings
needs of our members and enable them to save for what is important to them.
A secure home for members’ savings over the longer term – our financial strength means we
are able to generate robust profits that allow us to invest in the business and make longer-term
decisions in the best interest of members.
Superior customer service – our colleagues are focused on supporting the differing and evolving
needs of our members and brokers, generating consistently high levels of satisfaction.
Colleagues
Stable employment opportunities – we offer meaningful roles that are fairly rewarded and have
a supportive and inclusive culture which creates career development opportunities for all. Our
engagement scores consistently exceed our peer benchmark.
Communities
Support for the communities in which we operate – we contribute directly to society through
the work of the Leeds Building Society Foundation, our fundraising efforts and colleague
volunteering scheme.
Environment
Products and services that reduce climate risk – the increased focus on climate risk presents
further opportunity for the traditional mutual model to evolve and deliver innovative solutions
that contribute to a sustainable future.
Third parties
Products and services through partnerships with trusted third parties who uphold the Society’s
values and align their goals and objectives with our responsible business aims.
Regulators
A strong focus on risk management and customer-centred decision making, with our ‘How
We Do Business’ standards
4
setting out how we continually strive to do the right thing for our
members, colleagues and communities.
Investors
A safe and secure investment – we maintain our financial stability through strong income
performance, a continued focus on cost efficiency and by keeping a robust liquidity position.
4 These can be found on our website at leedsbuildingsociety.co.uk/your-society/how-we-do-business/.
People
Our overarching aim is to deliver our purpose through our highly engaged colleagues.
We have remained focused on a positive colleague experience and high engagement to enable all our people
to contribute towards delivering a strong service to our members and to continue to make the Society a great
place to work.
Colleague engagement
In 2021, we were accredited as a 3 star organisation
by Best Companies, having achieved a 2 star rating
the last time we entered, in 2018. This is the highest
rating an organisation can achieve and means that we
have ‘extraordinary’ levels of colleague engagement.
This is endorsed by the results of our annual colleague
engagement survey, in which 93% of colleagues took
part and our results remained consistent with 2020.
We maintained our record engagement score of 86%
(2020: 86%),which is above the sector benchmark,
and achieved a leadership score of 84% (2020: 85%),
both positions which we are proud to maintain,
particularly at a time of disruption brought on by
the pandemic.
Wellbeing
We established our formal approach to mental
health and wellbeing in 2018. Since then, over 550
colleagues, including over 160 people leaders, have
been trained on mental health awareness. We have
over 45 active Mental Health First Aiders in place to
provide support to others and who receive continuous
professional development. Since 2018, and
through our partnership with the Building Societies
Association (BSA), the Society has trained over 100
people in other financial services organisations and
businesses in our supply chain, as Mental Health
First Aiders.
We continued to support colleagues throughout 2021,
particularly in light of the ongoing pandemic and the
challenges this created. During 2021, there has been
consistently high usage of the wellbeing hub on our
colleague intranet. We have delivered a Mindfulness
for Leaders programme with 10 of our senior leaders
Business Model and Strategy continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
15
and 26 colleagues having participated in a four week
‘Developing your Mindfulness’ programme. We have
also recognised both the World Mental Health and
World Menopause days in October and our first Men’s
Mental Wellbeing group took place in November.
Many of our head office based colleagues are working
in a hybrid way – with some of their time spent in the
office and the remaining time working from home.
Additionally, we offer a broad range of flexible working
options and patterns, supporting colleagues to
effectively balance their home and work life.
From May 2021, colleagues started to occupy our new
head office which provides a light, modern, connected
and sustainable working environment for colleagues
to thrive in. The many different types of work spaces,
carefully chosen through a detailed fit out of the
building, drives collaboration between colleagues,
which helps promote diverse thinking and increased
levels of innovation. The building also has a number
of enhanced environmental and wellbeing benefits
for colleagues, such as electric vehicle car charging
points and a fully kitted out bike store and repair area.
Working with a local manufacturer, we recycled the
old windows to make counter tops for use around the
building and 70% of the carpet tiles were made from
recycled material.
Diversity and inclusion
When our colleagues were surveyed in 2021, 93%
responded positively to the statement ‘I work in
an environment where everyone can feel included,
respected and accepted for who they are’.
We have two targets in relation to gender diversity – to
reach 33% women on the Board and in our Leadership
Team by the end of 2021. On the Board, we have
increased our gender diversity to 27% (2020: 20%) and
have further improved diversity of thought with a
non-executive director from an ethnic background. We
are currently recruiting another non-executive director
and anticipate achieving our target in 2022. We are
marginally under target at the year end for gender
representation in our Leadership Team, at 32%.
In 2021, we reviewed our diversity and inclusion
strategy aimed at continued improvement in diversity
and inclusion across the Society and to build on the
strong, inclusive culture we already have in place.
To support the delivery of our purpose, we have
re-defined our diversity and inclusion ambitions:
‘Leeds Building Society is an organisation that
anticipates and delivers great services to our
current and future members, and where all
colleagues feel valued and included for who they
are and the unique perspectives they bring’. This
is underpinned by three core motivations and areas
of focus – ‘People’, ‘Inclusive Culture’ and ‘Doing the
Right Thing’.
We have engaged with our Board and our Senior
Leadership Team to review and consider targets for
the representation of women on the Board and in our
Leadership Team, as well as ethnic representation on
the Board, Leadership Team and broader colleague
population. We believe by setting targets, we are able
to drive and track progress against our ambitions.
Additionally, we have engaged with broad ranging
and diverse groups in the Society to embed positive
practices into our processes internally.
When our colleagues were surveyed
in 2021, 93% responded positively
to the statement ‘I work in an
environment where everyone can feel
included, respected and accepted for
who they are’.
Our colleague-led forums, for gender, race equality
and mental health, which are each sponsored by a
senior leader, have continued to make progress during
the year. Additionally, a networking group has been
established, to improve understanding and awareness
of the LGBTQ+ community within the Society. Our
Accountable Executive for Diversity is Andrew
Greenwood, Deputy Chief Executive Officer and
Executive Director.
Highlights this year include:
n
We have renewed our investment in Mission
INCLUDE, with a further 10 colleagues
participating in this mentoring programme,
focused on broader diversity, including ethnicity,
religion, disability, sexual orientation, behavioural
and background diversity.
n
We have piloted a reverse mentoring programme,
pairing six senior leaders with six colleagues of
different and diverse ethnic backgrounds, who
are sharing their lived experiences working at
the Society.
n
We have also increased our commitment to
mentoring female talent specifically within our
Operations function, with 26 colleagues in active
mentoring partnerships following a successful
programme that supported nine colleagues in the
Customer function.
n
We introduced a virtual work experience
programme supporting ten year 9 students, at risk
of falling out of education, in collaboration with
Ahead Partnership.
The gender composition of our workforce is detailed below:
2021 2020 2019 2018
Female Male Female Male Female Male Female Male
Colleagues Number 838 507 829 499 838 486 822 465
Percentage 62% 38% 62% 38% 63% 37% 64% 36%
Leadership Team Number 40 85 33 70 33 66 31 62
Percentage 32% 68% 32% 68% 33% 67% 33% 67%
Directors* Number 3 8 2 8 3 9 3 10
Percentage 27% 73% 20% 80% 25% 75% 23% 77%
*Number includes executive and non-executive directors
Business Model and Strategy continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
17
Reward
We are proud to have been recognised as a Living
Wage employer since 2019, reflecting our ongoing
commitment to paying the Real Living Wage. Our fair
reward principles ensure we offer fair pay, which is
benchmarked externally and is designed to attract
candidates with the skills and experience needed. All
colleagues participate in a bonus scheme, which is
linked to the Society’s objectives, their own individual
objectives and demonstration of behaviours. We
have a Fair Pay Charter, which is available to view on
our website and since September 2021 have paid a
minimum of £10 per hour.
Colleagues, excluding the Senior Leadership Team,
received salary increases in both April and September
during 2021, as the Society better understood the
economic climate and its performance as the
year progressed.
Developing our talent
In 2021, we continued to support our colleagues’
development, by enhancing our suite of digital
learning, with a particular focus on our management
population. As the Society shifted towards a hybrid
way of working, we produced manager toolkits to
support optimising this way of working and ‘how to’
guides, to help colleagues host interactive, engaging
virtual meetings. We have significantly increased our
apprenticeship levy spend through extending our
customer contact centre programme and introducing
new apprenticeship programmes, including a
leadership and management qualification.
We are proud to have been recognised
as a Living Wage employer since 2019,
reflecting our ongoing commitment
to paying the Real Living Wage.
The Board
The Board recognises the crucial role that colleagues
play in our success and the service we offer to
members, and all Board members play an active role
in supporting this. Since 2019, Lynn McManus,
Non-Executive Director and Chair of the
Remuneration Committee, has had responsibility for
representing colleagues’ views at the Board. Lynn
has met with our Colleague Association regularly
throughout 2021 and has a keen interest in colleague
matters, views and opinions.
Communication continues to be an important part
of keeping colleagues in touch with our progress,
successes and to remain connected, ever more so in
an environment of hybrid working arrangements. We
have continued to work hard to engage and inform
colleagues through a range of virtual communication
briefings, videos, cascades and our colleague intranet.
Our colleague mobile app, Totem, allows all our
people to stay in touch informally around matters that
interest them.
Our colleague turnover is 17.5%, which is within our
target range (2020: 12.7%).
Key performance indicators
The Society measures its performance against its strategic drivers using a number of key performance
indicators (KPIs), including both financial measures, as defined under IFRS, and non-financial measures.
Alternative Performance Measures (APMs) given below are in common use across the financial services industry
and are useful in explaining the performance of the business. The APMs are defined in the Glossary on page 244.
Key performance
indicator
What is measured Performance 2021 update
More responsive model
Profit before tax Profit before tax, as reported in
the Income Statement, creating
capital to support future business
growth.
2021
2020
2019
2018
2017
£163.7m
£80.7m
£88.0m
£116.9m
£120.9m
Profit increased significantly
due to strong underlying net
interest income and reversals
of 2020 charges for credit
losses and fair values, which
reflect the improved economic
environment.
Net interest margin
5
The difference between interest
received on assets and interest
paid on liabilities, measured as a
percentage of mean assets. This
is the Society’s main source of
income.
2021
2020
2019
2018
2017
1.31%
0.99%
1.00%
1.15%
1.24%
Net interest margin benefitted
from lower funding costs due to
competitive wholesale pricing
and government support as well
as strong mortgage margins.
Market savings rates remained
low but we continued to pay
above average rates.
Common Equity Tier
1 (CET1) ratio
The highest quality form of
capital that mainly comprises
retained earnings and other
reserves, as a proportion of risk
weighted assets (RWAs). This is
measured to help make sure that
the Society retains an excess
over the regulatory minimum.
2021
2020
2019
2018
38.0%
36.3%
33.6%
31.3%
2017
14.5%
Our strong profitability has
increased CET1 and capital
remains well above internal and
regulatory limits, placing us in a
good position to withstand future
shocks. The increase in 2018 was
due to the Society being granted
Internal Ratings Based (IRB)
permission.
UK leverage ratio Another measure of capital
strength. Measured as the
Society’s Tier 1 capital as a
proportion of relevant total
assets excluding central bank
reserves.
2021
2020
2019
2018
2017
6.1%
5.8%
5.3%
5.5%
5.5%
The increase in profits in the
year was more than enough
to support the balance sheet
growth and increase the leverage
ratio. In 2021, the regulator
confirmed that this measure
is not binding for the Society;
however, we still consider it to be
a relevant indicator.
Cost to income ratio
5
A cost efficiency ratio which
measures costs in relation
to the Society’s income. It is
calculated as the percentage of
the Society’s total income spent
on administrative expenses and
depreciation and amortisation.
2021
2020
2019
2018
2017
43.9%
51.0%
53.5%
44.8%
43.2%
Cost control remains an
important area of focus for
us and the relative increase in
income in 2021 is much larger
than the increase in costs,
resulting in an enhanced ratio.
5 Alternative Performance Measure, defined on page 244.
Business Model and Strategy continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
19
Key performance
indicator
What is measured Performance 2021 update
More responsive model (continued)
Cost to mean asset
ratio
6
An additional cost efficiency ratio
which measures costs in relation
to the Society’s total assets. It
is calculated as administrative
expenses plus depreciation and
amortisation, divided by the
average total assets.
2021
2020
2019
2018
2017
0.58%
0.48%
0.50%
0.52%
0.56%
Costs have increased in the
year due to an acceleration
of investment in capabilities,
including people and systems.
This will enable future business
and asset growth and the
underlying cost control remains
robust.
Colleague
engagement score
Colleague engagement is
measured annually across all
colleagues. Society goals are
delivered by highly engaged
colleagues.
2021
2020
2019
2018
2017
86%
86%
82%
81%
80%
Colleague engagement remained
high during 2021 at 86%, due to
continued support for colleagues
and communities during the year.
It remains ahead of our sector
benchmark.
Close-the-gap innovation
New (gross)
residential lending
6
The value of residential lending
advanced by the Society during
the year, including loans for
house purchases, remortgages
and further advances.
2021
2020
2019
2018
2017
£4.4bn
£2.5bn
£3.5bn
£3.8bn
£4.1bn
After new lending was
suppressed in 2020 due to
COVID-19, the market has
bounced back very strongly and
we have been able to support
more borrowers than ever before.
New lending reached 1.4% of the
market, above our natural market
share of 1.2%.
Net residential
lending
6
Gross residential lending, less
repayments of principal and
redemptions.
2021
2020
2019
2018
2017
£1.5bn
£0.0bn
£1.0bn
£1.0bn
£1.8bn
Record new lending has led to an
increase in our net lending, which
has returned to pre-pandemic
levels.
Number of days from
mortgage application
to offer
The number of business days
it takes to issue a mortgage
offer from initial receipt of the
application.
2021
2020
2019
2018
2017
18
24
15
16
16
We experienced strong demand
for mortgages during 2021,
with record application volumes
received, as members reassessed
their property needs following
the pandemic and given the
stamp duty holiday. Despite
this, the number of days from
mortgage application to offer
reduced by six days compared to
2020, as we continued to invest in
resource to support our lending
operations, and following the first
full year deployment of our new
lending system, Mortgage Hub.
6 Alternative Performance Measure, defined on page 244.
Business Model and Strategy continued
Key performance
indicator
What is measured Performance 2021 update
Close-the-gap innovation (continued)
Broker Net Promoter
Score (NPS)
Demonstrates how likely brokers
are to recommend the Society to
their peers. Calculated using the
percentage of people who are
extremely likely to recommend
and subtracting those who are
unlikely to recommend.
2021
2020
2019
2018
56
46
54
49
Broker NPS increased in 2021
following improvements to the
application process as a result of
the implementation of Mortgage
Hub. In addition to this, the
Society’s products and criteria
received positive feedback from
brokers throughout 2021.
Step-up savings
Savings balances The value of shares and deposits
held by the Society’s members
and other customers, as reported
in the Statement of Financial
Position.
2021
2020
2019
2018
2017
£15.3bn
£14.2bn
£14.5bn
£13.9bn
£13.1bn
Savings balances have increased
to fund higher mortgage lending
and are now at record levels.
Savings rate benefit The annual benefit to all our
savers of paying above market
rates to savers, based on the
Society’s weighted average
savings rate compared to the rest
of market rate.
2021
2020
2019
2018
2017
£71.5m
£82.8m
£88.5m
£81.5m
£75.0m
Wherever we can, we have
sought to maintain savings rates
as high as possible for as long
as possible, but rates remained
lower across the market in 2021
than in 2020. We paid an average
rate of 0.79% against the rest
of the market rate of 0.29%,
benefitting members by £71.5
million in the year
7
.
Customer
satisfaction
The percentage of customers
surveyed who described
themselves as quite, very or
extremely satisfied with the
service received from the
Society.
2021
2020
2019
2018
2017
93%
93%
91%
91%
91%
Customer satisfaction has
sustained the record high
performance of 2020 at 93%,
demonstrating our focus on
members’ needs and high levels
of service.
Responsible business
As we conclude the first year of our responsible business strategy (2021 to 2025), we can evidence how our
focused efforts have had many tangible and positive impacts on the stakeholders and communities we serve.
It has highlighted the importance of incorporating our core purpose into all that we do, while raising our
ambition to prioritise social and environmental issues, alongside our underlying business performance targets.
It demonstrates what social purpose can achieve and reinforces our commitment to providing social value,
building on our success as we move towards our 150th year, in 2025.
During 2021, the Society has maintained its focus on reducing our impact on the environment and has
already achieved a net zero position on scope 1, 2 and 3 (business travel) as well as launching innovative new
propositions for customers to support the transition towards net zero with the launch of our first ‘green’
mortgage. The Partnership for Carbon Accounting Financials (PCAF) is helping us to develop the parameters to
further understand our scope 3 financed emissions. Alongside the wider industry, we have more work to do to
evolve and refine this analysis and model the factors within and outside of our control so that we can align our
plans to the requirements of the 2015 Paris Agreement and the latest climate science.
7 CACI’s CSDB, Stock, December 2020 to November 2021, latest data available.
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
21
Business Model and Strategy continued
Our responsible business targets support us in establishing the right priorities and culture across the Society,
helping ensure we use our commercial success to drive positive social and environmental impact through what
we do, while ensuring we have the relevant governance in place to reduce and mitigate risk. The Society is well
placed to make progress and drive further change over the coming years. You can read more about our progress
and highlights in 2021 and our priorities out to 2025 below and on the following pages.
Highlights
In 2021, we:
n
Reduced our carbon footprint and reached carbon neutral status, as well as being reaccredited with the
Carbon Trust Standard for Carbon;
n
Launched our first ever green mortgage and launched ‘Dedicate a Tree’ children’s savings account, as
well as dedicating and planting a tree for each of our colleagues;
n
Won the What Mortgage ‘Best Shared Ownership Mortgage Lender’ award for the sixth year in a row,
demonstrating our commitment to affordable housing;
n
Launched a two year partnership with the Canal & River Trust and adopted a mile of waterway outside
our head office in Leeds;
n
Reached 8,000 people via our social mobility outreach and financial education volunteering programme;
n
Reached a total of over £380,000 for Dementia UK through colleague fundraising and matched funding
activities which has helped launch their ‘Closer to Home’ campaign. We also launched a three year
Dementia UK Bond; and
n
Donated over £144,000 to 158 UK charities in 2021 through the Leeds Building Society Foundation.
We continue to work closely with a range of expert partners to support our responsible business strategy,
including Fair Tax, The Carbon Trust, Living Wage Foundation, Leaders in Diversity, ClimateCare, Sustainalytics
and Eiris Vigeo.
Our responsible business strategy
In 2021, we focused on the development of the next phase of our responsible business strategy which was
closely linked to the refresh of our purpose and strategic drivers. The focus areas upon which the responsible
business strategy is founded have been driven directly by the feedback we received in our materiality
assessment from stakeholders, including over 3,800 members, colleagues, communities, third parties,
intermediaries, the Board and partners.
Internal and external stakeholder
priorities mapping
Board and Senior Leadership Team
External stakeholders and colleagues
There is a positive correlation between the priorities
of the business and those of our key stakeholders.
Of the 21 questions we surveyed responses to, green
shows the areas which both our internal and external
stakeholders agreed were high priority and the amber
and red areas were lower priority. We have used these
green priority areas to shape our focus to ensure we
are embedding responsible business across all parts
of the Society and developing the relevant
workstreams which will deliver sustainable impact.
Our five focus workstreams are Affordable Home
Ownership, Climate Change, Diversity and
Inclusion, Sustainable Communities and Trust and
Transparency. These areas ensure that we are doing
the right thing for our members, colleagues and our
planet, and keep us aligned to our purpose.
More responsive model
Work towards
alignment to an
overall net zero
pathway by 2050
or sooner
PROGRESS: ACHIEVED
Next steps are further consdering
scope 3 which includes suppliers,
our mortgage book and colleague
commuting
PROGRESS: ON TRACK
In 2022 we will be assessing
and working towards delivery of
science-based targets
Maintain our net
carbon neutral
position on
scope 1 and 2
plus scope 3
business travel
Target 2
Target 1
Target 1
PROGRESS: ACHIEVED
Currently 52% of our mortgage
book has an EPC of C or above
(Jun 21). We aim to maintain
and improve on this (based on
properties where we hold an EPC
rating)
Reach over 50%
of the Society’s
mortgaged
properties with
an EPC rating
of C+
Target 3
PROGRESS: ACHIEVED
We maintained our record
colleague engagement score of
86% in 2021
Maintain strong
colleague
engagement
score of over
80%
Target 4
Achieve 12%
overall ethnic
representation
Achieve 7% ethnic
representation
among leaders
PROGRESS: BEHIND
On the Board, we have increased
our female representation to 27%
(20%: 2020) and achieved 32% of
leaders
PROGRESS: AHEAD
Overall ethnic representation was
9.3%, slightly ahead of our 2021
target
PROGRESS: BEHIND
Ethnic representation among
leadership ended the year at just
under 4%, which is marginally
behind our aim for 2021
Improve gender
diversity with
35% female senior
leaders and 33% at
Board level by 2025
8
Target 6
Target 1
Target 5bTarget 5a
PROGRESS: AHEAD
We are 29% towards our 2025
target having donated over
£428,000 to charities and good
causes in 2021
Provide £1.5m
to charities and
communities
through grants,
donations and
sponsorship
Target 7
Close-the-gap innovation
PROGRESS: AHEAD
Our Broker Net Promoter Score has
historically averaged 50. In 2021,
this increased to 56, which was
ahead of our 2021 target
Help 65,000
first time
buyers into a
home of their
own by 2025
PROGRESS: AHEAD
We supported over 20,000 first
time buyers to get onto the
housing ladder in 2021, which was
a record year
Improve
mortgage broker
satisfaction
scores by 20%
by 2025
Target 9
Target 1
Target 8
Maintain high
member
satisfaction
scores of
over 90%
PROGRESS: ACHIEVED
We have a 0.57% share of the UK
branch network
9
PROGRESS: ACHIEVED
Our member satisfaction score
(measured as an annual average)
was 93% in 2021
Maintain our
share of UK high
street branches
at higher than
0.50%
Target 11
Target 1
Target 10
PROGRESS: ACHIEVED
Our average savings rate premium
in 2021 was 0.50% higher than the
rest of the savings market
10
Maintain an
average savings
rate premium of
at least 0.25%
compared to
market average
Target 12
These measures and
targets will remain
under review in light
of the further work
required in 2022 on our
climate change agenda
and the embedding of
our new purpose.
Our responsible business goals (2021 to 2025)
Step-up savings
A new governance model has been put in place to oversee the delivery of the next phase of our responsible
business strategy and we have developed the following measures to set out our ambition and track progress
out to 2025.
8910
8 The 33% target for Board gender diversity is by 2022, a further review will take place to determine targets out to 2025.
9 ONS bank and building society data, 2021.
10 CACI’s CSDB, Stock, December 2020 to November 2021, latest data available.
Key
Ahead – where the cumulative performance to date is within
>5% than the pro-rata target (where appropriate)
On Track – where the cumulative performance to date is
between 100%-105% versus the pro-rata performance
Behind – where the cumulative or in-year performance is
behind the associated target
Achieved – where the reported performance for the year is
in line with or above the in-year target
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
23
Climate Change
The Society is committed to the global call to action on climate change. Our responsible business strategy is
focused on aligning our climate targets to continue supporting the UN 2030 agenda
11
and Paris Agreement
Treaty
12
. We are committed to operating as a more inclusive, net-zero carbon, water positive and climate
resilient mutual. In 2021, we are reporting against the Task Force on Climate-related Financial Disclosures
(TCFD) on pages 39 to 63. Over the coming years, we, alongside the industry, will work on our Science Based
Targets and our pathway to Net Zero.
As part of our commitment to our climate agenda over the years, we have achieved
the Carbon Trust Standard for Carbon. This is a voluntary certification and mark of
excellence, only awarded to organisations that can demonstrate they have reduced
their carbon footprint and have the right processes in place to continue to reduce it
in the future. For data on emissions see page 61.
C
A
R
B
O
N
N
E
U
T
R
A
L
C
O
M
P
A
N
Y
ClimateCare
Certified Partner
2021
In 2021, the Society was awarded carbon neutral status by ClimateCare for our direct
(scope 1 and 2) and indirect (scope 3 from business travel) greenhouse gas emissions.
We are extremely proud of this as we achieved this key milestone one year ahead of
our commitment. Using a market-based approach to measure our emissions, which
excludes the purchase of renewable electricity, our scope 1 and 2 emissions have
decreased by almost 1,200 tonnes CO
2
e since 2016. We have introduced the first
mortgages in the UK to be carbon-offset, moved to 100% green tariff energy, reduced
our emissions and are committed to improving our performance each year.
We have switched to sustainable energy provision and more recently it has remained
a firm guiding principle in the fit out of our EPC A-rated head office, with its efficient
use of resources, local suppliers, active recycling and facilities to support electric
cars, amongst many other initiatives.
11 The UN established 17 Sustainable Development Goals, to be achieved by 2030, to address global issues and create a more sustainable planet for all.
12 The Paris Agreement is a legally binding international treaty on climate change to limit global warming to below 1.5 degrees celsius.
The UN Sustainable Development Goals (SDGs) call on
governments, businesses and others around the world to meet
three key objectives by 2030: to end extreme poverty, fight
inequality and injustice, and limit climate change. They translate
into 17 goals and 169 targets and are essential for the good of
society, the environment and sustainable economic growth. These
form a social value charter for individuals, communities and society
in general. Through our purpose, business priorities and wider
responsible business strategy, we are supporting this agenda by
aligning our focus to the following SDGs:
Affordable Home Ownership
The Society’s segmental lending strategy ensures
that we can meet the needs of those that are not well
served by the wider mortgage market. That’s why we
have made home ownership the central focus of our
new purpose, to ensure we do more to support people
onto and up the property ladder.
We are one of the original peer-to-peer lenders and
have been helping people buy houses for nearly
150 years – we truly understand how important it is
for everyone to have a home. We are proud of our
market leading position in shared ownership; being
the first lender to accept an application under the
government’s First Homes scheme and being the first
to launch a dedicated range to support it. We also
won the What Mortgage? Best Shared Ownership
Mortgage Lender award in 2021 for a historic sixth
consecutive time.
First time buyers are the lifeblood of the housing
market, yet for some, the dream of getting onto
the property ladder seems out of reach. That’s why
we support a range of different affordable housing
schemes to ensure that we can help people that
need it most – from those using Help to Buy to
purchase a new build property with the support of the
government’s equity loan, to those using First Homes
to purchase a property discounted by up to 50%.
First Homes is a great example of how we support
putting home ownership within reach of more people,
generation after generation. We are hugely proud
that our first two sets of keys were handed over to key
workers within our communities, a police officer and
an NHS worker, both being welcomed as members of
our growing member family.
The Society’s prudent approach and financial strength
has enabled us to withstand external economic
upheaval and market uncertainty. Our focus on
supporting people into home ownership saw us
re-enter the 95% loan to value market in April.
2021 was a record-breaking year for the Society as
we helped over 20,000 members to purchase their
first home. In light of our new purpose, we still have
further work to do to outline what our ambitions
are for delivering it, by understanding what the key
barriers are to home ownership in the UK and how we
can help overcome them.
Business Model and Strategy continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
25
Environmental campaigns and partnerships
The Society is always looking for opportunities to better serve our communities and have a practical and
positive impact. This year we have launched three new environmental partnerships, which have allowed us to be
actively involved in making a difference. All these activities allow us to not only reduce our carbon footprint, but
educate our members and colleagues, while making a significant and measurable difference.
Help make a difference by signing up to Do Nation
as a part of our latest environmental campaign.
Visit Collin to find out more
Pledge today,
change tomorrow
Pledge today,
change
tomorrow
Pledge
today,
change
tomorrow
Help make a difference by signing up to Do Nation
as a part of our latest environmental campaign.
Pledge today,
change tomorrow
Find out more
Help make a difference by signing up to Do Nation
as a part of our latest environmental campaign.
Pledge today,
change tomorrow
Pledge today,
change tomorrow
This year we partnered with Do Nation to run our first
ever major colleague environmental campaign ‘Pledge
Today, Change Tomorrow’. The online platform
allowed colleagues to make small, meaningful changes
called ‘pledges’ to reduce our overall environmental
footprint. This has been tracked over a period of time
and collectively we have made 1,080 pledges which
totalled 27.4 tonnes CO
2
e, which is equivalent to
498 London to Paris flights’ worth of carbon.
Yorkshire Dales Millennium Trust
We have formed a partnership with Yorkshire Dales
Millennium Trust this year and are delighted to have
developed various ways to support this partnership
such as introducing a new children’s savings product,
dedicating trees for each Society colleague, and
providing volunteering opportunities to get involved.
The Society dedicated 1,500 trees on behalf of our
colleagues across the UK and colleagues spent two
days in December planting trees, supporting the
creation of two new woodlands in the Yorkshire Dales.
Together, we will have offset an estimated 250 tonnes
of CO
2
over the next 50 years through this initiative.
We also launched a new ‘Dedicate a Tree’ children’s
savings account initiative, which saw us partner with
Yorkshire Dales Millennium Trust to sponsor the
planting of trees in two hectares of woodlands across
the Dales. This means that our members can open
a savings account to help children to build up their
future, while also helping the planet. The initiative has
been successful and therefore we aim to continue it
for the foreseeable future.
The Canal & River Trust
Driven by our commitment to the environment and
with a focus on the places where we operate, the
Society has launched a partnership with Canal & River
Trust for the next two years. As part of this, we have
adopted a mile long stretch of the waterway which
runs adjacent to our new head office on Sovereign
Street in Leeds. The funding provided to the Canal
& River Trust as part of the adoption programme
will allow us to focus on three areas: heritage,
environment and wildlife.
As part of the adoption we will maintain the historic
Grade II Listed river lock gates, remove plastics and
litter to help keep the waterways and towpaths clean,
plant wildflowers and install bird boxes. It is a great
way to make a difference while enjoying the health and
wellbeing benefits brought about by spending time
by water.
Green mortgages
As an organisation, we’re very mindful of our carbon
footprint. Our journey started several years ago, when
we refurbished our branch network and we made an
active choice to reduce electricity usage. We have
been building on these strong foundations – this year,
we were one of the first lenders to join the Green
Finance Institute’s (GFI) Coalition for the Energy
Efficiency of Buildings, and we have launched pilots for
a range of new green mortgages which adhere to the
GFI’s Green Home Finance Principles.
We launched our first ever green mortgage in August
2021, a Fixed Rate Green Mortgage product offering
£500 cashback for residential properties with an
EPC rating of A to C, which is an official indication
of the energy rating of the home. In September, we
extended our green mortgage range to include a
number of Buy to Let options. These products help
to support those members who are looking to reduce
their environmental impact through purchasing an
energy-efficient home.
We have demonstrated our commitment to helping
the planet by launching the UK’s first carbon offset
benefit for all 95% loan to value, mainstream, fixed
rate mortgages for home purchase, available for all
properties regardless of their energy efficiency rating.
For each of these mortgages lent by the Society,
we are offsetting carbon emissions during the fixed
rate period, based on the emissions generated by an
average Leeds Building Society property. This was
available on a pilot basis for a limited time and its
performance will help us to gauge customer appetite
and to explore how to better support our members as
they look to reduce their impact on the environment.
Business Model and Strategy continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
27
Diversity and Inclusion
The Society’s re-defined ambition for diversity
and inclusion is that ‘Leeds Building Society is an
organisation that anticipates and delivers great
services to our current and future members, and
where all colleagues feel valued and included for who
they are and the unique perspectives they bring.’
Further information on our diversity and inclusion
strategy can be found on page 16.
Social Mobility Pledge
We continue to align ourselves to the Social
Mobility Pledge, which is a cross party campaign to
improve social mobility in the UK. Through our work
experience, mentoring, education and employment
focused volunteering programmes, we have
prioritised supporting those from disadvantaged
backgrounds. The Society is committed to the
expansion of our outreach programmes tackling
financial education and employment issues for
vulnerable groups.
Our commitment to the pledge held steadfast this
year. We recruited four apprentices into our customer
services programmes and have initiated 12 students
in our work experience programme. In 2020, we
introduced our financial literacy programme to help
develop young people’s understanding and skills,
targeting students from vulnerable and diverse
backgrounds. All our social mobility programmes are
spearheaded by our registered volunteers. 41% of the
school pupils we have piloted our financial education
and careers programmes with are eligible for free
school meals and a quarter of the school population
speak English as an additional language.
Business Model and Strategy continued
Sustainable Communities
13 Calculated from the London School of Economics – Care Policy and Evaluation Centre Report:
alzheimers.org.uk/sites/default/files/2019-11/cpec_report_november_2019.pdf
Our responsible business strategy places significant
focus on contributing to the communities where we
operate. Our mutual status means we will always
endeavour to do what is in the best interest of our
members and the communities where they live
and work.
Listening to what matters to members and seeking
their feedback helps us focus on meeting their
evolving needs. Our community investment is
designed around social value and delivered through
the sharing of skills, resources and donations across
the UK.
Where our giving comes from (2021)
n
Society donations
n
Interest donations
n
Members and colleagues’
fundraising
£80,700
(19%)
£116,350
(27%)
£231,250
(54%)
Our charity partnership with Dementia UK
The Society launched a four year partnership with
Dementia UK in April 2020. There are currently around
900,000 people with dementia in the UK and this
is projected to rise to nearly 1.6 million by 2040
13
.
Dementia UK is the only UK charity caring for people
with dementia and, like us, they aim to help people
stay in their own home. The support given by their
specialist Admiral Nurses helps families stay together
as long as possible.
In 21 months of fundraising, we have raised over
£380,000 which is 76% of our overall four-year
partnership target of £500,000. This has helped
Dementia UK respond directly to an increase in
demand for their Admiral Nurse helpline and launch
‘Closer to Home’, which helps support more dementia
sufferers nationwide, bringing Admiral Nurse
specialist care to more communities.
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
29
Business Model and Strategy continued
Our colleague Paul’s story
Hundreds of families, including Paul’s, have
benefitted from this service. Paul has worked at
Leeds Building Society for 37 years and was thrilled
that Dementia UK became the Society’s chosen
charity partner.
“I have been actively involved in fundraising
throughout the partnership. I went sober for
October in 2020 and raised £1,200. I also climbed
Ben Nevis in July 2021 with friends and colleagues
and raised over £4,000 in memory of my Dad. He
was at the forefront of our minds throughout and
there was no way we were giving up. I felt a massive
sense of achievement when we got to the top – it
was a great feeling.
I think the partnership is going to help to educate
people and let them know that there is support
out there. I have learned a lot from the partnership
so far and I now know more about Admiral Nurses
and the wonderful work they do. The Closer to
Home clinics, funded by Leeds Building Society,
are going to help so many people affected by
dementia access life-changing support in their
local communities.
I don’t know what I
Paul’s dad, Jeffrey Horsbrough
would have done
without the support
from Dementia UK, the
NHS and Dad’s care
home. Those initial calls
to the Admiral Nurse
Dementia Helpline
enabled us to get
everything lined up for
Dad and prepared us for
what was to come, even
though in the beginning
it was hard to believe. I
know the partnership
will help other families
like mine get the
support they need.”
Charitable bond
In September 2021, the Society launched a new
savings bond in support of Dementia UK, which has
proved popular with our members. The three-year
fixed rate bond pays savers a competitive rate of
interest and based on balances invested, the Society
will make a total donation to Dementia UK of £72,000
over the three-year period, exceeding our target of
£50,000. Through products like this we are able to
give savers the chance to earn a competitive rate
while also knowing they are helping others and making
a difference.
Building up society through skills sharing
The Society understands the value and impact it
can have by providing all colleagues the opportunity
to directly give back within their communities and
that is why our volunteering scheme offers 14 hours
to all colleagues to spend on community projects
that are important to them. Pre-pandemic, we saw
consistently high participation rates and, in line with
government guidelines, we were able to relaunch
volunteering activity in the third quarter of 2021. Our
colleagues have since been busy volunteering in social
and environmental projects across the country.
As a financial services provider, our colleagues are
experts in money matters and are equipped with
the knowledge to support young people understand
finance. In 2021, we have experienced tremendous
growth in reaching approximately 8,000 people
through our financial education and Skills4U
programme, which supports career development.
Like many others, we had to adapt our mechanism of
delivery and in collaboration with various schools and
teachers, we have successfully provided both virtual
and recorded sessions throughout the year, delivered
by our trained colleagues.
82.6% of students asked said the
panel increased their understanding
of how to get into different careers
or jobs in the region.
78.3% of students asked said the
panel helped them think about their
goals after school.
78.3% of students said the panel had
motivated them to work harder at
school.
Leeds Building Society Foundation
Leeds Building Society Foundation continues to
support charities across the UK to help improve the
lives of people who are disadvantaged or in vulnerable
circumstances. The Foundation receives an annual
donation from the Society and is supported by
members through the Your Interest in Theirs scheme.
These charities are critically important to local
communities and ensure the Foundation’s funding
reaches those who are in greatest need.
In 2021, the Leeds Building Society Foundation
distributed over £144,000 in grants to 158 charities.
The LBS Foundation Board agreed it would undertake
a strategic review of the Foundation in early 2022.
The Trustees will revisit its purpose statement, how it
aligns to the Society’s business, its funding approach
and how impact will be measured. This work will help
determine the future focus of the Foundation over the
next decade and how it will contribute to the Society’s
150th anniversary, in 2025.
“The funding went directly to supporting our
ongoing work with the homeless community in
and around the West Lothian area experiencing
food insecurity. Through our Catalyst Kitchen
program, we are constantly trying to improve and
advance how we work with vulnerable individuals,
and this money was invaluable in allowing us to
further support the people who need our help
the most.” Emma Husband, Fundraising and
Communications Manager, The Larder.
20%
14%
10%
5%
29%
6%
16%
Foundation funding by theme (2021)
n
Disadvantage
n
Poverty
n
Homelessness
n
Illness
n
Mental or physical disability
n
Caring responsibilities
n
Social inclusion
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
31
Business Model and Strategy continued
Trust and Transparency
14 Edelman, 2020 edelman.com/research/evolution-trust.
15 Rating correct in December 2021.
16 leedsbuildingsociety.co.uk/your-society/tax-strategy/.
Responsible business means operating in a
transparent way and we understand ‘trusting a
brand’
14
can be the deciding factor when purchasing
any product. In 2021, the Society remained a
4 star
15
rated company on Trustpilot, evidencing
our commitment to providing the best customer
experience possible for our members.
The Society was ranked as the fourth most ethical
savings provider by Which?, which was scored by
Ethical Consumer in its review of banks and building
societies, looking at various factors including
environmental reporting, carbon management,
transparency, ethical lending and company ethos.
ESG audits
Sustainalytics and Vigeo Eiris are global leaders in
ESG and corporate governance research and ratings
firms who assess the Society’s ESG performance.
As a result of our continued progress and proactive
engagement from colleagues, we have materially
improved our results since the last review.
Sustainalytics has adjusted our overall risk rating from
Medium in 2020 (score 25/30) to Low in 2021 (score
18/20), which places us in the top 10% among our
lending peers. Vigeo Eiris has increased our assurance
from Limited to Robust which places us in the top 15%
among our industry peers.
NEGL
0-10
SUSTAINALYTICS
10-20
2021
18
2020
25
20-30 30-40 40+
LOW MED HIGH SEVERE
2021 Ranking:
4th / 88 in mortgages
Up 10 places from 2020
0-28
VIGEO EIRIS
29-49
2020
36
2021
54
50-59 60+
ADVANCEDROBUSTLIMITEDWEAK
2021 Ranking:
12th / 97 in sector
Up 29 places from 2020
Fair Tax Mark
Our approach means paying the right of amount
of corporation tax and reporting our tax affairs
transparently to stakeholders, as outlined in our Tax
Strategy
16
. The Society was re-accredited with the
Fair Tax Mark in 2021 and continues to be one of the
only high street financial services providers to attain
this accolade. Paying our fair share of tax ensures we
are contributing to the vital public services needed to
benefit our members, colleagues and communities.
Policies
Policies and standards underpin our responsible
business strategy, setting out how colleagues are
expected to behave and the parameters for decision
making. Environmental, Social and Governance
(ESG) factors are considered when assessing the
creditworthiness of our counterparties for liquidity
investments, and if a counterparty was judged not to
meet this criteria then the limit may be rescinded.
The Society has a set of relevant policies that include
the Tax Strategy, Board Diversity Policy and ESG Policy.
Additionally, our Modern Slavery statement can be
found on our website leedsbuildingsociety.co.uk.
Governance
The Responsible Business Forum has provided
strategic direction for corporate responsibility at the
Society, supporting the integration of responsible
business practice into the way we operate and
measure progress against our targets.
Alongside the Forum, the Society has a number
of other working groups which focus on specific
corporate responsibility priorities and part of the
Society’s commitment to diversity and inclusion.
These include green champions, mental health,
gender diversity and race equality forums, as well as a
new LGBTQ+ network.
Our Fair Pay Charter
Our colleagues are vital to the success of the Society and to making sure our members receive the best possible
service. We think it is only right they share in the Society’s successes and we have always strived to make sure
they are fairly rewarded. The Society has published our Fair Pay Charter, which commits us to:
n
Paying at least the Real Living Wage, as set by
the Living Wage Foundation, to colleagues and
contractors.
n
Aligning executive directors’ and colleagues’
pension contributions.
n
Fair salaries based on role, skills, performance and
external benchmarks.
n
Objective pay decisions made regardless of
gender, age, ethnicity, disability, sexual orientation
or any other protected characteristics.
n
Competitive total reward packages for all
colleagues. This includes a range of health and
wellbeing options.
n
Listening to our colleagues, through our Colleague
Association, about salary and reward decisions.
n
Helping colleagues understand how they are
rewarded. This includes clear performance
standards and feedback.
n
Equal opportunities for all, so everyone can
progress their career.
n
Supporting colleagues to work flexibly, to balance
both personal and business needs.
n
Providing time for colleagues to focus on career
development.
n
Pay which is accurate and on time.
Paying the Real Living Wage
We are proud to have paid at least the Real Living Wage to all our colleagues since
2014. Set by the Living Wage Foundation, this is higher than the government’s
minimum, or National Living Wage and is an independently calculated hourly rate of
pay based on the actual cost of living. Since 2019, we have extended the Real Living
Wage to include our third party contracted colleagues. In September 2021, we went
further and increased the minimum pay rate for our colleagues to £10 an hour, a
5.3% increase and above the 2021 Real Living Wage rate of £9.50 an hour.
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
33
Business Model and Strategy continued
Looking forward
One constant that has remained throughout our 147
year history is doing the right thing for members,
colleagues and communities. It is core to our
existence and as we head into the next decade of
responsible business, we will continue to adapt and
innovate to remain responsive and relevant, while
meeting our members’ evolving needs.
There is further work to do in order to assess our
longer term responses following the refresh of our
purpose, including our climate response, but we will
keep these under review and provide an update as
work progresses. While the outlook is undoubtedly
challenging, the strength of our culture, our social
purpose and our finances mean we can continue to
work for the mutual good of our members, colleagues
and communities.
Directors’ regard to stakeholder
interests
Our approach to corporate governance is based on
the Principles and Provisions of the 2018 version of
the UK Corporate Governance Code (available at
frc.org.uk). In order to meet the requirement for a
Section 172 Statement (in so far as it is relevant to
a building society), we include a summary of how
the Board has carried out its duties in promoting
the success of the organisation. This includes how
the Board engages with stakeholders and remains
cognisant of their needs when running the business.
Further detail on the Board’s activities, engagement
with stakeholders and how it demonstrates its
commitment to doing the right thing can be found
in the Responsible Business section of this report
on pages 21 to 34 and in the Corporate Governance
Report on pages 95 to 118.
The Board’s approach
The Society considers the needs of a diverse range
of stakeholders, which have been identified as those
who may be affected by our activities and those
groups whose actions can affect the operation of
the business. These stakeholders are also actively
considered in the development of the Society’s
strategy, specifically members’ product and servicing
needs, the expectations of regulators, the needs
of mortgage brokers, views of investors and credit
rating agencies, as well as any potential impact on
colleagues. The Board recognises that agreeing a
strategy, which is cognisant of key stakeholders,
will optimise long term value creation and ensure
relevance in a fast changing environment.
Examples of two key decisions made by the Board
during the year, and how stakeholder impact
was taken into account, are shown on page 38 –
specifically the decision to approve an additional pay
award for colleagues and re-entry into the 95% loan to
value market segments.
Governance of the Board has adapted since the
onset of the pandemic, through increasing the
frequency of meetings and adjusting the content to
deal with the fast changing environment. The needs
of our stakeholders have been at the forefront of
the discussions at these meetings and have been
key in determining our response, for example we
consistently kept branches open for members during
the pandemic.
Our behaviours help to underpin a strong culture
appropriate for a mutual organisation, encouraging
actions that are in the best interests of members and
other stakeholders. Demonstration of the behaviours
in the workplace forms a key part of our performance
management approach. For further information on
culture and how this is monitored, see page 98 of the
Corporate Governance Report.
Stakeholder engagement
We have set out below our key stakeholder groups and
how we engage with them. Further information on the
Board’s engagement with each of these stakeholder
groups is provided in the Corporate Governance
Report on pages 111 to 117. Key performance
indicators relevant to members and brokers, such
as Net Promoter Score, can be found in the Key
Performance Indicators section within this report on
pages 19 to 21.
Stakeholder
group
Why they are important to us How we engage with them Reporting to the Board
Members and
brokers
Members own the Society, and the
Society acts to benefit members’
interests over the longer term.
The majority of our lending is
done via brokers, who are key to
our business model of helping
members into homes of their own.
n
Gain feedback though our online
panel TalkingPoint
n
Social media
n
Trustpilot
n
Independent external customer
and broker research
n
Annual General Meeting (AGM)
n
Annual analysis of five-year
forecast of member joiners and
leavers and monthly reporting
n
Six-monthly update on
customer experience and
service levels
n
Annual complaints report
Colleagues Colleagues are critical to the
success of the Society. High levels
of engagement mean colleagues
will be more productive, have a
higher level of wellbeing and will go
the extra mile for our members.
n
Yearly colleague survey
n
Colleague Association
n
Board appointed colleague
representative Lynn McManus
(Non-Executive Director) meets
regularly with the Colleague
Association
n
Colleague development and
wellbeing sessions
n
Communication on matters
relevant to colleagues and the
Society
n
Colleague survey results
n
Colleague Association topics
n
Colleague update from
colleague representative
n
Pension scheme information
17
n
Update on diversity and
progress against our targets
n
Annual culture review
n
Annual Speak Up Standard
review and approval
Third Parties Our supplier partners are key to
our ability to develop and deliver
services to members, and are
an important aspect of how we
are represented with our other
stakeholders.
n
Governance meetings at
appropriate levels take place in
accordance with the materiality
of the relationship
n
Our policies and standards drive
a fair and transparent supplier
selection process for new and
renewed requirements
n
The Board is involved in
decisions on suppliers for key
strategic projects
n
Management information on
suppliers
n
Annual approval of Modern
Slavery Act Transparency
Statement
Communities As a mutual, we strive to make
a positive difference to the
communities in which we operate.
n
Gain feedback though our online
panel TalkingPoint
n
Independent external customer
research
n
Annual General Meeting (AGM)
n
Approval of our new purpose
and strategic framework
n
Approval of our updated
responsible business strategy
and regular updates on our
progress against our targets
Environment We are committed to minimising
our impact on the environment in
the places in which we operate, as
well as managing environment-
related risks. This is also an
increasing focus for our wider
stakeholders.
n
Discussions held with a wide
range of stakeholders, including
government bodies, building
society peers and third party
experts such as Carbon Trust
n
Progress reports on our climate
data and insights
Regulators Regulators are responsible for
maintaining a safe and sound
financial system, as well as
ensuring consumer protection.
Meeting regulatory requirements
engenders trust from our
stakeholders and demonstrates
that we are doing the right thing.
n
Regular dialogue/interactions
with our regulators both directly,
and through our industry bodies
n
Monitoring regulatory
publications from the regulators
and wider stakeholder groups
n
Reviewing regulatory
publications and taking action as
required
n
The Board receives updates
on regulatory matters and a
summary of key regulatory
actions being undertaken by the
Society
n
Material dialogue/interactions
with our regulators are shared
with the Board as appropriate
n
The Board has sight of the
progress/delivery of regulatory
actions
17 Information on colleague pension schemes can be found in note 25 of the accounts.
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Leeds Building Society | Annual Report and Accounts 2021
35
Stakeholder
group
Why they are important to us How we engage with them Reporting to the Board
Investors Investors provide an important part
of our funding, which supports our
aim to help members into homes of
their own.
n
Individual meetings with key
institutional investors, group
presentations, attendance at
investment conferences and
investor events
n
Regular and close dialogue is
maintained with credit rating
agencies, including formal
annual review meetings
n
Investor relations approach
considered as part of the
wholesale funding strategy,
contained within the overall
Treasury strategy, as approved
by the Assets and Liabilities
Committee
Members and brokers
The Board balances the interests of borrowing and saving members, as well as
brokers, when making decisions about the Society’s short and longer term strategy.
Further details on engagement with our members and brokers can be found within
the Corporate Governance Report on pages 112 and 117.
Colleagues
Consideration of diversity in the workplace is a key focus for the Society, which is
supported through our mental health, gender diversity and race equality colleague
forums as well as our new LGBTQ+ colleague network. Further information
on diversity can be found in the People section on page 16 and the Corporate
Governance Report on page 100.
Third parties
Our supply chain includes suppliers of goods and services, including professional
services (such as conveyancing services), IT platform services (access and
administration) and IT software licences.
In 2021 we grew our Third Party Management capability in recognition of the
increasingly important role our suppliers play in our ability to thrive in a demanding
business climate. We select suppliers based on their ability to reliably deliver services
that enhance our members’ experience, their alignment to the Society’s behavioural
standards and the measurable benefit we receive.
Our Third Party Management Policy and associated standards were fully revised,
including a clearer risk-based classification of suppliers which enables us to take a
more consistent and risk-appropriate approach to our management of
each engagement.
Further details on engagement with suppliers can be seen in the Corporate
Governance Report on page 115.
Communities
Leeds Building Society was set up to help members save and buy homes of their
own. As a mutual, we also aim to make a positive difference in wider society and
the Board understands that our mortgage and savings business needs to be
underpinned by a broader commitment to the communities in which we operate.
An example of this is our commitment to pay our fair share of tax as evidenced by
our Fair Tax accreditation. Our communities are defined as the places where our
members and colleagues live and work, however we consider social issues as well as
geography in defining where we focus our efforts.
More detail, as well as further information on responsible business at Leeds Building
Society, can be found within the Responsible Business section on pages 21 to 34.
Environment
We continue to take the impacts of climate change seriously. This year we have
reported on our carbon emissions within the Annual Report and Accounts, aligned
to the Taskforce For Climate Disclosures (TCFD) requirements. These aim to help
stakeholders understand our carbon footprint and to highlight the steps we are taking
to reduce this. More information on this can be found in the Responsible Business
section on pages 25 to 27 and the Climate Change section on pages 39 to 63.
Investors
We have a variety of different types of investors who support our wholesale funding
strategy across secured and unsecured types of debt. Our financing strategy aims to
have the appropriate level of diversification of funding, so we are not exposed to only
one type of funding.
We have an active investor relations strategy, and further information on
engagement with investors and credit ratings agencies can be seen in the Corporate
Governance Report on page 114.
Key decisions made in the year
The key decisions taken this year by the Board have been mindful of all stakeholders’ needs, while benefitting
our members over the long term. These decisions aim to improve member, broker and colleague experience,
as well as increasing our financial stability through improving income performance/reducing costs. This means
that we can continue to operate successfully in the future for the benefit of all of our stakeholders.
A case study is given below and a summary of Board activities during the year can be found in the Corporate
Governance Report on pages 109 to 111.
Business Model and Strategy continued
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Leeds Building Society | Annual Report and Accounts 2021
37
Approval of additional pay award for colleagues
(May 2021)
Our successful strategy, and decisions taken over
recent years, have put the Society in a strong position
to be able to respond robustly to changes in our
external environment and to meet the evolving needs
of our members and other stakeholders.
As a member-owned, responsible business, we need
to ensure we appropriately balance how the value our
business model generates is distributed across our
different stakeholders in a sustainable way that also
ensures we protect the long term interests of the
Society and its members.
In May 2021, the Board discussed the value benefit
received by our members and wider stakeholders,
including colleagues, communities and the
environment. It was agreed that an additional
investment in colleague fair reward would be provided,
to recognise colleagues’ dedication and outstanding
contribution to the Society during the pandemic.
This included a minimum pay increase for all eligible
colleagues, excluding the Senior Leadership Team,
of 2%, as well as a rise in the minimum full time
equivalent salary of 5.3% to £10 per hour, over and
above the 2021 Real Living Wage of £9.50 per hour.
Under our fair reward commitment, an additional
increase was applied to keep pace with external
benchmarking across the financial services sector.
A career pathway was also introduced in the branch
network to recognise and reward colleagues who’ve
reached a level of experience and competence that
enables them to offer a higher level of service to our
members.
The pay review undertaken in September means that
we will be better able to attract and retain talent,
providing long term value for the Society and its
members, as well as contributing more value to the
communities in which we operate.
Re-entry into 95% loan to value market segments
(March 2021)
Throughout the pandemic we’ve continued to support
the housing market and our members, particularly
affordable housing, including shared ownership.
However, as a result of the significant and uncertain
economic impacts of the pandemic, we temporarily
removed our highest loan to value products from the
market during 2020.
Subsequently, with economic and mortgage market
prospects improving, and following the reopening of
the housing industry, in March 2021 the Board made
the decision to re-enter the 95% loan to value market.
It’s important to us to be able to assist borrowers who
are not well served by the wider market, including
buyers with smaller deposits, to enable more people
to buy a home and we felt it was the right time to
extend our proposition to further support this.
A variety of factors were considered when making this
decision, including the economic and market outlook
and its potential impact on homebuyers and home
movers (such as unemployment levels, affordability
and house price expectations), the impact on the
Society’s performance and financial stability, and
insight from our intermediary partners. We reviewed
our capacity to ensure we could provide an excellent
service to our members and we ensured a consistent
experience by launching simultaneously across
intermediated and direct channels.
We keep our products, rates and lending criteria under
constant review to ensure we can continue to offer
mortgages to meet the needs of customers who
are looking to take their first step onto the property
ladder. To enable more first time buyers to buy their
own home, we were also one of the first lenders to
become part of the First Homes scheme, offering a
minimum 30% discount from market value to local
buyers, and in particular key workers, which is passed
on when the home is sold.
Business Model and Strategy continued
Climate Change
Year ended 31 December 2021
Climate change is arguably one
of the biggest challenges
currently facing us all. That’s why we’re
dedicated to reducing our carbon
footprint and helping our colleagues,
members, and the communities
we operate in, to do the same.
“
“
Andrew Greenwood
Deputy Chief Executive Officer
This is our inaugural full set of disclosures under the recommendations of the
Financial Stability Board’s Task Force on Climate-related Financial Disclosures
(TCFD). The TCFD framework is structured around four key pillars and aims to
provide consistent climate-related financial risk disclosures and information on the
Society’s exposure to, and management of, climate risks and opportunities.
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Leeds Building Society | Annual Report and Accounts 2021
39
1. Strategy 2. Governance
Actual and potential impacts of climate risks and
opportunities on the Society’s business, strategy,
and financial planning.
The Society’s governance arrangements around
climate-related risks and opportunities.
See section 1 See section 2
3. Risk management 4. Metrics and targets
The processes used by the Society to identify,
assess, and manage climate-related risks.
The metrics and targets used by the Society to
assess and manage relevant climate-related risks
and opportunities.
See section 3 See section 4
Climate-related disclosures overview
Climate framework
Vision
Climate change strategic aim
Support the orderly transition to a greener, net zero economy by 2050 or sooner
Pillars
Our carbon footprint
Reduce the Society’s own carbon
emissions
Support transition to net zero
Help key stakeholders reduce
their carbon footprint
Manage climate-related risks
Embed capabilities to monitor
and manage the risks and
opportunities
Targets
Carbon neutral by end-2022
Direct (market-based) and
indirect (business travel
1
)
emissions
EPC rating of C or better
For 50% or more of our UK
mortgaged properties
2
by 2025
Alignment to net zero
Work towards alignment with a
2050 net zero pathway
Enablers
Green
products
Data and
analytics
Monitoring
and
disclosure
Communication
and
engagement
Governance
and
oversight
Operating
model
Risk
management
Summary of progress against TCFD recommendations
The Society signed up as a TCFD supporting signatory during 2021 and we are committed to implementing
the recommendations in full in line with the principles of our purpose-led responsible business strategy and
requirements under the Prudential Regulation Authority’s (PRA’s) Supervisory Statement 3/19 (SS3/19) –
Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change.
Good progress has been made during the year against the 11 TCFD recommendations, with several important
activities completed to enhance our understanding of climate risks and opportunities and further develop our
strategic targets and response plans. We recognise that this is just the start of the journey and further work is
planned in 2022, and beyond, to support the orderly transition to a greener, net zero economy.
1 Includes emissions from rail, road (excluding taxis) and air as a result of the Society’s business travel.
2 Where a valid Energy Performance Certificate (EPC) is available for the property.
TCFD recommendation Key progress areas in 2021 Future priorities 2022+ Further details
1. Strategy
a) Describe the climate-related
risks and opportunities the
organisation has identified
over the short, medium, and
long term.
n
Initial enterprise-wide
view of climate risks and
opportunities, and their
potential impacts, discussed
at Board and Board Risk
Committee.
n
Defined our initial climate
strategic aims and targets
as part of our purpose-led
responsible business strategy.
n
Stress testing of our potential
climate risk exposures
completed, based on the Bank
of England’s 2021 Climate
Biennial Exploratory Scenarios
(CBES).
n
Invest in capabilities to
enable development of
decarbonisation plans and
targets aligned with the Paris
Agreement net zero pathway.
n
Development and roll-out
of our Green Finance
propositions.
n
Refinement of our
assessment of climate risks
and opportunities, including
further development of our
scenario testing capabilities.
n
Wider stakeholder
engagement across our
value-chain.
Section 1.4
b) Describe the impact of
climate-related risks
and opportunities on the
organisation’s businesses,
strategy, and financial
planning.
Section 1.5
c) Describe the resilience of
the organisation’s strategy,
taking into consideration
different climate-related
scenarios, including a 2°C or
lower scenario.
Section 1.6
2. Governance
a) Describe the Board’s
oversight of climate-related
risks and opportunities.
n
Responsibilities defined
and embedded into our
established governance
structure.
n
Revised Target Operating
Model for the management
of climate risks and
opportunities agreed.
n
Climate risk training delivered
to the Senior Leadership
Team and Board.
n
Review and approval of net
zero plans and targets.
n
Embedding of the new
climate operating model
and alignment of climate
objectives with defined
accountabilities.
n
Expansion of climate risk
training to the wider colleague
population.
Section 2.1
b) Describe management’s role
in assessing and managing
climate-related risks and
opportunities.
Section 2.2
3. Risk management
a) Describe how processes for
identifying, assessing, and
managing climate-related
risks are integrated into the
organisation’s overall risk
management.
n
Processes for identifying,
assessing, and managing
climate risks defined and
embedded into our Enterprise
Risk Management Framework.
n
Initial risk appetite for the
management of climate risks
defined and agreed by Board
Risk Committee.
n
Climate data for our mortgage
book sourced and analysed
to quantify potential physical
and transition climate risks.
n
Data infrastructure has been
developed to incorporate
climate data into credit
decisioning systems.
n
Update and refinement of
our climate risk appetite in
line with development of net
zero plans and targets and
additional insights on climate
risks and opportunities.
n
Development of credit
decisioning processes and
policies.
n
Further analysis of climate
transition risks following
government policy
announcements at COP26.
n
Incorporation of climate risk
factors into due diligence
processes for third party
suppliers.
Section 3.1
b) Describe the organisation’s
processes for identifying and
assessing climate related
risks.
Section 3.2
c) Describe the organisation’s
processes for managing
climate-related risks.
Section 3.2
Climate Change continued
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Leeds Building Society | Annual Report and Accounts 2021
41
Climate Change continued
TCFD recommendation Key progress areas in 2021 Future priorities 2022+ Further details
4. Metrics and targets
a) Describe the targets used
by the organisation to
manage climate-related
risks and opportunities and
performance against targets.
n
Initial climate-related Key
Risk Indicators (KRIs) and
Management Information (MI)
defined and implemented in
internal reporting.
n
Verified as carbon neutral
(scope 1 and 2 plus scope 3
business travel
3
).
n
95% reduction in our carbon
footprint
4
since 2016.
n
Joined the Partnership for
Carbon Accounting Financials
(PCAF) to develop our
assessment and reporting of
scope 3 financed emissions.
n
Development and refinement
of climate-related internal
MI and KRIs, and external
disclosures.
n
Development and agreement
of decarbonisation targets
aligned with the Paris
Agreement net-zero pathway.
n
Completion of environmental
surveys for our branch
network and implementation
of recommendations to
improve energy efficiency.
Section 4.1
b) Disclose the metrics used
by the organisation to
assess climate-related risks
and opportunities in line
with its strategy and risk
management process.
Section 4.2
c) Disclose scope 1, scope 2,
and, if appropriate, scope
3 greenhouse gas (GHG)
emissions, and the related
risks.
Section 4.3
Governance and assurance approach
These disclosures have been subject to internal review and validation and have been reviewed by the Audit
Committee before approval by the Board. Our greenhouse gas emissions and overall approach to carbon
management are also subject to biennial accreditation by an independent third party.
Production of these disclosures is governed by a policy standard which covers, inter alia, adequacy, verification,
frequency and medium of publication of the disclosures. There is currently no external audit requirement in
relation to these disclosures.
Section 1 – Climate risk strategy
3 Includes emissions from rail, road (excluding taxis) and air as a result of the Society’s business travel.
4 Based on reductions in our scope 1 and scope 2 (market-based) emissions.
Strategic aims
As part of our purpose-led responsible business
strategy (see pages 21 to 34), the Society is
committed to the global call to action on climate
change, recognising the critical role that the financial
services industry has in supporting the response.
During 2021, the Board approved a new Climate
Risk Strategic Framework centred around the aim
to support the orderly transition to a greener, net
zero economy by 2050 or sooner. This aim will be
supported by three pillars and underlying targets:
Pillar 1 – Our carbon footprint
The Society is committed to reducing the climate
change impacts from its own operations and working
towards alignment to a 2050 net zero emissions
pathway.
In this context, the Society established an interim
target to achieve carbon neutrality by the end of
2022 (scope 1 and 2 emissions on a market-based
approach, plus scope 3 emissions from business
travel
3
), which has been successfully achieved in 2021,
one year ahead of plan. We recognise that further
targets will be required to minimise and reduce our
emissions over the medium to longer term, which
we intend to progress in 2022. Refer to section 4 for
further details.
Pillar 2 – Supporting the transition to net zero
Currently 16% of the UK’s total carbon emissions
emanate from the energy consumed within UK
homes
5
. As the UK transitions to a low carbon
economy, it is likely that homeowners will be required
to enhance the energy efficiency of their properties
to meet new standards. While these standards are yet
to be fully defined by the UK Government, the Society
considers that it has a responsibility to support our
members in making this transition, through our
product proposition and communications.
During 2021, we have successfully launched our
inaugural green finance products to encourage the
purchase of more energy-efficient homes and enable
members to offset emissions from their homes
during the fixed term of their mortgage. We intend to
develop our proposition further in 2022 in response to
growing customer demand for green products.
An initial target has been set to ensure that at least
50% of the Society’s UK based mortgaged properties
have an Energy Performance Certificate (EPC) rating
of C or better by 2025. The target has been set as
the minimum baseline that we will aim to maintain
to ensure there is an appropriate balance between
encouraging improvements in the energy efficiency
of homes below EPC rating C by helping support
members to make those improvements and taking on
new lending to properties with an EPC rating of A, B or
C already.
Whilst the average EPC position is currently
favourable versus our 2025 target (52% as at 30
June 2021), only 62% of our UK mortgage portfolio
currently has a valid EPC available and the average
may therefore change in the future as data gaps are
closed. The performance of the portfolio is also likely
to fluctuate between now and 2025 as we develop
our responsible business strategy and future green
product proposition to focus on helping to finance the
green transition.
5 Source: 2020 UK Greenhouse Gas Emissions, final figures (publishing.service.gov.uk).
We recognise that targets based on average
EPCs alone will not be sufficient to help solve the
problem. More needs to be done jointly between the
Government and the finance industry to increase
product innovation, customer awareness, and
financial support to collectively deliver a fair and
orderly transition. This will be a key area of focus
for the Society in 2022, as we further develop our
understanding and capabilities to support the green
transition. We will continue to monitor and adjust
our targets where required to ensure they remain
appropriate, as customer and regulatory expectations
for the pace of transition become clearer.
Pillar 3 – Managing the risks from climate change
Whilst the transition to a low carbon economy
creates opportunities, this is also accompanied by
risks, which must be understood and effectively
managed. The Society has integrated climate
change risks into its Enterprise Risk Management
Framework (ERMF), which facilitates the appropriate
identification, management, monitoring and reporting
of climate related risks. Our approach to climate risk
management is set out further in section 3.
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Leeds Building Society | Annual Report and Accounts 2021
43
Section 1.1 – Progress and key achievements
1,400
1,200
1,000
800
600
400
200
0
2016 2017 2018 2019
2020 2021
95% reduction in our scope 1 and 2 emissions between 2016 and 2021
Market Based Emissions
n
Purchase of 100%
renewable energy.
n
Recycling of all
paper.
n
Achieved Carbon
Trust accreditation
demonstrating
commitment
to reducing our
carbon footprint.
n
Launch of Green
Champion
colleague
initiative.
n
Purchase of new
head office, to
combine three
head office sites
into one.
n
Refurbishment of
new head office,
which achieved
EPC rating of A.
n
Initial climate
change strategic
aim agreed.
n
Initial climate
change
disclosures.
n
Partnership with
Canal & River
Trust.
n
Carbon neutral for
scopes 1, 2 and
3 business travel
emissions.
n
Climate strategic
framework agreed.
n
TCFD disclosure.
n
PRA SS3/19
implemented.
n
Launch of green
products and
Green Hub.
n
‘Do Nation’
platform launched.
n
Partnership with
Yorkshire Dales
Millennium Trust.
Section 1.2 – Stakeholder considerations
Our climate strategy has been designed to consider the requirements of our key stakeholders:
Communities
Government
Members
Investors
ColleaguesSuppliers
n
Support members to reduce their
carbon footprint.
n
Education around potential impacts
of climate change risks.
n
Work with key suppliers to
understand and reduce our
supply chain emissions.
n
Identify and mitigate potential
resilience risks from adverse
climate impacts.
n
Provide disclosure around the
Society’s climate strategy, targets,
and exposures.
n
Demonstrate the Society
understands and manages its
exposure to climate risk.
n
Demonstrate that the Society
understands and manages its
exposure to climate risk.
n
Deliver compliance with regulatory
requirements.
n
Encourage, educate, and
support colleagues to reduce
the Society’s carbon footprint.
n
Support participation in
community events to improve
the local environment.
n
Green partnerships/sponsorship
and volunteering activities.
n
Investment in carbon offset
schemes to improve the
environment.
Section 1.3 – Memberships and affiliations
The Society has partnered with or joined the following organisations to increase our knowledge and
understanding of climate-related risks and opportunities:
We have partnered with Hometrack and their data partners Ambiental
and Terrafirma to obtain industry-leading climate risk data and
insights for our mortgage portfolio. Data will also be delivered at the
point of origination for new mortgage lending, enabling the Society
to incorporate climate change metrics into our future mortgage
origination strategy.
During 2021, we became one of the first building societies to sign up
to the Green Finance Institute’s Green Home Finance Principles which
promote a consistent methodology for the application of financial
proceeds towards the purchase or retrofit of domestic buildings that
achieve verifiable environmental benefits.
We have joined the Partnership for Carbon Accounting Financials
(PCAF) to better understand the challenges of measuring and reporting
emissions associated with our residential property portfolio.
We have achieved the Carbon Trust Standard for Carbon. This is
a voluntary certification and mark of excellence, only awarded to
organisations that can demonstrate they have reduced their carbon
footprint and have the right processes in place to continue to reduce in
the future.
Climate Change continued
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45
Section 1.4 – Climate-related risks and opportunities over the short, medium and long term
Time horizons
The time horizons over which financial risks and opportunities from climate change may be realised are
uncertain and may occur outside of traditional planning horizons. The Society assesses these risks and
opportunities as set out in the table below:
Time horizon Description
Short term 0 to 3 years Our horizon for assessing business model viability
Medium term 3 to 5 years Our financial planning horizon
Long term 5 to 30 years Our climate risk stress testing horizon
Climate-related risks
Risks to the Society from climate change arise through two primary channels, or risk factors: physical and
transition risk.
Summary of key climate risk physical risk drivers and relevance to our business model
Climate risk
factor
Description Key drivers Relevance
6
Horizon
Physical risk
Arises from the
increased severity and
frequency of extreme
climate and weather-
related events.
Flooding High
Long term
Subsidence Medium
Coastal erosion Medium
Heatwaves Medium/Low
Wildfires Medium/Low
Hurricanes Low
Water stress Low
Desertification Low
Transition risk
Arises from the process
of adjustment towards a
low carbon economy.
Government policy High Medium term
Carbon pricing Medium
Medium/Long termConsumer sentiment Medium
Investor sentiment Medium
Technological change Low
Long term
Refer to sections 1.5 and 3.2 for further details of our assessment of these risks, potential impacts and current
mitigants in place.
6 Relevance is based on the likelihood/impact of the risk drivers crystalising, based on the types and geographic locations of the Society’s current assets and investments.
Climate-related opportunities
As well as risks, we have also identified several potential climate-related opportunities as part of our support of
the transition to a net zero economy.
Opportunities Description Stakeholders Horizon
Green finance
Development of innovative new financial products to
help members reduce their carbon footprint.
n
Members
n
Communities
n
Investors
Short/Medium term
Communication
Engagement with colleagues, members, and suppliers
to increase understanding of climate-related risks and
support the transition to net-zero.
n
Members
n
Colleagues
n
Third party suppliers
Short term
Partnerships
Collaborate with key organisations to increase
knowledge, develop good practice and lobby for
change.
n
Third party suppliers
n
Industry bodies
n
Government and
regulatory authorities
Medium term
Section 1.5 – Climate change impact on our business, strategy, and financial planning
As a UK-based mutual that is focused on residential mortgage lending, with no appetite for any exposure to
carbon-intensive industries, our business model is most likely to be impacted by climate-related risks and
opportunities in the following ways:
Key potential impacts Our response and future plans
Physical risk
n
Future rises in temperatures and precipitation in the UK have
the potential to impact the credit quality of our mortgage
portfolio e.g. damage to properties from flooding and erosion
leading to reductions in the value of mortgage collateral or
impacts to borrowers’ ability to repay the debt.
n
Partnered with Hometrack to assess property-level
physical risk profile.
n
Risks assessed as part of credit policy and underwriting.
Climate data to be built into our future mortgage origination
strategy.
n
Scenario analysis completed as part of our 2021 Internal
Capital Adequacy Assessment Process (ICAAP) to better
understand the potential financial impacts from physical
risks. Refer to section 1.6 for further details.
n
Resilience measures in place for our key operational sites
(e.g. flood defences and insurance).
n
An increase in adverse weather events such as flooding may
impact the resilience of our operations through damage to our
premises, infrastructure, and disruption to our critical third
party services or colleagues.
n
Macroeconomic shocks in the UK due to increased global
disruption from climate change may impact our future
profitability and growth because of increased unemployment
and falling house prices.
Climate Change continued
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47
Key potential impacts Our response and future plans
Transition risk
n
Changes in government policy, such as minimum energy
standards for homes, have the potential to impact the future
credit quality of our mortgage book i.e. reductions in house
prices where properties do not meet minimum standards, and
stresses to borrower affordability due to the cost of making
energy efficiency improvements and rising energy prices.
n
Scenario analysis completed in the 2021 ICAAP to assess
financial impacts from the transition to minimum energy
ratings.
n
Launched our first green mortgage and savings products in
2021 to encourage the purchase of more energy-efficient
homes.
n
Alignment with TCFD for climate-related disclosures during
2021.
n
Strategy and initial targets established in 2021 to manage
our carbon footprint. Further targets to be developed to
minimise and reduce our emissions over the medium to
longer term.
n
Rising carbon prices caused by the transition to net zero could
negatively impact our future income where emission offsets are
purchased to reduce our carbon footprint.
n
Increasing demand for green mortgage and savings in the UK
may impact our future profitability and growth if we fail to adapt
to meet changing consumer preferences.
n
An increased focus from stakeholders on green credentials may
impact our reputation if the risks and opportunities are not
effectively managed and disclosed.
Section 1.6 – Scenario analysis
The Society has developed a proportionate approach to climate risk scenario analysis as part of our Internal
Capital Adequacy Assessment Process (ICAAP), to understand the potential future impacts of climate change
on our overall risk profile and to inform strategic planning.
Scenario testing approach
Aligned with the Bank of England’s 2021 Climate Biennial Exploratory Scenario (CBES) exercise, the Society has
modelled three climate-related scenarios as part of our 2021 ICAAP.
The scenarios assessed the potential financial impacts from different combinations of physical, transition and
economic risks over a 30-year time horizon (2021 to 2050s). Impacts were modelled based on a static balance
sheet
7
(i.e. no run off of assets and liabilities and no management actions).
Climate change scenarios
Transition risk
High
1. Late policy action scenario (LPA)
Low
2. Early policy action scenario (EPA) 3. No additional policy action scenario (NPA)
Low High
Physical risk
7 Excluding residual Commercial loans, Gibraltar and Spanish mortgages. Outstanding balances are de minimis and were therefore excluded from the analysis.
Climate change scenario descriptions and key assumptions
Late policy action (LPA) Early policy action (EPA) No policy action (NPA)
Description
Disorderly transition to a
net zero economy by 2050
Orderly transition to a
net zero economy by 2050
No further climate policy
leading to a 3.3°C rise in
temperatures by 2050
Transition risk
● High ● Medium ● Limited
Transition begins 2031 2021 N/A
Nature of transition
Late and disorderly. New
climate policy from 2030
Early and orderly. New climate
policy from 2021
Only climate policies in place
pre-2021
EPC ratings
All properties reach their
maximum potential rating by
2030s
All properties reach their
maximum potential rating by
2020s
No change
Peak carbon price £690/tonne Co
2
£580/tonne Co
2
N/A
Physical risk
● Limited ● Limited ● High
Mean global warming
8
1.8°C increase 1.8°C increase 3.3°C increase
Emissions RCP
9
2.6 2.6 8.5
Economic impact (UK)
● Sudden recession ● Temporary downturn ● Permanent downturn
Scenario conclusions
The exploratory climate risk analysis completed during 2021 has provided the following insights:
n
The Society has limited potential exposure to physical risk, under a range of future climate pathways over the
next 30 years (see figures 1, 2 and 3), due to the geographically diversified and low LTV profile of the current
mortgage portfolio.
n
More material potential impacts have been observed through transition risks from the movement towards a
low-carbon economy. For example, 48% of the mortgaged properties in our portfolio with a valid EPC were
rated D or lower
10
(see figure 4) and are therefore more exposed to potential future changes in minimum
energy ratings.
n
Modelling of these climate change impacts continues to be complex and highly uncertain. This is primarily
due to the longer-term time horizons that the risks are expected to materialise over (versus the relatively
short behavioural lives of the current mortgage book) and uncertainties around the timings and impacts of
future government climate policies.
n
We intend to refine and enhance our scenario testing capabilities in future years as additional data become
available and further industry good practice emerges.
8 Increase in average global temperatures compared to pre-industrial levels.
9 Equivalent Representative Concentration Pathway (RCP) developed by the Intergovernmental Panel on Climate Change (IPCC) to model different climate futures based
on the volume of greenhouse gas emissions. RCP 2.6 is a very stringent pathway where emissions fall to zero by 2100 and keep temperature rises below 2°C. RCP 8.5 is a
pathway where emissions continue to rise throughout the 21st century.
10 Based on the mortgage portfolio as at 30 June 2021.
Climate Change continued
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49
Figure 1 – 2050s flood risk profile
11
Mortgage balance (£bn)
Negligible Very low Low Moderate High Very high
14
12
10
8
6
4
2
0
n
EPA/LPA scenario
n
NPA scenario
Figure 3 – 2050s subsidence risk profile
8
Mortgage balance (£bn)
16
14
12
10
8
6
4
2
0
Negligible Very low Low
n
EPA/LPA scenario
n
NPA scenario
11 Based on the mortgage portfolio as at 30 June 2021.
Figure 2 – 2050s coastal erosion risk profile
8
Mortgage balance (£bn)
16
14
12
10
8
6
4
2
0
Negligible Low Moderate Very high
n
EPA/LPA scenario
n
NPA scenario
Figure 4 – Current and potential EPC ratings
8
Mortgage balance (£bn)
7
6
5
4
3
2
1
0
A B C D E
F G
n
Current EPC rating
n
Potential EPC rating
Section 2 – Climate risk governance
During 2021, the Society has established and embedded appropriate governance arrangements to identify
and manage the risks and assess the opportunities associated with climate change. Where appropriate, this
integrated model has used existing committees and built on their area of responsibility and expertise.
Climate
Change Forum
Responsibile
Business
Forum
Executive
Committee
Models and
Rating System
Committee
Operational
Resilience
Committee
Conduct and
Operational Risk
Committee
Assets and
Liabilities
Committee
Audit
Committee
Board Risk
Committee
Board
Nominations
Committee
Remuneration
Committee
Board Sub-Committee
Executive Committee
Working Group
Section 2.1 – Board-level oversight of climate-related risks
Committee Role Activities and areas of focus in 2021
Board
The Board has ultimate accountability for overseeing
the implementation of our purpose led strategy,
including the management of climate-related risks.
Whilst the Board fulfils some of these duties directly,
other responsibilities are cascaded through the
Society’s committee structure. See pages 102 to
111 for further details of the Society’s governance
arrangements.
n
Oversaw development of the Society’s revised
purpose and associated responsible business
strategy, as described on pages 8 to 38.
n
Received climate-related training, which provided
an overview of climate science, market and
regulatory developments, progress towards
compliance with PRA SS3/19, the Society’s carbon
footprint and the Society’s role in supporting a
green transition.
n
Set initial climate strategic aim and targets.
Board Risk
Committee
The Board has delegated responsibility for overseeing
the identification and management of current and
future risks associated with climate change in line with
its stated appetite to the Board Risk Committee.
n
Oversaw integration of climate risks into the
Society’s Enterprise Risk Management Framework
and approval of a new climate risk appetite.
n
Approval of a new target operating model for the
management of climate risks.
n
Approval of a revised ESG Policy, including updated
minimum control statements for climate risks.
n
Approval of outputs and conclusions from
inaugural climate stress testing activity, as part of
the ICAAP.
n
Approving a suite of climate risk indicators.
n
Monitoring delivery of activities to comply with
PRA SS3/19 by 31 December 2021.
Audit
Committee
The Audit Committee assists the Board in ensuring
that the internal systems of control and external
disclosures relating to climate change are appropriate.
n
During the year, the Committee received a deep
dive on trends in ESG reporting, including TCFD,
which has informed non-financial reporting in
2021.
Remuneration
Committee
The Remuneration Committee oversees the design
and implementation of reward structures to ensure
they appropriately motivate colleagues, whilst
underpinning the longer term viability of the Society.
n
Oversaw the inclusion of broader ESG related
deliverables into corporate and personal objectives
and extended controls within the Remuneration
Policy to appropriately capture ESG risks.
Nominations
Committee
The Nominations Committee supports the Board
in ensuring that it appoints directors and senior
management with the right skills and experience to
advance the Society’s climate objectives.
n
To ensure that the Board maintains an appropriate
level of knowledge and expertise, a Climate Risk
Competency Framework has been developed. The
key elements of this framework will be embedded
into the Board’s skills matrix in 2022, reflective
of its increasing importance, and to supplement
broader ESG related expertise.
Climate Change continued
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51
Section 2.2 – Management level oversight of climate-related risks
Executive risk committees
The Board Risk Committee is supported by five executive risk committees, each of which focus on discipline(s)
of the risk universe and how these are influenced by climate change factors:
Forum Chair Responsibilities 2021 discussion topics
Credit
Committee
Chief
Commercial
Officer
Oversees the management of risks from climate change
on the Society’s residential mortgage portfolio and the
development of associated policy/appetite.
n
Credit policy
n
Climate risk MI
n
Updated ToR
Assets and
Liabilities
Committee
Chief Financial
Officer
Oversees the management of treasury related risks
impacted by climate change (e.g. funding and liquidity,
market risk and capital) and the development of associated
policy/appetite.
n
ESG training
n
ICAAP scenario analysis
n
Climate risk MI
n
Updated ToR
Conduct and
Operational Risk
Committee
Chief Customer
Officer
Oversees the management of conduct and operational risks
from climate change (e.g. customer detriment and physical
damage to the Society’s operational properties) and the
development of associated policy/appetite.
n
ICAAP scenario analysis
n
Climate risk MI
n
Updated ToR
Operational
Resilience
Committee
Chief Operating
Officer
Oversees the management of resilience risks from climate
change (e.g. disruption to operations from physical climate
events such as flooding and increased supply chain costs)
and the development of associated policy/appetite.
n
Climate risk MI
n
Updated ToR
Models and
Rating System
Committee
Deputy Chief
Executive Officer
Oversees the development and use of models used to
quantify and profile the Society’s climate risk exposures,
and the development of associated policy/appetite.
n
Climate model
materiality assessment
n
Updated ToR
Given the cross-cutting nature of climate risk, the Society also operates two cross-functional governance
forums, which are responsible for the day-to-day management of climate related risks under the oversight of
the Executive Committee:
Forum Chair Responsibilities 2021 discussion topics
Responsible
Business Forum
Chief Strategy
and Insights
Officer
Ensures appropriate alignment of climate change initiatives
to the Society’s responsible business strategy.
n
Development of
responsible business
strategy
n
Oversight of the ESG
budget
Climate Risk
Forum
Risk Director
Delivery of BRC approved plan to meet requirements of PRA
SS3/19 and operational implementation of green strategy.
n
Compliance with SS3/19
n
Green strategy and
targets
n
Disclosure reporting
n
Green product
proposition
Climate Change continued
Senior Management Function
Responsibility for managing climate-related risk has been assigned to the Deputy Chief Executive Officer, as
the appropriate Senior Management Function (SMF) under the PRA’s Senior Managers Regime. This includes
ensuring that climate-related financial risks are adequately reflected in risk management frameworks, and that
the Society can identify, measure, monitor and report on its exposure to these risks.
Training and awareness
Ensuring robust understanding of climate-related risks and opportunities is crucial for colleagues at all levels
of the organisation. During the year, both the Board and Senior Management Team undertook climate-related
training to enhanced knowledge of this rapidly. Wider colleague engagement has been facilitated through a
climate risk webinar and internal communications throughout the year.
Section 3 – Climate risk management
Section 3.1 – Integration of climate change in risk management
Climate Risk Management Framework
The Society has developed a Climate Risk Management Framework to ensure that climate risks and
opportunities are appropriately identified, measured, managed, monitored, and reported.
The Society does not view climate-related risks as a separate principal risk category, but as risk factors that
have a bearing on existing risks across the Society’s principal risk universe.
The management of climate-related risks and opportunities has been incorporated into existing governance
and risk management processes, where appropriate, ensuring that the risks are being managed in line with
Board approved appetite.
Enterprise Risk Management Framework (ERMF)
Climate Risk Management Framework (CRMF)
Climate risks (physical and transitional)
Credit risk
Funding and
liquidity risk
Climate Data
Standard
Policies and
standards
Strategic/business
risk
Model risk
Climate Key Risk
Indicators
Governance and
reporting
Conduct risk
Capital risk
Climate Scenario
Analysis Standard
Stress testing
Operational risk
Market risk
Climate Disclosure
Standard
Risk appetite and
limits
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53
Risk appetite
Our initial climate risk appetite has been defined in line with current good practice guidance, combining a
qualitative statement with measures the Society uses to assess adherence with appetite over a time period
reflective of the risks from climate change.
Vision
Climate Change Strategic Aim
Support the orderly transition to a greener, net zero economy by 2050 or sooner
Appetite
“The Society has a low tolerance for ESG risks in order to create long term value for its key stakeholders
and protect its brand and reputation.”
Supporting Measures
n
To be carbon neutral by the end of 2022 for scope 1 and 2 (on a market-based approach) and scope 3
(business travel emissions
12
), utilising carbon offsets to remove residual emissions.
n
To maintain an EPC rating of C or better for at least 50% of the Society’s UK residential mortgage
lending portfolio by 2025.
n
To work towards alignment with a 2050 net zero emissions pathway.
n
To maintain negligible/low exposure to physical climate risks (flooding, subsidence, and coastal
erosion), both currently and under a high-emissions 30-year representative scenario (as defined
under the ICAAP).
Section 3.2 – How climate risks are identified, assessed and managed
Climate risk operating model
A climate change operating model has been established to assist the Board and Deputy CEO in the effective
identification and management of climate risks.
A central strategy and risk management hub ensures there is close alignment between the Society’s purpose
and climate risk appetite/policy and provides direction to relevant functional areas that have accountability for
the management of each aspect of climate risk.
Deputy CEO = Climate Risk SMF
RD
Risk Director
CBO
Chief Brand and
Marketing Officer
CSIO
Chief Strategy and
Insight Officer
COO
Chief Operating
Officer
CFO
Chief Financial
Officer
CCO
Chief Commercial
Officer
RD
CSIO
Strategy and risk
management
COO CFO
Operational
resilience
CFO CCO
Green finance
CSIO CBO
Communication
CSIO COO
Operational
infrastructure
RD CSIO
Carbon
footprint
RD CFO
Reporting and
disclosure
12 Includes emissions from rail, road (excluding taxis) and air as a result of the Society’s business travel.
Three lines of defence
The Society defines roles and responsibilities in relation to climate risk under a three lines of defence (3LOD)
approach, reflective of the Society’s size and complexity.
3LOD Climate-related remit
First line
(Business lines)
n
Development of the Society’s climate risk strategy and wider responsible business strategy.
n
Identification, assessment, and management of climate change risks across the risk universe.
n
Colleague engagement campaigns.
Second line
(Risk function)
n
Maintenance of the Climate Risk Management Framework.
n
Climate risk monitoring and reporting.
n
Development of climate scenario analysis and stress testing.
Third line
(Internal Audit)
n
Independent assurance of the adequacy and effectiveness of first and second line risk management, on a
risk-based approach.
n
Supplemented by external assurance reviews as required.
Assessment and management of climate-related risks
The Society uses its ERMF, as described on pages 136 to 141, to assess how climate change risks could impact
each of the Society’s principal risks.
Our current assessment of potential impacts
13
against each of our eight principal risks is presented below along
with key mitigants in place to manage the risk. The assessment is based on available data and insights and
should be viewed in the context of the current complexity and high degree of uncertainty around future climate
change.
Summary of climate-related risks, potential impacts and mitigants
● = High potential impact ● = Medium potential impact ● = Low potential impact
Risk factor Risk description Horizon Key mitigants
1. Credit risk
Physical risk ●
n
Increasingly frequent/severe flooding,
subsidence and erosion from climate
change causes physical damage to
properties, negatively impacting the
value of the collateral.
n
Higher insurance/repair costs for
members, impacting debt serviceability.
n
Increased default risk for wholesale
counterparties exposed to climate
change.
Long term
n
Flood risk assessment required as part
of underwriting/conveyancing.
n
Appropriate insurance policies are
required under mortgage terms and
conditions.
n
Stressed affordability assessments.
n
Postcode concentration limits.
n
LTV limit structure for lending segments.
n
Semi-annual back book assessment
of physical risks under multiple climate
pathways/stresses.
n
Development of automated decisioning
processes to incorporate climate data.
n
ESG assessments for wholesale
counterparties.
13 Potential impact reflects our assessment of the inherent impact/likelihood of the risks occurring.
Climate Change continued
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55
Risk factor Risk description Horizon Key mitigants
1. Credit risk (continued)
Transition risk ●
n
Changes in government policy
negatively impact house prices and
borrower affordability (e.g. minimum
EPC ratings).
n
Transition to a green economy impacts
borrower affordability (e.g. rising energy
costs).
n
Macroeconomic downturn from
climate change impacts house prices
and borrower affordability (e.g. higher
unemployment).
Medium term
n
Semi-annual back book assessments
of EPC ratings to assess concentration
risks.
n
Transitional risk stress testing
conducted as part of ICAAP assessment.
n
EPC ratings being collected as part of
underwriting for certain products.
n
Stressed affordability assessments.
n
Horizon scanning for technological
changes or changes in consumer
sentiment.
n
Development of automated decisioning
processes to incorporate climate data.
2. Business and strategic risk
Physical and
transition risk ●
n
Loss of income from an increase in the
severity and frequency of climate events.
n
Changes in member expectations
relating to the provision of green
strategic objectives.
n
Reputational impact of carbon footprint
of products and services leading to lower
member attraction and retention.
Medium term
n
Responsible business strategy, including
the setting of appropriate appetite and
targets for climate risk.
n
Green product proposition and
governance.
n
ICAAP stress testing/sensitivity analysis.
n
Disclosures articulating the Society’s
approach to climate risk management.
n
Horizon scanning and assessment (e.g.
regulatory change).
n
Member engagement and education.
3. Operational risk
Physical risk ●
n
Branches or offices are damaged, or loss
of systems, processes or data, due to
physical impacts (e.g. flooding).
n
Increased incidence of environmental
perils affecting the delivery of third party
goods and services.
n
Internal capability affected by physical
events preventing colleagues from
accessing the office or branches.
n
Regulatory breaches/censure.
Medium/Long
term
n
Corporate insurance policy.
n
Business continuity planning and
operational resilience factored into our
investment strategy (e.g. additional
flood defences for our new head office
site in Leeds).
n
Disaster recovery testing.
n
ICAAP Operational Risk Pillar 2a
assessment.
n
Remote working capabilities.
n
Environment factors considered as part
of supplier due diligence.
n
Supplier audits/recovery testing.
n
Regulatory horizon scanning and
compliance assessments.
Transition risk ●
n
Increased supply chain costs due to
climate-related inflationary pressures.
n
Reputational damage from third party
relationships due to their climate change
credentials.
Medium term
n
Supplier due diligence and exit planning.
n
Supplier relationship meetings.
Climate Change continued
Risk factor Risk description Horizon Key mitigants
4. Model risk
Physical and
transition risk ●
n
Increased reliance on complex models
to understand climate related risks over
longer term horizons to support current
day decision making.
n
Models are based on the latest climate
science, with historic performance not
an indicator of future performance.
n
A lack of transparency around model
assumptions and limitations results in
incorrect decision making.
Medium/Short
term
n
Model Risk Policy requirements and
materiality assessment.
n
Independent model validation reports.
n
Data completeness checks and
reconciliations.
n
Variance analysis and associated
commentary to understand key trends.
n
Model documentation and localised
procedures.
n
Credit risk and modelling SMEs.
n
Third party management arrangements
and oversight.
5. Funding and liquidity risk
Physical and
transition risk ●
n
Erosion of savings deposits (e.g. due to
property retro-fit costs or loss of income
from climate related macroeconomic or
transitional impacts).
n
Reduction in savings balances due to a
change in member preferences towards
green products.
n
Increased cost of wholesale funding due
to a change in investor appetite for green
bonds.
n
Increased losses from counterparties
with a higher exposure to climate risk.
Medium/Long
term
n
Annual ILAAP and Recovery Planning
processes.
n
Daily monitoring of the Society’s liquidity
position and early warning indicators.
n
Weekly cashflow forecasting.
n
Liquidity management actions under the
Recovery Plan.
n
Climate risk disclosures articulating the
Society’s approach to the management
of climate risk.
n
Green product proposition and
governance.
6. Market risk
Physical and
transition risk ●
n
Changes in market pricing as a result
of the implementation of new climate
policies (e.g. rising price of renewable
energy and carbon-offsets).
n
Changes in the value of certain financial
assets and liabilities as a result of
macroeconomic events in response
to climate change (e.g. interest rate
movements).
n
Changes in member behaviour in relation
to their mortgage or savings deposits.
Long term
n
ICAAP stress testing/sensitivity analysis.
n
Implementation of the Market Risk Policy
and associated limit structure.
n
Environmental factors are considered
annually as part of counterparty credit
limit assignment.
n
Regular testing of the liquidity of market
securities.
n
Monitoring and recalibration of
behavioural life models for savings and
mortgages.
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57
Risk factor Risk description Horizon Key mitigants
7. Conduct risk
Physical and
transition risk ●
n
Potential liability and conduct risks from
green propositions and assumed advice.
n
Inappropriate treatment of members
who are in financial difficulty as a result
of the impacts of climate change.
n
Increased member activity (e.g.
increased call volumes) resulting from
physical risk, impacting the Society’s
service capacity.
Medium/Long
term
n
Product Governance Framework.
n
Credit risk appetite and policy.
n
Colleague training, with regular
oversight and assessment.
n
Compliance monitoring reviews.
n
Complaints handling and resolution
procedures.
n
Resource planning and business
continuity arrangements.
8. Capital risk
Physical and
transition risk ●
n
Reduction in capital from changes in
risk weighted assets and impairment
provisions for mortgages as a result of
climate related events.
n
Increase in operational losses linked to
climate events.
n
Impairment of balance sheet assets,
such as premises or branches, due to
either physical damage or transitional
impacts.
Long term
n
The annual ICAAP considers the risk
profile of the Society across all its
principal risk categories (including the
impact of climate change).
n
Further alternative scenarios and
sensitivity analysis.
n
Credit risk appetite and policy.
Section 4 – Climate risk metrics and targets
Section 4.1 – Key climate risk targets and performance
As part of our responsible business strategy, the following initial targets relating to climate change have been
agreed by the Board:
Targets
Carbon neutral by end-2022
Direct (market-based) and
indirect (business travel)
emissions
EPC rating of C or better
For 50% or more of our UK
mortgaged properties
14
by 2025
Alignment to net zero
Work towards alignment with a
2050 net zero pathway
2021 performance
n
Verified as carbon neutral
(scope 1 and 2 plus scope 3
business travel
15
) in 2021, one
year ahead of plan.
n
95% reduction in our carbon
footprint since 2016.
16
n
52% of our UK mortgaged
properties had an EPC of C or
better as at 30 June 2021.
n
Launched our first green
finance products (mortgages
and savings).
n
Climate risk embedded
into our Enterprise Risk
Management Framework
during 2021.
n
Stress testing of our
potential future exposure
to climate-related risks
completed.
We recognise that further targets will be required to help finance the transition to net zero and minimise and
reduce our own emissions over the medium to longer term.
14 Where a valid Energy Performance Certificate (EPC) is available for the property.
15 Includes emissions from rail, road (excluding taxis) and air as a result of the Society’s business travel.
16 Based on reductions in our scope 1 and scope 2 (market-based) emissions.
An initial target has been set to ensure that at least 50% of the Society’s UK based mortgaged properties
have an EPC rating of C or better by 2025. The target has been set as the minimum baseline that we will aim to
maintain to ensure there is an appropriate balance between encouraging improvements in the energy efficiency
of homes below EPC rating C by helping our members to make those improvements and taking on new lending
to properties with an EPC rating of A, B or C already. Whilst the average EPC position is currently favourable
versus our 2025 target (52% as at 30 June 2021), only 62% of our UK mortgage portfolio currently has a valid
EPC available and the average may therefore change in future as data gaps are closed. The performance of the
portfolio is also likely to fluctuate between now and 2025 as we develop our responsible business strategy and
future green product proposition to focus on helping to finance the green transition.
We are also committed to resolving the current challenges to enable alignment with a net zero pathway,
including further measurement and assessment of our scope 3 emissions. To assist with this, we will be
engaging with third party specialists during 2022 to progress our understanding.
Section 4.2 – Climate risk metrics
Physical risk metrics
As at 30 June 2021, the Society’s UK mortgage portfolio
17
demonstrated a low current and future risk posture
for flooding, subsidence, and coastal erosion:
Present day
Low emissions scenario
18
(2050s)
High emissions scenario
13
(2080s)
Properties
Exposure
(£m)
% of
Book
Properties
Exposure
(£m)
% of
Book
Properties
Exposure
(£m)
% of
Book
Flood risk
Negligible 128,627 13,599 79.6% 128,940 13,633 79.8% 128,359 13,566 79.4%
Very low 12,634 1,350 7.8% 12,412 1,328 7.7% 5,895 600 3.6%
Low 3,142 347 1.9% 3,062 341 1.9% 4,188 457 2.6%
Moderate 2,779 302 1.7% 2,857 306 1.8% 4,649 524 2.9%
High 4,682 508 2.9% 4,494 492 2.8% 7,194 793 4.5%
Very high 2,596 249 1.6% 2,695 255 1.7% 4,175 415 2.6%
Unmatched
19
7,175 890 4.4% 7,175 890 4.4% 7,175 890 4.4%
Coastal erosion
Negligible 148,852 15,957 92.1% 148,833 15,954 92.1% 148,768 15,948 92.0%
Low 6 1.0 0.0% 4 0.7 0.0% 3 0.4 0.0%
Moderate 7 0.8 0.0% 21 2.9 0.0% 28 2.9 0.0%
Very high 4 0.9 0.0% 11 1.7 0.0% 70 8.1 0.0%
Unmatched
14
12,766 1,286 7.9% 12,766 1,286 7.9% 12,766 1,286 7.9%
Subsidence risk
Negligible 132,937 13,688 82.2% 127,157 13,007 78.7% 103,725 9,982 64.2%
Very low 7,051 892 4.4% 10,865 1,318 6.7% 31,121 3,960 19.3%
Low 8,881 1,380 5.5% 10,847 1,634 6.7% 14,023 2,017 8.7%
Moderate – – – – – – – – –
High – – – – – – – – –
Very high – – – – – – – – –
Unmatched
14
12,766 1,286 7.9% 12,766 1,286 7.9% 12,766 1,286 7.9%
17 Excludes de minimis legacy Commercial, Gibraltar and Spanish lending portfolios, which are closed books in run-off and have therefore been excluded from the analysis.
18 Low emissions scenario equates to a 1.8°C increase in global temperatures by 2050s. High emissions scenario equates to a 3.3°c increase in temperatures by 2080s.
19 Unmatched refers to properties where we have been unable to source physical risk data.
Climate Change continued
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59
Transition risk metrics
The Society currently uses EPC data as the primary way of assessing the potential impact of transition risk.
An EPC shows how energy-efficient a property is based on a traffic light rating from A to G (with A being the
most efficient and G the least). Ratings show the estimated energy cost (heating and lighting) and associated
carbon emissions for the property. Current and potential ratings (after considering available energy efficiency
improvements) are provided on the EPC.
EPC ratings for our UK mortgage portfolio are monitored to provide an overall view of the energy efficiency
(and potential emissions) of our mortgaged properties. The table below presents the current and potential EPC
profile of our UK residential mortgage portfolio as at 30 June 2021.
Current EPC rating Potential EPC rating
EPC rating
Total
mortgage
book
Owner
occupied
Buy to let
Total
mortgage
book
Owner
occupied
Buy to let
A 0.4% 0.5% 0.1% 17.9% 25.3% 3.9%
B 27.7% 39.0% 6.4% 53.2% 51.4% 56.7%
C 24.2% 20.0% 32.0% 24.9% 20.2% 34.0%
D 34.0% 28.2% 45.0% 3.4% 2.7% 4.8%
E 11.5% 9.8% 14.6% 0.5% 0.4% 0.6%
F 1.9% 2.0% 1.5% 0.1% 0.1% 0.1%
G 0.4% 0.4% 0.4% 0.0% 0.0% 0.0%
Average
20
C C D B B B
Overall, 62% of the total UK mortgage portfolio was matched with a valid EPC
21
. Of those properties, 52% had a
current EPC rating of C or better. The average rating for the total portfolio with a valid and matched EPC was C
(compared to a UK average of D
22
). Based on potential EPC ratings, 96% could reach C or better and the average
for the total portfolio would increase to B. During 2022, we will continue to focus on ways to increase EPC data
coverage and help support the transition from current to potential ratings.
Other climate-related metrics
During the year, the Society developed a suite of internal key risk indicators (KRIs) to help support the
monitoring of climate risks through relevant internal governance forums. These KRIs will continue to be refined
and built out over time, as more data becomes available and new risks emerge.
Section 4.3 – 2021 greenhouse gas (GHG) reporting
The Society’s GHG Reporting has been completed in accordance with requirements of The Companies Act
2006 (Strategic Report and Directors’ Report) Regulations 2013 and the UK’s Streamlined Energy and Carbon
Reporting (SECR) regulations.
Reported emissions have been calculated using the World Resources Institute and the World Business
Council for Sustainable Development GHG Protocol, which is the internationally recognised standard for the
measurement, management and reporting of GHG emissions. The Society has set its organisational GHG
emissions boundary using the operational control approach, which captures GHG emissions from operations
under our control. Reported emissions encompass the seven GHGs defined under the Kyoto Protocol and are
broken down into three main categories:
20 Average EPC rating based on number of properties.
21 Only properties that are newly built, leased or rented out are required to have an EPC under current UK regulations.
22 Source: data provided by Hometrack.
Category Description
Scope 1
Direct GHG emissions that originate from assets that the Society owns or controls e.g., emissions from the
combustion of gas to heat branches or fugitive emissions from ventilation systems.
Scope 2
Indirect GHG emissions from the generation of purchased electricity. Under the GHG Protocol, the Society is
required to report scope 2 emissions of both market and location-based approaches.
n
Market based approach – reflects emissions from electricity that the Society has purposefully chosen, e.g.
renewable energy.
n
Location based approach – reflects the average emissions intensity on the grids upon which energy
consumption occurs, such as using UK Government grid-average emissions factors.
Scope 3
All other indirect emissions that occur across the Society’s value chain. At present scope 3 emissions reporting
is voluntary and is an emerging area of focus to achieve net zero emissions. For 2021, the Society’s scope 3
emissions include business travel only. We intend to include additional scope 3 emission categories in future
reporting once processes have been established to capture the required data.
Table 1 below outlines the Society’s Streamlined Energy and Carbon Reporting emissions for 2021 with
comparisons to 2020 and 2016 (our baseline year for reporting purposes). Numbers for 2016 and 2020 have
been restated from prior periods following enhancements in our data collection and validation processes during
2021. Prior year disclosures are provided in table 2 for comparative purposes.
Table 1 – SECR restated for 2016 and 2020
Market-based approach Location-based approach
Emissions (t/CO
2
e)
23,
24
2021 2020
2016
(Baseline)
2021 2020
2016
(Baseline)
Scope 1
Diesel – – 6 – – 6
Gas 41 39 102 41 39 102
Fugitive emissions 0.01 0.04 No data 0.01 0.04 No data
Scope 2
Electricity 18 19 1,150 906 1,032 1,552
Total scope 1 and 2 59 58 1,258 947 1,071 1,660
Scope 3
Business travel
25
32 98 No data 32 98 No data
Total scope 1, 2 and 3 91 156 1,258 979 1,169 1,660
Purchased offsets
26
(91) (156) – (91) (156) –
Net carbon outturn – – 1,258 888 1,013 1,660
Other metrics
Emissions per FTE (Scope 1 and 2) 0.04 0.04 1.03 0.70 0.82 1.36
Energy consumption (Mwh) 4,491 4,640 4,320 4,491 4,640 4,320
Energy consumption (per FTE) 3.30 3.53 3.54 3.30 3.53 3.54
23 t/Co
2
e stands for tonnes of carbon dioxide equivalent (the recognised measure for GHG emissions).
24 In accordance with GHG reporting standards, estimates of gas and electricity have been used to calculate our scope 1 and 2 emissions where automated meter readings
and invoices were not available.
25 Includes emissions from rail, road (excluding taxis) and air as a result of the Society’s business travel.
26 Offsets for our total scope 1, 2 and 3 business travel 2021 emissions will be purchased during 2022 once final energy consumption data is available and has been
independently verified.
Climate Change continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
61
Table 2 – SECR prior year disclosures
Market-based approach Location-based approach
Emissions (t/CO
2
e) 2020
2016
(Baseline)
2020
2016
(Baseline)
Scope 1
Diesel – 6 – 6
Gas 37 102 37 102
Fugitive emissions 0.04 No data 0.04 No data
Scope 2
Electricity – 1,131 1,000 1,533
Total scope 1 and 2 emissions 37 1,233 1,037 1,641
Scope 3
Business travel 154 No data 154 No data
Total scope 1, 2 and 3 emissions 191 1,233 1,191 1,641
During 2021, we were awarded carbon neutral status by ClimateCare, one year ahead of plan, following the
purchase of certified carbon credits to offset our residual market-based emissions. Refer to page 25 for
further details.
The Society has also implemented various initiatives in 2021 to reduce our carbon footprint over time:
n
Moved into a new EPC A-rated head office site in Leeds.
n
Installed automatic meter readers across the property estate to enable real time monitoring of energy
consumption.
n
EPC and environmental surveys have been undertaken across the branch network to inform the
development of a property estate strategy in 2022.
Summary of our carbon footprint 2016 to 2021
Location-based emissions (tCO
2
e)
2016 2017 2018 2019 2020 2021
2,000
1,500
1,000
500
0
n
Scope 1
n
Scope 2
n
Scope 3 (business travel)
Market-based emissions (tCO
2
e)
Baseline 2017 2018 2019 2020 2021
n
Scope 1
n
Scope 2
n
Scope 3 (business travel)
2,000
1,500
1,000
500
0
Energy consumption (Mwh)
2016 2017 2018 2019 2020 2021
5,000
4,000
3,000
2,000
1,000
0
n
Non-renewable energy
n
Renewable energy
Section 4.4 – Waste and water consumption
The Society continues to divert 100% of our generated waste
27
from landfill, with 85% recycled in 2021 and the
remainder sent to a waste-to-energy facility to generate Refuse Derived Fuel (RDF).
2021 2020
Waste material Weight (Kg) Recycled RDF Weight (Kg) Recycled RDF
Dry mixed recyclables 18,550 100% – 9,109 100% –
Glass
28
1,039 100% – – – –
Mixed municipal waste 64,777 77% 23% 47,852 76% 24%
Paper and cardboard 16,534 100% – 22,016 100% –
Total 100,900 85% 15% 78,977 86% 14%
The Society does not currently have data available to report on our water consumption across our head office
and branch sites, however this is something that we plan to review in 2022 and will provide an update in future
disclosures at the appropriate time.
27 Includes waste arising from core business activities conducted through our head office and branch sites, which excludes items such as redundant IT equipment. The
numbers disclosed exclude waste from three of our branches that are part of a shared building.
28 Data for glass is only available for 2021.
Climate Change continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
63
Principal Risks
Year ended 31 December 2021
The Society’s purpose of: “Putting home ownership within reach of more people – generation after
generation” can only be achieved if risks are identified, understood and managed effectively. By understanding
the nature of our risks, we can make informed decisions, which support our longer-term viability and protect
members’ interests.
We deliver our purpose through a corporate strategy, which is built upon three strategic drivers (as described on
page 11). Inherent within this strategy are eight principal risk categories. These comprise: credit; funding and
liquidity; capital; market; operational; conduct; model
1
and strategic/business risks. For each of these principal
risk categories, we operate appropriate systems of control including risk governance, appetite setting, policies
and key risk indicator reporting. These set the risk parameters within which the corporate plan needs to be
delivered, as well as providing appropriate triggers for management response under stressed conditions. No
changes were made to the Society’s suite of principal risk categories during 2021.
Policy/Limit Framework
Corporate Plan
Strategic Risk Appetite
Principal risks
Stress Testing Framework
Credit Funding and liquidity Capital Market
Operational Conduct Strategic/businessModel
1 As defined on page 71.
With regard to climate change, the Society does not view climate-related risks as a separate principal risk
category, but as risk factors that have a bearing on existing risks across the Society’s principal risk universe.
Refer to pages 39 to 63 for details of our assessment of the potential impacts of climate-related risks.
The eight principal risk categories are influenced by underlying subsets of risk types, which comprise our risk
universe. Over time, the nature and profile of these underlying risks evolve, reflecting changes in our current
risk profile and the economic/business cycle. Accepting that risk is an inherent part of doing business, and
that it is not possible to identify, anticipate or mitigate every risk that may materialise, our risk management
processes (described on pages 136 to 141) aim to provide reasonable assurance that the Board and Executive
understand, proactively manage and monitor the main uncertainties faced in achieving agreed objectives.
During 2021, the risk profile of the Society has continued to be influenced by the effects of COVID-19 across all
principal risk categories. During this time, the Society has retained appropriate governance arrangements to
assist in managing the response to the pandemic, which has been based upon the following corporate priorities:
n
keeping the Society financially secure;
n
safely keeping the Society operating for the benefit of our members; and
n
communicating to our colleagues and members.
In the context of the priorities above, the Society’s principal risks are summarised below. The risk categories are
not presented in order of materiality, as they all have the potential to affect future performance, depending on
the prevailing circumstances. The Society’s current top five emerging risks, which could affect the delivery of
our strategy (and cut across various principal risk categories), are set out in the Emerging Risks section on
page 73.
Strategic/business risk
n
The risk that the Society is unable to deliver its strategic objectives.
n
This risk mainly relates to poor execution of the Society’s strategy
or changes within the operating environment, which threaten the
sustainability of our business model.
Mitigation Commentary
n
The direction of business and investment activity are
set by the strategic planning process in the context
of the changing regulatory, technological, and
competitive landscape.
n
A Board defined appetite, supported by a suite of
appropriate policies.
n
The corporate planning process assesses the
business environment on a regular basis, and is
Board approved.
n
Competitor/market performance is assessed by
thematic reviews.
n
Stress testing is used to understand performance
under a variety of severe, but plausible, scenarios.
n
Independent risk reporting, including horizon
scanning, assesses the general operating
environment of the Society.
2021 performance
n
During 2021, the Society’s operating environment continued to be
influenced by the impacts of COVID-19. Following the lifting of social
restrictions, the UK has experienced a strong economic recovery and
a buoyant housing market. However, several downside risks emerged
towards the end of the year, including the emergence of a new
COVID-19 variant, which may negatively impact activity in 2022.
n
In response to the pandemic, the Society retained agile governance
arrangements established in 2020, to ensure that evolving risks were
appropriately managed and monitored. This was complemented
by frequent stress testing to understand the potential financial and
operational impacts under severe but plausible scenarios.
n
As a UK centric business, the direct impact of the UK’s exit from the
EU at the end of 2020 has been relatively contained to date or masked
by COVID-19 impacts. Developments have been monitored closely
throughout 2021 and appropriate response plans deployed to meet
revised requirements. We remain vigilant to a potential scarcity of
skilled resource, which may inflate costs or slow down delivery.
n
Competition pressures in the UK mortgage market heightened in the
second half of 2021, as lenders reversed earlier criteria tightening. From
a savings perspective, price competition has also started to increase
following closure of the Bank of England’s Term Funding Scheme
(TFSME) and changes in interest rate views in Q4 2021. We have
continued to carefully monitor the market positioning of our products
and have responded accordingly.
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
65
Principal Risks continued
Strategic/business risk (continued)
n
Our cost to income ratio decreased during the year to 43.9% versus
51.0% in 2020, supported by higher income. The Society maintains
an efficient business model relative to peers, which supports further
investment in operations. Here we have continued to progress an
ambitious change agenda to support member experience and further
strengthen our resilience (moving to a new head office and substantially
transitioning our data centres to more secure and resilient locations).
Outlook
n
There remains a heightened level of uncertainty regarding the outlook
for the Society’s operating environment in 2022, due to the threat
of new COVID-19 variants, macroeconomic pressures (e.g. inflation
and rising interest rates) and pre COVID-19 levels of mortgage
competition. Margin compression is forecast for 2022 and beyond due
to the competitive environment for UK savings and mortgages.
n
The Society remains vigilant to changes within its operating
environment. Business environment risks are assessed on a regular
basis, under both central and stressed conditions, to understand and
manage the impact on the Society.
Credit risk – retail
n
The risk that residential or commercial borrowers are unable to make
their loan payments.
n
This risk arises from the Society’s residential lending activities and
legacy credit portfolios.
Mitigation Commentary
n
A Board defined appetite, supported by the Lending
Policy, limit frameworks and management reporting.
n
The Society focuses its lending in areas of specific
expertise.
n
Continuous review of performance against appetite.
n
Forward looking assessments of adherence to
appetite and limits.
n
Underwriting processes are designed to be robust
and include the use of credit scoring models,
affordability stress testing, automated decisioning
and suitably qualified underwriters.
n
Independent appraisal of collateral, such as
valuations.
n
Oversight of the Society’s lending portfolios is
provided by a dedicated second line Credit Risk team.
n
Stress testing assesses vulnerabilities within credit
portfolios and informs pre-emptive actions.
n
Benchmarking of credit controls and performance.
2021 performance
n
Whilst underpinned by government support, economic conditions were
favourable during the year, with material increases in house prices and
decreases in unemployment versus projections. These two factors are
key to supporting strong credit risk dynamics.
n
A considered approach was taken with respect to the unwinding of
temporary COVID-19 controls to ensure that re-entry into segments
of the market was safe and controlled. As a consequence, various credit
quality metrics of new lending in 2021 were stronger than in previous
years.
n
The loan to value (LTV) of the portfolio reduced from 50.9% to 50.5%
over 2021, supported by positive house price growth and lower LTV
new lending in the first half of 2021 (prior to re-entry into higher LTV
residential segments).
n
Mortgage payment deferral (MPD) take-up because of COVID-19
was broadly consistent with the UK average for owner-occupied
lending, with buy to let lending exhibiting a materially lower take-up;
an indication of the underlying credit quality of the buy to let book.
n
Arrears rates for our UK mortgage portfolio (arrears of more than 2.5%
of balance) have remained broadly stable over 2021. Owner-occupied
arrears are in line with UK averages
2
(0.86% compared to 0.89%) whilst
our buy to let portfolio remains materially lower (0.14% compared to
0.30%).
n
Increases in Stage 3 balances from 1.1% to 1.2% are principally driven
by changes to the IFRS 9 definition of default rather than any underlying
change in credit quality. Excluding any changes to the definition of
default, stage 3 balances would have remained broadly stable at 1.1%.
2 Source: UK Finance Q4 2021 arrears and possessions data.
Credit risk – retail (continued)
n
Overall provision coverage has reduced from 0.25% to 0.20% during
2021. This is primarily a reflection of the improved economic central
outlook, alongside modest improvements in underlying credit quality.
n
Further information regarding the Society’s credit risk profile can be
found within note 32 of the accounts.
Outlook
n
Although the UK has made a strong recovery to date, heightened
uncertainty remains which may impact the Society’s credit risk posture.
For instance, the threat of new variants may result in the reinstatement
of social restrictions or a sustained period of inflation could place
pressure on borrower affordability.
n
The UK mortgage market remains extremely competitive with margin
compression forecast throughout the planning period likely to result in
ongoing adjustments to the credit mix and criteria aligned to dynamic
market conditions.
n
The Society remains vigilant to changes in the operating environment
and will update lending appetite and controls accordingly.
Credit risk – wholesale
n
The risk that wholesale counterparties default on their obligations.
n
This risk predominately emanates from the Society’s liquidity holdings
and derivative portfolio, which is used for hedging market risk.
Mitigation Commentary
n
A Board defined appetite, supported by the
Wholesale Credit Risk Policy (including concentration
limits).
n
Review of performance versus appetite conducted at
least monthly, and more frequently during times of
stress.
n
All counterparty credit lines are reviewed at least
annually, based on internal analysis, credit default
swap spreads, geographic location, ESG posture and
other market intelligence.
n
The portfolio is monitored regularly by a dedicated
first line team, with oversight provided by the Risk
function.
n
Daily exchange of collateral and other netting
arrangements for derivative exposures.
2021 performance
n
The Society has maintained prudent investment criteria throughout
the pandemic to ensure exposures remain within Board appetite.
n
As at the end of 2021, 97.3% of the portfolio was invested with
counterparties with an external credit rating of Aa3 or better (2020:
96.4%). Further information regarding the Society’s wholesale credit
risk profile can be found within note 33 of the accounts.
n
During 2021, the Society incorporated minimum ESG criteria into its
suite of wholesale credit models to ensure counterparties are aligned
to its ESG principles.
n
The majority of our derivative portfolio is centrally cleared, which
mitigates bilateral counterparty risk. Where this is not possible,
derivative exposures are restricted to high quality counterparties and
are managed with collateral and netting arrangements.
Outlook
n
The Society will continue to monitor the performance of the portfolio
closely and maintain an appropriate investment strategy.
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
67
Funding and liquidity risk
n
The risk that the Society is unable to meet our financial obligations as
they fall due.
n
Funding risk is the inability to generate sufficient funding, or only do
so at excessive cost.
Mitigation Commentary
n
A Board defined appetite, supported by the Funding
and Liquidity Policy (including concentration limits).
n
The Society’s liquidity position is monitored on
a daily basis by a dedicated first line team, with
oversight provided by the Risk function.
n
An Internal Liquidity Adequacy Assessment Process
(ILAAP) is conducted at least annually, to determine
the level of liquidity resources required under
stressed conditions.
n
A portfolio of high-quality liquid assets is maintained
and regularly tested.
n
Access to central bank funding, through
prepositioned collateral.
n
Review of performance versus appetite conducted at
least monthly, and more frequently during times of
stress.
n
Stress testing conducted frequently to understand
the impact of severe, but plausible, scenarios and to
inform pre-emptive actions.
n
Maintenance of a Recovery Plan, including liquidity
actions.
2021 performance
n
The Society maintained a strong liquidity position throughout 2021.
As at 31 December 2021, the Society’s Liquidity Coverage Ratio
stood at 195%, which was considerably above minimum regulatory
requirements (100%).
n
Retail savings remain the Society’s predominant method of funding
(75% of share and deposit liabilities), through a strong retail franchise.
n
We also maintain access to capital markets through a well-established
wholesale franchise and diversified investor base, which is underpinned
by our credit ratings (Fitch: A- and Moody’s: A3). Using this strong
investor base, the Society successfully issued a £350 million senior
unsecured transaction and £350 million of subordinated liabilities
during the year.
n
The Society has also raised wholesale funding through the Bank of
England’s TFSME in 2021, which closed in October. As at 31 December
2021, the Society had accessed £2.24 billion of funding through this
scheme (2020: £810 million).
n
In 2021 we adopted a more responsive and dynamic approach to
liquidity management focusing more on risk-based liquidity measures
and stress testing. This ensures that we hold the right amount of
liquidity for the circumstances and future expectations whilst at
all times ensuring that our minimum risk appetite and regulatory
requirements are fully observed.
n
Further information regarding the Society’s liquidity risk profile can be
found within note 34 of the accounts.
Outlook
n
The Society carries strong levels of on balance sheet liquidity into
2022 and remains well positioned to address any liquidity/funding
uncertainty that may arise through a combination of its retail and
wholesale franchises.
Market risk
n
The risk that market movements adversely impact the Society.
n
The Society’s market risk exposures mainly relate to interest rate risk
(including basis and optionality risks) and foreign currency risk.
Mitigation Commentary
n
A Board defined appetite, supported by the Market
Risk Policy (including concentration limits).
n
The Society’s market risk exposures are monitored
frequently by a dedicated first line team, with
oversight provided by the Risk function.
n
Market risk positions are managed by the offsetting
of assets and liabilities and use of derivatives.
Derivatives are used to hedge market risk exposures,
where a natural hedge is not feasible.
n
Stress testing is conducted frequently to understand
the impacts of movements in interest and foreign
exchange rates on value and income.
n
Monthly review of performance against appetite.
2021 performance
n
During the year, the likelihood of negative interest rates abated, as
the UK economy recovered strongly from the pandemic. Following a
material rise in inflation during the second half of the year, the Bank of
England raised Bank Base Rate to 0.25% in December.
n
The Society has retained close oversight of its market risk exposures
and product offerings, making tactical adjustments to the balance
sheet structure in response to the evolving external environment. This
has also been complemented by stress testing to understand margin
impacts under various interest rate paths (including the potential for
negative rates) and different balance sheet shapes.
n
Successful transition of reference interest rate from LIBOR to SONIA,
ahead of the regulatory deadline of 31 December 2021.
Market risk (continued)
n
In recent years we have developed the capability to measure the
interest rate risk of our assets and liabilities on a behavioural basis as
well as the more common contractual basis. Subsequently, in 2021
we commenced the building of a structural hedge to manage the
behavioural attributes of our stable and rate insensitive deposits.
n
The Society retains a small foreign exchange exposure relating to
wholesale funding activity and a legacy mortgage portfolio in Spain.
These exposures remain comfortably within Board approved limits.
n
Further information regarding the Society’s market risk profile can be
found within note 35 of the accounts.
Outlook
n
Towards the end of 2021, financial markets indicated that further
interest rate rises were likely in 2022 in order to combat higher
inflation. The expectation of higher interest rates represents a
change in sentiment compared to previous years when the outlook
has been more benign. The expectation of higher rates for the first
time in many years is likely to lead to a more volatile rate environment
requiring a constant and more pro-active approach to interest rate
risk management to ensure the Society’s future earnings and value are
protected.
Capital risk
n
The risk that the Society has insufficient quality or quantity of capital
resources to meet current or future business requirements.
Mitigation Commentary
n
A Board defined appetite, supported by the Capital
Management Policy and capital strategy.
n
Monthly review of performance against appetite.
n
An Internal Capital Adequacy Assessment Process
(ICAAP) is conducted at least annually, to assess the
level of capital required to support current and future
business activities.
n
The Society’s capital position is monitored by a
dedicated first line team, with oversight provided by
the Risk function.
n
Stress testing is conducted to understand the
impact on the Society’s capital position, under a
range of severe scenarios.
n
Maintenance of a Recovery Plan, including actions to
generate/preserve capital.
2021 performance
n
During 2021, our capital ratios have strengthened further, with capital
resources significantly above minimum regulatory requirements. As
at 31 December 2021, our Total Capital Ratio stood at 45.1% (2020:
43.9%), while the leverage ratio was 6.1% (2020: 5.8%).
n
The Society is captured by the Minimum Requirements for Own Funds
and Eligible Liabilities (MREL) regulation, which is designed to ensure
that taxpayers do not absorb the cost if a bank or building society
fails. Following changes to the wider UK capital regime during 2021,
the Society is required to apply MREL requirements on a risk weighted
asset basis. As at 31 December 2021, the Society retained excess levels
of capital above current transitional and end state requirements, which
are applicable from 21 July 2023.
n
Throughout the year the Society has periodically assessed the impact
of COVID-19 on its capital position under various magnitudes of stress.
These exercises have concluded that the Society retains significant
headroom over its risk appetite for the stresses modelled.
n
Further information regarding the Society’s 2021 capital position is
detailed within our 2021 Pillar 3 disclosure, located on our website.
Outlook
n
Changes to prudential regulation in the UK, taking effect from January
2022, have necessitated redevelopment of Internal Ratings Based (IRB)
model suites across the industry. In common with all UK IRB firms, we
are redeveloping our residential mortgage model suite in discussion
with the UK regulators and expect to implement a revised set of
models in the second half of 2022. Under these revised requirements,
the Society’s risk weighted asset percentage is expected to increase
and result in a reduction of the Society’s Total Capital Ratio. Until
the revised models are approved, a post model adjustment (PMA)
will be applied to the currently approved Rating System: Pillar One
risk weighted assets and expected losses. For further details, refer
to the Society’s 2021 Pillar 3 disclosure, located on our website.
Notwithstanding this change, the Society expects to retain significant
capital headroom versus risk appetite.
Principal Risks continued
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Leeds Building Society | Annual Report and Accounts 2021
69
Capital risk (continued)
n
The UK capital regulatory landscape continues to evolve with the
forthcoming Basel III finalisation reforms due to be published during the
second half of 2022.
n
We continue to monitor developments in capital regulation and plans
accordingly.
Operational risk
n
The risk of financial or reputational loss, as a result of inadequate or
failed processes, people, systems or external events.
n
The drivers of operational risk are: legal and regulatory; people;
information security (including cyber); IT; business continuity; data;
financial crime; and financial reporting risks.
Mitigation Commentary
n
A Board defined appetite, supported by an
appropriate suite of operational risk related policies.
n
Monthly review of performance against appetite.
n
Maintenance of an Operational Risk Management
Framework, outlining the process for identification,
assessment, mitigation and monitoring of
operational risks, incident management protocols
and reporting operational losses across the Society.
n
The control environment is validated by the first line
through Risk and Control Self Assessments (RCSA),
control testing and oversight procedures.
n
Key divisional risks are also reviewed on a quarterly
basis with senior management, with outputs
submitted to BRC.
n
Oversight is provided by specialist teams within the
Risk function.
n
Maintenance of an Operational Resilience Framework
and associated testing programme to ensure the
provision of resilient services to members.
n
Stress testing is used as part of the ICAAP to ensure
the Society retains sufficient capital for extreme, but
plausible, operational risk events.
2021 performance
n
Throughout the pandemic the health and safety of colleagues and
members have continued to be the Society’s top priority. During
this time, we have ensured that office locations and branches have
remained COVID-secure.
n
During 2021, we continued to build our operational resilience
framework/capability. This has included scenario testing and defining
initial impact tolerances for critical business services. In addition, the
Society has successfully transferred the majority of its ‘in-house’
production systems to new and more resilient data centres, with
minimal impact on live services. Residual elements will be migrated in
early 2022.
n
The cyber and financial crime threat landscape remains heightened, as
criminals seek to take advantage of the prevailing climate. Ransomware
has evolved into a key threat to all companies. In response, the
Society’s cyber strategy has evolved to consider the increasing
sophistication of ransomware attacks and enhanced mitigations have
been implemented. The Society’s cyber/IT defences are independently
tested by external specialists on a semi-annual basis.
n
The Society continues to rely on key third parties to deliver certain
aspects of our services to members. The Society’s Third Party
Management Framework has continued to evolve in line with the
regulatory policy statements released in March 2021, to further
understand and mitigate the risks to the Society.
n
The Society continues to progress an ambitious change agenda for
the benefit of its members. Management retains close oversight of
our change portfolio through an Executive Change Committee which
ensures that resources and our change capacity are appropriately
utilised and prioritised.
n
As a consequence of wider market challenges, recruitment for various
skills is a key area of focus and is being tracked by the appropriate
teams. Our approach to assessing and managing key person risk has
been enhanced, including specific lenses on operational resilience and
resolution, as well as talent and knowledge. Mitigation plans have been
agreed, where required.
Outlook
n
The health and wellbeing of colleagues and customers remains a key
priority including determining an optimal approach to hybrid working
as government guidance changes, in response to the outbreak of new
variants of COVID-19.
n
During Q1 2022 a key focus area for the Society will be to finalise its
response to the regulatory requirements for both operational resilience
and outsourcing and third party management, ahead of their scheduled
implementation date (31 March 2022).
Model risk
n
The risk of incorrect decision making principally based upon the
inputs/outputs of models, due to errors in the development,
implementation or use of such models.
Mitigation Commentary
n
A Board defined appetite, supported by an
appropriate Model Risk Policy and standards,
which govern the Society’s approach to model
documentation, development, implementation,
validation and change.
n
A model inventory is maintained, acting as a
Society-wide repository of key model artefacts.
n
A materiality assessment is conducted
semi-annually on all models within the inventory.
This defines the appropriate level of governance,
dependent on model materiality.
n
Models are validated independently from model
owners.
n
A dedicated Models and Rating System Committee
(MRSC) is responsible for ensuring that all Society
models are developed and maintained in line with
internal standards.
2021 performance
n
During 2021, model risk has been a key focus area for the BRC
with various activities undertaken to further enhance model risk
governance. These activities include: approval of a qualitative risk
appetite statement and supporting metrics, enhancements to BRC
model risk management information, development of a model risk
competency framework and targeted training sessions covering the
Society’s IRB models.
n
The Government’s response to COVID-19 has distorted the traditional
relationships of several economic variables used to calibrate key
Society models. Relevant models remain subject to heightened levels
of monitoring and analysis to inform adjustments/overlays and ensure
that modelled outputs remain within appropriate ranges. In this
context, the application of any PMAs to key models continues to be a
particular focus of the Board and relevant sub-committees.
n
The Society has continued to progress the development of a new suite
of IRB models to meet forthcoming regulation, as set out in the capital
principal risk section on page 69.
Outlook
n
We will continue to maintain close oversight of model inputs/outputs
under the prevailing environment to ensure they remain appropriate.
n
The Society will look to enhance its model risk maturity further in
2022, with a particular focus on finalisation of revised IRB models and
development of climate risk modelling.
Principal Risks continued
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Leeds Building Society | Annual Report and Accounts 2021
71
Conduct risk
n
The risk that actual or potential customer detriment arises, or may
arise, from the way the Society conducts its business.
Mitigation Commentary
n
A Board defined appetite, supported by the Conduct
Risk Policy.
n
Maintenance of a Vulnerable Customer Standard,
which sits underneath the Society’s Conduct Risk
Policy. This applies to all Society functions, to
support a consistent approach to the identification,
treatment, and care of vulnerable customers.
n
The Society operates a focused business model
with limited complexities, relative to larger financial
institutions, that could adversely impact customers.
n
The Product Governance Framework ensures that
products are only developed to meet customer
needs and their ongoing suitability is frequently
assessed.
n
Processes and controls are in place to ensure
product literature is clear and transparent.
n
All customer facing colleagues are suitably trained,
with competency assessed on an ongoing basis.
n
The Society’s Complaints Handling Policy and
supporting arrangements ensure that complaints
are addressed with empathy and sensitivity through
a fair and transparent process.
n
The Society operates appropriate post sales
handling to facilitate good member outcomes
ensuring they do not face unreasonable barriers to
product changes, switching providers, or making a
complaint.
n
The Society maintains appropriate governance
arrangements to provide oversight of conduct risk,
which are supported by a culture promoting fairness
and the delivery of good customer outcomes.
2021 performance
We continued to respond to the various conduct risks that could arise
because of the pandemic:
n
Access to products and services was maintained as the branch network
and Contact Centre remained open. Support functions, by working in a
largely dispersed way, were also able to continue operating.
n
Support for members in financial difficulty, with mortgage payment
deferrals available until 31 July 2021. In addition, the Society has had a
temporary hold on charging any arrears fees, since March 2020.
n
The Society followed the requirements of the repossession
moratorium, which took effect from March 2020 and was lifted on
31 October 2021.
n
The Society has made further investment in people and systems in
its Mortgage Support team (arrears handling). Particular focus has
been given to the ongoing coaching and development for colleagues,
to support them in dealing with customers likely to exhibit some form
of vulnerability. Increased levels of quality assurance oversight have
been retained throughout the period to identify areas of focus for
remediation.
n
Mortgage lending criteria remained appropriate to ensure the Society
continued to lend responsibly and underwriting head count was
increased to deal with higher than expected volumes.
n
An integrated assurance model was maintained across the three lines
of defence, to prevent duplication and maximise assurance coverage.
n
Complaint volumes remain low and in the H1 2021 Financial Conduct
Authority (FCA) data, the Society ranked favourably against peers
(second best in banking and seventh for home finance). 91% of
reportable complaints were resolved within ten working days.
n
The Conduct and Operational Risk Committee monitored the delivery
of good customer outcomes through management information,
oversight updates and outputs from the product governance work.
n
We have continued to proactively participate in various industry
working parties and regulatory engagements/initiatives.
Outlook
n
The Society will continue to monitor any further customer impacts of
the pandemic and respond accordingly.
n
Key developments in FCA regulation, such as the Consumer Duty, due
to be implemented in 2022, will further strengthen the industry’s focus
on delivery of good customer outcomes.
n
During 2022, the Society will implement a revised operating model
for its Mortgage Support team, which will provide more consistent
outcomes and experience for customers entering into arrears.
Emerging risks
We continue to identify, assess and monitor emerging risks, within the context of our principal risk categories,
through our Enterprise Risk Management Framework, described on pages 136 to 141. These are new or
evolving risks where the impact is more uncertain. When assessing emerging risks, we consider the likelihood
of the relevant risk materialising and the potential impact on our business strategy and stakeholders. These
risks are considered by the Board and the Board Risk Committee, as part of our strategic and business planning
processes and throughout the year. As at the end of 2021, the following are considered as the top
emerging risks:
Emerging risk Description Strategic response
COVID-19 and
macroeconomic
risk
n
Although the UK has vaccinated a significant
proportion of its population against COVID-19, the
emergence of new variants remains a concern and
may require reintroduction of more stringent social
restrictions, which could constrain the economic
recovery.
n
As a UK centric business, the Society is naturally
exposed to a downturn in the UK economy and
housing market. While the economy has recovered
strongly during 2021, the outlook remains
uncertain, driven by the impact of the UK-EU trading
agreement, supply chain disruption and potential
global and domestic inflationary pressures.
n
In addition, there are also a number of emerging
geopolitical risks, which could also affect the
macro-economy and/or financial markets in 2022
e.g. tensions in Eastern Europe.
n
We can respond quickly in relation to COVID-19
developments through our established governance
arrangements.
n
Macroeconomic risks are assessed on a regular
basis, under both central and stressed conditions
to understand and manage the impact on the
business model e.g. tightening/loosening of
lending appetite (volume, risk premia, mix).
n
Strong levels of capital and liquidity continue to be
retained over regulatory minima.
Competition
risk
n
Lending market competition is significant, driven
by an unwinding of criteria tightening from the
pandemic, growth in customer deposits and
increasing customer confidence. It is anticipated
that this will continue to compress mortgage
margins, impacting profitability.
n
Increasing activity from new entrants to core
markets has been observed, primarily through
digital channels, due to continued innovation and
changing customer behaviours.
n
The competitive landscape is regularly reviewed
and our product proposition updated accordingly.
n
Management carefully considers these risks as part
of our strategic/business planning activities, which
have set the future path for strategic investment
and development to ensure that the Society is able
to adapt accordingly.
People risk
n
An unexpected impact of COVID-19 within the UK
has been the ‘great resignation’ with employees
across the economy choosing to either retire early
from work or embrace alternative flexible working
practices available across various industries
(ultimately creating a labour deficit in certain areas
of the economy). The impact is increasing wage
inflation and excess demand vs supply across
various niche skill sets such as IT, Digital and other
operational related roles.
n
This is an emerging risk which has heightened
quickly and is receiving close management
attention to mitigate direct impacts on the Society.
n
Management continues to invest in the people
strategy across various dimensions including:
• Salary and colleague total package
benchmarking.
• Flexible/hybrid working arrangement reviews.
• Department/team specific solutions.
• Career development pathways.
• Responding to market dynamics on a real time
basis to improve colleague retention whilst
looking to fill vacant positions.
Principal Risks continued
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Leeds Building Society | Annual Report and Accounts 2021
73
Emerging risk Description Strategic response
Climate change
n
Climate risk continues to be identified as an
emerging risk due to uncertainty surrounding
the exact nature and timing of the impact on the
Society’s strategy and operations. Both transitional
and physical risks could present material risks to the
Society in the future depending on the precise path
and timescales of government intervention and
actions.
n
Stakeholder and regulatory expectations continue
to rise with regard to the Society’s management
and response to climate risk, which could result in
heightened reputational risks.
n
Refer to pages 46 to 50 for further details of our
assessment of the potential future risks from
climate change.
n
The Society has continued to mature its approach
to managing the risks arising from climate change,
with the development and implementation of a
Climate Risk Management Framework during 2021.
n
Scenario analysis was included as part of the 2021
ICAAP to explore the potential impacts of physical
and transitional risks on our mortgage portfolio.
n
The Society has established strategic relationships
to further support its understanding of climate
risks and development of capabilities.
n
To enhance stakeholder transparency, the Society
has made its inaugural climate related disclosures
(pages 39 to 63), aligned to the recommendations
from TCFD.
Affordability
risk
n
During the second half of 2021, wholesale market
energy price rises and broader inflation impacts
(the cost of living squeeze) out of the COVID-19
pandemic have emerged as potential challenges on
mortgage affordability.
n
These affordability pressures are expected to
heighten further into 2022, which will also be
compounded by the forthcoming increases to
national insurance contributions in April and
potential rises in Bank Base Rate during the year.
n
For our residential mortgage assessment process
we apply an income and expenditure based
assessment of borrowers’ abilities to afford their
mortgage payments under stressed interest rate
conditions.
n
The affordability model is updated on at least an
annual basis and is maintained in line with the
requirements of the Model Risk Policy.
n
In addition to this assessment, wider controls
around levels of indebtedness and periodic
underwriting reviews assess the affordability of our
existing residential mortgage portfolio.
n
From a buy to let perspective, an affordability
assessment based on rental income, expected
running costs and stressed interest rates, is
undertaken. This assesses a landlord’s ability to
manage financial fluctuations, such as reduced
rental income flows.
Principal Risks continued
Viability Statement
Year ended 31 December 2021
In accordance with provision C2.2 of the UK Corporate
Governance Code, the directors are required to
assess formally the longer term prospects and
viability of the Society. This assessment considers our
ability to continue in operation and meet our liabilities
as they fall due, taking into account our current
financial position and the principal and emerging risks
set out on pages 64 to 74.
Assessment of longer term prospects
Our business model, purpose statement and updated
strategic drivers are set out on pages 10 to 14. The
Board receives strategic updates throughout the year,
which assess the business model across multiple
dimensions, including threats from principal and
emerging risks, additional scenarios that may occur
and stress testing. The strengths of our business
model and financial position, capital strength and
levels of profitability over the next five years and
beyond are included in the Board’s consideration.
These reviews concluded that the Society has
remained strong throughout the pandemic and is
well placed to build on its position. Our updated
purpose statement and strategic drivers reflect the
environment the Society now operates in and aim
to maintain the relevance of our business model,
including managing and mitigating potential threats.
The directors have also considered the risks to the
Society’s business from climate change. This includes
physical risks to the Society’s mortgage stock and
own properties and transitional risks as the UK
migrates to a net zero economy. Further details are
provided on pages 39 to 63 of the Strategic Report.
Financial and operational stress testing
The Society maintains a stress testing programme
which includes regular operational planning exercises
and more formal risk assessments. The elements
of this programme, ranked in order of increasing
severity, are summarised as follows:
Operational
sensitivities
Corporate plan
and trading
sensitivities
Downturn
and growth
alternative
scenarios
ILAAP
ICAAP
Recovery Plan
testing
Reverse
stress testing
The Society’s process for forecasting financial
performance takes into account our strategic
objectives, the risk involved in meeting those
objectives and our strategic risk appetite. The
corporate planning and alternative scenario modelling
processes assess these forecasts under a range of
macroeconomic scenarios which reflect the longer
term effects of the pandemic and macroeconomic
uncertainties on society and the behaviours and
needs of current and potential future members.
The directors assess the Society’s capital and
liquidity viability through the ICAAP and ILAAP.
These consider our ability to withstand severe capital
and liquidity stresses set out by regulators. The
processes incorporate new and emerging regulation,
where sufficient information is available. Mitigating
management actions and the ability of those actions
to minimise the impacts of the applied stresses are
also evaluated.
The ICAAP concluded that the Society has headroom
over regulatory requirements and would have
sufficient capital resources to withstand both the
central and stressed scenarios under current and
confirmed future requirements.
The ILAAP also concluded that the Society is able to
meet both internal and external liquidity risk capacity
requirements and regulatory requirements under
modelled stress scenarios.
Further stress testing, including Recovery Plan
testing, is carried out on each of the principal risks
outlined on pages 64 to 72. This is performed to
understand our ability to withstand extreme stress
scenarios, including adverse economic scenarios
that go above and beyond those experienced at any
point previously, major volatility in financial markets,
significant liquidity outflows and operational risk
events. This testing demonstrates that there are
appropriate resources, measures and controls in place
to withstand these extreme events.
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75
Reverse stress testing considers a range of specific
scenarios which would cause the Society to fail and
concluded that, since such scenarios are unlikely to
occur, they do not pose a risk to the viability of the
business.
Stress testing of operational resilience is undertaken
to verify that the Society has appropriate measures in
place for the delivery of key customer facing services
during a stress event. This is performed using a
number of severe but plausible scenarios, including
third party failure, cyber attack, IT and system failures
and loss of key premises. The testing demonstrated
that resilience is broadly in line with expectations and
supports the ongoing viability of the business.
The Society assesses its resilience to people risks
and capabilities by regularly conducting talent and
succession planning reviews for key roles up to and
including the Board. We also identify and monitor
key person risks for roles with strategic importance
and mitigate these where appropriate to maintain
operational resilience and to safeguard continuity of
service.
The risk management process, detailed on pages 136
to 141, includes ongoing monitoring and reporting
of new and emerging risks. This allows us to make
additional enhancements to the control environment,
to adapt to and respond quickly to these risks.
Assessment period used for reviewing viability
The directors consider the viability of the Society over
a three year period to 31 December 2024. A three year
period for viability is determined to be appropriate for
the following reasons:
n
uncertainty is inherent in the predictions
of economic, competitive and regulatory
environments, particularly in the current climate.
Going beyond the three year period increases
this uncertainty and reduces the reliability of the
assessment of viability; and
n
it is within the period covered by our projections
of cash flows, capital and profitability. However,
there is nothing in our planning beyond the three
years that would cause a change in the directors’
consideration of viability.
Assessment of viability
The directors have assessed the financial impact of
the modelled stress scenarios and the outcomes from
operational resilience testing described previously.
Based on these assessments the directors believe
that:
n
Our business model remains appropriate and
will continue to be relevant as the operating
environment evolves beyond the pandemic.
n
We have and will continue to maintain an
appropriate level of liquidity, which meets the
expected demands of the business and the
requirements that arise in modelled stressed
scenarios.
n
We hold sufficient capital resources, including an
excess above the regulatory minimum and have
plans in place to ensure we meet future known
requirements. We have sufficient resources under
both central and modelled stressed scenarios.
n
There are suitable operational capacities in place to
manage the impacts of risk events to a reasonable
extent, though it is impossible to eliminate all risk.
This has been evidenced as we have continued to
operate effectively under the stress of the global
pandemic.
The directors have a reasonable expectation that
the Society will be able to continue in operation and
meet our liabilities as they fall due, over the three year
period to 31 December 2024.
Viability Statement continued
Financial Review
Year ended 31 December 2021
We delivered a strong performance in 2021, navigating
the uncertainty brought about by the pandemic well.
Our robust underlying financial position and measured
approach to decision making have allowed us to
provide support to our members through significantly
increased levels of lending along with continuing to
pay above average rates to our savers.
Despite the ongoing challenges posed by the
pandemic, a buoyant housing market, coupled with
our continued focus on those segments of the
mortgage market where we have particular expertise,
such as shared ownership, have helped us to grow our
balance sheet by 9% and deliver increased levels of
profitability. In turn, this has allowed us to invest in the
long term future of the business, to the benefit of our
members, colleagues and other stakeholders.
This report includes a number of alternative
performance measures (APMs) which are not defined
in International Financial Reporting Standards
but provide useful additional information about
our financial performance and position
1
. Further
information on the calculation of APMs and
reconciliation to an equivalent statutory measure can
be found on page 244.
Mortgage lending
We provide residential mortgages in the UK, through
a network of approved mortgage brokers and
directly to customers through online and telephone
channels. We fund the majority of mortgage lending
with members’ savings, through a range of channels,
while the remainder is funded from other financial
institutions, including central bank schemes, on
competitive terms.
We focus our mortgage lending on supporting
borrowers who are less well served by the wider
market, such as shared ownership customers, as well
as first time buyers and later life homeowners, helping
more people into home ownership.
Gross new lending during the year was £4.4 billion
(2020: £2.5 billion). The increased level of lending was
driven by strong demand across the market, due to
people wanting to move as a result of the pandemic
and supported by government initiatives such as
the stamp duty holiday. We were the first lender to
participate in the Government’s flagship First Homes
1 Financial information refers to the performance of the Group, as reported on pages 172 to 240.
2 Share of new mortgage lending and natural market share are calculated using UK mortgage market data obtained from UK Finance. Natural market share represents the
Society’s gross UK mortgage exposures at 31 December 2021 as a proportion of total UK mortgage market balances.
scheme and have launched our first green mortgages
during the year. We also trialled a unique proposition
whereby we were the first lender to offset the carbon
emitted from homes of any EPC rating for low deposit
residential mortgages.
Our share of new mortgage lending was 1.4%
(2020: 1.0%) compared to our natural market share
of 1.2% (2020: 1.1%)
2
.
The chart below shows the mix of new lending by
product type in 2021.
2021 new residential lending by type
n
Mainstream owner-occupied
n
Buy to let
n
Shared ownership
n
Other affordable home
ownership
n
Other
60%
18%
13%
4%
5%
We have a conservative lending policy, which is
reflected in the distribution of loan to value (LTV)
ratios across the book. The average loan to value of
new lending in 2021 has increased to 67.4% (2020:
59.0%), reflecting a change in mix of products
available and the segments of the market on which we
focus. Credit criteria for new lending remain tight and
positive house price inflation in the year has resulted
in overall book LTV reducing to 50.5% (2020: 50.9%).
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Leeds Building Society | Annual Report and Accounts 2021
77
Fair value gains and losses
We hold certain financial assets and liabilities at their
current fair value, defined as the value an independent
third party would be willing to pay or receive, and
the movement in this fair value is recognised in the
Income Statement. Changes in fair value are primarily
due to timing differences, which will trend to zero as
the asset or liability reaches maturity.
Fair value movements in 2021 resulted in a charge of
£0.5 million (2020: £16.8 million). We made a voluntary
change in the assumptions used to value one of the
Society’s equity release swaps which resulted in a
one-off charge of £21.1 million. Without this charge,
the underlying fair value movements showed a gain of
£20.6 million, largely reflecting the reversal of some of
the impacts seen in 2020, as benchmark interest rates
have increased in the year, following the significant
reductions seen in the previous year.
Management expenses
Management expenses for the year are
summarised below:
2021
£m
2020
£m
Colleague costs 73.0 61.1
Other administrative expenses 43.9 31.8
Depreciation and amortisation 9.1 7.5
Total management expenses 126.0 100.4
% %
Cost to income ratio 43.9 51.0
Cost to mean asset ratio 0.58 0.48
Management expenses £m and colleague numbers
2017 2018 2019 2020 2021
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0
1,500
1,000
500
0
95.5
126.0
100.4
101.2
98.9
n
Management expenses £m (left hand scale)
Average number of colleagues (FTE) (right hand scale)
1,322
1,308 1,303
1,313
1,361
We continue to focus on operating the Society
efficiently with close control over our costs and our
cost ratios remain among the best in our sector.
However, costs have increased this year as we focus
on investing in the long term success of the Society
through our multi-year programme of technological
change. We have continued to invest in Mortgage
Hub, enhancing the experience for mortgage brokers
submitting applications to us and we are improving
the functionality of our website to improve the
experience for savings members. Certain expenditure
was also supressed in 2020 or deferred from 2020 into
2021 due to the pandemic, which has inflated the year
on year growth.
Our colleagues are fundamental to our ability to
deliver the service that our members value and we
have strengthened key areas of the business to
support this investment so that we are well positioned
to deliver our future strategy. This has resulted in
an increase in headcount with the average number
of colleagues (full time equivalent) employed by the
Society in 2021 increasing to 1,361 (year to December
2020: 1,313). The increase in colleague costs reflects
the growth in headcount and the investment in skills
and capabilities to deliver our change programme.
Impairments and provisions
The table below summarises the impact of
impairments and provision charges or (releases) on
the Income Statement in the year:
2021
£m
2020
£m
Residential loans (3.9) 14.7
Commercial loans (0.2) (0.1)
Impairment (credit) / charge on loans
and advances to customers (4.1) 14.6
Other provisions 1.4 1.1
Total impairments and provisions (2.7) 15.7
Residential impairment
We make provisions for expected credit losses
across all loans, based on the probability of each
loan defaulting and resulting in a loss, while taking
into account a range of assumptions about future
economic scenarios and an assessment of whether
the credit risk of the loan has increased.
The provision for residential impairment increased
significantly during the previous financial year due to
COVID-19 and the heightened economic uncertainty.
Profitability
The Income Statement for the year is summarised
below:
2021
£m
2020
£m
Net interest income 282.2 205.4
Fees, commissions and other income 5.3 8.2
Fair value losses (0.5) (16.8)
Total income 287.0 196.8
Management expenses (126.0) (100.4)
Impairment credit / (charge) on loans
and advances to customers 4.1 (14.6)
Other impairments and provisions (1.4) (1.1)
Profit before tax 163.7 80.7
Tax expense (43.5) (18.7)
Profit after tax 120.2 62.0
Following a year of reduced profits due to the
pandemic, profit before tax increased to £163.7
million (2020: £80.7 million). This performance
has primarily been driven by growth in net interest
income, due to higher lending volumes and increased
net interest margin. The stabilisation and reversal
of some impairment charges and reduced fair value
losses associated with economic uncertainty caused
by Brexit and COVID-19, have also contributed to
higher profits. Management expenses have grown
this year, as we continue to invest in the long term
sustainability of the business, but we maintain a
strong focus on efficiency with close control over our
costs and an improved cost to income ratio.
Profit after tax is our primary source of new capital
and is essential in ensuring long term security for
members, as well as meeting the regulator’s
capital requirements.
3 CACI’s CSDB, Stock, December 2020 to November 2021, latest data available.
Net interest income
2021
£m
2020
£m
Net interest income 282.2 205.4
Mean total assets 21,576.7 20,723.8
% %
Net interest margin 1.31 0.99
Net interest income is our principal form of income
and was £76.8 million higher than in 2020. The high
levels of demand seen in the mortgage market in the
latter stages of 2020 and through 2021 have been
coupled with a restricted supply of mortgages at the
start of the year, resulting in higher margins on new
lending. We offer competitive rates to our borrowers,
including in those underserved segments of the
market where we have particular experience and
expertise, such as shared ownership and interest only.
Strong lending margins and new lending growth have
been supported by sustained low interest rates and
significantly lower wholesale funding costs, as a result
of the Bank of England’s Term Funding Scheme with
additional incentives for SMEs (TFSME), which has
replaced higher cost borrowing.
Across the retail savings market, interest rates have
remained low through much of the year as demand
exceeded supply and the pandemic limited consumer
spending. We continue to work hard to support our
savings members by paying above market rates but
have been mindful of the pressure that the
demand/supply imbalance has created. During the
year we paid an average rate of 0.79% to our savers,
compared to the rest of the market average rate of
0.29%
3
. We also launched our first fixed rate bond
supporting Dementia UK, which attracted £24 million
of savings, and a new regular saver product based on
member feedback.
Fees, commissions and other income
We offer home insurance and other services to our
members through relationships with third parties and
the Society earns commission on these products.
Other income also includes rental income, foreign
exchange movements and other ancillary fees
and receipts.
Financial Review continued
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Leeds Building Society | Annual Report and Accounts 2021
79
Financial Review continued
Over the course of 2021 house prices have increased
and the economic outlook has improved, reducing
the expected level of credit losses and resulting in a
release of some of the additional provisions made
in 2020.
The central economic assumptions used for
calculating impairment have been updated as at
31 December 2021, to reflect the latest view of the
economic outlook. Economic uncertainty remains,
given that the Government has ceased the majority
of support schemes and there is inflationary pressure
which may result in further changes in the Bank Base
Rate, as well as the threat of new COVID-19 variants.
This uncertainty is reflected in the alternative
modelled scenarios and post model adjustments.
The key judgements and estimates involved in the
calculation of impairment loss provisions are set out
in note 2 of the accounts on pages 183 to 189.
The impact on the Income Statement for the financial
year is a £3.9 million release (2020: £14.7 million
charge) which equates to a cost of risk of (0.02%)
(2020: 0.09%).
Residential impairment loss provision coverage has
reduced during the twelve month period from 0.25%
to 0.20%
4
as the macroeconomic environment has
improved, the mortgage book has grown and arrears
performance has been better than expected, partly
due to government support schemes such as furlough
and self-employed grants. The number of borrowers
in arrears has increased slightly since the start of the
year, with the proportion in arrears by 1.5% of balance
or more rising from 0.62% to 0.66%.
Total balance sheet impairment loss provisions
against residential mortgages at 31 December
2021 were £37.3 million (2020: £42.8 million), as
summarised below:
2021
£m
2020
£m
UK 30.4 35.4
UK coverage 0.17% 0.21%
Overseas 6.9 7.4
Total residential impairment
provisions 37.3 42.8
4 Excluding loan commitments.
Commercial impairment
We continue to successfully manage down our legacy
commercial lending portfolio with our net exposure to
commercial loans falling to £10.4 million at
31 December 2021 (2020: £16.3 million). All loans
are up to date and no losses have been realised in
the current or prior year. At the end of 2021, balance
sheet impairment provisions against commercial
mortgages were £1.7 million (2020: £1.9 million),
the reduction in provisions being due to the reduced
book size.
Other provisions
The charge for other provisions primarily reflects
additional provisions made at the half year for
the increased costs of the Financial Services
Compensation Scheme levy on deposit takers
expected for 2021/22 and for costs in relation to
leased office properties, which have been vacated
following the move to the Society’s new head office.
The majority of these amounts were settled by
year end.
Taxation
The income tax expense of £43.5 million (2020:
£18.7 million) represents 26.6% (2020: 23.2%) of
profit before tax. We pay UK corporation tax at the
prevailing rate of 19% for 2021 (2020: 19%) and also
pay the 8% surcharge on banking profits over a £25
million threshold introduced in 2016.
We have adopted the Code of Practice on Taxation
for Banks and established appropriate procedures,
controls and oversight to ensure we meet our
obligations under the Code. We manage our tax
obligations to ensure compliance with all statutory
requirements and do not intentionally structure
transactions to give a tax result which is contrary to
the intentions of Parliament. We maintain an open and
transparent relationship with HMRC.
The Audit Committee reviews our tax policy annually.
This provides a framework for the operation, planning
and oversight of tax and tax risk to ensure compliance
with relevant legislation. The policy has been
complied with throughout the year. Our Tax Strategy
is published on our website and we are committed
to transparency in the reporting of our tax affairs.
We have been a proud holder of the Fair Tax Mark
since 2018.
Assets
Our total assets increased by £1.9 billion, to
£22.5 billion in the year. This increase is primarily due
to positive net lending in the year of £1.5 billion
(2020: £6 million). Having carefully managed our
growth during the early stages of the pandemic, we
have been able to take advantage of the opportunities
provided by the favourable market conditions in 2021.
2021
£m
2020
£m
Residential loans 18,340.3 16,795.3
Commercial loans 10.4 16.3
Other loans 218.0 224.5
Impairment provision (41.5) (47.2)
Loans and advances to customers 18,527.2 16,988.9
Liquid assets 3,646.8 2,974.8
Derivative financial instruments 219.3 192.8
Fixed and other assets 120.4 483.2
Total assets 22,513.7 20,639.7
Residential mortgage asset quality % %
Proportion of mortgages in arrears
5
0.66 0.62
Balance-weighted average indexed
LTV of mortgage book 50.5 50.9
Balance-weighted average LTV of new
lending 67.4 59.0
Loans and advances to customers
Our loans and advances to customers comprise
mainly UK residential mortgages, which include
residential owner-occupied, buy to let and shared
ownership. Our legacy commercial loan portfolio
continues to reduce and we have not made any new
commercial loans. Other loans include a collateral loan
that represents a pool of equity release mortgages
purchased from a third party, where some of the risks
relating to those mortgages were retained by the
third party.
5 Arrears of more than 1.5% of the balance or in possession.
UK residential mortgage balances
The Society’s segmental lending strategy in recent
years is reflected in the mix of the mortgage book as
a whole, with buy to let and shared ownership making
up significant proportions of the book.
2021 UK residential mortgage balances by type
n
Mainstream owner-occupied
n
Buy to let
n
Shared ownership
n
Other affordable home
ownership
n
Other
44%
30%
12%
5%
9%
The distribution of the loan to value profile of the
portfolio is shown below.
2021 UK residential mortgage balances by
indexed LTV
n
<50%
n
50%-60%
n
60%-70%
n
70%-80%
n
80%-90%
n
>90%
50%
20%
13%
10%
5%
2%
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
81
Liquid assets
Liquidity ratios
2021
%
2020
%
Liquidity Coverage Ratio 195 195
Liquid assets as a percentage of shares
and borrowings 17.90 15.81
The level of liquid assets (including reserves with
the Bank of England and other High Quality Liquid
Assets) varies throughout the year depending on
the level of funding inflows compared to mortgage
completions and other refinancing obligations. The
Society maintained elevated levels of liquidity through
2021 due to the uncertain economic environment
and the increased liquidity at 31 December is held in
preparation for funding maturities in the first half
of 2022.
At 31 December 2021 liquidity included £3.4 billion of
High Quality Liquid Assets (31 December 2020: £2.7
billion), which are either in cash or are readily realisable
as cash when required. 100% of assets are rated A or
above (31 December 2020: 100%).
We also have access to additional contingent
liquidity through the Bank of England’s Sterling
Monetary Framework.
The mix of liquid assets at 31 December 2021 is
shown below.
2021 liquidity portfolio
n
Cash in hand and balances with
the Bank of England
n
Loans and advances to credit
institutions
n
UK Government securities
n
Government agency debt
n
Supranational bonds
n
Residential mortgage backed
securities
n
Covered bonds
70%
4%
6%
5%
2%
8%
5%
The PRA monitors liquidity under the Capital
Requirements Regulation (CRR) framework. Our
Liquidity Coverage Ratio (LCR) is 195% (2020: 195%),
significantly in excess of the regulatory minimum
of 100%. The Net Stable Funding Ratio (NSFR) is
currently calculated based on our interpretation of
expected requirements as 151% (2020: 141%).
Liabilities
A summary of our liabilities is shown below:
2021
£m
2020
£m
Shares 15,258.0 14,162.7
Wholesale funding 5,111.0 4,654.7
Derivative financial instruments 166.8 237.9
Other liabilities 136.6 188.2
Subordinated liabilities 339.4 –
Subscribed capital 227.3 241.5
Total liabilities 21,239.1 19,485.0
Equity attributable to members 1,274.6 1,154.7
Total liabilities and equity 22,513.7 20,639.7
Key ratios % %
Wholesale funding as proportion of
total borrowing 25.1 24.6
As a building society, one of our core principles is to
provide a safe place for our members’ money, with
savings balances providing the main source of funding
for our mortgage lending. Achieving an appropriate
level, mix and duration of funding is essential to
ensure we have the necessary resources to meet
lending growth aspirations, with approximately three
quarters of our total funding from members’ savings.
During 2021, there has been a slight change in mix
towards wholesale funding due to the extension of the
Government’s term funding scheme (TFSME) of which
we have drawn down £1.4 billion during the year. At
31 December 2021, outstanding borrowing under the
TFSME scheme was £2.2 billion.
Shares (retail savings)
Retail savings balances increased by £1.1 billion during
the year to £15.3 billion at 31 December 2021 (31
December 2020: £14.2 billion). As a mutual building
society we remain committed to providing savers with
a safe home for their money as well as competitive
interest rates. We continue to pay above average
market rates to our members, with our average rate
for the year of 0.79% (2020: 1.19%) being 0.50%
(2020: 0.59%) above the rest of the market average of
0.29% (2020: 0.60%)
6
.
We support our members with a range of savings
products including easy access and fixed rate bonds
and ISAs. The chart below shows the mix of savings
balances by rate type.
2021 retail savings balances by type
41%
44%
15%
n
Fixed rate bonds
n
Fixed rate ISAs
n
Administered
Wholesale funding
Total wholesale funding at 31 December 2021
was £5.1 billion (31 December 2020: £4.7 billion),
representing 25.1% of total funding.
In addition to the TFSME drawings noted above,
during the year, we issued £350 million of senior
preferred fixed rate notes, repayable in October 2027,
helping to provide term funding at an attractive cost
for the Society.
We have now fully repaid the remaining £675 million of
original TFS drawings and also repaid €500m of senior
unsecured notes which matured in early April.
6 CACI’s CSDB, Stock, December 2020 to November 2021, latest data available.
The mix of our wholesale funding portfolio at 31
December 2021 is shown below:
2021 wholesale funding portfolio
n
Covered bonds
n
Securitisation
n
Senior unsecured debt
n
Time deposits
n
TFSME
n
Other
32%
15%
44%
3%
6%
The maturity profile of our wholesale funding is shown
below:
2021 wholesale maturity
n
Less than 1 year
n
1 to 2 years
n
2 to 3 years
n
3 to 4 years
n
4 to 5 years
n
More than 5 years
12%
24%
40%
14%
10%
We maintain robust credit ratings from two key
agencies reflecting our strong capital base, good
profitability and strong funding position. During the
year our outlook was updated from negative to stable
as the macroeconomic environment strengthened.
Long
Term
Short
Term
Outlook
Moody’s A3 P-2 Stable
Fitch A- F1 Stable
Financial Review continued
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Leeds Building Society | Annual Report and Accounts 2021
83
Subordinated liabilities
In March 2021, we issued £350 million of senior
non-preferred fixed rate notes, repayable in March
2027. The transaction was hugely successful and at
the time of the deal, had the lowest coupon of any
similar issuance from a UK bank or building society.
This issuance provides flexibility in regard to the
regulatory Minimum Requirement for Own Funds
and Eligible Liabilities (MREL) and rating agency
methodology during a positive issuance environment.
Derivative financial instruments
We transact derivative financial instruments to
mitigate the risks within the balance sheet, primarily
interest rate risk associated with offering fixed rate
mortgage and savings products. During the year,
we successfully transitioned all of our derivatives
which referenced LIBOR as the risk free rate to now
reference SONIA, ahead of the discontinuation of the
publication of LIBOR at the end of 2021.
Capital
Our regulatory capital principally comprises
accumulated retained profits in the general reserve
and subscribed capital provided through debt
issuance and permanent interest bearing shares
(PIBS). Capital is ultimately held for the protection
of depositors and other creditors by providing a
buffer against unexpected losses. Capital disclosures
included in this report are in line with the UK Capital
Requirements Directive V (UK CRD V).
We maintained our strong capital position throughout
the year, with all capital ratios significantly in excess
of the regulatory minima. We have used the Internal
Ratings Based (IRB) approach to calculate our capital
requirement for most of our residential mortgage
book since 2018.
Total regulatory capital has increased by £110.7
million during 2021 to £1,458.7 million (2020:
£1,348.0 million). This is mainly due to retained profits
accumulated during the year, which are added to the
general reserve. Risk-weighted assets (RWAs) have
increased by £161.2 million during 2021 to £3,231.2
million (31 December 2020: £3,070.0 million) driven
by an increase in mortgage lending. As a result of
these movements, the CET 1 ratio, calculated on a
transitional basis, has increased to 38.0% from 36.3%
at 31 December 2020.
7 The capital ratios are calculated as relevant capital divided by risk-weighted assets and the leverage ratio is calculated as Tier 1 capital divided by total exposure (total
assets per the prudential group consolidated position subject to some regulatory adjustments).
8 The UK leverage ratio reflects the UK regulatory regime which excludes deposits with central banks from the leverage exposure measure. The UK regime does not apply to
the Society as the applicable threshold set by the regulator (>£50 billion of retail deposits) is considerably in excess of the Society’s balance. Despite not being captured by
this regime, the Society continues to exceed the minimum 3.25% requirement.
The following table shows the composition of our
regulatory capital as at 31 December 2021. More
detailed disclosures can be found in the Pillar 3
document available on our website.
2021
£m
2020
£m
Capital resources
Total equity attributable to members 1,274.6 1,154.7
Less pension surplus, intangible assets
and other regulatory adjustments (45.9) (39.0)
Common Equity Tier 1 (CET1) capital 1,228.7 1,115.7
Additional Tier 1 capital 2.5 5.0
Total Tier 1 capital 1,231.2 1,120.7
Tier 2 capital 227.5 227.3
Total regulatory capital resources 1,458.7 1,348.0
Risk-weighted assets (RWAs) 3,231.2 3,070.0
CRD IV capital ratios
7
% %
CET1 ratio 38.0 36.3
Total capital ratio 45.1 43.9
UK leverage ratio
8
6.1 5.8
Capital management
We are regulated by the PRA and the FCA and are
required to manage our capital in accordance with
the rules and guidance issued by the PRA under CRD
IV. Our capital requirements are monitored on an
ongoing basis, to ensure the minimum regulatory
requirement is always met and that the Society has
sufficient levels of capital for current and projected
future activities.
Pillar 1
We hold capital to meet Pillar 1 requirements for
credit risk, operational risk and market risk. The
IRB approach to capital modelling is applied, which
allows us to calculate our capital requirements using
internally determined risk parameters that reflect the
specific risks of our mortgage book. The standardised
approach is applied to all other exposures, operational
risk, market risk and credit valuation adjustments.
Pillar 2A
The PRA requires us to hold additional Pillar 2A
capital for the risks not covered under Pillar 1. At 31
December 2021, the regulatory requirement was
2.38% of RWAs, a point in time estimate set by the
PRA during 2020.
Capital buffers
CRD IV requires entities to hold capital buffers that
can be used to absorb the impact of a stress scenario.
For the Society, the buffer framework comprises a
sector wide Capital Conservation Buffer, set at 2.5%
of RWAs since 2020, as well as a macro-prudential
Countercyclical Capital Buffer. This is currently
set at 0% of RWAs for exposures to the UK but will
increase to 1% from 13 December 2022. In addition,
the Internal Capital Adequacy Assessment Process
(ICAAP) considers whether any additional capital is
required over and above the regulatory buffers to
satisfy our risk appetite over the planning horizon and
absorb the impact of a severe, but plausible, stress
scenario. The ICAAP is reviewed by the PRA when
setting our Total Capital Requirement (Pillar 1 and
Pillar 2A). We have performed regular stress tests on
our capital base and these tests have consistently
demonstrated a capital surplus above requirements
after applying management actions.
We have utilised available transitional arrangements
in relation to the impact of adopting IFRS 9 on
regulatory capital and the figures above reflect those
arrangements. Had the transitional arrangements not
been adopted, at 31 December 2021 the CET 1 ratio
would have been four basis points lower and the UK
leverage ratio would be unchanged.
Minimum Requirement for Own Funds and Eligible
Liabilities (MREL)
MREL aims to increase resilience within the financial
sector and reduce the risk to taxpayers if a firm were
to fail. All banks and building societies are assigned a
preferred resolution strategy by the Bank of England
dependent on their balance sheet size and quantum
of transactional accounts. Due to the Society having
a balance sheet in excess of £15 billion, the Bank of
England has stated a preferred resolution strategy
for the Society of bail-in, requiring us to hold both
recovery and resolution capital requirements.
We are phasing in MREL over a transitional period
to 31 December 2022. The transitional MREL
requirement set for us, by the Bank of England, is
equal to 18% of risk weighted assets until 20 July
2023. End state MREL requirements are two times
minimum regulatory requirements plus any
regulatory buffers, active from 21 July 2023. The
Society has capital resources considerably in excess
of both end-state and transitional requirements
and continues to forecast significant headroom
moving forward.
New and emerging regulation
Changes to IRB models, under revised capital
requirements regulation to apply from January
2022, are expected to increase RWAs. The Society
is expected to retain significant headroom over risk
appetite following this change and further IRB floors
currently under consultation by the PRA.
We are well prepared to meet the requirements of the
new standardised approach, which comes into force
in January 2023. As an IRB lender, the predominant
impact will be the new capital floor, to be phased
in from January 2023 until January 2028. We have
accounted for this in our corporate plan.
Financial outlook
We have delivered strong levels of growth and
profitability in the year, supported by the buoyant
mortgage market. However, the outlook for the
UK economy remains unclear going into 2022 with
the emergence of a new variant of COVID-19, the
continued impact of supply chain issues in some
sectors and high global energy prices. These factors
are likely to result in higher inflation over the year and
potentially lead to increases in interest rates. While
this is positive for savers, it may also increase the cost
of borrowing for mortgage customers.
The uplift in mortgage margins seen during the
pandemic has started to reduce and we expect them
to trend back towards pre-pandemic levels over time.
Against expected high levels of market competition,
our strong franchise in mortgage lending and retail
savings and expertise in key segments will help us
achieve our new purpose of putting home ownership
within reach of more people. We will continue to
manage growth and invest in the business, supported
by strong efficiency ratios and a keen awareness
of risk.
Financial Review continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
85
During the pandemic we have demonstrated the
strength of our balance sheet and our business model
to generate sustainable levels of profitability across
the economic cycle and, as we progress through the
challenges arising from the pandemic, we are well
placed to thrive and continue to deliver long term
value to our members.
Non-financial information statement
We have complied with the requirements of s414CB
of the Companies Act 2006 by including certain
non-financial information within the Strategic Report.
The required information can be found on the
following pages:
n
Our business model is described on pages 10 to 14
and key indicators of performance are on pages
19 to 21.
n
Our approach to managing our impact on the
environment and to managing the risks arising
from climate change is explained on pages 39 to 64.
n
Our Colleague Policy is designed to ensure the
fair, transparent and consistent treatment of
colleagues in accordance with legislative and
regulatory requirements. Further information on
our strategy in relation to colleagues is detailed on
pages 15 to 18.
n
We have a zero tolerance approach to bribery and
corruption, upholding ethical behaviours in our
business activities at all times. The Prevention of
Financial Crime Policy sets out the requirements
of colleagues in this respect and all colleagues
undertake regular mandatory training.
n
Additionally, our Third Party Management Policy
ensures that we only enter into third party
arrangements with suppliers that have the
policies and procedures in place to comply with
all applicable anti-bribery and corruption laws,
including the Bribery Act 2010 and the Modern
Slavery Act.
Line managers throughout the business are
responsible for ensuring colleagues in their teams
comply with these policies. Attestation of compliance
is provided by first line management annually. Periodic
independent reviews of compliance are undertaken by
the Risk function (second line) and Internal Audit (third
line), using a risk based approach.
Approval of the Strategic Report
This Strategic Report (on pages 2 to 87) has been approved by the Board of Directors and is signed on behalf of
the Board.
Andrew Conroy
Chief Financial Officer
24 February 2022
Financial Review continued
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Leeds Building Society | Annual Report and Accounts 2021
87
The Board of Directors
Year ended 31 December 2021
The biographies of each
member of the Board are
shown below and serve to
demonstrate the reasons why
the strengths and experience
of each director contribute to
our long term and sustainable
success.
Iain Cornish
Chair and Independent Non-Executive Director
Appointed: Independent Non-Executive
Director in January 2019 and Chair of the Board
in April 2020.
Board committees: Chair of Nominations
Committee
Strengths and experience: Iain has more
than 30 years’ experience working in financial
services. A former CEO of Yorkshire Building
Society (2003-2011) and Chair of the Building
Societies Association (2007-2008), Iain has
held a number of non-executive posts. He
was a Treasury Select Committee Special
Advisor and Independent Director for the
Prudential Regulatory Authority and chaired
the Financial Services Authority Practitioner
Panel. In addition to significant experience
within the sector, Iain has relevant risk and audit
committee experience.
Other roles: Iain is a trustee and treasurer of
Macmillan Cancer Support.
“As Chair, my role is to lead the Board and oversee
the development and delivery of the Society’s
strategy. The Board’s primary focus throughout
the pandemic has been to adapt to the changing
environment so that we can continue to provide a
high level of service and support to our members,
keep colleagues informed and safe and maintain
financial resilience. Over the next year my priority
will be to ensure that the Society invests wisely
and further improves its operations to continue to
meet the needs of current and future members in
a rapidly changing world.”
Richard Fearon
Chief Executive Officer
Appointed: Chief Executive Officer in February
2019 and Executive Director in 2016.
Strengths and experience: Richard started
his career at Oliver Wyman & Company and
spent 10 years at Lloyds Banking Group in
senior mortgage and savings roles. Richard
has an excellent understanding of product
development to meet customer needs, as
well as strong strategic and commercial
skills. As Chief Executive Officer, Richard has
responsibility for developing and proposing the
Society’s strategy, objectives and plans and
maintaining our business model and culture.
Other roles: Richard is the Chair of the UK
Finance Mortgages Product and Service Board.
“One of my priorities as CEO is ensuring our
members are at the heart of every decision we
make. Our corporate priorities have supported
us in navigating the disruption caused by the
COVID-19 pandemic and we’ve been able to
continue to effectively serve members and uphold
our purpose as a mutual building society. My role
involves leading the management team so that we
can operate in the best interests of our members.”
Annette Barnes
Independent Non-Executive Director
Appointed: February 2019
Board committees: Member of Board Risk and
Remuneration Committees
Strengths and experience: Prior to joining
the Society, Annette was CEO at Lloyds Bank
Private Banking Ltd and Managing Director
of Wealth & Mass Affluent for Lloyds Banking
Group. With her background in operations,
technology and customer experience, and
recent board and regulatory positions, Annette
brings a wealth of knowledge to the Board.
Other roles: Annette is a non-executive
director of GlobalData plc, Quilter Life &
Pensions Limited and Quilter Investment
Platform Limited.
“The world has changed in many ways since I
began my career in financial services more than
30 years ago; with significant digital
advancements and an appropriate focus on
the value of a diverse workforce. In my role as
a board member, it’s for me to challenge and
support management, so that collectively we
can continue to meet the changing needs of
members, colleagues and other stakeholders.
The Board really focuses on the needs of all of its
stakeholders and for me, that is a huge part of
the role.”
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
89
The Board of Directors continued
David Fisher
Independent Non-Executive Director
Appointed: March 2012
Board committees: Member of Audit, Board
Risk and Remuneration Committees
Strengths and experience: With more than 30
years’ experience in financial services, David’s
career began at Halifax Building Society. Since
then, he has developed a wealth of knowledge
in retail financial services and has a strong
understanding of risk management, pensions
and human resources. Prior to joining the
Society, David was CEO of Sainsbury’s Bank.
David was Chair of the Board Risk Committee
until December 2021.
Other roles: David is a non-executive director
of Tandem Bank Ltd and Tandem Money Ltd.
“The Society’s ongoing strength and stability rely
on our ability to identify, manage and mitigate
risk. My role as a member of the Board Risk
Committee and Audit Committee is to ensure we
are financially resilient and have robust systems
in place to manage risks throughout the business,
which include our risk management framework
and internal controls. I’m extremely impressed
with how the management team has responded
to the additional risks posed by the pandemic and
my ongoing priority is to ensure risks are being
managed appropriately, so we can remain secure.”
Andrew Conroy
Chief Financial Officer
Appointed: Chief Financial Officer in July 2019
and Executive Director in January 2020.
Strengths and experience: Andrew started
his career at PricewaterhouseCoopers before
moving to West Bromwich Building Society. He
has more than 15 years’ experience in financial
services, including a number of senior roles in
both building societies and banking institutions.
Having worked within finance, treasury and
corporate strategy, Andrew has developed
strong technical skills in financial accounting and
treasury risk management.
Andrew is the Chair of the Assets and Liabilities
Committee and Balance Sheet Optimisation
Group and has responsibility for the Society’s
Finance, Treasury and Third Party Management
functions, along with oversight of its recovery
and resolution plan and activities.
Other roles: Andrew is a trustee for Saltmine
Trust.
“COVID-19 has significantly impacted the global
economy and this, as you would expect, has
impacted many firms in the financial services
sector, as well as many of our members.
My focus is to ensure we support our members
and colleagues by safeguarding the Society’s
financial position. This continues to be my priority,
as I lead our finance function into 2022.”
Neil Fuller
Independent Non-Executive Director
Appointed: December 2020
Board committees: Chair of Board Risk
Committee (subject to regulatory approval) and
member of Audit Committee
Strengths and experience: Neil joined the
Board in December 2020 with over 35 years’
experience in retail banking and financial
services. Prior to joining the Society, Neil held
senior roles at Bank of Ireland UK plc including
Chief Risk Officer and Executive Board
Director and for a short time, Interim Chief
Executive Officer. Before this, he undertook the
role of Chief Risk Officer at GE Capital Bank
Ltd and a variety of roles including Risk Director
and Chief Risk Officer in the UK retail division
of Royal Bank of Scotland and NatWest.
Neil’s experience and knowledge of risk
management in the financial services sector
will bring value and further strengthen the
Board. Neil was appointed as Chair of Board
Risk Committee from January 2022, subject to
regulatory approval.
Other roles: Neil is a non-executive director of
Aspinall Financial Services Ltd.
“I believe the experience I’ve gained as Chief
Risk Officer at different organisations and my
understanding of risk management and the
principal risks facing the financial services sector
bring value to the Board. The ethics of a mutual
resonate strongly with me and I very much enjoy
working with the Society.”
Andrew Greenwood
Deputy Chief Executive Officer
Appointed: Deputy Chief Executive Officer in
May 2021 and Executive Director in January
2015.
Strengths and experience: Andrew started his
career as a solicitor in private practice and has
worked for the Society since 1998 in a variety of
legal, compliance and risk focused roles. Having
developed extensive experience of working in a
highly regulated environment, Andrew leads the
Risk function, which is made up of a number of
specialist teams.
Andrew is responsible for the overall
management of the Society’s risk control
framework, which includes co-ordinating and
managing principal risks and risk appetite. He
reports directly to the Board Risk Committee
and attends all the Society’s management
risk committees.
Andrew is also responsible for our Human
Resources, Learning and Development and
Property and Business Services functions.
“Having worked for the Society for more than
20 years, primarily in the Risk function, I have
extensive experience of risk management and a
strong knowledge of the organisation, its people
and culture. A key aspect of my role as Chair of
the Models and Rating System Committee is
supporting the Board to fulfil our financial risk
management responsibilities and helping other
directors understand the model framework, which
underpins assumptions and decision making. This
role continues to be important as we adapt to
changes in the economy.”
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91
The Board of Directors continued
Rob Howse
Chief Operating Officer
Appointed: Chief Operating Officer in
September 2019 and Executive Director in May
2021.
Strengths and experience: Before joining
Leeds Building Society, Rob spent over 10 years
in a number of senior executive technology,
operations and change roles mainly at RBS
and Lloyds Banking Group, where he was
focused on Retail Banking. His earlier career
included time in Telecoms, the Royal Navy and
as a management consultant at McKinsey and
Company where, as an associate partner, he
specialised in advising multinational clients on
the design and execution of transformation
programmes.
As Chief Operating Officer, Rob’s
responsibilities include transformation,
technology and operational resilience and he
is the Chair of the Executive Transformation
Committee and the Operational Resilience
Committee.
Other roles: Rob is co-Chair of the UK Finance
Digital, Technology and Cyber Product and
Service Board.
“Since joining the Society, I’ve used my extensive
experience of technology, transformation and
operational resilience to strengthen the execution
of the Board’s strategic agenda and help assure
day-to-day operations. I’ve used this experience
to ensure that the Society continues to operate
safely while still investing in our long term future
and improving the way that we work every day.“
Gareth Hoskin
Independent Non-Executive Director
Appointed: November 2015
Board committees: Chair of Audit and member
of Board Risk, Nominations and Remuneration
Committees
Strengths and experience: Gareth has
acquired extensive experience during his 30
years working in financial services, both in the
UK and abroad. Having spent almost 20 years
at Legal & General plc, Gareth was a director
and CEO of the International Division. Prior
to this, Gareth was a chartered accountant
at PricewaterhouseCoopers. In January
2019, Gareth was appointed Vice Chair and
Senior Independent Director of the Board. His
responsibilities as Chair of the Audit Committee
include safeguarding the independence of
the Internal Audit function and acting as our
whistleblowing champion.
Other roles: Gareth is a non-executive director
and Chair of the Audit Committee of Saga
plc and a non-executive director and Chair of
Acromas Insurance Company Ltd. He is also
advisor to the Board of Green Park Partners Ltd.
“As Chair of the Audit Committee, it’s my
responsibility to make sure our financial
statements are fair, balanced and include all the
information you, as a member or stakeholder,
need to assess and understand our performance.
It’s my role to provide challenge, where required,
and to use my experience from the past 30 years
to oversee the Society’s reporting and audit
processes.”
Lynn McManus
Independent Non-Executive Director
Appointed: September 2017
Board committees: Chair of Remuneration and
member of Audit, Board Risk and Nominations
Committees
Strengths and experience: Lynn joined the
Board in September 2017 bringing more than
20 years’ experience within financial services.
She has worked within finance, risk, HR and
communications and her most recent role was
at Clydesdale Bank, where she was a member
of the executive team. Lynn is a chartered
management accountant. Lynn is the
Board-appointed colleague representative.
In her role as Chair of the Remuneration
Committee, she’s responsible for overseeing
the development and implementation of the
Society’s remuneration policies and practices.
Other roles: Lynn is a director of Kane LMMG
Ltd and Doggy Day Care Academy Ltd.
“Along with my Board accountabilities I have
two further key responsibilities. The first is to
represent colleagues as the board-appointed
colleague representative; I am delighted to be a
spokesperson for all colleagues and represent
their views at Board level. The focus on our
colleagues is always a high priority and is central
to many of the important decisions we make. The
second is in my role as Chair of the Remuneration
Committee. It’s my responsibility to make sure the
Society has the appropriate policies in place to
set Board and senior management remuneration,
which are clearly aligned to our strategy and
culture and promote the right behaviours
and outcomes.”
Anita Tadayon
Independent Non-Executive Director
Appointed: October 2021
Board committees: Member of Board Risk
Committee
Strengths and experience: Anita joined the
Board in October 2021 with over 25 years’
experience and a strong track record in
transformation. Anita has held a number of
senior roles and has developed a great deal
of expertise in combining technology and
change along with the development and
design of customer journeys. Anita is currently
employed by BT Group as Global Portfolio &
Digital Product Roadmap & Lifecycle Director.
Previously she ran a Design Function in BT
Consumer and worked for both Sky and British
Gas in Transformation. Anita also brings FCA
regulatory knowledge from her time with British
Gas, where she was responsible for the conduct
team within customer operations. Anita has an
MBA from London Business School.
Other roles: Anita is a director of Tadayon
Consulting Limited and Global Portfolio & Digital
Product Roadmap & Lifecycle Director for the
BT Group.
“I am delighted to have joined the Society as a
non-executive director and feel strongly about
the values associated with mutuality. I believe
that my knowledge and experience will provide
different insights to the Board, thereby adding
value to the decision making process.”
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93
The Executive Committee
Year ended 31 December 2021
The Executive Committee (ExCo) (with support from the Management Committee) operates under the
leadership of Richard Fearon, the Chief Executive Officer. It is responsible for the delivery of our strategy,
corporate objectives and corporate plan. As executive directors of the Board, Richard Fearon, Andrew
Greenwood, Andrew Conroy and Rob Howse, whose biographies can be found on pages 89 to 92, are also
members of the ExCo. Details of the other members of the ExCo are set out below:
Jaedon Green – Chief Customer Officer
Jaedon has worked in financial services for over 30 years, with experience across many areas of the industry,
including telephone and internet banking, credit and risk management and life assurance and pensions.
Prior to joining the Society, he worked in a lead banking role, tasked with the rejuvenation of mortgage sales
through a number of different brands. As Chief Customer Officer, Jaedon is responsible for our branches,
Contact Centre and back office operations, including customer services. Jaedon is also a non-executive
director of Leeds Federated Housing Association and board adviser to Together Housing Group.
Nikki Marsh – Chief Brand and Marketing Officer
Nikki has principal responsibility for the development, positioning and reputation management of the
Society’s brand, customer relationship management strategies and acquisition strategies, alongside
contributing to the overall running of the Society as a member of the Executive Committee. Nikki has
30 years of customer focused expertise, specialising predominantly in heavily regulated environments
across both the public and private sector.
Andy Mellor – Risk Director
Andy has worked in financial services for over 25 years, with experience of performing a variety of senior roles
in building societies, banking and also consultancy. Andy worked in specialised treasury roles prior to risk
management, internal audit and advisory roles. Andy’s recent focus has been on developing the Risk function,
as part of the risk strategy refresh and he joined the ExCo in March 2021, following his appointment as Risk
Director.
Andy Moody – Chief Commercial Officer
Andy has extensive experience in financial services, having operated in various senior risk, commercial and
consulting roles across PricewaterhouseCoopers, Skipton Building Society, Northern Rock, National Australia
Bank and Bradford & Bingley. Andy joined the Society in 2012 and has held the roles of Director of Credit Risk,
Deputy Chief Risk Officer and more recently, Chief Commercial Officer, in which he has overall responsibility
for the development and management of our products, their distribution and our digital channels.
Nick Young – Chief Strategy and Insights Officer
Nick joined the Society in August 2018 and has a background in commercial management and strategic
change delivery. He has hands-on experience of driving performance improvement initiatives across a range
of industries, gained through his time as a management consultant with Boxwood Group. Prior to joining the
Society, Nick held a number of different product strategy and commercial roles in the savings and personal
current account business areas at a large UK bank. He is responsible for leading the Strategy and Insights
function, with functional responsibility for strategy, responsible business, customer insight, data and internal
communications. Nick is chair of the Responsible Business Forum and also ExCo sponsor for Race Equality.
Corporate Governance Report
Year ended 31 December 2021
Dear member,
I report to you for the second time in my capacity as Chair. The purpose of this report is to provide you with an
overview of the way in which the Board has operated over the last twelve months and to describe to you how we
incorporate good governance in all our decisions and activities, with particular emphasis on how we engage with
our stakeholders.
What is good corporate governance and why is it important to us?
Corporate governance is a framework which enables management and the Board to operate more effectively,
ensuring appropriate decision making processes and controls are in place, so that the interests of all
stakeholders are presented in a balanced way and taken into consideration. As we continue to face the
challenges arising from the pandemic, strong governance is more important than ever to ensure the right
decisions are made at the right time, so the Society can continue to operate safely and successfully in this fast
changing environment.
Our approach to corporate governance is based on the principles and provisions of the current UK Corporate
Governance Code (the Code), published by the Financial Reporting Council, in so far as they are relevant to a
building society (as set out in the Building Societies Association Guidance) and I am pleased to confirm that our
governance arrangements meet the relevant requirements of the Code. A copy of the Code is available at
frc.org.uk.
This report sets out how the Board has operated throughout 2021 and how it has applied the provisions of
the Code.
Board strategy
The Board’s key strategic areas of focus and discussion during 2021 have included:
Purpose: Having been in existence for almost 150 years the Board re-visited the reasons for the Society’s
existence. It discussed how, as a modern mutual, we could continue to meet members’ needs both now and in
the future. For more information on this see the Strategic Report on pages 10 to 14.
Diversity and inclusion: In 2021 we continued to focus on ways to enhance diversity and inclusion across the
Society, recognising the value this brings to our culture. We understand that progress in this area shouldn’t just
be limited to having targets in place and achieving a truly diverse and inclusive workplace goes beyond that. As
part of this work, we continue to keep our Board recruitment plans under review and we have further developed
our people strategy, which is also closely linked to the new purpose and the responsible business strategy. More
information is available within this report and in the Nominations Committee Report on page 124.
Operational resilience: Enhancing the operational resilience of the financial sector remains a strategic priority
of our regulators and COVID-19 has reinforced its importance. Whilst we ended the year having kept the
Society operationally resilient throughout 2021, the Board supported a rolling programme, with prioritised
ring-fenced funding, to further reduce our technology risk exposure and to enhance operational resilience.
External environment: Despite the continued uncertainty during 2021, the Board has overseen service
improvements for our intermediary partners and our members, with a particular focus on supporting members
who were facing financial difficulties, for example, by not charging arrears fees. The Society was in a strong
position to respond positively to increased demand for mortgages during 2021, driven in part by the temporary
reduction in stamp duty.
Ways of working and responding to change: The Board approved the move to our new head office, which has
been specifically designed to support cross-functional collaboration and enhanced tools and technology to
support sustained remote working, which in turn is aligned to our priority of keeping colleagues safe. In order to
ensure the Society is able to respond quickly to the increased pace of change, organisational adjustments were
made so we can better focus on more agile deliverables, where appropriate.
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95
Technology improvements to be made over a multi-year horizon. The Board remains committed to delivering
improvements in technology, which are designed to improve member experience across all channels, whether
that be digitally or in person through our branches. Technological improvements are informed by both
qualitative and quantitative member/intermediary research. To support these improvements, the Society will
adopt and implement a focused data strategy over a multi-year horizon.
Environmental, Social and Governance (ESG): During 2021 the Board was not only in receipt of frequent ESG
updates, but it was also provided with tailored training on this topic, which included an overview of climate risk
and how it may impact the Society (financial and non-financial risks) and its key stakeholders. The Board also
reviewed the completed actions and those underway in response to climate change. Responsible Business
targets have also been agreed to demonstrate our commitment to Environmental, Social and Governance
matters. Please see page 23 for further information.
Other strategic themes: As well as those matters referenced above, the Board has also considered a number
of other important strategic themes including: our savings and lending strategies, the role of our branches, the
migration of our data centre and our investment priorities. More information on these topics is included within
the Business Model and Strategy section of the Strategic Report.
Ongoing impact and response to the pandemic
This year, the Board has continued to adapt its governance processes to meet the challenges arising from the
pandemic. One of the ways we have done this is by holding meetings more frequently, with additional interim
Board meetings being scheduled on a regular basis. Additional meetings have also been held by management,
with the ExCo meeting more often to provide a platform where issues arising can be discussed and dealt with
promptly and in an efficient manner.
In the interests of health and safety and in line with government restrictions in place from time to time, the
Board continued to meet virtually for most of 2021, with hybrid meetings taking place towards the end of year.
Technological investment in our new head office has further supported the move to hybrid meetings, allowing
greater flexibility.
Board evaluation
In 2021, in line with requirements of the Code, the Board appointed Russell Reynolds Associates to conduct an
external evaluation of its effectiveness. More information on the outcome of the evaluation and the process
followed is included in the Nominations Committee Report on page 123.
Changes to the Board in 2021
In May, Andrew Greenwood was appointed as Deputy Chief Executive Officer. Throughout 2021, Andrew
retained his Chief Risk Officer responsibilities and continued to lead the Risk function.
In May, Rob Howse, Chief Operating Officer, joined the Board as an executive director. Rob joined the Society
in 2019 with extensive financial services and technology experience and has been pivotal in progressing the
Society’s technology and change agenda. Rob’s role is to lead the transformation, technology, digital delivery
and resilience teams which were merged into a new division in March 2021, to create dedicated cross-functional
delivery teams across three streams of activities related to (1) mortgages, (2) savings and digital, and
(3) corporate activities. These streams are also aligned to the strategic priorities.
In October, we were delighted to announce that Anita Tadayon joined the Board as a non-executive director and
a member of Board Risk Committee. Anita has spent a significant part of her career in a regulated environment,
most recently at BT and prior to this, at Centrica and Sky. She has a strong track record in transformation,
combining technology and change with deep expertise in the development and design of customer journeys
and agile ways of working. Anita’s background and experience will bring further diversity and strength to
the Board.
David Fisher reached the end of his nine-year term; however, to assist with succession planning and continuity,
David agreed to extend his tenure to the end of 2022. Neil Fuller will replace David as Chair of Board Risk
Committee (subject to regulatory approval). For more information please see the Nominations Report on
page 121.
After six years, John Hunt retired as a non-executive director in April 2021. I would like to thank John for his
valued service during his time on the Board.
The year ahead
Robust corporate governance will continue to be at the core of the Board’s activities, to ensure the Society
continues to be successful in responding to the evolving needs of our members, colleagues and wider
stakeholders, as we continue to navigate our way through 2022 and beyond.
Iain Cornish
Chair of the Board
The role and responsibilities of the Board
The Board has formal terms of reference, which incorporate a clear set of roles and responsibilities and the
Board maintains a schedule of matters reserved for decision by the Board, which sets out items that cannot be
delegated and have to be retained for its own approval. The infographic includes examples of matters which fall
within the Board’s remit. Full details of the Board’s roles, responsibilities and matters reserved for its decision
can be found within the Matters Reserved for the Board and the Board’s Terms of Reference, both of which are
available on our website at leedsbuildingsociety.co.uk/your-society/about-us/board-committees/.
Board matters
Development and
oversight of the
Society’s overall
culture.
Proposals for the
appointment,
re-appointment
or removal of
external auditor.
Establishment
of and changes to
the Society’s
strategy.
Annual approval
of our Speak Up
Standard.
Development and
implementation
of the people
strategy.
Monitoring of the
performance of
the Society on
a regular basis.
Board evaluation.
Annual review of
the effectiveness
of our systems of
internal control.
Annual approval
of the Society’s
risk appetite.
The Society’s
capital and liquidity
requirements.
Corporate Governance Report continued
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97
Corporate Governance Report continued
How does the Board operate?
The Board operates through meetings of the full Board, as often as is necessary to discharge its obligations
and to ensure the smooth running of the Society. Before the pandemic this usually comprised 10 meetings a
year, with two additional meetings dedicated to planning and strategy. Since 2020, the Board has scheduled
additional interim meetings on a more regular basis to review and discuss, amongst other items, the ongoing
impact of the pandemic on our members and the operations of the Society, as well as colleague wellbeing,
operational resilience/performance and any changes or amendments to financial forecasts.
Members of the ExCo attend Board meetings regularly to provide updates from each division, any pertinent
matters and market trends. This provides Board members with close visibility on all areas of the business, as
well as the external environment.
In order to ensure the Board operates and manages risk effectively, we have in place a robust Enterprise Risk
Management Framework (ERMF) which ensures the continuous identification and review of business risks. More
information on the Society’s risk management process can be found in the Risk Management Report on pages
138 to 143.
How do we make decisions effectively?
The Board sits within a governance framework which facilitates effective decision making.
For each Board meeting, a comprehensive and timely set of papers is provided in advance. The Board receives
certain regular items at every meeting, such as the minutes of the previous meeting, minutes of any Board
Committee meetings held since the previous Board meeting, an action schedule, schedule of key matters,
business performance scorecard and updates on regulatory matters and business transformation.
Good quality reporting is vital for effective and informed decision making. The materials provided to the Board
are reviewed regularly to ensure the information provided is high quality, clear and concise.
In addition, to ensure decisions are made in line with our strategic objectives and to ensure stakeholder impact
is taken into consideration, supporting papers are required to include information on the key stakeholder
groups which have been considered or could be impacted by the outcome of the decision. In 2021, this
process was also applied to our Board and Management Committees to strengthen the quality of decision
making further.
For more information and examples of the Board decision making process, please see pages 34 to 38 of the
Strategic Report.
How do we monitor our culture?
We have a healthy and positive culture at the Society. Our culture helps us to deliver against our purpose and is
as important to our long term success as our overall strategy.
As a mutual, we encourage behaviours which support the delivery of our purpose and are in the best interests
of our members and other key stakeholders. Colleagues receive annual training, which includes information
on, and examples pertaining to, the behaviours and attitudes expected of all colleagues. To support this
further, the annual appraisal process requires colleagues to demonstrate how they consistently display the
expected behaviours.
We have continued to monitor culture using a range of strategic risk assessment measures and the Board
receives an annual report and update on culture. One of the principal ways culture was monitored in 2021 was
through a colleague engagement survey, which assessed the level of colleague satisfaction and engagement,
as well as their confidence in the leadership team. We were delighted to achieve an engagement index score
of 86%, with a 93% rate of participation. The key results indicated that 89% of colleagues felt supported
by their manager (up 9% on 2020) and 88% agreed that their manager cares for their wellbeing and actively
supports them (up 7% on 2020). Additionally, 90% of colleagues said they think the Society respects individual
differences (e.g. cultures, working styles, backgrounds, ideas – the same result as 2020), and 93% felt they
work in an environment where everyone can feel included, respected and accepted for ‘who they are’ – an
8% increase on 2020. This demonstrates our commitment to diversity and inclusion and sustaining our
collaborative culture.
In November 2021, the Society also took part in the Best Companies survey and we were delighted to receive
the highest award of a 3 star rating, having previously achieved a 2 star rating in 2018. The Best Companies
survey was selected in order to gather further valuable colleague insight and provide the opportunity to
benchmark ourselves against other organisations. We had an impressive 86% completion rate, meaning the
results were representative of colleague views. We are confident that the accreditation is testament to our
healthy culture and desire to do the right thing for members, colleagues and the communities in which
we operate.
As a Board, collectively we also take measures to monitor culture continuously through direct conversations
and the various touch points we have with colleagues, through attendance at meetings of the Colleague
Association, branch and departmental visits, for example.
As part of enhancing colleague engagement and as a means of monitoring culture, this year the Board trialled
new ways of bringing the colleague voice into the Board room, including the attendance of colleagues at Board
meetings and videos from branch colleagues. By way of example, the Board watched six videos with colleagues
providing views on the role of branches, how customer needs were met, how colleagues were treated
throughout the pandemic and changes in the branch network. This led to a discussion on the important role of
branches and how this had changed more recently, for example to provide support for Contact Centre, which
had provided additional resilience and had the added benefits of developing branch colleagues and providing
additional support for members.
The directors agreed the videos were a useful insight to demonstrate the passion of branch colleagues to meet
customer needs and provide great service and agreed it would be beneficial to do something similar for other
areas, such as Contact Centre, Mortgage Lending and Mortgage Support. Accordingly, dates for more colleague
updates have been scheduled for the 2022 Board meetings.
Whistleblowing
We encourage a culture that welcomes open discussion and challenge, where colleagues feel comfortable about
raising their concerns, which in turn allows us to take appropriate action quickly and prevent any malpractice.
All colleagues are encouraged to raise a concern without fear of retribution, victimisation or detriment, should
they encounter or suspect wrongdoing, through our Speak Up procedures.
The Board routinely reviews our Speak Up Standard and any reports arising from its operation. The annual
approval of our Speak Up Standard is included on the Schedule of Key Matters reserved for the Board and was
last approved in October 2021 based on the recommendation of the Audit Committee. Gareth Hoskin,
Non-Executive Director and Vice Chair is the Society’s appointed Whistleblowers’ Champion.
In 2021, a Compliance review of colleague conduct arrangements concluded that the Speak Up Standard was
written in a tone and manner to encourage colleagues to speak up and report concerns. Additionally,
36 qualitative interviews were undertaken with colleagues, all of whom stated they would raise a concern if
they had one and they had confidence that in doing so, their concerns would be taken seriously and be dealt
with confidentially.
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99
Corporate Governance Report continued
We have continued to reinforce the internal arrangements for raising concerns, through ongoing
communication, training and awareness of our Speak Up Standard, by a variety of means including:
n
Our Speak Up procedure and guidance are available to all colleagues on the Society’s intranet.
n
Mandatory e-learning on the Society’s Speak Up arrangements is provided to all colleagues annually. In 2021,
100% of colleagues completed the training.
n
Provision of an independent and confidential route for reporting concerns is available via our external Speak
Up Hotline Service, with contact details provided on our intranet and external websites accessible to both
third parties and colleagues.
n
New colleagues receive a mandatory induction pack which incorporates information about
whistleblowing procedures.
Diversity and inclusion
In 2021, the Board continued to place great importance on diversity and this has been a priority when reviewing
the composition of the Board and succession planning. Mindful of developing the diversity of the Board, a
detailed recruitment process was undertaken in 2021 which successfully resulted in the appointment of Anita
Tadayon in October.
In June, the Board discussed our diversity strategy and proposed targets for the future. The Chair invited
an open discussion to understand how the Board as a whole, could support the Executive Committee in
progressing the diversity agenda, at all levels and to agree how it could provide the right level of challenge and
oversight. It was agreed that to deliver progressive results, further steps should be taken, with meaningful
targets and specific supporting actions to achieve them. Consequently, it was agreed to focus attention on:
n
Diversity outcomes – focusing on specific targets and key actions we believe are required to deliver these.
n
Inclusion enablers – to support our diversity agenda more broadly and to continue to develop our overall
inclusion approach to a position of greater maturity. Examples of inclusion enablers include:
– Wellbeing: to create a wellbeing approach focusing on different dimensions, for example, to continue
developing our programme of mental wellbeing, including support provided by Mental Health First Aiders
and mindfulness, with a spotlight on specific areas, such as menopause.
– Disability: working towards achievement of Disability Confident level 3 by 2023, supported by the new
executive committee sponsor, Nikki Marsh, Chief Brand & Marketing Officer.
– Talent development: programmes to support the development of colleagues, with meaningful
interventions, enhancing the development and retention of diverse talent.
– Colleague-led forums: we have three colleague-led forums, which focus on gender, race equality and
mental health. A network was also established in 2021 for LGBTQ+ colleagues to enhance inclusion
and awareness.
It was also agreed to engage with external advisors to secure additional expertise in the development and
implementation of our diversity and inclusion strategy. A number of follow-on sessions have been scheduled in
2022 and we will provide an update on our progress next year.
As outlined above, one of the ways the Society seeks to build on our diversity and inclusion activities is
through the work of our colleague-led forums – gender, race equality, mental health and the LGBTQ+
network. Each forum promotes colleague awareness and considers opportunities and initiatives to attract,
nurture and develop a diverse talent pool – an approach fully supported by the Board.
Gender Diversity Forum – the forum’s aims are to actively promote gender diversity across
the Society through communications and events, focusing on helping female colleagues
progress and develop in their career and sharing opportunities and initiatives with all
colleagues across the Society. This year the forum’s activities have included a review of
maternity/paternity support and menopause research to determine further actions which
can be taken. It delivered an insights session on the menopause to raise awareness and
discuss the impact it can have on work life and launched a second pilot mentoring scheme.
Race Equality Forum – this year the forum sought to continue to raise awareness and
educate colleagues on race equality matters through running a number of interactive insight
sessions on the forum’s purpose and objectives for 2021. The forum also worked with HR
to discuss the setting of representation targets, as well as providing support for a reverse
mentoring programme. The Race Equality Forum also provides a focal point for working
towards the Race At Work Charter’s initiatives.
Mental Health Forum – the forum seeks to raise mental health awareness amongst
colleagues, encouraging open conversations about mental health and supporting
colleagues should they need it. In 2021, the Mental Health Forum has:
n
Launched virtual mental health awareness sessions.
n
Worked with Contact Centre managers through bespoke wellbeing sessions to support
contact centre colleagues.
n
Continued to train new Mental Health First Aiders for the Society and for other building
societies in partnership with the Building Societies Association.
n
Continued to organise Pause and Breathe mindfulness sessions designed to support
colleagues’ wellbeing.
LGBTQ+ Network – this network was set up in mid-2021, with a focus on providing a
social and supportive space for colleagues who identify as LGBTQ+ or are an ally of the
community. The network agreed several initiatives for 2021, including:
n
Improving understanding and awareness of the LGBTQ+ community and encouraging an
open conversation around LGBTQ+ issues, history and culture.
n
Creating a space on the colleague intranet, where colleagues can access a library
of resources with information relating to support, education and awareness,
and culture.
For further information on our diversity and inclusion strategy and the agreed targets in place for 2025, please
refer to our Nominations Committee Report on pages 124 to 125.
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101
Corporate Governance Report continued
Our governance structure
Board committees
BOARD
Nominations
Committee
Audit Committee
Board Risk Committee
Remuneration
Committee
To assist the Board in carrying out its role effectively and so certain matters can be discussed and considered in
more detail; some responsibilities are delegated to a number of Board committees, each one having clear and
detailed Terms of Reference (ToR). The ToRs list the duties of the Board committees which have been delegated
to them from the Board, copies of which can be found on our website: leedsbuildingsociety.co.uk/your-society/
about-us/board-committees or by writing to the Secretary at Leeds Building Society, 26 Sovereign Street,
Each Board committee is comprised of independent non-executive directors, with members selected for
their relevant skills and areas of expertise. The Chair of each committee is responsible for ensuring receipt of
accurate, timely and clear information to assist with their deliberations and decision making. Board committees
have been established in line with the provisions of the Code and membership is limited to non-executive
directors only, with other Board members/Senior Leaders in attendance as and when required.
The Board committee governance structure is outlined below and further details on each committee, the
activities undertaken in 2021 and their membership can be found in each committee’s individual report.
Board committees – Key priorities
Audit Committee
Nominations Committee
(NomCo)
Remuneration Committee
(RemCo)
Board Risk Committee
(BRC)
Key priorities
n
To monitor the integrity of
external financial reporting.
n
To review the effectiveness
of the systems of internal
control.
n
To assess the effectiveness,
performance and
independence of the
Internal Audit function and
the external auditor.
Key priorities
n
To review the structure,
size, diversity and
composition of the Board.
n
To oversee succession
planning and identify
candidates to fill Board
and senior leadership
vacancies.
n
To ensure compliance
with good corporate
governance standards and
the Code.
Key priorities
n
To ensure that
remuneration policies,
principles and practices
support our long term
interests and are
appropriate to attract,
reward and retain talented
executive directors and
senior leaders.
Key priorities
n
To review our exposure to
risk and oversee the risk
management framework to
ensure that it is appropriate
to mitigate current and
prospective risks.
n
To oversee risk related
reviews.
n
To develop a strategic risk
appetite and review the
Society’s ICAAP, ILAAP
and RRP prior to Board
approval.
Executive and management committees
Executive Committee (ExCo)
ExCo operates under the direction of the Chief Executive Officer and has the primary purpose of enabling the
executive directors and chief officers to manage the Society in a co-ordinated way, taking a broad view of key
issues and priorities. ExCo delegates some of its duties to, and is supported by, the Management Committee,
Pricing Committee, Executive Transformation Committee and Balance Sheet Optimisation Group.
In 2021, ExCo continued to meet more frequently, to enable decisions to be taken more quickly and deal with
any challenges arising as a result of the pandemic.
The Executive and Management Committee structure is outlined below:
Executive Committee (ExCo)
Pricing Committee
Management Committee
(ManCo)
Executive Transformation
Committee
Balance Sheet
Optimisation Group
(BSOG)
Key priorities
n
The primary purpose of
the Pricing Committee,
as delegated by ExCo, is
to approve new product
pricing for our savings and
mortgage products.
Key priorities
n
ManCo is required to
monitor performance
against the corporate
priorities, to facilitate early
identification of divergence
from the corporate plan
and to monitor remedial
action(s), as appropriate.
Key priorities
n
The primary purpose of the
Executive Transformation
Committee is to provide
oversight of our change
portfolio to ensure it is
aligned to our overall
strategic vision.
Key priorities
n
The primary purpose of the
BSOG is to support ExCo
and ALCO with monitoring
of key financial measures
and risk early warning
indicators, along with
agreeing tactical decisions
to optimise the current and
future balance sheet.
Board and Board committee membership attendance record
The number of meetings held throughout 2021 and the attendance of all directors at scheduled Board meetings
and Board committees (members only) is shown below.
Board Audit Board Risk Nominations Remuneration
Annette Barnes 18/19 9/9 3/3***
Andrew Conroy 19/19
Iain Cornish 19/19 6/6
Richard Fearon 19/19
David Fisher 18/19 6/6 9/9 4/4
Neil Fuller 19/19 6/6 9/9
Andrew Greenwood 18/19
Gareth Hoskin 19/19 6/6 8/9 6/6 4/4
Rob Howse* 13/13
Lynn McManus 19/19 6/6 9/9 6/6 4/4
Anita Tadayon* 2/2 1/1
John Hunt** 5/5 3/4
* Rob Howse joined the Board in May 2021 and Anita Tadayon joined the Board in October 2021
** John Hunt resigned from the Board in April 2021
*** Annette Barnes joined the Remuneration Committee on 1 March 2021
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Corporate Governance Report continued
Division of responsibilities
Board roles
The roles of the Chair and CEO are distinct and are held by different people, Iain Cornish (Chair) and Richard
Fearon (CEO). As Chair, Iain’s principal role is to lead the Board and he is not involved in the day-to-day
management activities of the Society. Richard’s primary role, as CEO, is to focus on the running of our business
and the implementation of the strategy.
The Chair, CEO and Senior Independent Director each have a distinct job description which is reviewed and
approved by the Board each year. The table below highlights the key accountabilities of these roles, as well as
those for the executive directors, non-executive directors and Secretary:
All directors have access, if required to fulfil their roles and responsibilities, to independent professional advice,
at our expense.
Role Key accountabilities
Chair:
Iain Cornish
n
The effective running of the Board and guardian of the Board’s decision making processes.
n
To support and advise the CEO in the development of strategy and more broadly to support and
advise.
n
To ensure the Board receives accurate, timely and clear information and considers feedback and
views from stakeholders, including members and colleagues.
n
To lead the development of our culture by the governing body as a whole.
n
To take the lead in providing a properly constructed induction programme for new directors and in
identifying and seeking to meet the development needs both of individual directors and the Board as
a whole.
n
To ensure the effectiveness of the Board, its committees and individual directors is formally and
rigorously evaluated, at least once a year.
n
To promote the highest standards of integrity, probity and corporate governance.
Chief Executive Officer:
Richard Fearon
n
To develop and implement the Society’s strategy and corporate priorities, having regard to promoting
our success in the interest of our members and other stakeholders.
n
To ensure we operate an adequate system of control through the application of a three lines of
defence model.
n
To deliver a balanced business performance across a wide range of scorecard measures, to ensure
the achievement of short term corporate plan objectives, while building long term sustainable
performance.
n
To set the tone in respect of our culture and to unite all colleagues around our vision, strategy and
values.
n
To provide information and advice to the Chair, the Nominations Committee and other members of
the Board, on succession planning, particularly in respect of executive directors.
n
Responsible for all executive management matters affecting the Society.
n
To discharge the allocated PRA/FCA Prescribed Responsibilities and FCA Business Activities via the
Society’s management forums in line with the Society’s Risk Management Framework.
Senior Independent
Director/Vice Chair:
Gareth Hoskin
n
To work closely with the Chair, acting as a sounding board and providing support.
n
To act as an intermediary for other directors, as and when necessary.
n
Be available to key stakeholders to address any concerns or issues they feel have not been adequately
dealt with through the usual channels of communication.
n
To lead the performance evaluation of the Chair.
n
To deputise for the Chair and chair meetings where the Chair is conflicted.
Role Key accountabilities
Non-executive
directors:
Annette Barnes
David Fisher
Neil Fuller
Lynn McManus
Anita Tadayon
n
To help develop and constructively challenge proposals on strategy, ensuring a high level of conduct
and positive outcomes.
n
To bring independent judgement and perspective to Board debates and decisions and to use their
own experience to constructively challenge the proposals and updates from the Senior Leadership
Team.
n
To set our risk appetite and to ensure that the integrity of financial information and controls are
robust and fit for purpose.
n
To approve the corporate plan and monitor performance against agreed corporate priorities.
n
To have oversight of the culture, reward and talent management strategies whilst ensuring
management performance achieves the corporate goals.
n
To ensure the Society operates with the highest level of governance as set out in the Code and
to assist in the discharge of PRA/FCA prescribed responsibilities and FCA business activities via
management forums, in line with the Enterprise Risk Management Framework.
n
To promote the fair treatment of all members/customers.
n
To be sufficiently and appropriately informed of the matters under discussion and to represent and
have regard to the interests and views of the Society’s stakeholder groups, including but not limited
to members.
Executive directors:
Andrew Greenwood
Andrew Conroy
Rob Howse
n
To be responsible for and have oversight of the day-to-day management of the Society.
n
To escalate issues to the rest of the Board on a timely basis.
n
To set the strategy of the Society alongside the rest of the Board and ensure the necessary business
activities are undertaken in order to meet strategic objectives and delivery of strategy overall.
n
To ensure that prudential, conduct and operational risks are adequately controlled.
n
To ensure the Society operates within the agreed risk appetite and internal risk framework.
Secretary:
Katherine Tong
n
To provide advice and updates to the Board in respect of all governance related matters and best
practice guidance.
n
To provide support to the Board to ensure that complete and timely papers are received in advance of
all Board and Board Committee meetings.
n
To act as a point of contact for all Board members and provide advice as required.
n
To provide all necessary support to ensure the Board can function effectively with the appropriate
resources in place.
Composition, succession and evaluation
Board composition
The Code requires at least half of the Board, excluding the Chair, to be made up of independent non-executive
directors. The current composition of the Board comprises eleven directors, of whom four are executive
directors and seven are independent non-executive directors, which is compliant with the Code.
The Board considers that the current mix of skills, experience, backgrounds and opinions of the directors
complement each other and provides an appropriate balance. This helps ensure members’ interests are
protected and that we have effective leadership and direction. More information on the overall assessment of
directors’ skills and experience and how this is factored into succession planning is included in the Nominations
Committee report on page 119.
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105
Gender of Board members
n
Female
n
Male
Executive and non-executive
composition
n
Executive
n
Non-executive
Tenure of non-executive
directors
n
0 to 3 years
n
4 to 6 years
n
7 to 9+ years
Changes to the Board in 2021
The table below provides a summary of the changes to the Board membership in 2021.
Rob Howse Chief Operations Officer Appointed as Executive Director in May 2021
Anita Tadayon Non-Executive Director Appointed as Non-Executive Director in October 2021
John Hunt Non-Executive Director Resigned as Non-Executive Director in April 2021
The Board considers and acts upon recommendations for appointments from the Nominations Committee. At
the first opportunity, following their initial appointment by the Board, directors must be elected to the Board
by members in a general meeting. Since 2015, in line with the recommendations of the Code, all directors have
stood for annual re-election, at the AGM. In accordance with the Society’s Rules, the Board elects its Chair and
Vice Chair, annually, at its first meeting following the AGM. More information on the recruitment process and
the criteria used is included in the Nominations Committee Report on page 119.
Non-executive directors’ letters of appointment are available on request from the Society’s Secretary. In
accordance with the Society’s Rules, members are entitled to nominate candidates for election to the Board,
subject to compliance with PRA and FCA requirements.
Conflicts of interest
The Board has a Conflicts of Interest Policy which sets out the procedures for declaring and, if appropriate,
authorising any actual or potential conflicts of interest. The policy also provides examples of what would
constitute a conflict of interest and refers Board members to the Secretary for advice where required. The
policy requires that all additional appointments which a director wishes to take up should first be referred to
the Board for consideration and, if appropriate, approval (in terms of any potential conflict of interest and
time commitment).
The Secretary maintains a detailed register of any potential or actual conflicts of interest, which is periodically
submitted to the Board for review and re-affirmation that all declarations remain acceptable. The Board
considers that neither the Chair, nor any director, had a material conflict of interest to declare, which would
impact the effective discharge of their responsibilities, during the year ended 31 December 2021.
Time commitment and external appointments
All Board candidates are required to provide details of their other commitments prior to their appointment, to
ensure they have sufficient capacity to undertake the role. It is anticipated that after induction, non-executive
directors are required to commit, on average, up to 36 days per annum to the role. All directors are asked at
least annually to attest that the level of time commitment to their other roles and the Society’s records of their
external appointments remain correct.
In 2021, Anita Tadayon was appointed to the Board. Particular consideration was given to Anita’s time
commitments as she holds a full time position elsewhere. This was considered carefully as part of the
recruitment and interview process and by the Nominations Committee. It was agreed that Anita would have
sufficient time available to undertake the role and this would be reviewed annually as part of the appraisal and
review process.
The Board considers that all individual directors have sufficient time to discharge their duties at the Society
and they do not hold more than the prescribed number of directorships under Article 91 of the Capital
Requirements Directive IV. None of the executive directors held a non-executive directorship in a FTSE100
company during 2021.
During the year, no Board members took on any new external appointments. However, Iain Cornish stepped
down from his role as Chair and Non-Executive Director of St James’s Place Plc and St James’s Place UK plc in
May 2021. Gareth Hoskin also retired from his position as a non-executive director of Diabetes UK Services Ltd
and the British Diabetic Association in January 2021. A list of all external appointments held by Board members
is shown in the Annual Business Statement on page 242.
Independence
The ongoing independence of non-executive directors is considered annually against the criteria set out in
the Code by the Nominations Committee, which then provides a report and recommendation to the Board
for approval. In 2021, the Board considered all non-executive directors, including the Chair, who was also
considered to be independent on appointment, to remain independent in character and judgement and that
there are no circumstances which are likely to impair their independence.
As David Fisher exceeded his nine year tenure in March 2021 the Nominations Committee and the Board
considered his independence and confirmed that they were satisfied that he remains independent and is likely
to do so, for the remaining period of his extended appointment.
The Board’s annual review of potential conflicts of interest did not identify any relationship or conflict which
would impair a non-executive director’s ability to meet the independence criteria set out in the Code.
Further information is available within the Nominations Committee Report on page 122.
Board effectiveness
The Code requires Boards to undertake a formal and rigorous annual evaluation of their own performance and
the evaluation should be externally facilitated at least every three years. In November 2021, the Chair, with the
support of the Nominations Committee, engaged with Russell Reynolds, an external provider, to facilitate the
evaluation process. The last external review was conducted in 2018. The outcome of the 2021 review concluded
that the Board ‘was performing well – with no urgent action required’. Following the Board evaluation process in
November, a detailed report outlining the outcomes and any actions or suggested areas of improvement was
provided to the Board in January 2022.
A summary of the outcomes and more information on the 2021 Board evaluation process is included in the
Nominations Committee Report on page 123.
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107
All Board committees also periodically evaluate their own performance and effectiveness, and that of
the committee Chair, through a series of questions which is sent to all members and regular attendees of
the committee. This process serves to identify any areas where members may require further training/
development in order to discharge their duties effectively, or where the overall performance or approach of the
committee or Chair could be improved. The evaluation process followed in 2021 concluded that committees
were, overall, meeting their Terms of Reference, with a small number of improvement opportunities identified,
examples of which are shown below.
Committee Improvement opportunities
Board committees
Three of the Board committees received commentary regarding the length of committee papers noting
that, at times, papers included too much detail.
Each committee reminded report writers to ensure papers are succinct and concise whilst providing the
right level of detail to allow the committees to discharge their duties effectively and ensure debate is
focused at the right level relative to the committees’ remit.
Going forwards committee members were also encouraged to provide feedback on the content and
length of meeting papers.
In 2021, an internal governance review of all Society committee Terms of Reference was completed against their
Schedule of Key Matters. The review was conducted by the Secretariat & Regulatory Advice Team and individual
feedback was provided to committee Secretaries to ensure only papers within the relevant committees’ remit
are tabled. This served to ensure that committee meetings remain both efficient and effective by operating
within their remit as prescribed by the Terms of Reference applicable to each committee.
Directors’ induction, development and individual performance evaluation
On appointment, all new directors receive a detailed induction programme, which is tailored to their individual
requirements and based on their own existing skills and expertise. The Chair works closely with HR to map the
induction programme and has regular discussions with new NEDs on progress. The programme is designed to
be reflective of the role the new director will play within the committee and governance structure and usually
takes six to twelve months to complete, depending on the role and responsibilities of that particular director.
By way of example, a newly appointed director would typically meet with the Chair on a regular basis to discuss
a wide range of topics, including, for example, strategic items, industry hot topics, corporate objectives and
performance against these and expectations of the role.
The new appointee also receives the Terms of Reference for any Board committees of which they would become
a member, attend an introductory meeting with the Chairs and Secretaries of each Board committee and
receive detailed guidance on the Board’s Conflict of Interest Policy from the Society Secretary. They are also
provided with various documents to familiarise themselves with, such as our director’s information manual,
the Corporate Governance Code and the Building Societies Association’s guidance on the Code. This year, the
induction programme was reviewed and refined, to reduce the number of overall documents provided to a new
director and to ensure information was delivered in stages to avoid the excessive provision of information. A
detailed but succinct manual was created for new directors, which includes information on the Board structure,
how the Board operates, composition of committees as well as a summary of the Society’s strategy and
corporate plan, for example.
Non-executive director induction programme
Update from Neil Fuller on his recent experience of the Society’s induction programme.
On his appointment in December 2020, Neil received a detailed induction programme, which included a
review pack, a schedule of interviews with key colleagues from the Leadership Team, as well as with the
executive and non-executive directors alongside regular meetings with the Chair to discuss a wide range
of topics covering both the internal and external environment.
Neil found it extremely useful to have a structured programme which enabled him to meet other
colleagues and learn about the business at an early stage. All meetings were held virtually as a result of
the pandemic. However, Neil found this worked to his advantage, as he was able to meet more people
over a shorter period of time.
Neil also found the induction pack was complete with detailed information on Board activities, the
corporate plan and strategic objectives. Neil’s induction plan was tailored further in 2021 in preparation
for his appointment as Chair of the Board Risk Committee. This involved meetings with each of the senior
members of the Risk function, to enable him to learn more about their individual roles.
Each non-executive director is assigned a “buddy” who is either an executive director or a member of the
ExCo. Each buddy holds regular, informal meetings with their assigned non-executive director to provide
progress updates on the activities of the management committees they are members of and any other
pertinent areas. Neil confirmed that this was particularly useful, especially when he first joined the Society
as it enabled him to learn about the role of each committee and how they operated, at a quick pace.
Board development
In order to maintain continuous professional development, all directors have a clear set of agreed development
actions which are monitored, reviewed and refreshed during their annual evaluation.
Ongoing professional development is essential to enable directors to be sufficiently and appropriately informed
about our business and objectives, the regulatory framework and the market in which we operate. Having
a strong command of issues relevant to prudential and conduct risk is also essential and informs Board and
committee discussions and decisions.
The Board and each committee have an annual training plan, which sets out agreed areas of training to be
provided throughout the year. In 2021, the Board received training on a number of topics including structural
hedging, IRB models and IRB capital calculation, shared ownership, UK Finance mortgages policy priorities, as
well as detailed training on climate change, which included sessions from both internal and external subject
matter experts on climate risk and the climate strategy.
Board activities in 2021
Some of the key areas of Board activity during 2021, linked to our corporate priorities, are shown below. Further
information and examples of how stakeholders’ interests were taken into account in some of the key decisions
made during the year can also be found in the Strategic Report on pages 34 to 38.
Keeping the Society financially resilient
n
Approval of the Annual Report and Accounts for the period ending 31 December 2020 and Interim Financial
Report for period ending 30 June 2021.
n
Quarterly financial updates from Chief Financial Officer.
n
2022 corporate plan.
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109
Safely keeping the Society operating for the benefit of our members
n
Approval of the move to the Society’s head office.
n
Annual whistleblowing report.
n
Approval of any new Board appointments.
n
Annual corporate responsibility strategy and mutuality review.
n
Strategic Framework Review – vision, mission and purpose.
n
Update on the 2021 Board effectiveness review.
n
Approval of the Board Conflicts of Interest Policy.
n
Regular updates on regulatory matters and horizon scanning.
n
Annual review of the Society’s systems and controls.
n
Update and detailed discussion on the Society’s diversity and inclusion strategy including the agreement of
targets for both gender and ethnic representation on the Board.
n
Annual culture review.
n
ESG strategy review.
n
Discussions on purpose and vision.
Informing and engaging colleagues and customers
n
Approval of the format for the 2021 and 2022 AGMs.
n
People strategy update.
n
Regular colleague updates provided by Lynn McManus as the appointed representative of the workforce.
n
Brand strategy updates.
n
The first phase of the new diversity and inclusion strategy.
Strategy conference
A number of items were discussed at this year’s Board strategy conference, a summary of which is set
out below:
Topic Purpose and outcome
A summary of the current
social, economic and
political environment
and how this may change
over the short, medium
and longer term.
Purpose: To provide a brief summary of the key external environment themes, giving context for the
strategic discussions.
Outcome: To determine whether any changes were required to our strategic priorities in light of the
latest update.
Savings channel strategy
and insight. A discussion
on digital channel
requirements to support
our savings strategy.
Purpose: To set out the extent to which our members are adopting digital, relative to wider market
trends and to understand the drivers of any variance and the future outlook for our member base.
Outcome: A shared understanding of the differences in our position relative to the market both now and
in the future and implications for our channel strategy.
Technology roadmap.
A review of the data
strategy and proposals
to simplify and enhance
the IT landscape and
architecture.
Purpose: To seek further input on the most critical elements of our technology roadmap and the
alignment between front-end technology modernisation and delivery of our lending and savings
strategies.
Outcome: Consensus on the criticality of the technology roadmap in defining our change agenda and
alignment on the elements of the roadmap that support the lending and savings strategies.
Topic Purpose and outcome
Vision and purpose. The
Board held a detailed
discussion on the cultural
dimensions of vision
and purpose and the
importance of aligning
these elements with
the overall approach to
Responsible Business.
Purpose: To update the Board on the journey so far to refresh our vision and purpose and to put forward
our shortlisted vision and purpose statements.
Outcome: Mutual understanding of the process so far and the next steps to develop and finalise our
vision and purpose.
Mutual dividend.
Discussions on value
attribution across
stakeholders in the
current and upcoming
environment with a view
to maximising value for
stakeholders.
Purpose: To share thinking on value attribution across stakeholders in the current and upcoming
environment.
Outcome: Agreement on the proposed direction of travel, the prioritisation principles and increasing
stakeholder value.
Stakeholder engagement
The Board of Directors has a duty to promote our success, which includes engaging appropriately with all of
our stakeholders. The Board recognises the diverse range of our stakeholders and the importance of assessing
and understanding their needs. The diagram below displays our stakeholders, along with an explanation of how
we engage with each group. Further details on our stakeholders and why they are important to us along with
an example of how stakeholders are taken into account as part of the decision making process can be found on
pages 34 to 38 of the Strategic Report.
Communities Environment
Intermediaries
Third parties
RegulatorsColleagues
Investors
Members
WHO ARE OUR
STAKEHOLDERS?
The ExCo members operate a ‘buddy’ system with the non-executive directors. This ensures that the
non-executive directors have a regular point of contact and so they can be updated on substantive points from
the management committees. It is also useful for supporting new non-executive directors, as referenced by
Neil Fuller (see page 109). The buddy system also allows the non-executives to have regular contacts with the
broader teams and they often visit departments or observe team meetings.
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Members
We regularly engage with our members to understand what is important to them and gauge understanding
of the products and services they’d like to receive. Member feedback is then used to influence some of the
strategic discussions at Board level, for example, at the Board strategy conference in 2021, discussions on the
savings channel strategy and mutual dividend took place.
With TalkingPoint, our online forum, members have the chance to tell us what they think. It is an opportunity
to give feedback on a wide range of subjects, from the Society itself, to our new products and services. Using
TalkingPoint, members are encouraged to engage with us – and each other. The forum has 2,723 members and
over the past year 53% have actively taken part in research.
In 2021, a number of forum and research activities were undertaken, including for example, research conducted
with TalkingPoint where we asked members about the following topics:
Regular Saver – To understand what member and non-members’ expectations are of a regular saver product
and the demand for such products. This research has provided meaningful insight into discussions around the
savings products to be introduced into the Society’s product range in 2022.
Savings strategy – To understand the extent to which our savings customers use digital channels in comparison
to wider market trends and to explore the drivers of any variance. This research was considered in discussions
at our 2021 savings strategy conference.
AGM planning – This research looked to understand our members’ opinions on the voting pack content (post
and email) and how they would prefer to consume future AGM content. The findings from this research were
provided to the Board and have been used in the ongoing planning for the 2022 AGM.
Digital personas – This research looked to provide insight into online behaviours and preferences of both our
members and the market trends of different customer segments.
AGM 2021
We were disappointed that in 2021 we were, once again, unable to hold our AGM in the usual format of a physical
meeting in a Leeds city centre venue. We have carefully considered the options for our AGM in 2022 and we look
forward to meeting our members again in April.
Colleagues
Reward review
In May 2021, the Board discussed reward received by colleagues and it was agreed that an additional investment
would be made, to recognise colleagues’ dedication and outstanding contribution to the Society during the
pandemic. This was delivered by way of an additional increase, over and above the annual pay award, to all
eligible colleagues. More information is included in the Strategic Report on page 38.
Stakeholder engagement in action
In order to enhance visibility of Board members from within the Society, a number of non-executive
directors prioritised meeting colleagues to discuss their roles and responsibilities as well as to gain
colleague insight on any pertinent issues they are currently facing.
Examples of this included:
n
Throughout the course of 2021, and in preparation for his appointment as Chair of Board Risk
Committee in 2022, Neil Fuller met with all colleagues across the Leadership Team, within the Risk
function, to discuss their role and promote understanding of the way in which the Society manages
risk and the internal control mechanisms in place.
n
Annette Barnes and Iain Cornish visited Mortgage Support at our head office in Leeds to meet with
colleagues and to find out more about technology changes being implemented in 2022, to improve
efficiencies and the member experience.
n
A number of branch visits were undertaken in 2022. Annette Barnes visited Newcastle and South
Shields in September as well as our new Leeds city centre branch in October. Annette discussed
how colleagues were supported by the Society during the pandemic and how colleagues have been
supporting customers (for example by taking calls for Contact Centre), as well as discussing the new
branch ‘enquiry desk’ role which has been established to assist with career progression opportunities.
Lynn McManus also visited branches in Aberdeen, Glasgow and Edinburgh.
As outlined earlier in the report, the Board trialled new ways this year to bring the colleague voice into the Board
room, as a means of enhancing stakeholder engagement as well as monitoring culture more closely.
Colleagues who have been invited to the Board said:
James Keatley
“As a new joiner in March, I found myself engaging with the Board over the course of my first year. On all
occasions I have felt welcomed and that my voice was respected. I have been impressed by the diversity
of perspectives which has added valuable focus to my own thinking. Whilst such discussions are justifiably
challenging, they were conducted in a collaborative way, making my early experience at LBS overwhelmingly
positive.”
Graham Binns
“Presenting the ‘voice of the colleague’ session to the Board in September was a very positive experience. It
was really important that colleagues responded in as honest a manner as possible and this really came across in
the videos. The questions posed were relevant and provided the Board with a real-time view of how colleagues
were feeling. The response from the Board was excellent and I felt there was a strong level of engagement.
Questions asked were again relevant and enabled me to add more context if required. I was made to feel very
welcome by all in attendance and felt that I was listened to and my views were completely respected.”
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Board-appointed colleague representative
The Board considers this an important role and an additional means by which colleague views and behaviours
can be monitored on an ongoing basis.
What is the purpose of this role?
n
To allow Board members to obtain a full and rich understanding of colleague views across the organisation;
n
To ensure that colleague views are represented and discussed at Board level, and consequently taken into
consideration inherently as part of the Board’s overall decision making process; and
n
To provide an additional means to monitor culture and colleague opinions more closely.
As the Board-appointed colleague representative, Lynn McManus, Non-Executive Director, carries out a
number of branch and departmental visits and meets with the Colleague Association at least twice a year, to
discuss key themes and ways in which the Board can provide further support. Lynn also takes an active role in
reviewing colleague feedback received as part of the Society’s annual colleague engagement surveys. Updates
from Lynn are scheduled in advance at regular intervals, during these updates Lynn reports to the Board on her
findings and agrees appropriate actions with management. This is considered an important role by the Board
and one which has been discussed at the Nominations Committee this year.
Colleague Association
The Colleague Association is an elected colleague forum that works on behalf of colleagues to help ensure
we provide a great place to work. The Association’s committee is made up of 8 colleagues from across the
business, who meet a minimum of twice a year. In 2021, the Association met more frequently to discuss the
ongoing support needed for colleagues, following the introduction of hybrid ways of working as we started to
return to the workplace, as well as consulting with management on the 2021 reward review.
68% of colleagues are members of the Association, which provides legal assistance, guidance and welfare
support for its members. It is a forum for colleagues to provide feedback to senior management and the
Association’s committee has regular meetings with senior managers in respect of business performance,
culture, reward and any other employment matters directly affecting terms and conditions.
Stakeholder engagement in action
In 2021, Lynn McManus, in her capacity as the colleague representative attended two meetings along
with Andrew Greenwood, Deputy Chief Executive Officer and Becky Hewitt, Director of People. Iain
Cornish, Chair, also attended a meeting in July to gain insight into the work of the Association and discuss
colleague needs more closely with committee members.
Relations with other investors
The Treasury team has developed a programme for wholesale debt investor relations, which ordinarily includes
a presentation of the Annual Results at an invited event in the City of London presented by Andrew Conroy,
Chief Financial Officer. Regular financial performance updates are provided/made available to investors following
the publication of the annual and interim results. Engagement with investors is through holding individual
meetings with key institutional investors, group presentations and attendance at specially arranged investor
days. Attendance at investment conferences and specially arranged investor events provide the opportunity
for additional engagement. COVID-19 has impacted these meetings and conferences significantly and since
March 2020 meetings have been held remotely. It is likely that face-to-face meetings will gradually resume but
the landscape has changed and we expect that remote meetings will continue, allowing us to reduce our carbon
footprint in the process.
An investor relations area is maintained on our website, which gives access to a wide range of materials,
including the Annual Report and Accounts, investor presentations and the prospectuses for each of our
bond programmes.
Regular and close dialogue is maintained with credit rating agencies, Fitch and Moody’s. A formal review
meeting is held on an annual basis with each agency and representatives from the Society’s ExCo and Treasury
management. At other times, a close relationship and regular dialogue are maintained. In 2021, meetings and
discussions with these agencies continued to be held via conference call or video meeting.
We continue to monitor developments in Capital Markets regarding green, social and sustainable bond
issuances and other ESG factors. Demand for this type of issuance is increasing as asset managers receive
further inflows requesting returns that are linked to these types of initiatives. As a building society, our investors
are understanding of the social purpose that we are founded upon.
Third parties
Our supplier partners are an essential part of our business operations and key to the ability to develop and
deliver services to members. It is important that third parties represent us in a manner which supports and
enhances our reputation, as well as relationships with members, colleagues and other stakeholders. Our supply
chain includes suppliers of goods and services, including professional services (such as conveyancing services),
IT platform services (access and administration) and IT software licences.
In 2021 we grew our Third Party Management capability, in recognition of the increasingly important role our
suppliers play in our ability to thrive in a demanding business climate. This has built on the strong governance
framework in place with a renewed focus on delivering optimal value to our members through our supplier
partnerships, at point of procurement and throughout the lifecycle of those relationships. We select suppliers
based on their ability to reliably deliver services that enhance our members’ experience, alignment to the
Society’s values and behavioural standards and the measurable value we benefit from in return for our
investment, including joint innovation and market insight.
Our Third Party Management Policy and associated standards were fully revised in 2021, including a clearer
risk-based classification of suppliers which enables us to take a more consistent and risk-appropriate approach
to our management of each engagement. We provide regular updates to the Board on our progress in evolving
the Third Party Management function, in addition to reporting key performance metrics to the Operational
Risk Committee on a cyclical basis: in recognition of the growth of the function, a revised set of risk reporting
measures are in development for 2022 implementation. We have worked to enhance our assessment of current
and future suppliers’ Environmental, Social and Governance practices through creating our Supplier Code of
Conduct and partnering with a market-leading ratings provider, both of which will go live in early 2022. The
regulated nature of financial services means that we operate within a low-risk industry for modern day slavery,
but nevertheless we remain vigilant and take our responsibilities under the Modern Slavery Act seriously.
Copies of our Modern Slavery statement and Supplier Code of Conduct are available for viewing on our website.
Corporate Governance Report continued
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Regulators
Our regulators, the Prudential Regulation Authority and the Financial Conduct Authority, shared their areas of
focus for 2021 with the sector, which included:
The Prudential Regulation Authority:
n
Financial resilience.
n
Credit risk.
n
Operational risk and resilience.
n
Transition from LIBOR to alternative risk-free rates.
n
Competition and future regulatory frameworks.
n
Financial risks arising from climate change.
The Financial Conduct Authority:
n
Ensuring fair treatment of borrowers, including those in financial difficulties.
n
Ensuring good governance and oversight of customer treatment and outcomes during business change over
the next two years.
n
Ensuring operational resilience over the next two years and beyond.
n
Minimising fraud and other financial crime.
We have an open and transparent relationship with our regulators. Regular meetings are held with the Prudential
Regulation Authority, which are attended by our Chief Financial Officer, Andrew Conroy, along with members
of the Senior Leadership Team. Whilst the Society is not relationship managed by the FCA, the Society adopts
both a proactive approach (for example, updating the FCA of any new material issues arising), and a reactive
approach (for example, completing regulatory returns and surveys as prescribed by the FCA from time to time).
The meetings with the PRA include discussion on topics such as month end results, liquidity, thematic
reviews and market trends likely to impact our members and the Society. Since the outset of the pandemic,
the meetings have also included detailed discussions on how the Society has adapted to the changes in the
operating environment and any potential impact this has had or could have on the Society’s resilience, its
members, colleagues and other key stakeholders.
Communities
In 2021, the Board continued to focus on the development of its responsible business strategy and in
November approved a suite of measures and associated targets, aligned to our new purpose and values, which
demonstrate how our purpose-led strategy delivers social value to our stakeholders. For more information on
the progress made and the agreed targets, please refer to the Strategic Report on page 23.
We are committed to supporting the communities in which we operate. As part of this commitment we entered
into a four-year charity partnership with Dementia UK and have raised over £380,000 for the charity, since 2019.
As well as raising funds for our charity partner, colleagues are also encouraged to volunteer for a charity of their
choice and receive 14 hours a year back from the Society in lieu of volunteering.
Tax funds the essential public services our communities rely on every day. We are proud to pay our fair share of
tax and we transparently report the contribution we make. In 2021, we paid £45.9 million in corporation tax and
banking surcharge and were re-accredited with the Fair Tax Mark, please see page 80 for further details.
Environment
The Board takes the impact of climate change seriously and is committed to the global call to action on climate
change. During 2021, the Board approved a new Climate Risk Strategic Framework centred around the aim to
support the orderly transition to a greener, net zero economy by 2050 or sooner. Our climate strategy has been
designed to consider the requirements of our key stakeholders, including, for example, ways to support our
colleagues and members to reduce their carbon footprint, working with our key suppliers to reduce supply chain
emissions and investment in carbon offset schemes.
Stakeholder engagement in action
Board training
The Board received detailed training on climate risk, how it may impact the Society and its key
stakeholders (financial and non-financial risks) and the activities that have been completed so far in
response. The session included key insights across the pillars of climate risk (climate science/landscape;
risk management; carbon footprint). Our external climate risk partners, Hometrack, also provided some
insights on their view of the market/climate change landscape and how the Society is positioned to
respond to the risks and opportunities.
For information on how the Society takes into account the impact of its activities on the environment, including
climate change and our climate-related financial disclosures, please refer to pages 39 to 63.
Intermediaries (brokers)
During 2021, the Board received an overview of the Mortgage Transformation Delivery Stream to provide
visibility of the value being derived through the revised delivery model and against the clear objectives agreed
for the stream.
In 2020, as part of the broader transformation programme, a significant investment was made into our
intermediary Mortgage Hub, which was developed in partnership with Iress. The new platform has made
the mortgage process quicker, easier and more user-friendly for intermediaries, as well as improving online
functionality from application to completion and offering instant decisions in principle. Throughout 2021, we
worked with intermediaries to gauge feedback on the new Mortgage Hub, to develop it further to enhance the
experience and overall Net Promoter Score (NPS). Enhancements have included optimisation of decisioning
and mortgage processes to increase capacity throughput as well as supporting ESG deliverables and improve
new business acquisition and retention performance. Service has improved, through improved offer turnaround
times, which are now almost seven days quicker than at the start of the year. Work is also underway to develop
an online execution only solution and an appointment booking tool, to develop our direct to consumer
capabilities. Further enhancements are due to be made in 2022.
In addition, our engagement with intermediary partners has continued to evolve. In 2021, we have taken
measures to develop integration across a number of third party sourcing systems, which means the Society
is now visible on the majority of broker search platforms and customer information is transferred from the
broker’s portal directly into Mortgage Hub, saving the intermediary time re-keying the information and reducing
the risk of re-keying errors.
Corporate Governance Report continued
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Audit, risk, internal control and remuneration
Audit, risk and internal control
Our internal governance arrangements continue to support the independence and effectiveness of the Internal
Audit function and the integrity of our financial statements. The Audit Committee Report on page 126 provides
further information in this regard. We also have an Enterprise Risk Management Framework in place, designed
to manage risk, oversee internal control effectiveness and determine principal risks, so that we may achieve our
long term strategic objectives. The Risk Management Report on page 136 provides an overview of our approach
to risk and internal control.
Remuneration
The Board continues to support a remuneration policy and practices which are designed to promote our
sustainable success, with executive remuneration aligned to our purpose and behaviours and linked to the
delivery of our long term strategy. A summary of the work undertaken by the Remuneration Committee can be
found within the Directors’ Remuneration Report at page 144.
Approved by the Board of Directors and signed on behalf on the Board.
Iain Cornish
Chair
24 February 2022
Corporate Governance Report continued
Nominations Committee Report
Year ended 31 December 2021
Nominations Committee highlights from 2021
n
Appointment of Rob Howse as Executive Director
n
Appointment of Anita Tadayon as Non-Executive Director
n
External board evaluation
n
Establishment of a new network for potential non-executive candidates
Committee membership
n
Iain Cornish (Chair) – since April 2021
n
Gareth Hoskin – since January 2019
n
Lynn McManus – since April 2020
n
Katherine Tong – Committee Secretary
Number of meetings and attendance
n
Four scheduled meetings
n
Two additional meetings held
n
100% attendance record
Introduction from the Chair
Dear member,
I am pleased to present our 2021 report on the Nominations Committee, which reviews and summarises
our activities over the past year. The report will also provide more detailed information on the role and
responsibilities of the Committee.
Board appointments
As I have outlined in the Corporate Governance report, a number of changes have been made to the Board
composition during 2021, including the appointment of Rob Howse as Executive Director and Anita Tadayon as
Non-Executive Director. John Hunt also stepped down as a non-executive director in April. Further information
is included in this report, which also explains the criteria of each appointment and the recruitment process
followed.
Focus of the Committee during 2021
Key areas of focus for the Committee in 2021 have included the arrangement of an externally facilitated board
evaluation review, a review of our diversity strategy and targets, a detailed review of the Board’s skills matrix and
Board composition to enable robust succession planning for the Board.
Throughout the year, diversity remained high on the agenda, with detailed discussions taking place, alongside
an in-depth review of the Society’s diversity and inclusion strategy. The Board discussed why diversity was
important, the different types of diversity – which range beyond just gender and ethnicity and how the strategy
could directly link back to the Society’s purpose. The Board recognises it has a lead role to play in furthering
this agenda and agreed that revised targets, for both gender and ethnicity, would support in the delivery of the
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119
How did we do this?
As part of this process, the Committee reviewed the vacancies on the Board, including for example, one of
the non-executive vacancies and agreed that a candidate with experience in technological transformation
and change was required to fulfil the gaps left by a previous non-executive director. Enhancing diversity on
the Board was an important part of this search and this was discussed at length with the appointed external
recruitment agents, Warren Partners (with which we have no other connection or conflict of interest), so that
our requirements and expectations for the search were clear. Warren Partners is accredited by the Department
for Business, Energy & Industrial Strategy for its commitment to delivering greater gender diversity in the
Boardroom and it has signed up to the Enhanced Voluntary Code of Conduct. It is also a signatory of the Women
in Finance Charter.
A detailed brief for a new candidate was agreed and the recruitment process took several months to complete.
The Committee had agreed to take the necessary time to find the right candidate, with the requisite skills
and experience. The process concluded through the appointment of Anita Tadayon, who brings to the Board a
wealth of experience. Warren Partners has also been engaged to assist with the search for another
non-executive director which, as at 31 December, was still underway.
Similarly, the appointment of Rob Howse as an executive director was considered by the Committee. In view
of his performance, his wider contribution at Board meetings and the criticality of his role in delivering the
technology strategy, the Committee concluded and recommended to the Board that it was appropriate for him
to be appointed as an executive director. Rob joined the Board in May 2021.
Succession planning and developing a diverse talent pipeline for the future
As reported in the Corporate Governance Report, David Fisher reached his nine-year tenure in March 2021.
To allow for succession planning and continuity, subject to his reappointment at the 2022 AGM and providing he
remains independent from the Society, David expressed a willingness to remain on the Society’s Board after the
conclusion of his nine-year tenure. Through mutual agreement, David will continue in his role until the end
of 2022.
As part of the succession planning for David’s replacement, the Committee reviewed the composition of each
Board committee with this in mind, including David’s position as Chair of Board Risk Committee. Consequently
and following completion of a successful induction programme in his first year with the Society, it was agreed
Neil Fuller (Non-Executive Director) would replace David as Chair of this committee from January 2022 (subject
to regulatory approval). Prior to his appointment, Neil had already served 12 months as a member of the Board
Risk Committee and towards the end of 2021, Neil’s induction plan was tailored to include a number of meetings
with members of the leadership team within the Risk function, enabling Neil to meet relevant colleagues and
gain a deeper understanding of the function and how it operates. As is the case with all non-executive directors,
I, as Chair of the Board, had regular meetings with Neil about performance expectations and Neil’s observations
and reflections, all of which further informed the Committee’s succession planning discussions. As part of the
H2, 2021 activity, David then conducted a full handover to Neil, with additional support provided by the Deputy
Chief Executive and Risk Director.
Talent pipeline
We want to play our part in building a pool of non-executive directors within financial services, particularly those
with the right experience and skills, who are from more diverse backgrounds. To help develop this pipeline the
Leeds NED Network (the Network) was set up in 2021 with input from Warren Partners.
The Network’s objectives are to build a relationship with potential candidates, provide insight and training on
the role of a non-executive and the skills and experience required, both at the Society and, more generally,
across financial services. Each Network member was invited to join an initial meeting, held virtually, in
November. The meeting was led by the Society’s Director of People, with Joelle Warren from Warren Partners,
Annette Barnes and Anita Tadayon, two of our non-executive directors and me, as Chair of the Committee and
of the Board.
broader strategy. To generate debate and to challenge internal thinking, two external (independent) advisers,
with extensive experience in diversity and inclusion, were used to facilitate sessions with the whole Board.
The Committee continued to oversee the Society’s governance arrangements to ensure we operated within a
strong governance framework and in accordance with the recommendations of the UK Corporate Governance
Code (the Code).
What is the Nominations Committee responsible for?
Nominations Committee Responsibilities:
n
Oversight of succession planning for directors and the Senior Leadership Team.
n
Succession planning for the Board and its Committees.
n
Oversight of the appointment process for Board candidates.
n
Agreeing the approach for the annual Board evaluation review.
n
Review of the Board Conflict of Interest Policy, including monitoring any potential or actual conflicts
of interest.
n
Development of a diverse pipeline for succession.
n
Ongoing assessment of the independence and time commitment of non-executive directors.
Key activities in 2021
A summary of the activities undertaken by the Committee in 2021 is detailed below.
Board composition and succession planning
The Committee is responsible for ensuring the Board comprises the right number of executive and
non-executive directors, with the requisite skills and experience to deliver the Society’s strategic objectives and
to ensure the long term success of the Society.
The Committee regularly reviews the composition of the Board and its supporting board committees, to ensure
they comprise a sufficient number of executive and non-executive directors, who meet the requirements as set
out by the Code and the Senior Managers Regime (which sets out the expectations of the Society’s regulators
on accountability and governance). As part of this review, the current mix of directors’ skills, experience,
backgrounds and qualifications is reviewed through the completion of a skills matrix. This is considered
alongside the current composition of the Board and the Board tenure plan, to aid a detailed discussion with
regard to the Board’s succession planning requirements. The Committee also regularly reviews the length of
tenure of each non-executive director and the potential impact on Board committee membership of those
directors who are nearing the end of their term of appointment. This aids forward planning, promotes the
continual refresh of skills and experience on the Board and, together with the composition review, provides
insight and direction into the search process for new non-executive directors.
Board recruitment
In 2021, there were two non-executive director vacancies on the Board. As it does every year, the Committee
completed a detailed review of the skills matrix in order to agree the necessary attributes of the candidates
required to fulfil the vacancies. Consideration was also given to the gaps in skills and experience likely to arise
in the future as some non-executives neared the end of their agreed term with the Society. A great deal of
emphasis was placed on finding the right people for the roles, but also ensuring that the list of candidates was
diverse across a range of factors.
Nominations Committee Report continued
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121
Nominations Committee Report continued
Board re-appointments
The Committee is responsible for reviewing the re-appointment of all non-executive directors at the end of
each three year term.
Non-executive directors are appointed for a period of three years and are usually expected to serve two terms.
These terms are subject to ongoing performance evaluations and to annual re-election by members at the
AGM. Non-executive directors may also be proposed for a third term, up to a maximum of a further three years
(nine years in total), provided they are considered to remain independent from the Society.
In 2021, the Committee recommended to the Board that the following appointments should be extended by a
further three years (subject to re-appointment at each AGM):
n
Gareth Hoskin’s appointment was extended following his six year anniversary with the Society in
November 2021.
n
Iain Cornish’s appointment was extended following his three year anniversary with the Society in
January 2022.
n
Annette Barnes’ appointment was extended following her three year anniversary with the Society in
February 2022.
Iain Cornish and Gareth Hoskin did not take part in the discussions or the approval of the extension to their own
appointments.
As recommended by the Committee, each non-executive director receives a tailored refresher training
programme following the extension of their appointment for a further three years.
Conflicts of interest and directors’ independence
The Committee is responsible for assessing the independence of all non-executive directors, ensuring a robust
process for assessing and recording any potential or actual conflicts of interest.
During the year, the independence of all non-executive directors was assessed against the criteria set out in
the Code and their length of service. It was confirmed that none of the non-executive directors had been recent
employees of the Society, held a material business relationship with the Society, received any additional fees
other than their director’s fee or had close family ties or significant business links to other directors. With the
exception of David Fisher, none of the non-executive directors have been in post for more than nine years. The
Committee carefully reviewed the ongoing appointment of David Fisher, who exceeded his nine year tenure
in March 2021. The Committee discussed how David’s extensive experience of risk management, human
resources and broad financial services knowledge and skills were considered highly valuable and agreed that
his independence could be evidenced through his ongoing challenge to management at Board and committee
meetings and through the productive discussions he led as Chair of BRC. His term extension was considered
particularly important to support succession planning for the Chair of BRC role.
The Committee considered potential conflicts of interest by undertaking a review of the Board Conflicts of
Interest Register, alongside the external appointments and time commitments held by each director. The
Board’s Conflicts of Interest Policy was also reviewed and recommended to the Board for approval. In 2021, only
minor updates were made to the policy to reflect the changes in organisational structure and changes in the
Market Abuse legislation, as a result of the UK’s departure from the EU.
Consequently, and taking into consideration all of the above points, the Committee concluded that all directors
remain independent and that all appointments remained appropriate. Further details on conflicts of interest,
external directorships and the associated time commitments are contained within the Corporate Governance
Report on pages 106 to 107.
Board evaluation
The Nominations Committee is responsible for oversight of the annual board effectiveness review. Each
year the Committee agrees and recommends to the Board, the process for the annual review of the Board’s
effectiveness.
In 2021, it was agreed to proceed with an external review (being three years since the previous external
evaluation) and, following a thorough tender process led by myself and approved by the Committee, Russell
Reynolds Associates (RRA) was engaged to conduct the review. RRA has no other connection or conflict of
interest with the Society. RRA was chosen to lead the evaluation as the proposed approach to the review was
positively different to those conducted previously and they demonstrated a good understanding of what we
wanted to achieve. Central to RRA’s review would be to gain insight on the culture and behaviours of the Board
and it was considered this information could be used to drive meaningful actions.
The evaluation process consisted of a detailed questionnaire (to the Board directors and some key
stakeholders), a psychometric self-assessment questionnaire (for the directors), RRA’s attendance at the
Board Planning Conference and a Board meeting (to evaluate performance) and interviews with individual
Board members and stakeholders. Once RRA had collated the information, they conducted a facilitated
Board discussion to explore themes, such as Board leadership and Society purpose, Board governance and
performance, Board composition and people and culture. In my update to you last year, I said the effectiveness
review would also focus on the independence of non-executive directors. A key part to the RRA assessment
looked at the ability of directors to voice independent views, with a willingness to challenge and have a
constructive debate.
To enhance the process, and in line with the recommendations of the Code and the Financial Reporting
Council’s (FRC) Guidance on Board Effectiveness, additional stakeholders were also requested to take part in the
evaluation process, to provide additional insight into the operations of the Board. This comprised the external
auditor from Deloitte, members of the Society’s Executive Committee and the Society’s Secretary. They
completed the same questionnaire provided to Board members. The output from the facilitated Board session
was collated with the interview and questionnaire results and combined into a report. The results were shared
with the Board for discussion in January 2022, at which point actions were also agreed. Overall, the evaluation
concluded the ‘Board was performing well – with no urgent action required’. However, there were several themes
worthy of further discussion/exploration and these were focused on:
n
Balancing financial, non-financial and strategic matters, so the Board can continue to operate at the required
level.
n
Strategy and innovation – promoting different thinking styles and to explore further the benefits of a more
‘disruptive’ style of discussion.
n
The evolution of the governance framework should draw out how the Board can help promote greater agility
in decision making.
n
Diversity and inclusion – directors to continue their support to aid the effective transition of the new Board
Risk Committee Chair. The Board should be live to the prospect of changing dynamics/culture at the Board
as new NEDs join. The review also drew out the ongoing importance of progressing the diversity and
inclusion agenda.
n
Board papers and presentations – consider how board papers and presentations can be flexed to meet the
different styles of the reader and the different subject matters.
n
Stakeholder engagement – it is important to understand the purpose and value of each element
of engagement.
The Secretary will oversee the completion of any agreed actions and provide detailed updates to the Board
throughout the year.
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123
Diversity and inclusion
The Committee is responsible for ensuring the composition of the Board and the Leadership Team is diverse
and inclusive and reflects the Society’s strategic ambition, which confirms that the Society is an organisation
that seeks to deliver great service to its current and future members and where all colleagues feel valued and
included for who they are and the unique perspectives they bring. We see diversity as a very broad and complex
area, which includes, for example, seeking to achieve a balanced mix of skills, experience, backgrounds and
qualifications within the workforce. We recognise that all differences bring benefits – particularly in decision
making, where varying viewpoints can add real value. We take diversity and inclusion very seriously, we are
not complacent and we understand that we have much more to do. We recognise that diversity and inclusion
goes beyond ‘just meeting targets’ and the new strategy will be the foundation to engage all colleagues at the
Society, from the Board to the branch network.
We believe a gender balanced workforce is good for business, good for our members and is in line with our
commitment as a signatory to HM Treasury’s Women in Finance Charter and the targets set by the Hampton
Alexander Review. In 2020, the Board committed to increasing the representation of women in our Leadership
Team and agreed a target of 33% for females on the Board, by the end of 2021.
As at 31 December 2021, three members of the Board were female, representing 27% of the total Board
membership. Whilst we have not met the target of 33%, we have made positive progress and with the actions
and measures currently underway, we are confident our targets will be met in the near future. In terms of the
Leadership Team (our top three levels of management), 32% were female.
In 2021, the Committee completed a full review of our diversity and inclusion strategy. The Committee
considered the positive steps taken since we launched our diversity and inclusion strategy in 2017, including the
development of four colleague-led forums and networks, which have sought to promote, educate and inform
on gender, race equality, mental health and LGBTQ+. Additionally, we became early signatories to the Women in
Finance Charter, including setting and publishing targets and progress for gender representation on the Board
and Leadership Team.
The various activities we have undertaken have, in turn, supported the delivery of a positive culture and strong
colleague engagement, including:
n
In 2021, the Society ranked 166th in the Financial Times Diversity Leaders ranking (out of 850) and sixth out
of 19 in the Banking and Financial Services sector.
n
Colleague awareness, understanding and education around diversity has increased, supported by training for
all colleagues across a breadth of diversity and inclusion topics, including unconscious bias.
n
We achieved our Investors in Diversity accreditation in 2016, followed in 2018 by the Leaders in Diversity
accreditation and re-accreditation in 2020. We were the first financial services firm to achieve this accolade.
n
We signed up to the Race at Work Charter in 2019 and have recently launched an ethnicity reverse
mentoring programme.
Following a detailed review by the Committee, this matter was also discussed at length by the Board.
Consequently, the targets set out overleaf were agreed and will be subject to review at least annually.
Nominations Committee Report continued
Element Proposed target for 2025 Current position
Board gender diversity 33%
To be reviewed in 2022
27%
Leadership Team gender diversity 35% 32%
Ethnic minority representation – Board 1 director by end of 2021 and maintain same level
until 2025
1
Ethnic minority representation – Leadership Team 7% 3.8%
Ethnic minority representation – colleagues 12% 9.3%
Gender pay
We welcome the focus on driving fairness of pay for women, having embedded a Fair Reward approach over
several years. This helps to reference salaries objectively for all colleagues. We are proud that 59.5% of our
workforce is female. However, there are more men than women in more senior, and, therefore more highly paid,
roles. This means there is a gender pay gap. Further information can be found on our website.
More information on the activities undertaken to promote wider diversity within the Society can be found in the
Corporate Governance Report on page 100 and the Strategic Report on page 16.
Corporate governance
The Committee is responsible for overseeing governance at the Society. In order to do this the Committee
receives regular updates on governance matters, including changes to legislation and best practice.
These matters are taken into consideration, with any necessary actions being documented and tracked through
to completion accordingly.
In 2021, the Committee received an update following a detailed review of compliance against the Code. The
review confirmed the Society complies with the Code, insofar as it is possible for a building society, with no
further actions required.
The remit of the Board-appointed colleague representative was also discussed in detail, with a focus on
identifying further opportunities to improve the role based on our experiences to date. It was agreed that the
role brought valuable insight to the Board on colleague views and this was something the Board wanted to
develop further, for 2022.
Key areas of focus in 2022
In 2022, the Committee will be focused on the outcome of the Board Evaluation and ensuring all actions and
improvements are made as a result of the review. The Committee will also continue to work towards the
successful recruitment of a new non-executive director. Enhancing the diversity of the Board, as well as the
Senior Leadership Team, will remain an area of key focus and the Committee will continue to look at ways to
improve this further.
Iain Cornish
Chair
24 February 2022
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125
Audit Committee Report
Year ended 31 December 2021
Audit Committee highlights from 2021
n
Annual Report and Accounts recommended to the Board for approval
n
Integrated assurance shows control environment is effective and proportionate
n
Internal Audit and the external auditor remain independent and effective
Committee membership
n
Gareth Hoskin (Chair) – member since January 2016
n
David Fisher – member since May 2017
n
Lynn McManus – member since September 2017
n
Neil Fuller – member since January 2021
Number of meetings and attendance
n
Six meetings during the year with 100% attendance from Committee members
n
Meetings regularly attended by other Board members including the Chair, CEO and CFO
n
The Chief Internal Auditor, representatives of the Finance and Risk functions and other relevant
business areas, plus senior external audit personnel also in attendance
n
Two private meetings with the external auditor and two with the Chief Internal Auditor, not attended by
management
Introduction from the Chair
Dear member,
As Chair of the Society’s Audit Committee, I am pleased to present my report on the Committee’s work in
relation to the financial year ended 31 December 2021.
The Committee is comprised solely of non-executive directors and acts with authority delegated to it by
the Board. The Committee reports directly to the Board. All members of the Committee have considerable
recent and relevant financial, accounting or risk management experience and competence relevant to
financial services.
Our main areas of responsibility relate to the following four areas:
n
Considering the appropriateness and integrity of the Society’s externally reported financial statements,
including reviewing and challenging, where necessary, the actions and judgements made by management in
relation to the accounts.
n
Reviewing the adequacy and effectiveness of our systems of internal control and risk management.
n
Monitoring the effectiveness, performance and independence of the Internal Audit function.
n
Assessing the independence, performance and objectivity of the external auditor.
While the Society has delivered a strong financial performance this year, the consequences of the pandemic
continue to present challenges to the business, which are reflected in the work of the Committee.
The ongoing pandemic and the measures taken by governments to mitigate the impacts have meant persistent
uncertainty in the economic environment. This has caused a continued elevated reliance on management
judgement in certain areas of financial reporting, notably impairment loss provisions and the fair valuation
of financial assets. Committee members have devoted considerable time to reviewing and challenging these
judgements for both the Interim Financial Report and the Annual Report and Accounts.
We also recognise the increasing importance of Environmental, Social and Governance (ESG) matters to the
Society’s stakeholders and the Committee’s role in ensuring adequate, appropriate disclosures are made in the
accounts. We received training and knowledge updates on this topic throughout the year.
The Committee received appropriate assurance over our risk and control environment during the year, including
the results of the annual attestation process and we concluded that the control environment remains effective
and proportionate to our operations.
The Internal Audit function continues to provide an effective and independent third line of defence. Internal
Audit takes a flexible approach to planning its schedule of work and the regular updates provided to the
Committee have generated significant discussion and challenge, so that committee members could be satisfied
that Internal Audit’s work was focused on the most appropriate areas of risk throughout the year.
The Committee also satisfied itself that the external auditor remains effective and independent.
In March 2021, the Department for Business, Energy and Industrial Strategy (BEIS) issued a consultation paper
‘Restoring trust in audit and corporate governance’. The proposed regulations are likely to have a significant
impact on the Society’s future internal control environment, the work of the Committee and the relationship
between the Society and its external auditor. Updated proposals following the consultation are expected in
2022 and the Committee will consider these and build any actions required into future plans and meeting
agendas for 2022 and beyond.
Gareth Hoskin
Chair of Audit Committee
24 February 2022
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Audit Committee Report continued
What the Committee did during 2021
Financial statements and external reporting
The Committee reviewed the Society’s 2021 external financial reporting, comprising the Annual Report and
Accounts, Interim Financial Report and Pillar 3 Disclosures, on behalf of the Board. Following detailed discussion
and challenge, we recommended these to the Board for approval. All Board members attended the committee
meetings at which the final financial statements were reviewed, so all directors were aware of the matters
discussed and challenges raised with management.
In preparing the financial statements, management was required to adopt certain accounting policies and make
judgements, estimates and assumptions. The Committee reviewed these and evaluated management’s views
to assess whether the policies, judgements, estimates and assumptions were appropriate in the circumstances.
Management provided us with detailed reports ahead of reporting dates setting out the basis for the
accounting treatments to be adopted and further reports confirming the impacts of these in the accounts.
The external auditor also provided the Committee with reports detailing the challenge it has provided and its
opinions on management’s approach.
Committee members considered the narrative sections of the financial reports to assess whether a fair,
balanced and understandable view of our performance and position has been presented, based on their
knowledge and understanding of the business and the wider environment. This year we reviewed the TCFD
disclosures to be included in the Annual Report and Accounts for the first time.
The Committee is kept up to date with changes to accounting standards and regulatory focus areas for financial
reporting through reports and training from management and the external auditor.
The table overleaf sets out our work during the year in examining and challenging the key matters affecting
the financial statements. Further details on the critical judgements, estimates and assumptions which have a
significant impact on the financial statements are set out in note 2 of the accounts.
Area of focus How the Committee responded
Residential impairment loss
provisions
Under IFRS 9 – Financial
Instruments, we are required
to hold impairment loss
provisions against our financial
assets, calculated on an
expected credit loss basis.
For residential mortgages,
these provisions are calculated
using complex statistical
models which incorporate
historical default and loss
experience information.
The level of provision required
under IFRS 9 depends on
whether a significant increase
in credit risk has occurred since
the mortgage was originated
and determining this requires
significant management
judgement.
Provisions are calculated across
multiple forward looking,
probability weighted economic
scenarios which require
estimation by management.
Where risks are identified that
are not sufficiently covered by
the modelled provisions and
scenarios, additional provisions
can be made through
post model adjustments.
The identification and
measurement of these requires
significant levels of judgement.
Further details of the estimates
and judgements used are set
out on pages 183 to 189.
The models used for calculating residential impairment loss provisions have been substantially
redeveloped in 2021 by the Society’s specialist Credit Risk Modelling team. This work reflected the
experience gained from operating the models in a live environment since the adoption of IFRS 9 in
2018, while also incorporating further insight and inputs from the Society’s IRB models for capital
calculations, as appropriate and reducing the run-time of the models, improving efficiency.
The redevelopment work was overseen by the Models and Rating System Committee (MRSC),
who approved the final models in October 2021. The Audit Committee received updates through
the year on the progress of the work. As part of the approval of the final year end provisions, the
Committee received analysis and explanation of the model changes and their impacts, to support
the final provisions.
The pandemic continues to have a significant bearing on the economic environment, although the
economic outlook has improved during 2021 from that predicted at the start of the year. As noted
last year, the measures taken to combat the pandemic and the economic support provided by the
Government have meant that historic data is less reliable as a predictor of the future and a greater
reliance is placed on management’s judgement in key areas of IFRS 9.
At the time of the Interim Financial Report, there was a great deal of uncertainty over how the
unwind of government support schemes, such as furlough, would impact the economy in the
second half of the year. Management sought to reflect this uncertainty in the range of economic
scenarios used, with post model adjustments applied to cover those factors which could not be
reflected in the model data or the economic assumptions.
In order to support the Committee’s review and challenge of management’s assumptions,
members were given early sight of the proposals through Board updates ahead of the half
year end, allowing time for management to incorporate the challenges received into the final
assumptions.
Having reviewed management’s justification and evidence supporting the final judgements and
considered the review work of the external auditor, the Committee concluded that the level of
provisions in the interim accounts was appropriate.
By the end of the year, the emergence of a new COVID-19 variant, coupled with inflationary
pressures and the continuing effects of the cessation of government support schemes meant
that considerable uncertainty remained, requiring further judgement to be applied to economic
assumptions and post model adjustments.
Management’s proposed scenarios, weightings and post model adjustments were reviewed
and refined by the Balance Sheet Optimisation Group. The approach to setting the scenario
weightings was enhanced in response to feedback from the external auditor. As at half year, the
Board was also given early sight of the proposals ahead of finalisation of the year end provisions
and its feedback was incorporated into the final proposals.
The Committee is also supported in its assessment of the year end residential impairment loss
provisions by MRSC, as noted above, and Credit Committee, which approves the tests used to
determine whether a significant increase in credit risk has occurred, the approach to the non-UK
loan portfolio and provides preliminary approval of the final provisions, including final post model
adjustments.
In January 2022, management provided us with a detailed explanation of the rationale for the
economic assumptions and post model adjustments used, information on key metrics such as
coverage rates and proportions of loans in stages 2 and 3, benchmarking data and sensitivity
analysis. The Committee assessed the work performed and asked questions on the approach
taken. There was particular focus on the range and sensitivities of the post model adjustments
proposed given the evolving economic and regulatory backdrop. Diverse views were expressed
and discussed, including the perspective of the external auditor.
Management also set out for the Committee how they had addressed the matters raised by the
PRA in their September ‘Dear CFO’ letter which set out the findings from their industry wide
2020/21 written auditor reporting review.
The external auditor provided the Committee with a report setting out the conclusions of their
work, which included a detailed review of the redeveloped models.
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129
Audit Committee Report continued
Area of focus How the Committee responded
Residential impairment loss
provisions (continued)
Having considered management’s reports, the assurance from other committees and feedback
from the external auditor, the Audit Committee concluded that the updated impairment models
remain appropriate and that management’s approach to deriving economic scenarios and
probability weightings is reasonable. The Committee also agreed that the post model adjustments
at the 2021 year end were appropriate in the circumstances.
Therefore, the Committee concluded that the level of impairment provisions at 31 December
2021 is reasonable.
Fair value of the collateral loan
which represents a pool of
equity release mortgages
We hold a collateral loan to a
third party which represents
a pool of equity release
mortgages acquired from that
third party, for which some
but not all of the risks were
transferred to us.
The nature of the loan means
that under IFRS 9 it is classified
as being held at fair value
through profit or loss.
Since open market prices are
not readily available, the fair
value of this loan is calculated
using a model which requires
a combination of market data
and unobservable inputs.
The key estimates and
sensitivities are shown on
pages 189 to 190.
The model used by management to calculate the fair value of the collateral loan underwent
an in-depth review in 2019 and remains appropriate. The assumptions used in the model are
mostly evidence based, using historic data on the performance of the underlying mortgages.
However, a significant level of judgement is required in selecting the discount rate to be used and
management updated its approach to this in 2020, taking advice from third party specialists to set
an appropriate approach. This approach has been applied consistently in the current year.
Management provided the Committee with reports for the interim and year end accounts
explaining the assumptions used and the sensitivity of the model output to the changes in these
assumptions. Where management applied judgement to extrapolate observed trends in historic
data or made post model adjustments to override current market observations, where these were
deemed to be transitory, we reviewed this in detail. We challenged the approach taken to deriving
future house prices on the underlying mortgage portfolio based on recent sales data and probed
the extrapolation technique used by management.
Management also provided narrative to rationalise the movement in the fair value of the collateral
loan in the year. We noted that the nature of the loan means that there is no directly comparable
market data available, so a significant level of judgement is required in the valuation and therefore
a wide range of valuations could be considered reasonable.
Taking into consideration management’s explanations, the sensitivity analysis provided and the
views of the external auditor, the Committee concluded that the fair value recorded in the financial
statements for the collateral loan was within a reasonable range.
Fair value of the RPI linked
derivative hedging the
collateral loan (equity release
swap)
We hold derivative financial
instruments to mitigate risks
from movements in market
rates.
Derivatives are measured
at fair value through profit
or loss, so changes in the
value of these instruments
are recognised in the Income
Statement immediately.
The valuation of the RPI
linked derivative hedging
the collateral loan requires
management judgement in
the modelling approach and
assumptions used.
In previous accounting periods, the Society has used the valuation provided by the counterparty
for the Retail Price Index linked derivative hedging the collateral loan. Following discussions with
the external auditor at the 2020 year end, during 2021 management has developed its own model
for the valuation of this derivative. The valuation at 31 December 2021 has been based on this
modelled valuation. The impact of the change in valuation approach is set out on page 190 of the
accounts.
The model was developed in accordance with the Society’s Model Risk Policy and was reviewed by
second line and approved by MRSC in October 2021. In November 2021, we received an update on
this work and management’s intention to deploy the model in the 2021 financial statements.
To support the change in approach, management demonstrated that the model produced a
consistent valuation to the counterparty when consistent assumptions were used. However,
management have proposed changes to assumptions which drive a difference in valuation, most
notably the redemption profile for the underlying mortgages.
Management provided the Committee with analysis showing why these assumptions were more
reflective of the Society’s portfolio, also noting that this would provide consistency between the
valuation of the collateral loan and the swap.
Management also confirmed that it considers the new approach to be consistent with the
requirements of IFRS 13, which was corroborated by the external auditor.
Having considered and challenged the evidence provided by management and the external
auditor’s opinion that the resultant valuation is within a reasonable range, the Committee
approved the change in valuation approach. We also concluded that the valuation of the derivative
in the accounts at 31 December 2021 is reasonable.
Area of focus How the Committee responded
Hedge accounting
Changes in the fair value of
derivatives are recognised
in the Income Statement
immediately. However, if
strict accounting criteria are
met, these instruments can
be designated in accounting
hedge relationships and the
volatility that would arise
from the recognition of these
fair value movements can be
largely offset by changes in
the fair value of the underlying
items being hedged by them.
Management continues to apply the hedge accounting rules of IAS 39 to certain of our derivative
portfolios. During the year, management provided the Committee with reports on the volume and
value of derivatives held, the hedge relationships in place and effectiveness testing results which
showed all hedges remained effective throughout the year.
The transition of derivatives from LIBOR to SONIA has had a significant impact on the
composition of the Society’s macro accounting hedges. The Committee received updates
on these impacts and how the requirements of IAS 39, including the amendments relating to
IBOR reform, continued to be met throughout the transition. We noted the transition oversight
provided by ALCO and received assurance from Internal Audit and the external auditor on the
approach taken.
The strict and detailed rules around hedge accounting mean that the external auditor performs
detailed substantive testing of management’s results, including reperformance of hedge
effectiveness testing and derivative valuation. We noted the results of this testing which did not
reveal any material errors or control deficiencies.
The Committee therefore satisfied itself that the hedge accounting requirements of IAS 39
have been appropriately applied and that management’s hedge effectiveness testing performed
throughout the year was materially appropriate.
The Committee concluded that amounts recognised in the financial statements are fairly stated
and that appropriate disclosures have been made.
Other areas of management
judgement
Management judgement,
estimates and assumptions
are also applied in a number
of other areas of the financial
statements, including the
calculation of the retirement
benefit surplus and the
recognition, measurement
and impairment of intangible
assets.
The Committee reviewed the reports provided by management on these topics at the half year
and year end, discussed and challenged the judgements made.
Items of particular note to the Committee included the approach to reflecting COVID-19
impacted 2020 mortality data in the assumptions used to value the pension scheme liabilities,
where management’s proposed approach was informed by the professional opinion of third party
experts.
Having considered the information provided by management and the opinions of the external
auditor, the Committee concluded that the judgements, estimates and assumptions made were
appropriate and that the resulting balances in the financial statements are materially correct.
Going concern assessment
and Viability Statement
The directors are required
to prepare the financial
statements on a going concern
basis, unless they consider
that it is inappropriate to
presume that we will continue
in business for the next
12 months. The Board has
delegated this assessment to
the Audit Committee.
The Board is also required to
provide a statement on the
longer term viability of the
Society and has also delegated
this assessment to the Audit
Committee.
Management provided the Committee with reports to support the going concern assumption
for the Interim Financial Report and Annual Report and Accounts. Those reports drew on
management information used within the business to forecast and monitor key factors including
profitability, liquidity, capital and operations. No matters were identified that would indicate that
the Society would not be able to continue to operate over the period of assessment, even in the
event of an economic downturn or adverse stress.
In 2021 the Board undertook an in-depth strategic review and redefined our purpose to support
the long term sustainability of the Society. We factored this evolution, as well as the management
information and corporate plans provided, into our evaluation of the Society’s business model and
concluded that the adoption of the going concern assumption to prepare the 2021 Annual Report
and Accounts is appropriate.
In order to support the directors’ conclusions on viability, management provided a report to the
Board Risk Committee reviewing principal and emerging risks. This report set out details of the
stress testing undertaken in respect of those risks, including the ICAAP, ILAAP, Recovery Plan and
reverse stress testing.
Having considered the outcome of this review and other evidence presented to the Committee
through the year in relation to our risk management processes, including the annual reports
produced by the second and third lines of defence, the Committee was also satisfied that the
Viability Statement is appropriate.
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131
Area of focus How the Committee responded
Fair, balanced and
understandable
The Board is required to
present a fair, balanced and
understandable view of our
position and prospects in our
Annual Report and Accounts.
The Board has requested that
the Audit Committee confirm
that this requirement is met.
The Committee considered the process for the production, review and challenge of the Annual
Report and Accounts and other external reporting, and whether this would result in a balanced and
consistent report.
In reviewing the draft narrative sections of the report, we considered whether the content
was consistent with other information presented to us through the year. A separate review of
our performance was provided by management to the Board to support their assessment. We
noted the impact of the pandemic on the Society’s performance and the continued economic
uncertainty and provided feedback on how these had been presented in the documents.
After consideration of relevant information and discussion with the external auditor, the
Committee was satisfied that, taken as a whole, the Annual Report and Accounts are fair, balanced
and understandable.
Adequacy and effectiveness of internal controls and risk management systems
Maintaining effective systems of internal control is crucial for the Society in the achievement of its objectives
and the safeguarding of member and Society assets. The Society operates an Enterprise Risk Management
Framework (ERMF) which is designed to encourage a culture of sound risk management and internal control.
This is overseen by the Board Risk Committee and delivered through established governance mechanisms and a
three lines of defence assurance model. Further details on the ERMF can be found on pages 136 to 141.
We are responsible for reviewing the adequacy and effectiveness of these controls and risk management
systems and received information from all three lines of defence during the year in order to carry out our duties.
First line management is responsible for the design, documentation, operation and monitoring of internal
controls that adhere to the Board’s policies and standards. Every six months, they undertake an assessment
of the design and effectiveness of those controls through the Risk Control Self-Assessment (RCSA) process.
Critical controls are tested on a regular scheduled basis and the results of these tests are reviewed by the
second and third line under risk based assurance programmes. Any identified deficiencies with the design
or effectiveness of those controls are recorded in the risk register, along with remediation actions which are
tracked to completion.
The second line Risk function and third line Internal Audit function perform ongoing risk based monitoring of
the completeness and accuracy of risk registers and RCSA submissions. Second line provided reports to the
Committee on the outcome of the RCSA, along with an integrated enterprise wide view of risks and controls.
The reports showed an overall improvement in the control environment and that our control environment and
culture is substantially effective and proportionate to our operations. Where weaknesses in controls had been
identified these were receiving the appropriate level of attention from management, with remedial actions in
progress. We questioned management on the impact of control weaknesses on the overall operation of the
business and the matters covered in the Annual Report and Accounts.
Second line undertakes regular reviews of specific processes and functions across the business, prioritised
using a risk based approach. The Committee reviewed and approved the work plans for the Prudential Risk and
Compliance Monitoring teams.
Internal Audit conducts regular, independent, risk based assessments of the effectiveness and adequacy
of controls in different areas of our business. Its plan of work is refreshed on a quarterly basis, taking into
account reviews undertaken by the second line as part of an integrated assurance model and allowing a focus
on the most pertinent areas at a particular time. We assessed the coverage provided by this plan based on our
understanding of the business risks and raised challenges where we identified areas that would merit increased
scrutiny. Our comments were considered and addressed by the Chief Internal Auditor and the plan was
approved by the Committee in advance each quarter.
Audit Committee Report continued
Regular reports were provided to the Committee on progress against the plan of work, together with a
summary of findings from each review undertaken and tracking of the resolution of recommended actions to
improve controls. Where issues of particular concern were reported by Internal Audit, we asked management to
report to us directly on the action being taken to remediate the issues.
The Chief Internal Auditor provided a report to the Committee, bringing together observations from work
performed in the year and themes relating to our control environment. Internal Audit concluded that the
Society’s risk and control framework is mostly designed appropriately and operating effectively, with some
areas for improvement. Overall, it did not find any control weaknesses likely to be material to the financial
statements based on the assurance work delivered.
The external auditor also assesses the design and effectiveness of certain financial reporting, operational and
IT controls as part of its procedures to reach an audit opinion on the Annual Report and Accounts. The auditor
reported its findings to the Committee and in 2021 no material issues were raised in this report.
Effectiveness and performance of the Internal Audit function
Internal Audit plays an important role in the ERMF, acting independently of the rest of the business to provide
a reliable third line of defence. The Board has delegated the role of overseeing the effectiveness, performance
and independence of the Internal Audit function to the Audit Committee. The Chief Internal Auditor reports
directly to the Chair of the Audit Committee to ensure independence from executive management, with their
objectives for the year approved by the Committee.
Internal Audit uses a dynamic ‘three plus nine’ month approach to planning the reviews it is to perform so that
these can be focused on the areas of most relevance at a particular time. The Committee reviews, challenges
and approves the plan of work on a quarterly basis. We also approved the Internal Audit Charter and Terms of
Reference which detail the scope, purpose, authority and responsibilities of the function, noting that these
reflect industry best practice.
The Committee satisfied itself that Internal Audit had sufficient resources with the appropriate skills,
competencies and qualifications to deliver the audit plan. This includes the utilisation of third party ‘co-source’
partners where specialist skills are required.
To support us with our oversight of the effectiveness and performance of Internal Audit, the Chief Internal
Auditor provides an annual self-assessment of the function’s effectiveness against the Institute of Internal
Auditors’ International Professional Practices Framework and the Financial Services Code. In 2021, this
self-assessment did not highlight any areas of non-compliance.
Internal Audit also provides an annual declaration of independence, which confirmed that there was no
impairment of its independence. Further, since the Chief Internal Auditor has been in role for more than
seven years, the Committee undertook a review of their independence and satisfied itself that they remain
independent.
In addition to the regular self-assessments, the Audit Committee is required to commission an external quality
assessment of the Internal Audit function every three to five years. The most recent review was undertaken
by KPMG LLP in 2018 and concluded that the Internal Audit function is fully compliant with all sections and
subsections of the Chartered Institute of Internal Auditors’ Standards and the Financial Services Code. The next
external quality assessment is planned for 2022.
Based on work throughout the year, the Audit Committee is pleased to note that the Internal Audit function
is independent, effective and compliant with applicable standards. The Committee concluded that the work
completed by the Internal Audit function in 2021 has provided adequate coverage across our principal risks.
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Independence, performance and objectivity of the external auditor
The Committee is responsible for overseeing our relationship with the external auditor so that the auditor
remains independent and effective.
Deloitte LLP’s current tenure as external auditor is 17 years, having first been appointed in 2005. The current
audit engagement partner is Peter Birch who was appointed in 2020. The external auditor is appointed following
a competitive tender process, with the last tender being undertaken in 2016. The maximum auditor tenure
allowed by regulation is 20 years.
The external auditor provided the Committee with an audit planning document for review and challenge, setting
out the scope, materiality, coverage and timing of the audit work and the qualification and expertise of the audit
engagement partner and key members of the audit team. We evaluated the significant risks identified by the
auditor against management’s assessment of the significant areas of judgements and risks. We also reviewed
and approved the auditor’s engagement letter and fees.
The external auditor provided regular reports to the Committee on the progress of its work throughout the
audit cycle and the areas in which it has challenged management. The Committee had the opportunity to
discuss these reports during the Audit Committee meetings, at which management was present, and in private
sessions with the external auditor. The Audit Committee Chair also held regular meetings with the external
audit partner.
To support the Committee’s view of audit quality, the auditor also provided the Committee with an overview
of how the firm had responded to the Financial Reporting Council’s Audit Quality Review report on the firm for
2020/21 (published in July 2021).
The Committee is responsible for the annual review and approval of our policy on non-audit services, including
the employment of former partners or staff of the external auditor. The external auditor undertook a number
of non-audit assignments during the year, including review of the Interim Financial Report and regular annual
review work in connection with our structured funding vehicles. These assignments were conducted in
compliance with the approved policy and occur typically where it is either mandatory or more efficient for
the external auditor to perform the work, in light of the information previously reviewed during the audit
engagement. Total non-audit fees for work undertaken in 2021, including one-off items, represented 26% of
the audit fees for the year.
The Committee satisfied itself that the external auditor is effective and independent.
Other matters addressed by the Committee
Speak Up Standard
The Society’s whistleblowing policy is known internally as the Speak Up Standard. Although whistleblowing is a
matter reserved for the Board, the Chair of the Audit Committee is the Society’s Whistleblowers’ Champion and
the Committee reviews our policy on behalf of the Board and recommends it for approval.
The Committee received an annual report from management on the number and nature of reports submitted
and the extent of training and communication to colleagues. It also reviewed our culture in the context
of whistleblowing and concluded that we have a positive, open culture, which creates an environment for
colleagues to raise issues. This was supported by positive responses to internal colleague survey questions on
speaking up and a review by the Compliance Monitoring team of colleague conduct arrangements.
Other reporting matters
The Committee reviewed and approved our Financial Reporting and Disclosure Policy, Tax Strategy and Tax Risk
Management Policy. As part of the approval of the tax policy, management confirmed to us that the policy had
been complied with throughout the year.
Audit Committee Report continued
Maintaining Audit Committee effectiveness
The Committee undertakes an annual self-assessment of its effectiveness, via anonymous questionnaires to
all members and regular attendees at meetings, including the external auditor. The review concluded that the
Committee had operated effectively and in accordance with its Terms of Reference (ToR) and no significant
areas for remedial action were noted. Small improvement opportunities have been shared and will be addressed
through 2022. The review also concluded that the Chair continues to be effective, actively encouraging debate
and seeking input from all committee members.
The ToR are reviewed annually and updated to align them to the latest governance requirements and best
practice. The revised ToR were approved at the meeting in November 2021 and are published on our website.
All committee members are required to keep their knowledge and awareness both recent and relevant. Records
are maintained of where materials submitted to the Committee as part of its business contribute to member
knowledge and awareness. Additionally, separate training materials are provided where particular topics of
relevance are identified by members or attendees. In 2021, these additional topics included developments in
ESG reporting, IBOR transition and other specific aspects of financial reporting.
The year ahead
In 2022, the Committee will continue to oversee external financial reporting and the internal control
environment, together with the performance and independence of the Internal Audit function and the external
auditor.
We expect to receive updates on the BEIS proposals and what they mean for the Society and on the continually
evolving expectations around ESG reporting. We know we will have an important role to play in ensuring
external reporting remains transparent against a background of shifting and complex regulation and continues
to engender trust from our stakeholders.
We also expect to commence planning for the external audit tender ahead of the mandatory rotation of the
auditor by 2025.
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135
Risk Management Report
Year ended 31 December 2021
Board Risk Committee highlights from 2021
n
Close monitoring of COVID-19 impacts across the principal risk categories
n
External review of our Enterprise Risk Management Framework concluded that it remained fit for
purpose
n
Development and implementation of a Climate Risk Management Framework
Committee membership
n
David Fisher (Chair) – Chair since March 2014
n
Gareth Hoskin – member since November 2015
n
Annette Barnes – member since February 2019
n
Lynn McManus – member since January 2020
n
Neil Fuller – member since December 2020
n
Anita Tadayon – member since October 2021
n
John Hunt – left April 2021
Number of meetings and attendance
n
Nine meetings held during the year, with 96% attendance from Committee members
n
At the invitation of the Committee, meetings were also attended by the Chair of the Board and relevant
executive directors and members of the Senior Leadership Team, ensuring that the three lines of
defence were fully represented
Introduction from the Chair
Dear member,
As Chair of the Board Risk Committee (BRC), I am pleased to present the 2021 Risk Management Report. This
report provides an overview of our approach to risk management and a summary of the key areas of focus
during the year.
Approach to risk management
The Enterprise Risk Management Framework (ERMF) integrates various risk management tools to support the
effective development and implementation of our strategy. The framework sets out a structured approach
to identifying, assessing, controlling and monitoring risks, which is used to inform decision making at both
strategic and operational levels. The ERMF is periodically reviewed by the BRC, on behalf of the Board. The
Deputy Chief Executive Officer (DCEO) has responsibility for its implementation.
The ERMF
Risk reporting
Risk assessment and
management
Risk appetite and stress
testing
Society strategy
Risk appetite
Sets appetite in the context of our principal risks
to our strategy and corporate plan
Business performance
Manages and monitors business performance
against strategy, plan and appetite
Risk governance and culture
is integral to the way we manage our
business…
by enabling us to...
n
Identify and understand
the key risks, which could
impact the delivery of our
strategy and corporate
objectives.
n
Increase the range of
strategic opportunities
through consideration of
risks, creating value for our
members.
n
Provide assurance to the
Board that risks are being
identified and managed
effectively, in line with its
expectations.
n
Reduce performance
variability through
anticipation of the
risks that may affect
performance and taking
action to minimise
potential disruption.
n
Effectively allocate
resources based on robust
risk-based information.
During the year, the Society has integrated the management of climate risks and opportunities into all relevant
aspects of the ERMF. Refer to pages 53 to 58 for further details.
The main components of the ERMF are discussed below:
Risk governance and culture
Risk governance is the processes followed to support risk-based decision making and oversight across all
our operations, whereas risk culture relates to the behaviours and attitudes of colleagues in making these
decisions. Appropriate structures and our behaviours support the Board in discharging its accountability for risk
oversight, with management responsible for day-to-day decision making.
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137
Risk Management Report continued
Committee structure
The Board is our governing body, responsible for overseeing the implementation of our strategy and holding
management to account. To support the Board in the delivery of its responsibilities, we operate four Board
sub-committees, each with distinct mandates in their Terms of Reference (ToR).
BRC provides independent oversight of the effective management of our risk universe. BRC is supported by
five executive risk committees, each focusing on a particular discipline of risk. These committees are decision
making in nature and operate within delegated mandates and limits provided by the Board/BRC. Our committee
structure as at the year end is set out below:
Board
Chair: Iain Cornish
n
Safeguarding member interests.
n
Ensures robust risk management
systems and internal controls are in
place.
n
Setting risk appetite.
n
Leading, developing and
implementing the Society’s culture.
Remuneration Committee
Chair: Lynn McManus
n
Ensures remuneration
policies, principles and
practices support the
long term interests of
the Society.
Models and
Rating System
Committee
Chair: Andrew
Greenwood
n
Supports BRC
in relation to
model risk
matters and
maintenance of
the IRB Rating
System.
Assets and
Liabilities
Committee
Chair: Andrew
Conroy
n
Supports BRC
in relation to
balance sheet
risk matters.
Credit Committee
Chair: Andy Moody
n
Supports BRC
in relation to
lending related
matters.
Conduct and
Operational Risk
Committee
Chair: Jaedon
Green
n
Supports BRC
in relation
to conduct,
customer
related and
operational risk
matters.
Operational
Resilience
Committee
Chair: Rob Howse
n
Supports BRC
in relation to
operational
resilience
matters.
Board Risk Committee
Chair: David Fisher*
n
Reviews the Society’s
risk exposures and
oversees the ERMF.
n
Reviews strategic
risk appetite and the
Society’s ICAAP, ILAAP
and RRP prior to Board
approval.
Audit Committee
Chair: Gareth Hoskin
n
Monitors the integrity
of external financial
reporting.
n
Reviews the
effectiveness of
systems of internal
controls.
n
Assesses the
effectiveness,
performance and
independence of the
Internal Audit function.
Nominations Committee
Chair: Iain Cornish
n
Reviews the structure
size, diversity and
composition of the
Board.
n
Oversees succession
planning and identifies
candidates to fill Board
vacancies.
*Neil Fuller will become Board Risk Committee Chair from 1 January 2022 (subject to regulatory approval).
Policies and delegated authorities
Mandates are provided by the Board to management via the following routes to manage our day-to-day
activities:
Delegation route Summary
1. Corporate plan The Board approves a corporate plan annually, subsequent to the setting of risk appetite,
providing the parameters within which management should operate.
2. Policy framework We operate a tiered policy framework, through which mandates and limits are delegated to
management. Our policies are reviewed on an annual basis (or as appropriate), by relevant
committees.
3. Delegated Authorities Manual The Delegated Authorities Manual is designed to facilitate the effective discharge of
responsibilities and continuity of operations within a sound system of financial, operational and
budgetary control. It is reviewed by the Board annually.
Three lines of defence model and the Risk function
Our approach to risk management appropriately aligns to a three lines of defence model, which is standard
practice within the financial services sector. This ensures a clear delineation of responsibilities between control
over day to day operations, risk oversight and independent assurance activities. The key accountabilities under
the three lines of defence model are detailed below:
First line
(Business lines)
Second line
(Risk function)
Third line
(Internal Audit)
n
Executing strategy.
n
Identifying and managing risks.
n
Adhering to appetite, policies and
standards.
n
Implementing and maintaining
regulatory compliance.
n
Identifying emerging risks.
n
Oversight of day to day activities of
the first line.
n
Maintenance of the ERMF.
n
Coordination and oversight of the
setting of risk appetite.
n
Policy co-ordination/refresh.
n
Identifying emerging risks.
n
Enterprise risk reporting.
n
Independent risk-based assurance
plans.
n
Independent risk-based assurance of
the adequacy and effectiveness of first
and second line risk management.
The Risk function is independent from the operational business functions and ensures we follow a consistent
approach to risk management. It is led by the DCEO, who reports directly to the Chief Executive Officer (and
is also accountable to the Chair of the BRC). The Risk function comprises specialist teams, aligned to key risk
disciplines, which provide oversight and independent challenge of first line activities.
Risk culture
Risk culture is an essential element of effective risk management, underpinning how our ERMF is embedded
across the business and into decision making. In order to maintain an appropriate risk culture, the ERMF
includes a risk culture framework, designed around four components:
n
Tone from the top and desired behaviours – The Board and Senior Leadership Team are expected to
demonstrate our behaviours.
n
Accountability – Individuals at all levels are held accountable for risk management, to support the delivery of
our strategy and business objectives.
n
Effective communication – An environment of open and transparent communication is encouraged around
all risk management expectations.
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139
n
Incentives and performance management – An appropriate incentive scheme and other HR frameworks
are operated to promote, and align with, the desired risk culture. As part of these frameworks, the Society
provides appropriate training for the Board and wider colleagues to support a risk-aware culture.
During 2021, the Society developed a new strategic purpose, which will be delivered through a revised set of
desired corporate behaviours. These new behaviours will be embedded into working practices and decision
making across the Society during 2022, which will further stregthen the Society’s risk-aware culture.
Risk appetite and stress testing
Risk appetite framework
A key element of the ERMF is the Strategic Risk Appetite (SRA) Framework. This comprises qualitative
statements and quantitative metrics to set the parameters within which we should operate to deliver our
strategy. Our SRA Framework is reinforced through policies and standards, to ensure consistency and alignment
to the Board defined parameters.
The Board defines SRA across our principal risk categories (defined on pages 64 to 72) and is reviewed on an
annual basis. Performance against appetite is monitored continually and we have developed appropriate early
warning indicators and escalation procedures to anticipate and respond to risk profile changes. SRA metrics
are used in corporate planning and stress testing to measure and validate our long term viability, under both
plausible and more severe scenarios.
Stress testing
Stress testing is a risk management tool that we use to support an understanding of the vulnerabilities within
our business model. Our approach to stress testing is defined within a stress testing framework (part of the
ERMF) and supports:
n
A sound understanding of internal and external influences on the Society and the principal risks.
n
Assistance to the Board in strategic business planning and the setting of SRA.
n
Management of capital and liquidity resources against SRA and regulatory expectations.
We have developed an annual programme of stress testing activity, which informs the planning process and the
calibration of SRA. The key components of the programme are as follows:
Increasing
severity
Activity Description
Corporate planning Sensitivity analysis and a suite of alternative scenarios are used to assess the
corporate plan under a range of plausible stresses.
Prudential risk assessments ICAAP – an internal assessment of whether we have sufficient capital, given
current risks, as well as future risks from our strategy, under conditions as set out
by the PRA.
ILAAP – an internal assessment of whether we have sufficient liquidity and stable
funding to withstand a range of severe liquidity stresses.
Climate change Scenario analysis is used to assess the potential financial and non-financial
impacts of climate-related risks. Refer to pages 39 to 63 for further details.
Recovery Plan Scenario analysis is used to inform the development of a suite of recovery actions
(primarily capital and liquidity) to be used under extreme stress and to set and
validate operational protocols.
Reverse stress testing An assessment of the stress scenarios under which we would potentially become
unviable. This examines potential weaknesess in our business model under
extreme events so that mitigating actions can be identified (where possible).
Risk Management Report continued
Risk assessment and management
We operate defined risk assessment and management processes to facilitate the consistent identification,
analysis and evaluation, treatment and monitoring of risks across the organisation. The framework can be
applied to both strategic and operational risk assessments and is set within the context of our business
environment, strategy and objectives. A summary of the four stages of this process is set out below:
Risk identification – we operate Board level and operational level risk identification processes to capture new or
emerging risks, which could impact corporate objectives and the delivery of our strategy.
Risk analysis and evaluation – a range of methodologies are used to identify risks, to understand their
severity and likelihood to impact on the delivery of our strategy and to inform risk evaluation and treatment.
Management then evaluates and prioritises risks to inform decision making and to optimise the allocation
of resources.
Risk treatment – management selects and deploys appropriate risk responses, balancing the potential benefit
derived versus cost, effort and implications for key stakeholders. The principal mechanisms for risk treatment
are the deployment of suitable control actions, governance or assurance oversight, along with management
information monitoring to reduce the Society’s residual risk profile to acceptable levels.
Risk monitoring – we monitor risk assessment and management processes to proactively identify and adjust to
changes in risk profile and to understand the effectiveness of implementing risk treatment strategies.
Risk reporting
We operate an appropriate risk reporting hierarchy to provide the right information, to the right people, at the
right time, to inform and support timely decision making. This uses a combination of strategic and business
process reporting to understand the current or potential risk profile of the business, which may impact the
delivery of our strategy and corporate objectives. These reporting processes are conducted at an appropriate
frequency and are co-ordinated by the Risk function.
Board Risk Committee review
Committee purpose
The key purpose of the Committee is to assist the Board in understanding and managing risk related matters.
The Committee is responsible for:
n
Overseeing the development and effective implementation of the ERMF.
n
Reviewing and recommending risk appetite to the Board and monitoring our risk profile within these
parameters.
n
Monitoring our current and emerging risk profiles and ensuring that these are appropriately mitigated.
n
Promoting a risk aware culture within the Society.
n
Reviewing and recommending to the Board key prudential documents (ILAAP, ICAAP, and Recovery Plan).
n
Ensuring that that our remuneration arrangements reflect appropriate risk considerations.
A full set of duties are outlined within the Committee’s Terms of Reference. A copy of this document can be
located on our website.
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141
2021 key matters
The Committee had a balanced agenda in 2021, combining oversight of our current risk profile with emerging
risks/requirements. The key areas of focus for the Committee were: ongoing monitoring of the Society’s
response to the pandemic and impact across principal risk categories, further initiatives to enhance
the Society’s financial risk management and operational resilience practices and the development and
implementation of a Climate Risk Management Framework.
A summary of the key matters considered by the Committee during 2021 are outlined below:
Activity Description
COVID-19
n
Close monitoring of COVID-19 impacts across the principal risk categories.
n
Ongoing review of risk appetite to manage the potential associated effects of COVID-19.
n
Understanding potential impacts of COVID-19 on key model outputs.
Frameworks and policies
n
Annual review of the ERMF.
n
Annual review of Level 1a policies prior to Board submission.
n
Annual review of Strategic Risk Appetite.
n
Development and implementation of a Climate Risk Management Framework.
n
Review of the Model Governance Framework.
Stress testing
n
Annual review and recommendation of the ICAAP, ILAAP and Recovery Plan to the Board.
n
Review of reverse stress testing outputs.
Remuneration
n
Annual review of risk adjustment recommendations for the Senior Leadership Team.
n
Risk based assessment of corporate objectives.
Strategies
n
Risk strategy.
n
Liquidity risk strategy.
n
Market risk strategy.
n
Segmental lending strategy.
n
Collections operating strategy.
n
Annual review of pricing methodologies.
Operational resilience
n
Receipt of operational resilience updates.
n
Annual review of the cyber threat methodology.
n
Review of cyber penetration testing results.
n
Review of data centre migration.
Monitoring of risk profile
n
Risk exposures in relation to appetite (through management information).
n
External risk assessment via the Risk Director’s report and strategic heat map.
n
Review of the annual Money Laundering Reporting Officer’s report.
n
Review of underserved and niche segments.
n
Review of the Data Protection Officer’s report.
n
Review of risks associated with the change portfolio and key projects.
n
Review of regulatory reporting.
n
Annual review of accepted risks.
n
Review of Mortgage Support assurance reviews.
n
Oversight of executive risk committees.
Risk Management Report continued
Effectiveness review
During October, the Committee undertook an internal self-assessment of its effectiveness. The review
was performed using anonymous questionnaires and was completed by committee members and regular
attendees. The review concluded that the committee was operating effectively, in accordance with its ToR.
Outlook
On 1 January 2022, the stewardship of BRC transitioned from myself to Neil Fuller, who has significant risk
management experience. I wish Neil the best of luck in his new role. Furthermore, I would like to place on record
my thanks to colleagues within the Risk function for their continued support to me as Chair.
Over the next twelve months, the Committee will continue to concentrate its attention on the impacts of
COVID-19 as they emerge across our risk universe. Other key points of focus include:
n
Oversee the finalisation of the Society’s Operational Resilience Framework, ahead of regulatory
implementation in March 2022.
n
Continue to embed the Society’s Climate Risk Management Framework across the organisation.
n
Oversee ongoing investment in arrears handling capability to ensure consistent customer outcomes (people
and systems focus).
n
Oversee management’s response to the FCA’s Consumer Duty consultation.
n
Oversee the risks associated with the Society’s change portfolio.
I believe that the Committee remains well positioned to meet these challenges, as well as supporting the
Society in the delivery of our new strategy.
David Fisher
Chair of Board Risk Committee
24 February 2022
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143
Directors’ Remuneration Report
Year ended 31 December 2021
Remuneration Committee highlights from 2021
n
Review of compliance with the Remuneration Code
n
The setting and review of performance against objectives
n
Reviewing the variable remuneration schemes for 2022
n
Gender Pay Gap reporting
n
Providing oversight of reward for the broader colleague population
Committee membership
n
Lynn McManus (Chair) - member since January 2018 (Chair since January 2019)
n
David Fisher - member since May 2012
n
Gareth Hoskin - member since January 2018
n
Annette Barnes - member since March 2021
Number of meetings and attendance
n
Four meetings during the year
n
100% attendance from Committee members
n
Chair of the Board, Chief Executive Officer, Director of People and Reward Lead are regular attendees of
the meetings
Introduction from the Chair
Dear member,
I am pleased to present this year’s Remuneration Committee’s report. The report includes a summary of our
Remuneration Policy, together with key decisions made in the year.
The focus of the Committee is to set our Remuneration Policy, base pay, variable remuneration and other
benefits for executive directors and Material Risk Takers. The Committee also has oversight of reward for the
broader colleague population and I particularly welcomed the significant investment in colleagues in 2021.
Performance and awards 2021
Earlier sections of the Annual Report and Accounts have explained that we have delivered an extraordinary
performance, across all our key metrics and, as such, our variable pay outturn reflects this performance.
As reported last year, significant changes were made to the variable pay scheme last year, providing a stronger
link to our culture and behaviours. This is an important step in providing a clearer link to our mutual culture.
As part of the changes, the Committee decided to reduce the maximum bonus potential from 50% to 20%,
thereby aligning the bonus scheme potential for the entire Senior Leadership Team.
After careful consideration, annual bonuses of between 16.7% and 18.8% (2020: 40.8% and 41.4%) have been
awarded for 2021 to the executive directors, which represents between 83.5% and 94% (2020: 82% and 83%)
of the maximum award available.
In arriving at the decision to award variable remuneration, a full risk assessment process is undertaken, during
which the Committee considers a range of factors and input from the Board Risk Committee. Following full
consideration, no adjustment was deemed necessary. The Remuneration Policy has operated as intended.
As reported last year, the executive directors, other members of the Senior Leadership Team and non-executive
directors (including the Chair) did not receive an annual pay or fee increase in April 2021. Basic salary increases
for colleagues ranged from 0% to 25%, with an average of 5.80% in the year.
In light of the uncertainty surrounding the pandemic, the Committee took the decision to defer the 2020
variable remuneration for executive directors and re-test the outturn in 2021. This re-test has confirmed the
outturn reported last year and endorses the strong performance achieved in 2020. The 2020 awards received by
executive directors will be made in April 2022 and are subject to the normal payment and deferral schedule.
Directors’ Remuneration Policy
We are asking members to approve a change to the Directors’ Remuneration Policy at the 2022 AGM. Following
the significant changes to the structure of remuneration packages in 2021, we are not proposing major changes
this year. However, during 2021, there has been increasing competition for talent and we are not immune to this.
Whilst we have the option to use retention bonuses for all colleagues in the Society, we are seeking additional
flexibility to make retention awards specifically to executive directors in exceptional cases, where we believe it
is necessary in the interests of members and the Society to retain the service of an executive. These awards are
designed to incentivise a key individual to stay with the Society for a limited period and during the completion of
a specific project or other multi-year deliverable; the flexibility will ensure we have the capacity to respond to a
particular circumstance, without having to permanently increase pay levels.
Any retention awards will be subject to regulatory requirements around variable pay and we are proposing the
Committee has the flexibility to make an award up to the maximum permitted (in conjunction with the annual
bonus) without breaching the regulatory cap on variable pay, of 100% of fixed pay.
Presently, for example, the Remuneration Committee is considering the successful delivery of the critical,
multi-year core system migration programme.
I can assure you that the Committee will be, as we always are, very focused on the interests of members,
colleagues and other stakeholders when considering whether to make an award. If we do use the flexibility, we
will explain carefully in the subsequent annual report why we considered it was necessary to do so.
Looking ahead
We will continue to ensure we have the right reward structures to support our mutual culture, purpose and the
long term sustainability of the Society. As such, for 2022, the Committee has approved the inclusion of specific
measures for our diversity and inclusion and climate change aspirations in the annual variable remuneration
scheme.
I trust this report is helpful and informative. The Remuneration Committee recommends that members vote in
favour of the 2021 Directors’ Remuneration Report and the referenced change to the Remuneration Policy at
the AGM.
Lynn McManus
Chair of the Remuneration Committee
24 February 2022
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145
Our Remuneration Policy and principles
The Remuneration Policy is designed to support members by:
n
Being clearly linked to business objectives.
n
Driving behaviours consistent with our purpose, culture, values and strategy.
n
Being structured to attract and retain appropriately skilled colleagues to support the Society’s long term
interests and to promote a healthy culture.
All our remuneration decisions are based on:
n
Objectives which are linked to our business strategy, values and the long term interests, environmental,
social and governance (ESG) related objectives and the security of the Society and our members.
n
Procedures and practices that are consistent with, and promote, sound and effective risk management. They
balance fixed and variable remuneration, to create an acceptable relationship between risk and reward, whilst
not encouraging risk taking that exceeds the level tolerated by the Society.
n
Basic salary and total remuneration which are set at a competitive level to attract, retain and motivate
colleagues of the required calibre.
Components of remuneration structure
Executive directors
The following table summarises the principal components of the executive directors’ total remuneration and
the way they operate. Details which are commercially sensitive have not been provided.
Remuneration element Summary
Fixed remuneration
Basic salary Provides ability to attract and retain executives through market competitive rates of pay.
The basic salaries of executive directors are reviewed each year, as for any other
colleague, based on the economic environment, the overall financial position of the
Society and in accordance with benchmarking.
The only exception is if there is a material increase in scope or responsibility to the
executive director’s role.
Pension Based on membership of the Society’s defined contribution section of the pension
scheme. In appropriate circumstances, for example, where contributions exceed the
annual or lifetime allowance, there is an option to receive a monthly cash allowance in lieu
of pension contributions.
Executive directors appointed before 1 April 2019 receive a range of relevant employer
contributions, fully aligned with the colleague population who joined before 1 April 2019,
with a maximum contribution of 20% of basic salary, based on age and pensionable
service.
Executive directors appointed on or after 1 April 2019 will receive a maximum
contribution fully aligned with the colleague population who joined after 1 April 2019, of
10% of basic salary.
Benefits The principal benefits executive directors receive are:
n
life assurance (up to 4 x basic salary)
n
private medical insurance
n
group income protection
n
health screening
n
cash health plan.
Other benefits may be provided based on individual circumstances, for example,
relocation.
Remuneration element Summary
Variable remuneration
Annual bonus scheme The 20% maximum is split between:
Society performance – 10%
Personal performance – 10%.
Performance objectives are agreed by the Remuneration Committee at the start of each
year and reflect business priorities.
Personal performance objectives, appropriate to the responsibilities of the director, are
set at the start of each year and agreed by the Remuneration Committee. 30% of the
personal performance award is allocated to the demonstration of leadership behaviours.
The 20% maximum for the executive director in a control function is based on a range
of personal objectives only, with 30% of the award allocated to the demonstration of
leadership behaviours.
Robust risk evaluation measures are independently assessed by the Board Risk
Committee, with measures for the Deputy Chief Executive Officer assessed by an
independent senior manager.
For executive directors designated as ‘Senior Managers’ under the Senior Managers
Regime and over the de-minimis
1
, 60% of the bonus will be deferred over a period of
seven years with no vesting until three years after the award is made. 50% of variable
remuneration will be delivered in a share-like instrument
2
.
Retention awards Such awards will only be made in exceptional circumstances. The monetary value of the
award will be defined at grant and vesting of awards will usually be tied to the completion
of a defined period of service and the satisfactory completion of a specific project or
other multi-task deliverable.
Where awards have performance conditions, these will usually be defined when the
award is made and linked to the purpose of the award. For example, performance
measures might include satisfactory individual performance or successful completion of
a specific project.
Retention awards can be made up to the maximum permitted (in conjunction with the
annual bonus) without breaching the regulatory cap on variable pay, of 100% of fixed pay.
Retention awards are part of variable pay and may be subject to malus and clawback,
deferral and delivery in instruments as determined by the Remuneration Committee.
Notes:
(1) The de-minimis limit level is set by regulation, in relation to the level of bonus deferral applied, and impacts colleagues whose variable remuneration is greater than £44,000
per annum or where variable remuneration is more than 33% of their total remuneration.
(2) Where remuneration exceeds the de-minimis, 50% of the variable remuneration award will be paid in an instrument and 50% will be paid in cash. As a mutual organisation,
this means that 50% of the award payable in each year will be held and retained for a further 12 months and which can be written down in value if agreed capital levels are
not maintained. The instrument cannot increase in value or attract interest payments during the deferral and retention periods.
The Remuneration Committee may apply discretion to reduce bonus awards in whole or part using either malus
or clawback. Malus is a reduction factor which is applied to bonus payments which have not yet vested and
clawback is applied to seek recovery of bonus payments already paid.
Directors’ Remuneration Report continued
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147
Directors’ Remuneration Report continued
Bonus deferral and share-like instrument
For executive directors designated as ‘Senior Managers’ under the Senior Managers Regime and over the
de-minimis limit, 60% of the bonus will be deferred, over a period of seven years with no vesting until three
years after the award is made. 50% of variable remuneration will be delivered in a share-like instrument.
The table below illustrates how the 2021 bonus for the Chief Executive Officer, Deputy Chief Executive Officer,
Chief Financial Officer and Chief Operating Officer will be delivered:
Performance
year
April following
the bonus
scheme year
Paid one year
later
Paid two years
later
Paid three
years later
Paid four years
later
Paid five years
later
Paid six years
later
Paid seven
years later
Paid eight
years later
20% cash
Annual
bonus
scheme
20% share-like
instrument
40% of the bonus is awarded in
the April following the scheme
year. 50% of any award will
be delivered in a share-like
instrument
60% of the bonus will be deferred, over a period of seven years with no vesting until three years after
the award is made. 50% of any award will be delivered in a share-like instrument.
6% cash 6% cash
6% share-like
instrument
6% cash
6% share-like
instrument
6% cash
6% share-like
instrument
6% cash
6% share-like
instrument
6% share-like
instrument
Non-executive directors
Non-executive directors receive fees which reflect the level of responsibilities and time commitment required
for Board and Board subcommittee meetings. Non-executive directors receive a basic fee and an additional fee
for chairing a committee.
Fees are reviewed annually with recommendations made to the Board by the Executive Committee. The
Chair’s fee is reviewed by the Remuneration Committee. Fee levels are benchmarked against other financial
services organisations.
Non-executive directors are reimbursed for travel expenses for attending meetings and, where tax liability
arises for these travel expenses, this will be covered by the Society.
Report on remuneration 2021
Executive director remuneration summary for 2021
The total remuneration received by executive directors for 2021 is detailed below, compared with 2020. The
total remuneration for executive directors equates to 1.2% of profit before tax (2020: 2.0%). This information
has been audited and shows remuneration for the years ended 31 December 2020 and 31 December 2021, as
required to be reported under the Building Societies (Accounts and Related Provisions) Regulations 1998. The
awards made in respect of performance in 2021 are in line with the 2021 Remuneration Policy, with a maximum
variable pay of 20% for executive directors.
The Chief Executive Officer is the Society’s highest paid colleague. As we are a mutual organisation, we have no
share capital and, therefore, do not offer share based remuneration to executive directors or colleagues.
2021 audited
Executive directors Salary
Annual
bonus
Pension
Loss of
office
Total fixed
remuneration
Total variable
remuneration
Total
remuneration
£’000 £’000 £’000 £’000 £’000 £’000 £’000
R G Fearon 543 102 50
(1)
– 593 102 695
A P Conroy 342 60 34
(1)
– 376 60 436
A J Greenwood 361 62 51
(1)
– 412 62 474
R J Howse
(2)
229 63 23
(1)
– 252 63 315
Total remuneration
(3)
1,475 287 158 – 1,633 287 1,920
2020 audited
Executive directors Salary
Annual
bonus
Pension
Loss of
office
Total fixed
remuneration
Total variable
remuneration
Total
remuneration
£’000 £’000 £’000 £’000 £’000 £’000 £’000
R G Fearon 457 190 37
(1)
– 494 190 684
A P Conroy 290 119 29
(1)
– 319 119 438
A J Greenwood 305 125 43
(1)
– 348 125 473
Total remuneration
(3)
1,052 434 109 – 1,161 434 1,595
Notes
(1) These directors elected to receive part or all of the Society’s pension contribution as a cash allowance.
(2) R J Howse was appointed to the Board on 1 May 2021.
(3) No director received other taxable benefits of £1,000 or above.
Annual incentive
For 2021, financial performance and corporate performance incentive opportunities were based on the
performance measures in the table overleaf.
The table also illustrates performance against each of the measures. Personal performance achievement for
executive directors was in the range of 8.06% to 17.05% (17.05% in respect of the Deputy CEO).
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149
Vision:
strategic pillar
Corporate
performance
measure
Weightings for
maximum
(as % of salary)
Target Pay out %
Secure Keeping the Society
financially resilient
3.34%
n
Maintain a strong capital position.
n
Maintain an effective level of liquidity above
internal and regulatory limits.
n
Achieve a resilient level of profitability.
n
Balance the risk-reward equation in lending
choices.
3.34%
Customer
centred
Safely keeping the
Society operating
for the benefit of our
members
3.33%
n
Prioritise the safety and wellbeing of
colleagues and members.
n
Prepare the Society for the post-crisis
world, ensuring we are future facing (people,
products, process, technology).
n
Support our members, particularly as they
face financial difficulty.
n
Keep the business running and seek to
enhance operational resilience.
n
Appropriately balance savings and
mortgage members’ interests.
3%
People Informing and
engaging colleagues
and customers
3.33%
n
Ensure colleagues remain informed and
engaged.
n
Keep our members and brokers informed
and maintain trust and customer
satisfaction across all channels.
n
Provide robust service to our intermediary
partners.
3.19%
Notes
The corporate measures only apply to the Chief Executive Officer, Chief Financial Officer and Chief Operating Officer. The Deputy Chief Executive Officer is responsible for a
control function, and, therefore, is remunerated on personal objectives only.
Risk assessment
The risk assessment process is independently managed by the Risk function. Following completion of the risk
assessment process, the Risk Director provides an annual report on areas the Remuneration Committee should
consider, in respect of whether performance or risk adjustment is necessary to remuneration outcomes. The
report is initially reviewed by the Board Risk Committee, which then highlights any specific areas for further
consideration to the Remuneration Committee. In addition, the Risk function considers the corporate priorities
and personal objectives for executive directors’ future year remuneration, to ensure they are aligned with our
risk appetite.
The report from the Risk Director includes an assessment of the current year’s performance, in the context of
objectives for each prior year for which variable remuneration has been deferred.
The individual performance of Material Risk Takers and their teams is risk assessed by reference to a range of
dimensions including audit findings, compliance with regulatory policies, compliance with our risk appetite, and
general control and governance matters.
The Board Risk Committee considered the 2021 report in full and determined the Remuneration Committee
should assess whether an adjustment was required. Following full consideration, no adjustment was applied.
Unpaid deferred elements of the annual bonus scheme
Executive
directors
Performance
year
Due
2022
£’000
Due
2023
£’000
Due
2024
£’000
Due
2025
£’000
Due
2026
£’000
Due
2027
£’000
Due
2028
£’000
Due
2029
£’000
Due
2030
£’000
Total
£’000
£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
R G Fearon 2018 20 – – – – – – – – 20
2019 – 10 20 20 20 20 11 – – 101
2020 48 28 3 14 23 23 23 20 8 190
2021 20 20 – 6 12 12 12 12 8 102
Total 88 58 23 40 55 55 46 32 16 413
A P Conroy 2020 76 16 16 11 – – – – – 119
2021 12 12 – 4 7 7 7 7 4 60
Total 88 28 16 15 7 7 7 7 4 179
A J Greenwood 2018 16 – – – – – – – 16
2019 16 16 – – – – – – 32
2020 79 17 16 13 – – – – 125
2021 13 13 – 4 7 7 7 7 4 62
Total 124 46 16 17 7 7 7 7 4 235
R J Howse 2021 13 13 – 4 7 7 7 7 5 63
Total 13 13 – 4 7 7 7 7 5 63
P A Hill 2018 13 25 25 25 25 14 – – – 127
Total 13 25 25 25 25 14 – – – 127
R S P Litten 2018 9 17 17 17 17 9 – – – 86
2019 – 2 3 3 4 4 2 – – 18
Total 9 19 20 20 21 13 2 – – 104
K R Wint 2018 15 – – – – – – – – 15
2019 12 12 – – – – – – – 24
Total 27 12 – – – – – – – 39
Total 362 201 100 121 122 103 69 53 29 1,160
The payment of deferred elements is subject to future performance, for example, the application of malus.
Clawback will be applied as required by regulation.
Directors’ Remuneration Report continued
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151
Pensions and other benefits
A J Greenwood is a deferred member of the defined contribution section of the pension scheme and has opted
for a cash allowance in lieu of the Society’s pension contribution. R G Fearon and A P Conroy opted to receive
pension benefits as part contributions to the defined contribution section of the pension scheme and part cash
allowance, in lieu of the Society’s pension contribution. R J Howse has opted for a cash allowance in lieu of the
Society’s pension contribution.
No executive director has the right or opportunity to receive enhanced benefits beyond those already
disclosed, and the committee has not exercised its discretion during the year to enhance benefits.
Executive directors may be entitled to receive compensation for loss of office. Such payments will be based on
the monthly salary and pension contributions that the executive would have received if still in our employment.
Long term incentive awards made in the financial year
There were no long term incentive awards made in the financial year.
Payments for loss of office
There were no payments for loss of office made in the financial year.
Remuneration for Material Risk Takers (MRTs) in 2021
Material Risk Takers are senior managers who include executive and non-executive directors, chief officers and
directors whose actions have a material impact on the risk profile of the Society.
The basic salary or fees of Material Risk Takers is determined to reflect the responsibilities of the role. Salaries
are reviewed annually, as for all colleagues. Material Risk Takers, other than non-executive directors, are eligible
for an annual bonus scheme. The bonus scheme for Material Risk Takers in control functions is based on the
achievement of non-financial objectives. In 2021, there were 27 Material Risk Takers during the year.
Aggregate remuneration for Material Risk Takers is reported in the table below.
Remuneration for Material Risk Takers
Number of
beneficiaries
Fixed pay
(1)
Current year variable
pay
(2)
Total
2021 2020
2021
£’000
2020
£’000
2021
£’000
2020
£’000
2021
£’000
2020
£’000
Senior management 27 26 5,428 4,426 497 957 5,925 5,383
Other MRTs – – – – – –
–
–
Total 27 26 5,428 4,426 497 957 5,925 5,383
Notes:
(1) Fixed pay includes basic salary, benefits, pension, loss of office payments and fees for non-executive directors.
(2) £933k of variable pay is deferred for one, three, or seven years (2020: £1.589 million).
(3) Material Risk Takers who left the Society during the calendar year are included in the table above.
Remuneration for non-executive directors
The fees for non-executive directors are made up of a basic fee, plus a committee chair fee, as appropriate. The
Chair does not receive additional fees for roles carried out other than that of Chair.
Non-executive
directors
Basic fees
(£’000)
Benefits
(1)
(£’000)
Committee chair
fees (£’000)
Total
(£’000)
2021 2020 2021 2020 2021 2020 2021 2020
I C A Cornish
(2)
154 127 1 0 – – 155 127
R J Ashton (previous Chair) – 40 – 1 – – – 41
G J Hoskin (current Vice Chair) 51 51 0 1 24 24 75 76
A M Barnes 51 51 1 1 – – 52 52
D Fisher 51 51 0 0 17 17 68 68
N A Fuller
(3)
51 4 1 0 – – 52 4
J A Hunt
(4)
15 51 0 1 – – 15 52
P A Jenks
(5)
– 12 – 0 – – – 12
L R McManus 51 51 1 1 11 11 63 63
A Tadayon
(6)
13 – 2 – – – 15 –
Total 437 438 6 5 52 52 495 495
Notes:
(1) In addition to the payment of fees, non-executive directors are reimbursed for travel expenses for attending meetings and, where tax liability arises, this will be covered by
the Society.
(2) This director became Chair on 3 April 2020.
(3) This director was appointed on 1 December 2020.
(4) This director retired on 15 April 2021.
(5) This director retired on 26 March 2020.
(6) This director was appointed on 22 October 2021.
Non-executive directors (including the Chair) did not receive an annual pay or fee increase in April 2021.
The annual pay review takes place in April, for all colleagues in the Society, including non-executive directors.
Following a market review and external benchmarking, fees from 1 April 2022 will be as follows:
Non-executive
directors
Basic fees
(£’000)
Committee chair fees
(£’000)
Total
(£’000)
2022 2022 2022
I C A Cornish (Chair) 160 – 160
G J Hoskin (Vice Chair) 52 24 76
A M Barnes 52 – 52
D Fisher 52 – 52
N A Fuller 52 18 70
L R McManus 52 12 64
A Tadayon 52 – 52
Total 472 54 526
Payments to former directors
A payment of £12,653 has been made in 2021 to P A Hill, the former Chief Executive Officer, who retired on
30 June 2019. A payment of £8,531 has been made in 2021 to R S P Litten, the former Chief Financial Officer,
who left the Society on 18 April 2019. A payment of £26,877 has been made in 2021 to K R Wint, the former
Chief of Staff, who left the Society on 31 January 2020. The bonus payments consisted of deferred incentive
awards, which are assessed in full when they are awarded. All these payments were subject to risk assessment
and the Committee determined no risk adjustment was required.
Directors’ Remuneration Report continued
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153
Directors’ Remuneration Report continued
Policy review
The Remuneration Policy is subject to an annual review of both its content and implementation and is approved
by the Remuneration Committee. The Board Risk Committee also contributes to the policy review, to ensure it
takes sufficient account of risk considerations.
Remuneration arrangements meet regulatory requirements, including the FCA Dual–Regulated Firms
Remuneration Code, PRA Rulebook and good corporate governance practice.
Vote
Members are asked to vote on the Remuneration Policy at least every three years, or earlier if the policy
changes. The current Remuneration Policy took effect from the date of the 2021 AGM.
Annual General Meeting 2021 results
Resolution % votes for % votes against
Directors’ Remuneration Report 92.37% 7.63%
Annual General Meeting 2021 results
Resolution % votes for % votes against
Directors’ Remuneration Policy 91.73% 8.27%
Awards under different scenarios
The charts below show the awards split between fixed pay and variable pay, under the variable pay
arrangements, for each current executive director under different scenarios:
Chief Executive Officer
Fixed
602
Target
684
Maximum
710
100%
88%
85%
12%
15%
Deputy Chief Executive Officer
Fixed
412
Target
465
Maximum
483
100%
88%
85%
12%
15%
Chief Financial Officer
Fixed
376
Target
428
Maximum
445
100%
88%
85%
12%
15%
Chief Operating Officer
Fixed
378
Target
430
Maximum
447
100%
88%
85%
12%
15%
Fixed Consists of basic salary and pension (£’000)
Basic salary is as at 1 January 2022
Executive director Basic salary Pension Total fixed
Chief Executive Officer 543 59 602
Deputy Chief Executive Officer 361 51 412
Chief Financial Officer 342 34 376
Chief Operating Officer 344 34 378
Target Based on what an executive director would receive if the target level of performance was achieved, based on a 20%
variable remuneration scheme:
annual variable element pays out at 75% of the maximum available.
Maximum Based on what an executive director would receive if the maximum level of performance was achieved:
annual variable element pays out at 100% of maximum available.
Approach to recruitment remuneration for executive directors
Remuneration element Summary
Fixed remuneration
Basic salary and benefits The salary level will be set taking into account the responsibilities of the individual and by
comparison with roles carrying similar responsibilities, in organisations of a comparable
size, complexity and diversity to the Society. The executive director will be eligible to
receive benefits as set out in the Remuneration Policy table.
Pension The executive director will be able to participate in the defined contribution section of
the pension scheme or to receive a cash allowance of up to a maximum of 10% of basic
salary, in line with the colleague population.
Variable remuneration
Annual bonus The executive director will be eligible to participate in the annual bonus scheme as set
out in the Remuneration Policy table. The bonus award will be pro-rated to the number of
complete months worked during that year.
Replacement award When replacement awards cannot be avoided, the Committee will structure any such
awards so that, overall, they are no more generous in terms of quantum or vesting
period than the awards due to be forfeited. In determining the quantum and structure
of these commitments, the Committee will seek to replicate the fair value and, as far as
practicable, the timing and performance requirements of remuneration forgone.
Recruitment remuneration Any payments made to executive directors on joining the Society to compensate them
for forfeited remuneration from their previous employer will be compliant with the
provisions of the PRA Rulebook and the FCA Dual-Regulated Firms Remuneration Code.
Service contracts
Executive directors’ terms and conditions of employment, including details of remuneration, are detailed in
their individual service agreements, which include a notice period of twelve months. The standard contract is
available to view at the Society’s head office.
None of the executive directors currently hold any paid external directorships.
The non-executive directors do not have service contracts with the Society.
Policy on payment for loss of office
When determining any loss of office payment for a departing individual, the Committee will seek to minimise
costs to the Society, whilst seeking to reflect the circumstances in place at the time. Accordingly, the
Committee retains overriding judgement to make loss of office payments appropriate to the circumstances and
applying the overriding principle that there should be no element of reward for failure.
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155
Directors’ Remuneration Report continued
Remuneration element Summary
Fixed remuneration
Basic salary and benefits In the event of termination by the Society, there will be no compensation for loss of
office due to misconduct or poor performance. In other circumstances, executive
directors may be entitled to receive compensation for loss of office. Such payments
will be based on the monthly salary and pension contributions that the executive would
have received if still in employment with the Society. Executive directors are expected to
mitigate compensation for loss of office, in appropriate circumstances.
Variable remuneration
Annual bonus Where an executive director’s employment is terminated during or after the end of a
performance year, but before the payment is made, the executive may be eligible for a
pro-rated annual bonus for that performance year, subject to an assessment based on
performance achieved over the period and subject to risk adjustment. No award will be
made in the event of misconduct.
Where an executive director leaves the Society after an award is made, deferred
payments will remain payable, subject to the normal rules of the scheme, including risk
adjustment.
The Remuneration Committee, in determining the final awards, may apply judgement
to assess performance in the round. When assessing performance in the round, the
Remuneration Committee may take into account (inter alia) wider market, regulatory and
stakeholder considerations.
Statement of consideration of conditions elsewhere in the Society
The Remuneration Committee considers the increase in general basic salary for the wider colleague population
when determining the annual salary increases for the executive directors.
As reported last year, the Committee decided to reduce the maximum bonus potential from 50% to 20%,
thereby aligning the bonus scheme potential for the entire Senior Leadership Team. The change reduces ‘on
target’ performance to 15% of base salary (formerly 36%).
To ensure total compensation remains competitive, fixed pay was adjusted to reflect a proportion of the lost
variable pay opportunity. From 1 January 2021, base pay was adjusted by between 17.8% and 18.2% for the
executive directors.
Colleagues received pay reviews in both April and September but executive directors, other members of the
Senior Leadership Team and non-executive directors (including the Chair) did not receive an annual pay or fee
increase in April or September 2021.
The table below illustrates the comparison of average basic salary increase made in April and September 2021
to the Chief Executive Officer, executive directors and all other colleagues:
Chief Executive Officer
Executive directors
All other colleagues
0.00%
0.00%
5.80%
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00%
Statement of implementation of Remuneration Policy in the following year
The Remuneration Policy is implemented by management. A formal review of the implementation of the Policy
is conducted by the Remuneration Committee on an annual basis.
The executive directors’ salaries from 1 January 2022 are as follows, compared with 1 January 2021:
1 January 2022 1 January 2021
R G Fearon £542,670 £542,670
A J Greenwood £360,980 £360,980
A P Conroy £342,020 £342,020
R J Howse £343,620 n/a
The annual pay review takes place in April, for all colleagues in the Society, including executive directors.
Following a market review and external benchmarking, salaries from this date will be as follows:
1 April 2022 Increase
R G Fearon £590,000 8.7%
A J Greenwood £379,030 5.0%
A P Conroy £359,120 5.0%
R J Howse £370,000 7.7%
Chief Executive Officer (CEO) pay ratio
The Companies (Miscellaneous Reporting) Regulations 2018, came into force for accounting periods starting
from 1 January 2019 and requires the publication of the ratio of the CEO’s single figure total remuneration. We
have chosen to use the Government’s preferred methodology (option A), which determines the total full time
equivalent total remuneration for all colleagues for the relevant financial year, and compares the median, 25th
and 75th percentiles against the CEO single figure.
Year Method 25th percentile Median 75th percentile
2021 Option A 30:1 20:1 13:1
2020 Option A 32:1 21:1 14:1
2019 Option A 32:1 22:1 15:1
The ratios below are calculated as at 31 December 2021:
Remuneration element 25th percentile (£) Median (£) 75th percentile (£)
Total pay and benefits 23,010 34,875 51,681
Salary 19,590 30,062 44,130
Directors’ loans, transactions and related business activity
The aggregate amount outstanding at 31 December 2021 in respect of loans from the Society or a subsidiary
undertaking to directors of the Society or persons associated with directors was nil (2020: £766,337), being
no mortgages (2020: three) to directors and persons connected to directors. These loans were at normal
commercial rates. A register of loans and transactions with directors and their connected persons is maintained
at the head office of the Society and may be inspected by members. There were no significant contracts
between the Society or our subsidiaries and any director of the Society during the year.
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157
Directors’ Remuneration Report continued
History of remuneration of Chief Executive Officer
The table below shows the total remuneration of the Chief Executive Officer over the last five years, together
with the performance pay awarded as a percentage of the maximum possible. R G Fearon was appointed
Chief Executive Officer on 27 February 2019; the figures prior to 2019 relate to P A Hill, the former Chief
Executive Officer.
Total remuneration
£’000
Performance pay as % of maximum
2021 695 94.0
2020 684 82.9
2019 659 75.0
2018 785 89.7
2017 765 87.0
Percentage change in salary for Chief Executive Officer
The basic salary of the Chief Executive Officer did not increase during 2021. An average annual increase of
5.8% in basic pay was awarded to all colleagues. The annual change of each individual executive director’s pay,
compared to the annual change in average colleague pay is detailed below.
Annual increase
Chief Executive Officer 0%
Deputy Chief Executive Officer 0%
Chief Financial Officer 0%
Chief Operating Officer 0%
Colleague average 5.8%
Relative importance of spend on pay
The following table sets out the percentage change in profit and overall spend on remuneration in the year
ended 31 December 2021, compared to the previous year.
2021 2020 Percentage change
Profit after tax £120.2m £62.0m 94%
Colleague remuneration costs £56.0m £50.4m 11%
Headcount 1,474 1,432 3%
External advisers to the Remuneration Committee
The Remuneration Committee seeks the advice of independent external consultants, as required. The external
advisers to the Remuneration Committee in 2021 were PwC LLP, who provided professional advice, guidance
and training to the Committee. The appointment of advisers is carried out on a basis of careful evaluation
of potential providers against agreed criteria. PwC LLP does not have any conflict of interest in advising the
Remuneration Committee.
Directors’ Report
Year ended 31 December 2021
The directors are pleased to present their Annual Report and Accounts and Annual Business Statement, for
the year ended 31 December 2021.
Our business model and new purpose-led strategy are described in the Business Model and Strategy section of
the Strategic Report on pages 8 to 38, where key performance indicators are also presented.
Profits and capital
Profit before tax for the year was £163.7 million (2020:
£80.7 million). The profit after tax transferred to
the general reserve was £120.2 million (2020: £62.0
million). Total equity attributable to members at
31 December 2021 was £1,274.6 million (2020:
£1,154.7 million).
Gross capital at 31 December 2021 was £1,840.5
million (2020: £1,390.8 million) including £339.4
million (2020: £nil) of subordinated liabilities and
£227.3 million (2020: £241.5 million) of subscribed
capital. The ratio of gross capital as a percentage of
shares and borrowings was 9.04% at 31 December
2021 (2020: 7.39%) and the free capital ratio was
8.51% (2020: 6.81%). Further explanation of these
ratios is provided in the Annual Business Statement
on page 241.
Mortgage arrears
At 31 December 2021, there were 360 (2020: 228)
mortgage accounts 12 months or more in arrears.
The total mortgage arrears, for these cases, was
£3.9 million (2020: £2.7 million) and the total principal
balance outstanding was £36.2 million (2020:
£23.1 million).
Charitable and political donations
In 2021, the Group made a donation of £90,000 (2020:
£90,000) to the Leeds Building Society Charitable
Foundation. Our other donations to charities and
good causes (including colleague fund matching)
during the year amounted to £141,250 (2020:
£86,000).
The Caring Saver Account and the Your Interest
In Theirs scheme provided further donations of
£12,750 (2020: £13,535) and £79,600 (2020: £98,300)
respectively to specified charities. Additionally,
the Society launched a fixed rate bond supporting
Dementia UK which resulted in a donation of £24,000
in 2021.
Other charitable contributions from colleagues
and members totalled £80,700 (2020: £83,600)
taking total donations to charity and good causes to
£428,300 (2020: £371,600).
No political donations were made during the year
(2020: none).
Principal risks and uncertainties
Our approach to managing risks is set out in the
Risk Management Report on pages 136 to 143. The
principal risks and uncertainties we face are set out
in the Strategic Report on pages 64 to 72. Further
information relating to our financial risks and the
approach to management of those risks is included in
notes 32 to 35 of the accounts.
Colleagues
Information on key colleague policies and associated
key performance indicators, including processes for
communicating and consulting with colleagues, are
included in the Strategic Report on pages 15 to 18
and the Corporate Governance Report on pages
112 to 114.
We are proud to be accredited as a Leader in Diversity
and are committed to maintaining an inclusive
workplace which provides all colleagues with equal
access to development and opportunities, without
barriers. We are a Disability Confident accredited
employer and give full and fair consideration to
applications for employment from disabled persons,
having regard to their particular aptitudes and
abilities. Where a colleague becomes disabled during
the course of their employment, every effort is made
to continue their employment, making reasonable and
proportionate adjustments as necessary.
Business relationships
We are committed to developing strong business
relationships with our partners, notably our mortgage
brokers, suppliers and investors. Further details of
how the Board has regard to the interests of these and
other stakeholders can be found on pages 34 to 38.
Creditor payment policy
We aim to agree terms and conditions with suppliers
that outline the way in which business is to be
transacted, including the terms of payment, and
to pay in accordance with contractual and other
legal obligations.
Creditor days stood at 10 days at 31 December 2021
(2020: 15 days).
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
159
Environmental policy
The directors recognise that climate change is a
significant global issue which impacts on and requires
action from multiple bodies, including governments,
businesses and individuals. We are committed to
playing our part as a responsible business.
During the year, we have taken time to deepen our
understanding of the risks and opportunities for the
business from climate change and identify the
actions we will take to manage these. In this Annual
Report we have opted to include disclosures in line
with the recommendations of the Task Force on
Climate-related Financial Disclosures and these can
be found on pages 39 to 63 of the Strategic Report.
The actions we are taking to reduce our impact on the
environment, including updated targets, are set out
on pages 25 to 27 of the Strategic Report.
Pillar 3 disclosures
The disclosures required under Pillar 3 of CRD IV are
published on our website at leedsbuildingsociety.
co.uk/press/financial-results.
Corporate governance
We have provided statements on corporate
governance and directors’ roles and responsibilities
in the Corporate Governance Report on pages 95
to 118.
Directors’ responsibilities in respect of the
preparation of the Annual Accounts
This statement is made by the directors to explain
their responsibilities in relation to the preparation of
the Annual Accounts, Annual Business Statement and
Directors’ Report. It should be read in conjunction
with the statements on the respective responsibilities
of directors and the auditor on pages 168 and 169.
For each financial year, the directors are required by
the Building Societies Act 1986 (the Act) to prepare
annual accounts which give a true and fair view of the
income and expenditure of the Society and the
Group, and of the state of affairs of both, as at the end
of the financial year. Additionally, they must provide
details of directors’ emoluments in accordance with
Part VIII of the Act and regulations made under it.
The Act states that references to IFRS accounts giving
a true and fair view are references to their achieving a
fair presentation.
In preparing the Annual Accounts, directors are
required to:
n
Select appropriate accounting policies and apply
them consistently.
n
Make judgements and estimates that are
reasonable and prudent.
n
State whether the Annual Accounts have been
prepared in accordance with IFRS.
n
Prepare the Annual Accounts on the going concern
basis, unless it is inappropriate to presume that the
Group will continue in business.
The directors consider that the Annual Report and
Accounts are fair, balanced and understandable,
when taken as a whole, and that they provide the
information necessary for members to assess the
Society’s and Group’s performance, business model
and strategy.
In addition to the Annual Accounts, the Act requires
the directors to prepare an Annual Business
Statement and a Directors’ Report for each financial
year. Each contains prescribed information relating to
our business and subsidiary undertakings.
Directors’ responsibilities for accounting records
and internal control
The directors are responsible for ensuring that the
Society and our subsidiary undertakings:
n
Keep accounting records in accordance with the
Building Societies Act 1986.
n
Take reasonable care to establish, maintain,
document and review such systems and controls
as are appropriate to our business.
The directors have general responsibility for
safeguarding the Society’s assets and for taking
reasonable steps for the prevention and detection of
fraud and other irregularities.
The directors are responsible for the maintenance
of the corporate and financial information included
on the Society’s website. Legislation in the
United Kingdom governing the preparation and
dissemination of financial statements may differ from
legislation in other jurisdictions.
Directors’ Report continued
The directors who held office at the date of approval
of this report confirm that, as far as they are aware,
there is no relevant information of which our auditor
is unaware and that each director has taken all steps
necessary to make themselves aware of any relevant
audit information and establish that the auditor is
aware of that information.
Going concern
The directors are required to prepare financial
statements on a going concern basis, unless it is
inappropriate to presume that the Society and
the Group will continue in business for the next
12 months.
The directors review the results of regular forecasts
and stress tests to understand the potential financial
and operational performance of the business under
a range of economic and market conditions. This
informs their assessment of whether the Society and
the Group are going concerns. These assessments
reflect the potential impacts of the principal and
emerging risks set out on pages 64 to 74.
The directors have also reviewed the Society’s and
Group’s position over a longer period than the 12
months required by the going concern assessment.
This is explained in the Viability Statement on pages
75 to 76 of the Strategic Report.
Based on the assessments performed, the directors
have concluded that:
n
The Group has proven access to liquidity resources,
including access to central bank funding facilities
if required, sufficient to meet both the normal
demands of the business and the requirements
which might arise in modelled stressed
circumstances. The availability and quality of liquid
assets are structured so that funds are available
to repay any maturing wholesale funds and cover
exceptional demand from retail investors.
n
The Group’s other assets consist primarily of
mortgages secured on residential property. The
recoverability of all mortgage assets is reviewed
regularly and provisions are made, incorporating
a forward looking view of expected losses under
a range of macroeconomic scenarios, so that the
Group is not exposed to losses on these assets
which would impact its decision to adopt the going
concern basis.
n
The Group’s current capital resources are sufficient
to meet regulatory requirements. Having reviewed
future plans and forecasts, the directors consider
plans for future capital generation are sufficient
to maintain capital in excess of regulatory
requirements, under both central and modelled
stressed scenarios.
The directors have therefore concluded that there
is no material uncertainty in relation to the Society
and the Group’s continuation as a going concern
and therefore it is appropriate to continue to
adopt the going concern basis in preparing the
financial statements.
Directors
The names of the directors of the Society at
31 December 2021, their roles and membership of
board committees are detailed on pages 88 to 93.
In line with best practice, all executive and
non-executive directors offer themselves for election
or re-election by the members at the AGM.
None of the directors holds any beneficial interest
in shares in, or debentures of, any subsidiary
undertaking of the Society.
Auditor
In accordance with Section 77 of the Building
Societies Act 1986, a resolution for Deloitte LLP’s
re-appointment as auditor will be proposed at
the AGM.
Post balance sheet events
The directors consider that no events have occurred
since the year end to the date of this Annual Report
that are likely to have a material effect on the
financial position of the Group, as disclosed in the
Annual Accounts.
Katherine Tong
Director of Legal, Compliance and Secretary
24 February 2022
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Independent Auditor’s Report to the
Members of Leeds Building Society
Year ended 31 December 2021
Report on the audit of the financial statements
1. Opinion
In our opinion the financial statements of Leeds Building Society (the Society) and its subsidiaries (the Group):
n
give a true and fair view of the state of the Group’s and of the Society’s affairs as at 31 December 2021 and of the
Group’s and the Society’s income and expenditure for the year then ended;
n
have been properly prepared in accordance with United Kingdom adopted international accounting standards and
International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board
(IASB); and
n
have been prepared in accordance with the requirements of the Building Societies Act 1986.
We have audited the financial statements which comprise:
n
the Group and Society Income Statements;
n
the Group and Society Statements of Comprehensive Income;
n
the Group and Society Statements of Financial Position;
n
the Group and Society Statements of Changes in Members’ Interest;
n
the Group and Society Statements of Cash Flows; and
n
the related notes 1 to 38.
The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom
international accounting standards and IFRS as issued by the IASB.
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial
statements section of our report.
We are independent of the Group and the Society in accordance with the ethical requirements that are relevant to our audit
of the financial statements in the UK, including the Financial Reporting Council’s (the FRC’s) Ethical Standard as applied to
listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
The non-audit services provided to the Group and the Society for the year are disclosed in note 6 to the financial
statements. We confirm that we have not provided any non-audit services prohibited by the FRC’s Ethical Standard to the
Group or the Society.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
3. Summary of our audit approach
Key audit matters The key audit matters that we identified in the current year were:
n
IFRS 9 Financial instruments – UK Residential expected credit loss (ECL) provisioning;
n
Hedge accounting;
n
Fair value of collateral loan; and
n
Fair value of complex derivative instruments.
Within this report, key audit matters are identified as follows:
Similar level of risk
Materiality The materiality that we used for the Group financial statements was £7.5 million which was determined on
the basis of 0.5% of net assets.
Scoping All material entities in the Group are within our audit scope and audited to a lower materiality for the
purpose of individual entity reporting. Audit work to respond to the risks of material misstatement was
performed directly by the Group audit engagement team.
Significant changes
in our approach
Our risk assessment process has resulted in the key audit matters reported upon remaining broadly
consistent with the previous year.
4. Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in
the preparation of the financial statements is appropriate.
Our evaluation of the directors’ assessment of the Group’s and Society’s ability to continue to adopt the going concern
basis of accounting included:
n
obtaining an understanding of relevant controls around management’s going concern assessment;
n
assessing the Group’s and Society’s compliance with regulation including capital and liquidity requirements;
n
involving prudential risk specialists in assessing the information supporting the liquidity and capital forecasts, including
the stress testing and reverse stress testing performed by management;
n
assessing the assumptions used in the forecasts prepared by management; and
n
assessing historical accuracy of forecasts prepared by management.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions
that, individually or collectively, may cast significant doubt on the Group’s and Society’s ability to continue as a going
concern for a period of at least twelve months from when the financial statements are authorised for issue.
In relation to the reporting on how the Group has applied the UK Corporate Governance Code, we have nothing material
to add or draw attention to in relation to the directors’ statement in the financial statements about whether the directors
considered it appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant
sections of this report.
5. Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the
financial statements of the current period and include the most significant assessed risks of material misstatement
(whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall
audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
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Independent Auditor’s Report continued
Year ended 31 December 2021
5.1. IFRS 9 Financial Instruments – UK Residential Expected Credit Loss (ECL) provisioning
Key audit matter
description
Under IFRS 9, provision is required for the expected credit loss (ECL) on loans measured at amortised
cost. Estimating these expected losses requires the use of complex models and application of judgement
and estimation relating to assumptions about customer default rates, likelihood of repossession,
future property values, forced sale discounts and indicators of significant increases in credit risk. These
assumptions are informed using historical behaviour and experience through different economic cycles as
well as credit bureau data.
During the financial year management made a number of updates to the accounting models.
The Group held £37.3 million (2020: £42.8 million) of impairment provisions at year end in accordance with
IFRS 9, against total retail mortgages and loan commitments of £19,668.7 million (2020: £17,447.1 million).
The Group applies four macroeconomic scenarios when determining the ECL calculation: a central outlook,
a downside and an alternative downside scenario and a growth scenario. The selection and probability
weighting of relevant macroeconomic scenarios is judgemental and has a significant impact on the ECL
calculation. In the current year, additional post model adjustments of £9.4 million (2020: £9.5 million) were
put in place by management.
Our key audit matters in relation to ECL provisioning have been identified as:
n
the selection and probability weighting of relevant macroeconomic scenarios and assumptions. There
exists a risk of management bias in selecting the weightings and assumptions applied in the ECL model
and also a potential lack of consistency in approach when determining the weightings period on period.
As the downside scenarios are the most sensitive within the model and have the largest impact on the
overall ECL, there is a risk of management bias in selecting the probability weightings of macroeconomic
assumptions and the level of consistency in approach when determining the probability weightings for
each scenario period on period; and
n
the completeness and accuracy of post model adjustments to address risks that may not be reflected
in the ECL models. Management has recognised post model adjustments that increase the provision in
order to mitigate the model uncertainty risk, in particular those arising from downside inflation risk and
cladding issues associated with flats and apartments.
The Group’s loan loss provision balances are detailed within note 8. Management’s associated accounting
policies are detailed on pages 179 to 180 with detail about judgements in applying accounting policies and
critical accounting estimates on pages 183 to 189. Management’s consideration of the effect of the future
economic environment is disclosed on pages 184 to 188. The Audit Committee’s consideration of the
matter is described on pages 129 to 130.
How the scope of our
audit responded to
the key audit matter
We have tested the relevant controls over the loan loss provisioning process. This included assessment of
the level of challenge at key management review forums that formed part of these controls.
With the involvement of our credit risk and accounting specialists, we assessed the compliance of the
modelling approach and methodology with the requirements of IFRS 9 – Financial instruments, including
updates to the models that were made during the year. With the involvement of our IT and credit risk
specialists we assessed whether the documented modelled approach was implemented in practice and
whether the approach generated an IFRS 9 compliant output.
We challenged management’s consideration of the future economic environment by engaging our
economic specialists to review management’s approach as well as comparing modelled assumptions to
publicly available data from peer organisations, regulators and economic commentators.
We involved credit risk specialists to evaluate the completeness and accuracy of post model adjustments
made by management to address risks that may not be reflected in the ECL models.
We reconciled each book to the general ledger and substantively tested a sample of loans to assess
whether the data used in the provision calculation was complete and accurate. We reconciled our
substantive testing through to the financial statements disclosures to ensure accuracy.
We have validated that the forecasts collated from third party data sources have been taken directly and
validated that the underlying data feeding into management’s calculations for post model adjustments is
without management bias.
Key observations Based on the work performed, we concluded that the Group’s ECL applied to the UK residential mortgage
book was within a reasonable range.
5.2. Hedge Accounting
Key audit matter
description
The Group has designated a number of fair value macro hedges in order to minimise fair value volatility
through the income statement. Over the life of the hedge, hedged items (mortgages and savings accounts)
and instruments (derivatives) incept and de-designate from the hedge relationship.
Management has taken the IFRS 9 accounting policy choice to continue to apply IAS 39 accounting with
respect to all designated hedge relationships. Management’s chosen accounting policies are detailed on
page 179. The Audit Committee’s consideration of this risk is included on page 131.
In line with the requirements of IAS 39 management carries out prospective and retrospective
effectiveness testing on a monthly basis.
We have identified a key audit matter around the completeness of the identification of items which are
designated and de-designated from the hedge relationship, as well as the accuracy of the amortisation
adjustments posted against these items.
How the scope of our
audit responded to
the key audit matter
We have tested the relevant controls over the hedge accounting process, including the Group’s controls
over the identification and recording of the designation and de-designation adjustments.
We obtained management’s master document where the designation and de-designation adjustments
are calculated on a monthly basis and reviewed management’s methodology for assessing items that have
de-designated from the hedge relationship. We then tested the accuracy of the amortisation adjustments
posted by management through a full recalculation of the expected remaining amortisation as at 31
December 2021.
We tested the valuation of the items which had been designated or de-designated from the macro hedge
in the year through independent recalculation of the fair value of a sample of items as at their designation/
de-designation date.
We assessed management’s prospective and retrospective effectiveness testing.
We tested the completeness of the population of items within the master document through
reperformance of management’s monthly designation and de-designation process.
Key observations Based on the work performed, we concluded that the overall treatment in relation to the macro hedge
relationships adopted, and subsequent amortisation of de-designated items, was appropriate.
5.3. Fair value of collateral loan
Key audit matter
description
The Group holds a collateral loan to a third party secured on a portfolio of equity release mortgages.
The collateral loan represents a complex financial instrument held at fair value and is classified within level
3 in the fair value hierarchy (see page 236 for a definition of level 3 measurements). The collateral loan had a
carrying value at 31 December 2021 of £215.5 million (2020: £222.0 million). The fair value of the collateral
loan is determined using a discounted cash flow model, and is reliant upon a number of unobservable and
judgemental inputs.
Our key audit matter relates to the risk of management bias in selecting the discount rate used within
the fair value model and the impact the selection of discount rate has on the modelling of the no negative
equity guarantee. This includes consideration of repayment profiles and the credit risk associated with the
assets.
The Group’s disclosure of the collateral loan is detailed within note 13 and note 32. Management’s
associated accounting policies are detailed on page 178 with detail about judgements in applying
accounting policies and critical accounting estimates on page 189. The Audit Committee’s consideration of
the matter is described on page 130.
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Year ended 31 December 2021
Independent Auditor’s Report continued
How the scope of our
audit responded to
the key audit matter
We obtained an understanding of the relevant controls over the fair valuation of the collateral loan process.
We challenged management’s valuation methodology for the equity release mortgage portfolio with
assistance from our valuation specialists in the review of management’s valuation approach.
We performed testing over the accuracy of the valuation model by involving our modelling specialists in the
review of the model mechanics, which included an assessment of whether the model had been prepared in
accordance with the loan contractual terms with the third party.
We performed an independent assessment of the rate used to discount the future cash flows to present
value, including alternative approaches to calculating the discount rate. We utilised both internal and
external data and taking account of the repayment profiles and credit risks associated with the assets,
assessed the impact on the valuation from a reasonable range of outcomes.
We performed testing over the appropriateness of the other elements inherent in the valuation of the
underlying loan assets, such as no negative equity guarantees provided by the Group to the originator of
the underlying loans and evaluated the appropriateness of the assumptions in light of the current economic
environment.
Key observations Based on the work performed, we concluded that the Group’s valuation of the collateral loan was within a
reasonable range.
5.4. Fair value of complex derivative instruments
Key audit matter
description
In addition to the collateral loan detailed in the key audit matter above, there are a number of other complex
financial instruments held at fair value by the Group which are classified as level 3 within the fair value
hierarchy due to unobservable prepayment assumptions used within the calculation methodology.
These financial instrument liabilities have a net carrying value of £77.6 million (2020: £64.2 million) and
comprise the following:
n
the Retail Prices Index (RPI) linked derivative hedging the equity release portfolio; and
n
the intragroup derivative hedging the Residential Mortgage-Backed Securities (RMBS) securitisation
vehicle.
The following are the unobservable inputs:
n
the RPI assumptions applied to the RPI linked derivative; and
n
the prepayment rate of mortgages within the RMBS securitisation vehicle.
During the financial year, management changed its valuation methodology for the RPI swap and now
employs an internal model rather than an external counterparty valuation. The internal methodology
enables greater consistency of mortality and prepayment assumptions between the swap valuation and
the valuation of the collateral loan. The impact of this change is disclosed on page 190.
Management’s chosen accounting policies are detailed on page 179 with details about valuation techniques
and key inputs on page 239. The Audit Committee’s consideration of this risk is included on page 130.
How the scope of our
audit responded to
the key audit matter
We obtained an understanding of the relevant controls over the fair valuation of complex derivative
instruments process.
We performed testing over the complex derivatives outlined above, with the involvement of our pricing
specialists, we valued these instruments using independently developed models. We independently
sourced data for the RPI and other inputs used in our model.
We tested the appropriateness of the prepayment rate used in the valuation of the RMBS derivative by
considering historical actual prepayment rates.
Key observations Based on the work performed, we concluded that the Group’s valuation of complex derivative instruments
was within a reasonable range.
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the
economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in
planning the scope of our audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements Society financial statements
Materiality £7.5 million (2020: £6.5 million) £7.2 million (2020: £6.1 million)
Basis for determining
materiality
0.5% of net assets (2020: 0.5% of net assets) 0.5% of net assets capped at 95% of Group
materiality (2020: 0.5% of net assets capped at
95% of Group materiality)
Rationale for the
benchmark applied
The overall capital base is a key focus area for the Society’s members and regulators. Net assets are also
a more stable metric in comparisons to profit before tax. Therefore, net assets have been considered the
most appropriate base on which to determine materiality.
6.2. Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected
and undetected misstatements exceed the materiality for the financial statements as a whole.
Group financial statements Society financial statements
Performance
materiality
62% (2020: 70%) of Group materiality 62% (2020: 70%) of Society materiality
Basis and rationale
for determining
performance
materiality
In determining performance materiality, we considered the following factors:
a. the quality of the control environment and that we consider it appropriate to rely on controls over a
number of business processes;
and
b. the reduction in performance materiality is based on past experience of the number of corrected and
uncorrected errors.
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £0.38
million (2020: £0.3 million), as well as differences below that threshold that, in our view, warranted reporting on qualitative
grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall
presentation of the financial statements.
7. An overview of the scope of our audit
7.1. Identification and scoping of components
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide
controls and assessing the risks of material misstatement at the Group level. Based on that assessment, we performed an
audit of the Society and material subsidiaries. This provided 100% coverage of revenue, profit before tax and net assets of
the Group, executed at levels of materiality applicable to each individual entity which were lower than Group materiality and
in the range of £3.6 million to £7.2 million (2020: £3.1 million to £6.1 million).
We, as the Group auditor, were responsible for performing the audit of each subsidiary. At the Group level we also tested
the consolidation process.
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Year ended 31 December 2021
Independent Auditor’s Report continued
7.2. Our consideration of the control environment
Our approach in relation to the Group’s business cycles
We relied on controls over the following business cycles for the Group:
n
Residential mortgage lending
n
Customer deposits
n
Valuation of vanilla derivatives
We obtained an understanding of the relevant business cycles within the Group. We tested the relevant controls by
selecting a representative sample based on the frequency of the operation of the control and assessing the effectiveness
against supporting evidence.
Our approach in relation to the Group’s IT systems
We relied on controls over the following IT systems as being key to the financial reporting processes in the Group:
n
Core mortgage system
n
Core savings system
n
Treasury system
n
Data reporting tool
n
Underlying servers and databases for the above systems where applicable
n
Review of third party assurance report for key IT outsourced vendor
We obtained an understanding of the relevant IT controls associated with the above mentioned systems. We tested the
relevant IT controls by selecting a representative sample based on the frequency of the operation of the control and
assessing the effectiveness against supporting evidence. We tested key automated controls as identified during our
walkthroughs of the business cycles described in the preceding section.
8. Other information
The other information comprises the information included in the annual report, other than the financial statements and
our auditor’s report thereon. The directors are responsible for the other information contained within the annual report.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly
stated in our report, we do not express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be
materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this
gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we
conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
9. Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors
determine is necessary to enable the preparation of financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group’s and the Society’s ability to
continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the Group or the Society or to cease operations or have no
realistic alternative but to do so.
10. Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will
always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users
taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
11. Extent to which the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line
with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The
extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.
11.1. Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance
with laws and regulations, we considered the following:
n
The nature of the industry and sector, control environment and business performance including the design of the
Group’s remuneration policies, key drivers for directors’ remuneration, bonus levels and performance targets.
n
The results of our enquiries of management, Internal Audit and the Audit Committee about their own identification and
assessment of the risks of irregularities.
n
Any matters we identified having obtained and reviewed the Group’s documentation of their policies and procedures
relating to:
– identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-
compliance;
– detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged
fraud; and
– the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations.
n
The matters discussed among the audit engagement team and involving relevant internal specialists, including tax,
financial instruments, pensions, IT, economic, credit risk, pricing, and industry specialists regarding how and where fraud
might occur in the financial statements and any potential indicators of fraud.
As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation
for fraud and identified the greatest potential for fraud in the following areas: IFRS 9 Financial instruments – UK residential
expected credit loss provisioning and the fair value of collateral loan. In common with all audits under ISAs (UK), we are also
required to perform specific procedures to respond to the risk of management override.
We also obtained an understanding of the legal and regulatory frameworks that the Society operates in, focusing on
provisions of those laws and regulations that had a direct effect on the determination of material amounts and disclosures
in the financial statements. The key laws and regulations we considered in this context included the Building Societies Act
1986 for the Society and the UK Companies Act for the subsidiaries.
In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial
statements but compliance with which may be fundamental to the Society’s ability to operate or to avoid a material penalty.
These included the regulations set by the Prudential Regulation Authority relating to regulatory capital and liquidity
requirements.
11.2. Audit response to risks identified
As a result of performing the above, we identified IFRS 9 Financial instruments – UK residential expected credit loss
provisioning, fair value of collateral loan and fair value of complex derivative instruments as key audit matters related to the
potential risk of fraud. The key audit matters section of our report explains the matters in more detail and also describes
the specific procedures we performed in response to those key audit matters.
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Year ended 31 December 2021
Independent Auditor’s Report continued
In addition to the above, our procedures to respond to risks identified included the following:
n
reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with
provisions of relevant laws and regulations described as having a direct effect on the financial statements;
n
enquiring of management, the Audit Committee and external legal counsel concerning actual and potential litigation and
claims;
n
performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material
misstatement due to fraud;
n
reading minutes of meetings of those charged with governance, reviewing Internal Audit reports and reviewing
correspondence with the Prudential Regulation Authority and the Financial Conduct Authority; and
n
in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries
and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of
a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the
normal course of business.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members
including internal specialists, and remained alert to any indications of fraud or non-compliance with laws and regulations
throughout the audit.
Report on other legal and regulatory requirements
12. Opinions on other matters prescribed by the Building Societies Act 1986
In our opinion, based on the work undertaken in the course of the audit:
n
the Annual Business Statement and the Directors’ Report have been prepared in accordance with the requirements
of the Building Societies Act 1986;
n
the information given in the Directors’ Report for the financial year for which the financial statements are prepared is
consistent with the financial statements; and
n
the information given in the Annual Business Statement (other than the information upon which we are not required
to report) gives a true representation of the matters in respect of which it is given.
In the light of the knowledge and understanding of the Group and the Society and their environment obtained in the
course of the audit, we have not identified any material misstatements in the Directors’ Report.
13. Opinion on other matter prescribed by the Capital Requirements (Country by Country
Reporting) Regulations 2013
In our opinion the information given on page 243 of the financial statements for the financial year ended 31 December
2021 has been properly prepared, in all material respects, in accordance with the Capital Requirements (Country by
Country Reporting) Regulations 2013.
14. Corporate Governance Statement
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the
Corporate Governance Statement is materially consistent with the financial statements and our knowledge obtained
during the audit:
n
the directors’ statement with regards the appropriateness of adopting the going concern basis of accounting and
any material uncertainties identified on page 161;
n
the directors’ explanation as to its assessment of the Group’s prospects, the period this assessment covers and why
the period is appropriate on pages 75 to 76;
n
the directors’ statement on fair, balanced and understandable set out on page 160;
n
the board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on
pages 64 to 74;
n
the section of the annual report that describes the review of effectiveness of risk management and internal control
systems set out on pages 132 to 133; and
n
the section describing the work of the Audit Committee set out on pages 126 to 135.
15. Matters on which we are required to report by exception
15.1. Adequacy of explanations received and accounting records
Under the Building Societies Act 1986 we are required to report to you if, in our opinion:
n
adequate accounting records have not been kept by the Society; or
n
the Society’s financial statements are not in agreement with the accounting records and returns; or
n
we have not received all the information and explanations and access to documents we require for our audit.
We have nothing to report in respect of these matters.
16. Other matters which we are required to address
16.1. Auditor tenure
Following the recommendation of the Audit Committee, we were appointed by the Society’s members at the Annual
General Meeting on 15 June 2005 to audit the financial statements for the year ending 31 December 2005 and subsequent
financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the
firm is 17 years, covering the years ended 31 December 2005 to 31 December 2021.
16.2. Consistency of the audit report with the additional report to the Audit Committee
Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance
with ISAs (UK).
17. Use of our report
This report is made solely to the Society’s members, as a body, in accordance with section 78 of the Building Societies Act
1986. Our audit work has been undertaken so that we might state to the Society’s members those matters we are required
to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Society and the Society’s members as a body, for our audit work, for this
report or for the opinions we have formed.
As required by the Financial Conduct Authority (FCA) Disclosure Guidance and Transparency Rule (DTR) 4.1.14R, these
financial statements form part of the European Single Electronic Format (ESEF) prepared Annual Financial Report filed on
the National Storage Mechanism of the UK FCA in accordance with the ESEF Regulatory Technical Standard (ESEF RTS).
This auditor’s report provides no assurance over whether the annual financial report has been prepared using the single
electronic format specified in the ESEF RTS.
Peter Birch FCA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Leeds, United Kingdom
24 February 2022
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173
Income Statements Statements of Comprehensive Income
For the year ended 31 December 2021 For the year ended 31 December 2021
Notes
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
Profit for the financial year 120.2 62.0 117.2 62.4
Items that may subsequently be reclassified to profit and loss:
Fair value (losses) / gains on investment securities measured at fair value
through other comprehensive income (4.6 ) 11.1 (4.6) 11.1
Gains on investment securities measured through other comprehensive
income reclassified to profit or loss on disposal (1.9 ) (2.5 ) (1.9) (2.5)
Tax relating to items that may subsequently be reclassified 1.3 (1.6 ) 1.3 (1.6)
Effect of change in corporation tax rate 0.5 (0.7 ) 0.5 (0.7)
Items that may not subsequently be reclassified to profit and loss:
Actuarial gain / (loss) on retirement benefit surplus 25 7.1 (1.9 ) 7.1 (1.9)
Revaluation (loss) / gain on properties 17 (1.0 ) 2.7 (1.0) 2.7
Tax relating to items that may not be reclassified (1.0 ) (0.5 ) (1.0) (0.3)
Effect of change in corporation tax rate (0.7 )
(0.7)
–
Total comprehensive income for the year 119.9 68.6 116.9 69.2
Notes
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
Interest receivable and similar income 3 424.7 402.6 423.2 401.3
Interest payable and similar charges 4 (142.5 ) (197.2 ) (141.4) (196.3)
Net interest receivable 282.2 205.4 281.8 205.0
Fees and commissions receivable 6.8 5.6 6.8 5.6
Fees and commissions payable (0.4 ) (0.6 ) (0.1) (0.4)
Fair value losses from financial instruments 5 (0.5 ) (16.8 ) (4.6) (13.7)
Other operating (expense) / income (1.1 ) 3.2 0.1 2.4
Total income 287.0 196.8 284.0 198.9
Administrative expenses 6 (116.9 ) (92.9 ) (116.9) (92.9)
Depreciation and amortisation 16, 17 (9.1 ) (7.5 ) (9.1) (7.5)
Impairment credit / (charge) on loans and advances to customers 8 4.1 (14.6 ) 4.1 (14.6)
Provisions charge 22 (1.4 ) (1.1 ) (1.4) (1.1)
Operating profit and profit before tax 163.7 80.7 160.7 82.8
Tax expense 9 (43.5 ) (18.7 ) (43.5) (20.4)
Profit for the financial year 120.2 62.0 117.2 62.4
All amounts relate to continuing operations.
The notes on pages 177 to 240 form part of these accounts.
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
175
Statements of Financial Position Statements of Changes in
Members’ Interest
As at 31 December 2021 For the year ended 31 December 2021
Group 2021
General
reserve
£M
Fair value
reserve
£M
Revaluation
reserve
£M
Other
reserve
£M
Total equity
attributable
to members
£M
At 1 January 2021 1,125.1 5.4 9.9 14.3 1,154.7
Comprehensive income for the year 126.0 (4.7 ) (1.4 ) – 119.9
Revaluation gains transferred on disposal of assets 0.2 – (0.2 ) –
At 31 December 2021 1,251.3 0.7 8.3 14.3 1,274.6
Group 2020
General
reserve
£M
Fair value
reserve
£M
Revaluation
reserve
£M
Other
reserve
£M
Total equity
attributable
to members
£M
At 1 January 2020 1,064.6 (0.9 ) 8.1 14.3 1,086.1
Comprehensive income for the year 60.5 6.3 1.8
At 31 December 2020 1,125.1 5.4 9.9 14.3 1,154.7
Society 2021
General
reserve
£M
Fair value
reserve
£M
Revaluation
reserve
£M
Other
reserve
£M
Total equity
attributable
to members
£M
At 1 January 2021 1,133.5 5.4 9.9 14.3 1,163.1
Comprehensive income for the year 123.0 (4.7) (1.4) – 116.9
Revaluation gains transferred on disposal of assets 0.2 – (0.2) – –
At 31 December 2021 1,256.7 0.7 8.3 14.3 1,280.0
Society 2020
General
reserve
£M
Fair value
reserve
£M
Revaluation
reserve
£M
Other
reserve
£M
Total equity
attributable
to members
£M
At 1 January 2020 1,072.6 (0.9) 8.1 14.1 1,093.9
Comprehensive income for the year 60.9 6.3 1.8 0.2 69.2
At 31 December 2020 1,133.5 5.4 9.9 14.3 1,163.1
Notes
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
Assets
Liquid assets
Cash in hand and balances with the Bank of England 11, 29 2,538.7 1,823.2 2,538.7 1,823.2
Loans and advances to credit institutions 29 159.0 201.9 96.5 86.2
Investment securities 12 949.1 949.7 1,040.4 1,071.0
Derivative financial instruments 36 219.3 192.8 210.4 179.3
Loans and advances to customers 13
Loans fully secured on residential property 18,303.0 16,752.5 18,303.0 16,752.5
Other loans 224.2 236.4 224.2 236.4
Fair value adjustment for hedged risk on loans and advances to customers (169.1 ) 96.1 (169.1) 96.1
Other assets, prepayments and accrued income 14 166.5 270.4 205.2 361.4
Current tax assets 2.8
2.8
–
Deferred tax assets 26 4.5 5.6 4.5 5.6
Investments in subsidiary undertakings 15 –
1.9 1.9
Intangible assets 16 25.0 28.8 25.0 28.8
Property, plant and equipment 17 82.4 81.3 82.4 81.3
Retirement benefit surplus 25 8.3 1.0 8.3 1.0
Total assets 22,513.7 20,639.7 22,574.2 20,724.7
Liabilities
Shares 18 15,258.0 14,162.7 15,258.0 14,162.7
Fair value adjustment for hedged risk on shares (72.9 ) (13.5 ) (72.9) (13.5)
Derivative financial instruments 36 166.8 237.9 141.2 235.4
Amounts owed to credit institutions 2,258.9 1,497.3 2,258.9 1,497.3
Amounts owed to other customers 19 297.5 256.7 540.9 580.5
Debt securities in issue 20 2,554.6 2,900.7 2,395.2 2,685.8
Other liabilities and accruals 21 201.4 192.9 197.7 162.7
Current tax liabilities – 2.3 – 2.3
Deferred tax liabilities 26 6.2 4.7 6.6 5.1
Provisions for liabilities and charges 22 1.9 1.8 1.9 1.8
Subordinated liabilities 23 339.4 – 339.4
–
Subscribed capital 24 227.3 241.5 227.3 241.5
Total liabilities 21,239.1 19,485.0 21,294.2 19,561.6
Total equity attributable to members 1,274.6 1,154.7 1,280.0 1,163.1
Total liabilities and equity 22,513.7 20,639.7 22,574.2 20,724.7
The accounts on pages 172 to 240 were approved by the Board of Directors on 24 February 2022.
Signed on behalf of the Board of Directors by:
Iain Cornish Richard Fearon Andrew Conroy
Chair Chief Executive Officer Chief Financial Officer
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
177
Statements of Cash Flows Notes to the Accounts
For the year ended 31 December 2021 Year ended 31 December 2021
Notes
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
Profit before tax 163.7 80.7 160.7 82.8
Adjusted for:
Impairment release / (charge) (3.8 ) 14.0 (3.8) 14.0
Provisions charge 1.4 0.6 1.4 0.6
Depreciation and amortisation 9.1 7.5 9.1 7.5
Fair value of collateral loan which represents a pool of equity release
mortgages (0.6 ) (6.2 ) (0.6) (6.2)
Non-cash and other items (30.3 ) 3.5 (30.1) (7.9)
Cash generated from operations 139.5 100.1 136.7 90.8
Changes in operating assets and liabilities:
Derivative financial instruments 68.5 20.1 46.4 13.5
Loans and advances to customers (1,533.9 ) (21.9 ) (1,533.9) (21.9)
Other operating assets 102.8 (61.2 ) 154.7 (85.4)
Shares 1,095.3 (354.8 ) 1,095.3 (354.8)
Amounts owed to credit institutions and other customers 802.4 79.8 722.0 (238.8)
Other operating liabilities 9.2 55.8 35.8 31.4
Taxation paid (45.9 ) (27.0 ) (45.9) (27.0)
Net cash flows from operating activities 637.9 (209.1 ) 611.1 (592.2)
Cash flows from investing activities
Purchase of investment securities (511.8 ) (796.3 ) (511.8) (796.3)
Proceeds from sale and redemption of investment securities 504.7 1,562.4 534.7 1,861.2
Purchase of intangible assets (1.7 ) (11.7 ) (1.7) (11.7)
Purchase of property, plant and equipment (5.5 ) (19.1 ) (5.5) (19.1)
Proceeds from sale of property, plant and equipment 0.2
0.2
–
Net cash flows from investing activities (14.1 ) 735.3 15.9 1,034.1
Cash flows from financing activities 28
Net proceeds from issue of debt securities 508.7 2,427.2 508.7 2,427.2
Repayments of debt securities in issue (804.8 ) (2,541.4 ) (754.8) (2,493.5)
Net proceeds from issue of subordinated liabilities 346.9
346.9
–
Principal lease payments (2.0 ) (2.0 ) (2.0) (2.0)
Net cash flows from financing activities 48.8 (116.2 ) 98.8 (68.3)
Net increase in cash and cash equivalents 672.6 410.0 725.8 373.6
Cash and cash equivalents at the beginning of the year 2,025.1 1,615.1 1,909.4 1,535.8
Cash and cash equivalents at the end of the year 29 2,697.7 2,025.1 2,635.2 1,909.4
1. Accounting policies
(a) Basis of preparation
The Group and Society financial statements are prepared in accordance with International Accounting Standards in conformity with
the requirements of the Building Societies Act 1986 and with those parts of the Building Societies (Accounts and Related Provisions)
Regulations 1998 (as amended) that are applicable. The Group and Society financial statements are also prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted by the United Kingdom.
The Group prepares its accounts under the historical cost convention, except for the valuation of financial assets and liabilities held
at fair value through other comprehensive income or fair value through profit or loss including all derivative financial instruments, and
certain freehold and long leasehold properties. As stated in the Directors’ Report, the directors consider that it is appropriate to continue
to adopt the going concern basis in preparing the financial statements.
The particular accounting policies adopted are described below and the policies, presentation and methods of computation are
consistent with those applied by the Group in the prior year, except where otherwise indicated.
The Group has applied Interest Rate Benchmark Reform – Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16) with effect
from 1 January 2021. These amendments introduced a practical expedient in relation to modifications of financial instruments required
as a result of interest rate benchmark reform and ensure that hedge accounting is not discontinued solely as a result of the reform. The
Group has applied the amendments in accounting for one of its micro fair value hedges where the hedging instrument transitioned from
LIBOR to SONIA.
These financial statements are presented in sterling and, except where otherwise indicated, have been rounded to the nearest one
hundred thousand pounds.
(b) Future accounting developments
At the date of authorisation of these financial statements, the following standards and interpretations (which have not been applied in
these financial statements) were in issue but not yet effective:
n
IFRS 17 – Insurance Contracts
IFRS 17, which is effective from 1 January 2023, is not expected to have a material impact on the Group since the Group does not
issue insurance contracts. The Group holds a collateral loan which represents a pool of equity release mortgages purchased from a
third party and is currently accounted for under IFRS 9 – Financial Instruments. The ‘no negative equity’ feature of the equity release
mortgages could be considered to represent an insurance contract but the standard permits the continued application of IFRS 9 to
this loan following the adoption of IFRS 17.
(c) Basis of consolidation
Leeds Building Society does not have a parent or controlling entity. The Group accounts consolidate the accounts of Leeds Building
Society, its subsidiaries and those entities over which it is deemed to have control, as listed in note 15. Uniform accounting policies are
applied throughout the Group. Intragroup transactions are eliminated upon consolidation.
(d) Financial instruments
(i) Classification and measurement
Financial assets
In accordance with IFRS 9, the Group has classified its financial assets with reference to both the Group’s business model for managing
the assets and the contractual cash flow characteristics of the assets. The Group’s financial assets have been classified into the following
categories:
n
At amortised cost
These are assets for which the business model is to hold the asset and collect the contractual cash flows, and those cash flows are
solely payments of principal and interest. This means that cash flows typically occur on pre-determined dates and that interest
primarily reflects the time value of money, compensation for credit risk and a profit margin.
The Group has classified the following assets as ‘at amortised cost’: cash in hand and balances with the Bank of England, loans and
advances to credit institutions and loans and advances to customers, with the exception of a collateral loan which represents a pool of
equity release mortgages purchased from a third party for which some but not all risks were transferred to the Group.
Assets held at amortised cost are initially recorded at fair value (usually transaction price) plus any directly attributable costs. They are
subsequently measured using the effective interest rate method less provisions for impairment.
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
179
Notes to the Accounts continued
Year ended 31 December 2021
1. Accounting policies (continued)
(d) Financial instruments (continued)
(i) Classification and measurement (continued)
n
At fair value through other comprehensive income (FVOCI)
These are categories of assets for which the business model is to hold the asset and collect the contractual cash flows or to sell the
assets. The contractual cash flows must be solely payments of principal and interest. The Group holds investment securities in order
to meet current and future liquidity requirements, and these are considered to meet the definition of the hold or sell business model.
They are therefore classified as ‘at FVOCI’, apart from those assets for which the cash flows are not solely payments of principal and
interest, as noted below.
These assets are initially recognised at fair value plus any attributable costs. Subsequent changes in fair value are recognised in equity,
except for impairment losses which are recognised in the Income Statement. Upon derecognition, any accumulated movements in
fair value previously recognised in equity are reclassified to profit or loss in the Income Statement.
Premia and discounts arising on the purchase of assets held at FVOCI are spread over the life of the asset using the effective interest
rate method.
n
Atfairvaluethroughprofitorloss(FVTPL)
Assets for which the business model is neither to hold nor to hold or sell, or those for which contractual cash flows are not solely
payments of principal and interest, are classified as ‘at FVTPL’. The Group has classified the collateral loan which represents a pool
of equity release mortgages as ‘at FVTPL’ since the underlying contract with the customer contains a ‘no negative equity guarantee’
that any shortfall arising on the sale of the property securing the mortgage will not be pursued.
Certain investment securities may also be classified as ‘at FVTPL’, either because interest can be foregone or because their credit
risk is higher than the average credit risk of the underlying collateral. At 31 December 2021 the Group did not have any investment
securities which met this classification (2020: none).
In addition, IFRS 9 has mandated that derivative financial instruments are classified as ‘at FVTPL’.
These assets are initially recognised at fair value and any subsequent changes in fair value are recognised immediately in the Income
Statement.
Financial liabilities
All financial liabilities are classified as ‘at amortised cost’, with the exception of derivative financial instruments which under IFRS 9 are
mandatorily classified as ‘at FVTPL’.
Financial liabilities are initially recorded at their fair value, and those to be measured at amortised cost are subsequently measured using
the effective interest rate method. The premia and discounts, together with commissions and other costs incurred in the raising of
wholesale funds and subordinated liabilities, are amortised over the period to maturity using the effective interest rate method. Those
liabilities measured at FVTPL are initially recognised at fair value and any subsequent changes in fair value are recognised immediately in
the Income Statement.
(ii) Sale and repurchase agreements
Investments and other securities may be lent or sold subject to a commitment to repurchase them (a ‘repo’). Such securities are
retained on the Statement of Financial Position when substantially all of the risks and rewards of ownership remain within the Group, and
the counterparty liability is included separately on the Statement of Financial Position as appropriate. Where applicable, the difference
between sale and repurchase price is accrued over the life of the agreement using the effective interest rate method.
(iii) Recognition and derecognition of financial assets and liabilities
Purchases and sales of financial assets are recognised at settlement date.
Financial assets are only derecognised when the contractual rights to receive cash flows from them have expired or when the Group has
transferred substantially all risks and rewards of ownership. Within the Society accounts, the Society has not derecognised the mortgage
loans which have been used to secure its issue of debt securities as substantially all the risks and rewards are retained by the Society and
the Society retains control of the assets. Financial liabilities are only derecognised when the obligation is discharged, cancelled or has
expired.
1. Accounting policies (continued)
(d) Financial instruments (continued)
(iv) Derivative financial instruments and hedge accounting
The Group continues to apply the IAS 39 hedge accounting standards, as permitted by IFRS 9.
Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into, and are subsequently
re-measured monthly at their fair value. The need for credit valuation adjustments is considered in the determination of the fair value
of derivatives. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative.
All derivatives are entered into by the Group for the purpose of providing an economic hedge; however certain criteria must be met
before the instruments can be allocated to accounting hedge relationships. The Group makes use of accounting fair value hedges
to reduce volatility in the Income Statement. If derivatives are not designated as accounting hedges then changes in fair values are
recognised immediately in the Income Statement.
A fair value hedge is used to hedge exposures to variability in the fair value of financial assets and liabilities, such as fixed rate mortgages
and savings products. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the
Income Statement together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
If the hedge no longer meets the criteria for hedge accounting, the relationship is de-designated and the adjustment to the carrying
amount of the hedged item is amortised to the Income Statement over the period to maturity. The Group has not had any cash flow
hedge relationships in place during the current or prior years or at the end of the current year.
For the purposes of the fair value liability hedge, the Group includes fixed rate Individual Savings Accounts in the population of products
eligible for inclusion in the hedge as permitted under the ’carve out’ applied when IAS 39 was adopted for use in the European Union and
subsequently transposed into IFRS as adopted by the United Kingdom.
(e) Impairment of financial assets
Impairment losses are calculated for all financial assets held at amortised cost or at FVOCI. Loss provisions are also held against undrawn
loan commitments, where a loan offer has been issued to a customer and remains unexpired but the loan has not yet completed and so
has not yet been recognised in the Statement of Financial Position.
Impairment loss provisions are calculated to cover future losses expected to emerge over a defined time period, dependent on the stage
allocation of the individual asset, as set out below. This approach to impairment losses is known as the expected credit loss (ECL) basis.
n
Stage 1 – assets are allocated to this stage on initial recognition and remain in this stage if there has not been a significant increase
in credit risk since initial recognition. Impairment losses are recognised to cover 12 month ECL, being the proportion of lifetime ECL
arising from default events expected within 12 months of the reporting date.
n
Stage 2 – assets where it is determined that there has been a significant increase in credit risk since initial recognition, but where
there is no objective evidence of impairment. Impairment losses are recognised to cover lifetime ECL.
n
Stage 3 – assets where there is objective evidence of impairment, i.e. they are considered to be in default or in the cure period
following default (see below for full definition of default). Impairment losses are recognised to cover lifetime ECL.
Assets continue to be recognised, net of impairment loss provisions, until there is no reasonable prospect of recovery, which is generally
at the point at which the property securing the loan is sold. If a loss is ultimately realised, it is written off against the provision previously
made. Any subsequent recoveries are recognised directly in the Income Statement as a credit to impairment, as they arise.
(i) Impairment of loans and advances to customers
The primary driver in determining whether an individual loan has had a significant increase in credit risk is a quantitative assessment of
the increase in lifetime probability of default (PD). At each reporting date, lifetime PD is recalculated and compared to the lifetime PD
calculated on initial recognition. The loan is allocated to Stage 2 if the lifetime PD has increased over a pre-determined threshold which
is set using a test-based approach and expressed as a percentage increase, segmented by product type and risk banding at the date of
initial recognition.
In addition to the above, qualitative criteria have been set such that loans which are considered to have a significantly increased credit
risk but would not be captured above are moved to Stage 2. These qualitative criteria include loans which have reached the end of their
contractual term and loans where the customer has been identified as bankrupt but is not in arrears. A backstop is also in place such that
all loans which are 30 days past due are moved to Stage 2.
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
181
Year ended 31 December 2021
1. Accounting policies (continued)
(e) Impairment of financial assets (continued)
(i) Impairment of loans and advances to customers (continued)
Definition of default: Individual loans are considered to be in default and are allocated to Stage 3 if the loan is more than 90 days past
due, is subject to certain forbearance activities, is in possession, meets ‘unlikely to pay’ criteria or if the customer has been identified as
bankrupt and is in arrears by more than a nominal amount. A cure period is in place such that the loan would move back to Stage 2 if the
loan exits default and remains not in default for more than 12 months or, for loans subject to forbearance, if 12 consecutive full payments
are made after the forbearance activity has completed. The Group has updated its definition of default during 2021 to align to the
regulatory definition under the Internal Ratings Based (IRB) approach for capital requirements. This has resulted in a change in the list of
events considered to be a default. The impact of this change is shown in note 8.
ECL is calculated by multiplying loss given default (LGD), probability of default (PD) and exposure at default (EAD). Each element of the
calculation is modelled at individual account level on a monthly basis over the remaining contractual term of the loan, with the first 12
months totalled to obtain the 12 month ECL and the lifetime ECL obtained by totalling the above over the full contractual life of the loan.
Modelling assumptions are based on historical data analysis of the impact of economic variables on loan behaviour. These assumptions
are then applied to the forecast economic scenarios to predict future loan behaviour.
The overall ECL recorded in the financial statements is calculated as the probability weighted ECL over a range of possible forecasted
macroeconomic scenarios.
The Group utilises a wide range of forbearance strategies to support customers in financial difficulty, working with customers on a
case by case basis to determine the most suitable approach. The implementation of a forbearance strategy does not give rise to the
derecognition of the loan.
(ii) Impairment of liquid assets
The Group reviews the external credit ratings of its liquid assets (cash in hand and balances with the Bank of England, loans and advances
to credit institutions and investment securities) at each reporting date. Those assets which are of investment grade (external credit
rating of Aaa to Baa3 or equivalent) are considered to have low credit risk and therefore are assumed to have not had a significant
increase in credit risk since initial recognition, as allowed by IFRS 9. Liquid assets which are not of investment grade are not expected to
be material, but would be assessed on an individual basis.
ECL is calculated by multiplying loss given default (LGD), probability of default (PD) and exposure at default (EAD). LGD is calculated
based on publicly available data on historic recovery rates by product and PDs are similarly based on public information and analysis
performed by third parties to derive PDs for similar products.
(f) Interest receivable and payable and similar income and charges
Interest income and expense on all financial instruments are recognised in interest receivable or payable in the Income Statement.
Interest income and expense are calculated using the effective interest rate method for financial assets and liabilities held at amortised
cost and at FVOCI.
The effective interest rate method is a method of allocating the interest income or interest expense to the carrying value over the
relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts, over the
expected life of the financial instrument, to the net carrying amount of the instrument.
Specifically, for mortgage assets, the effect of this policy is to spread the impact of discounts, cashbacks, arrangement and valuation
fees, early redemption charges and costs directly attributable and incremental to setting up the loan over the expected life of the
mortgage. Expected lives are reassessed at each Statement of Financial Position date and any changes are reflected in the effective
interest rate calculation, resulting in an immediate gain or loss in the Income Statement. For investment securities, the effective interest
rate method spreads any premia or discounts arising on the purchase of the asset over the period to the maturity date of the asset.
Interest received on the collateral loan and investment securities classified as ‘at FVTPL’ is recognised within ‘Interest receivable and
similar income’. Amounts accrued and settled in relation to coupon payments and receipts which are contractually due on derivative
financial instruments are recognised within ‘Interest receivable and similar income’ for all derivatives which are economic hedges of
financial assets, regardless of whether or not they are in an accounting hedge relationship, and within ‘Interest payable and similar
charges’ for all derivatives which are economic hedges of financial liabilities. All other movements in the fair value of assets held ‘at
FVTPL’ are recognised through ‘Fair value gains less losses from financial instruments’.
1. Accounting policies (continued)
(g) Fees and commissions receivable
Fees and commissions are earned on referral of customers to third party service providers. The Group’s performance obligation is
satisfied at the point of referral and income is recognised at this point. Commission received by the Group from third parties may be
required to be repaid at a later date if certain policies are cancelled. A provision is included in the accounts to cover the estimate of the
amount of clawbacks that will become payable in the future, based on products that have been sold and commissions received prior to
the year end.
(h) Intangible assets
An intangible asset is an identifiable non-monetary asset without physical substance. An intangible asset is recognised to the extent it
is probable that expected future economic benefits will flow from it and the costs can be measured reliably. Intangible assets primarily
arise from IT development activity and the cost of the asset includes both external costs, such as software licences and IT development
services, and the costs of Group colleagues directly involved in the development of the asset. Amortisation of such assets is charged to
the Income Statement on a straight line basis over the useful life of the asset once it is brought into use, as follows:
New core systems – 10 years
System enhancements or non-core additions – 5 years
Intangible assets are reviewed for impairment at each Statement of Financial Position date or when there is an indication of impairment.
Impairment occurs when the economic benefits arising from the asset are lower than its carrying amount. If such an indication exists,
the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. The recoverable amount is the
higher of fair value less costs of disposal and value in use, calculated on the discounted cash flow method. Any impairment in the value of
these assets is recognised immediately as an expense in the Income Statement.
(i) Property, plant and equipment
Freehold and long leasehold properties are revalued every three years by an independent firm of valuers. The fair value of the properties
is determined from market based evidence reflecting the property’s highest and best use. Any increase in value is recognised through
other comprehensive income in the revaluation reserve, unless the increase represents the reversal of a previous impairment, in which
case it is recognised through the Income Statement. Any reduction in value is recognised through other comprehensive income as the
reversal of previous revaluation gains or as an impairment through the Income Statement if no such gains exist.
No provision is made for depreciation of freehold and long leasehold properties as in the opinion of the Board, their residual value will not
be materially different to book value.
All other items of property, plant and equipment are initially recognised at cost and then depreciated. Depreciation is calculated on a
straight line basis, to write down the cost of such assets to their residual values over their estimated useful lives as follows:
Short leasehold properties Unexpired lease term
Improvements to properties 8 to 10 years
Office and computer equipment 3 to 5 years
Property, plant and equipment are reviewed annually for indications of impairment. Impairment losses are recognised immediately as an
expense in the Income Statement.
(j) Leases
The Group classifies all contracts which give the right to control the use of an identified asset for a period of time in exchange for a
consideration as leases. If the supplier of the asset has a substitution right then this is not classified as an asset and the contract is not
classified as a lease.
(i) Lessee
At the commencement of a lease, the Group recognises a right-of-use asset within ‘Property, plant and equipment’ and a lease liability
within ‘Other liabilities and accruals’ in the Statement of Financial Position. The lease liability is initially measured at the present value
of all contractual payments that are unpaid at the commencement date, discounted using the Group’s cost of borrowing at the date
of inception of the lease. The calculation of the lease liability reflects the Group’s judgement as to whether it will exercise a purchase,
extension or termination option. For leases of land and buildings, the Group has elected not to separate non-lease components and to
account for the lease and non-lease components as a single lease component.
Interest is charged on the lease liability at the Group’s cost of wholesale borrowing at the date of inception of the lease and recorded in
‘Interest payable and similar charges’ within the Income Statement.
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
183
Year ended 31 December 2021
1. Accounting policies (continued)
(j) Leases (continued)
(i) Lessee (continued)
The lease liability is re-measured when there is a change in future lease payments arising from a change in an index or rate, if there is
a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee, or if the Group changes its
assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is re-measured in this way,
a corresponding adjustment is made to the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use
asset has been reduced to zero.
The right-of-use asset is initially measured at an amount equal to the lease liability. It is subsequently depreciated using the straight line
method from the commencement date to the end of the lease term (or the end of the estimated useful life for the equivalent item of
property, plant and equipment if shorter). Right-of-use assets are reviewed annually for indications of impairment. Impairment losses
are recognised immediately as an expense in the Income Statement.
No right-of-use asset or lease liability is recognised for leases with a lease term of less than 12 months and leases of low value items.
Lease payments associated with these leases are recognised within administrative expenses on a straight line basis over the lease term.
(ii) Lessor
All of the Group’s leases where the Group acts as a lessor are classified as operating leases. The Group recognises lease payments
received under operating leases in line with receipt of payments.
(k) Retirement benefits
Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. For defined benefit retirement
benefit schemes, the cost of providing benefits is determined using the projected unit method, with valuations updated at each year
end. Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside the Income Statement
and presented in the Statement of Comprehensive Income.
The retirement benefit surplus or obligation recognised in the Statement of Financial Position represents the fair value of scheme assets
less the present value of the defined benefit obligation. Where the fair value of the assets exceeds the present value of the obligation,
the surplus that may be recorded on the Statement of Financial Position is capped at the asset ceiling. This is the total of the future
economic benefits that will flow to the Group as a result of the surplus.
(l) Tax
Tax on the profits for the period comprises current tax and deferred tax. Tax is recognised in the Income Statement except to the extent
that it relates to items recognised directly in reserves, in which case it is recognised in reserves. Current tax is the expected tax payable
on the taxable income for the year, using tax rates applicable at the Statement of Financial Position date and any adjustment to tax
payable in respect of previous years.
Deferred tax is recognised where there is a temporary difference between the carrying amount of assets and liabilities in the Statement
of Financial Position and the amounts used for the calculation of corporation tax payments. Deferred tax liabilities are generally
recognised for all taxable temporary differences apart from those arising on investments in subsidiaries where the Group is able to
control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable
future. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available, against which deductible
temporary differences can be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realised or the
liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted by the Statement of Financial Position
date.
(m) Foreign currency
Assets and liabilities denominated in foreign currencies are translated into sterling at the appropriate rates of exchange prevailing at the
Statement of Financial Position date and exchange differences are included in the Income Statement. All foreign currency income and
expense is translated into sterling at the rate of exchange on the day of receipt or payment.
(n) Segmental reporting
The Group’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews the Group’s internal reporting
and is responsible for all significant decisions. The Group has determined that it has one reportable segment under IFRS 8 as the Chief
Executive Officer reviews performance and makes decisions on the Group as a whole. Therefore, no separate segmental reporting note
has been provided.
2. Critical accounting estimates and judgements
The preparation of these financial statements involves making judgements in the application of accounting policies which affect the
amounts recognised in the financial statements. In addition, the Group makes estimates and assumptions which could affect the
reported amounts of assets and liabilities in the next financial year and beyond.
The Group reviews all critical judgements and estimates on a regular basis, including approval by the Audit Committee as explained on
pages 128 to 132, to ensure that these remain appropriate. The critical judgements and estimates which have a significant impact on the
financial statements of the Group are described below.
(a) Critical judgements
(i) Classification of financial assets
Management judgement is applied in the classification of financial assets in determining the business model for managing the assets and
in determining whether the contractual cash flows are solely payments of principal and interest. In particular, for retail mortgages, it has
been determined that term extensions and forbearance activity are not contractual so do not impact on the assessment and such assets
remain held at amortised cost.
In the case of the collateral loan which represents a pool of equity release mortgages, the existence of the no negative equity guarantee,
which means that certain receipts would be foregone in the event of a shortfall on sale, is judged not to be consistent with payments
being solely principal and interest. Further, the no negative equity guarantee is not considered to represent a significant insurance risk
requiring accounting under IFRS 4 – Insurance Contracts. The collateral loan is therefore classified under IFRS 9 as a financial instrument
measured ‘at FVTPL’.
(ii) Impairment of loans and advances to customers
n
Significantincreaseincreditrisk
As described in note 1e(i), a test-based approach is used to determine the thresholds, expressed as a percentage increase, over which
an increase in lifetime PD compared to the lifetime PD calculated on initial recognition represents a significant increase in credit risk.
Management judgement is applied to determine the appropriate tests required to derive the thresholds. The tests, which have been
applied consistently with the previous year, aim to move loans through the stages in a timely manner, so that loans move to Stage
2 in advance of falling into arrears and to Stage 3 in advance of default, thus minimising the reliance on the 30 days past due and 90
days past due backstops respectively. If these thresholds moved such that all loans were assessed as having experienced a significant
increase in credit risk and therefore provisions were recognised to cover lifetime ECL (i.e. all loans currently classified as Stage 1 were
moved to Stage 2), impairment loss provisions at 31 December 2021 would increase by £4.8m (2020: £7.6m).
n
Definitionofdefault
The definition of default is given in note 1e(i). Management has judged that the definition of default for impairment loss calculations
should be aligned to the IRB regulatory definition of default. Further it is management’s judgement that 12 months is the appropriate
cure period for recovery from default.
n
Postmodeladjustments
Post model adjustments (PMAs) are applied to modify the level of impairment loss provisions from that calculated by the detailed
models used to determine ECL. They are used where there is a material risk that is not adequately captured within modelled ECL as
a result of a lack of historical data with which to model or ongoing uncertainty. Judgement is required in determining whether a PMA
should be used and the appropriate quantum of the adjustment. All PMAs are subject to approval by the Credit Committee and must
be reviewed and reapproved at least annually.
At 31 December 2021, the total of the material PMAs used by the Group was £9.4m (2020: £9.5m). These PMAs were applied to cover
the following:
n
The model performance risk resulting from factors which were not reflected in the development of the models due to lack of
historic data and therefore result in the risk of loss not being fully reflected in the modelled ECL. These factors include:
n
the ongoing impacts of government interventions previously implemented to mitigate the adverse impacts of the pandemic
which may continue to mask potential adverse loan performance. At 31 December 2021 this is primarily focused on the ongoing
performance of those loans where a mortgage payment deferral extension was taken and on the effect of the continued
backlogs in possession proceedings following a moratorium during the pandemic;
n
the potential impacts of short term inflationary pressures and national insurance increases on customer affordability, although
it is noted that the stressed affordability assessments performed when mortgages are originated provide assurance that the
majority of customers can absorb some level of affordability stress; and
n
the risk of inherent bias in reported house prices towards properties which have recently sold, which may not be reflective of
the composition of the Group’s mortgage book.
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
185
Year ended 31 December 2021
2. Critical accounting estimates and judgements (continued)
(a) Critical judgements (continued)
(ii) Impairment of loans and advances to customers (continued)
n
There continues to be uncertainty in relation to high rise flats where possible problems with cladding could result in lower
valuations and significant costs to leaseholders, impacting on their ability to sell the property. High remediation costs and
challenges obtaining new mortgages on these properties both have the potential to impact on the value of the Group’s collateral
and thus calculated LGDs. At present, insufficient data is available to allow such risks to be reflected in modelled ECL with any
degree of certainty, requiring a PMA based on high level estimates.
Further details of the estimates used to evaluate these PMAs are presented in note 2b(i) below.
(iii) Intangible assets
The Group applies judgement as to whether IT development activity results in an asset that qualifies for recognition as an intangible
asset. For an asset to be recognised under IAS 38 it must be probable that future economic benefits will flow from the asset and the cost
of the asset must be able to be measured reliably. For each significant project undertaken by the Group, an assessment is performed by
the relevant business area of whether a separately identifiable asset is being developed and the level of future benefits flowing from the
asset.
Intangible assets are reviewed annually for indications of impairment, which includes the application of judgement as to whether it
is probable that future economic benefits will be realised from the asset, and whether the value in use of the asset is in excess of the
carrying value (see note 16 for further information).
(iv) Property, plant and equipment
Freehold and long leasehold premises are revalued every three years by an independent firm of valuers, with the last formal valuation
having taken place at 31 December 2019 (or 31 December 2020 for the Group’s new head office).
It is management’s judgement that the ‘highest and best use’ valuation of this head office property should reflect the long term
occupation of the property by Leeds Building Society and therefore the valuation has been undertaken as if the property were an
investment property with a long term (15 year) lease and a covenant equivalent to that of the Group, with no break clauses. This
valuation is higher than if the property were valued on an open market basis. The Group’s previous head office property and branches
continue to be valued on an open market basis.
It is management’s judgement that the valuations obtained at 31 December 2019 (or 2020) appropriately reflect the fair value of these
properties as at the date of the Statement of Financial Position.
(v) Leases
The application of the requirements of IFRS 16 for leased assets requires the application of judgement as to whether a contract
contains a lease. In particular, the Group has a multi-year service contract with a third party for the provision and maintenance of its
IT infrastructure. It is management’s judgement that this contract does not provide the Group with the right to control the use of an
identified asset and therefore does not meet the definition of a lease under IFRS 16.
(b) Significant accounting estimates and assumptions
(i) Impairment losses on loans and advances to customers
Wherever possible, the calculation of impairment loss provisions for loans and advances to customers has been performed using
statistical modelling. For the UK residential mortgage portfolio, probability of default (PD) is modelled based on analysis of how
macroeconomic variables have impacted the performance of loans with similar credit risk characteristics historically. Loss given default
(LGD) is modelled based on projected house prices combined with analysis of historic experience of forced sale discounts.
The significant estimates required for the calculation of impairment loss provisions are forecast UK macroeconomic variables, the
probability weightings of the macroeconomic scenarios used and in the calculation of post model adjustments.
Macroeconomic scenarios and probability weightings
The Group has used four macroeconomic scenarios (2020: four), which are considered to represent a reasonable range of possible
outcomes, in determining impairment loss provisions. The scenarios have been revised during the period to reflect the improved
economic performance in the year while recognising there are still significant downside risks around inflation, the effect of the easing of
COVID-19 restrictions and the unwind of government support schemes.
2. Critical accounting estimates and judgements (continued)
(b) Significant accounting estimates and assumptions (continued)
(i) Impairment losses on loans and advances to customers (continued)
A summary of each of the four revised macroeconomic scenarios is as follows:
n
Central scenario reflecting the improved economic performance in the year, including GDP returning to pre-pandemic levels, balanced
against continued uncertainty due to inflationary pressures which will drive modest increases in interest rates. This scenario shows
that unemployment has already peaked following the success of the furlough scheme and forecasts that house price growth will
continue during 2022 due to the shortage of supply of properties and higher affordability.
n
Downside scenario as modelled in the Group’s risk management process reflecting a ‘1 in 20’ stress scenario, with higher
unemployment than the central scenario and reductions in house prices as demand falls.
n
Alternative downside scenario representing a more severe downturn than in the downside scenario with peak unemployment of
10.3% and a fall in demand across the housing market, causing greater reductions in house prices in the earlier years of the forecast.
n
Growth scenario representing a more optimistic view of recovery from the pandemic than assumed in the central scenario, including
higher house price growth due to an imbalance between supply and demand.
Scenarios are developed by the Group based on analysis of third party published economic data and forecasts. The relative weighting
of the macroeconomic scenarios is derived by determining the point in the economic cycle at which the UK economy sits at the balance
sheet date. This determines a possible range of outcomes for each scenario based on defined boundaries. Management judgement is
then applied to determine the appropriate point within the ranges, informed by current relevant market, macroeconomic and political
factors and the degree of uncertainty inherent in the UK economy.
At 31 December 2021, the ongoing uncertainty as a result of the pandemic and the UK’s departure from the European Union have meant
that management set the probability of the growth scenario towards the lower end of the established range and the downside and
alternative downside towards the higher end of the range. The final weightings used are shown in the table below.
2021 2020
Central 45% 45%
Downside 30% 30%
Alternative Downside 10% 10%
Growth 15% 15%
The tables on page 187 show the macroeconomic assumptions used in each scenario. The variables with the most significant impact on
the calculated impairment loss provisions are house price inflation and unemployment rate. The tables show the full year rates for house
price inflation and Gross Domestic Product growth, together with the year end position for unemployment rate and Bank Base Rate.
Beyond the five year period shown, assumptions move towards historic long run averages over the following five years and then remain
constant at these rates thereafter.
In both the downside and alternative downside scenarios the unemployment rate is forecast to peak at the end of 2022 before reducing
over the next five years as illustrated in the chart below, while the second chart illustrates the cumulative impact of the annual house
price inflation assumptions.
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
187
Year ended 31 December 2021
2. Critical accounting estimates and judgements (continued)
(b) Significant accounting estimates and assumptions (continued)
(i) Impairment losses on loans and advances to customers (continued)
Unemployment Rate (%)
0%
Dec
2021
Dec
2022
Dec
2023
Dec
2024
Dec
2025
Dec
2026
2%
4%
6%
8%
10%
Central Downside Alternative downside Growth Weighted
12%
House prices (December 2021= 0)
20%
(30)%
Dec
2021
Dec
2022
Dec
2023
Dec
2024
Dec
2025
Dec
2026
(20)%
(10)%
0%
10%
Central Downside Alternative downside Growth Weighted
2. Critical accounting estimates and judgements (continued)
(b) Significant accounting estimates and assumptions (continued)
(i) Impairment losses on loans and advances to customers (continued)
31 December 2021
2022 2023 2024 2025 2026
House price inflation Central 2.0% 2.0% 1.0% 1.0% 1.0%
Downside (13.7)% (2.0)% 0.0% 0.0% 1.0%
Alternative Downside (19.5)% (9.5)% 3.5% 2.0% 1.5%
Growth 6.0% 4.0% 3.5% 3.0% 3.0%
Weighted* (4.3)% (0.1)% 1.3% 1.1% 1.4%
Unemployment rate (31 December) Central 4.9% 4.8% 4.6% 4.3% 4.3%
Downside 7.3% 6.5% 6.2% 5.8% 5.8%
Alternative Downside 10.3% 9.0% 8.6% 7.4% 6.8%
Growth 4.7% 4.5% 4.3% 4.0% 3.8%
Weighted* 6.1% 5.7% 5.4% 5.0% 4.9%
Gross Domestic Product growth Central 5.0% 2.0% 1.5% 1.5% 1.0%
Downside 3.0% 1.7% 1.3% 1.3% 1.0%
Alternative Downside 2.1% 2.2% 1.4% 1.1% 0.9%
Growth 7.5% 4.0% 2.0% 2.5% 2.0%
Weighted* 4.5% 2.2% 1.5% 1.6% 1.1%
Bank Base Rate (31 December) Central 0.5% 0.75% 0.75% 0.75% 0.75%
Downside 0.1% 0.1% 0.1% 0.1% 0.1%
Alternative Downside (0.1)% (0.1)% 0.1% 0.1% 0.1%
Growth 0.75% 1.0% 1.0% 1.25% 1.25%
Weighted* 0.4% 0.5% 0.5% 0.6% 0.6%
31 December 2020
2021 2022 2023 2024 2025
House price inflation Central (5.0)% (1.0)% 0.0% 2.0% 2.0%
Downside (13.7)% (2.0)% 0.0% 0.0% 1.0%
Alternative Downside (10.0)% (14.5)% 5.0% 3.5% 3.5%
Growth 2.0% 3.0% 4.0% 3.5% 3.5%
Weighted* (7.1)% (2.1)% 1.1% 1.8% 2.1%
Unemployment rate (31 December) Central 7.0% 5.0% 4.8% 4.5% 4.3%
Downside 7.0% 7.0% 6.5% 6.5% 6.1%
Alternative Downside 10.0% 9.0% 8.5% 7.5% 7.0%
Growth 4.5% 3.9% 3.5% 3.5% 3.5%
Weighted* 6.9% 5.8% 5.5% 5.3% 5.0%
Gross Domestic Product growth Central 7.0% 4.0% 2.0% 2.0% 2.0%
Downside 2.0% 2.0% 1.5% 1.5% 1.6%
Alternative Downside 0.0% 5.0% 3.5% 3.0% 2.0%
Growth 14.0% 3.0% 3.0% 3.0% 2.0%
Weighted* 5.9% 3.4% 2.2% 2.1% 1.9%
Bank Base Rate (31 December) Central 0.1% 0.1% 0.1% 0.1% 0.1%
Downside 0.1% 0.1% 0.1% 0.1% 0.1%
Alternative Downside (0.1)% (0.1)% 0.1% 0.1% 0.1%
Growth 0.1% 0.1% 0.25% 0.25% 0.25%
Weighted* 0.1% 0.1% 0.1% 0.1% 0.1%
*Note that ECLs are calculated for each loan in each scenario and then probability weighted, so the weighted figure here is for illustrative
purposes only.
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
189
Year ended 31 December 2021
2. Critical accounting estimates and judgements (continued)
(b) Significant accounting estimates and assumptions (continued)
(i) Impairment losses on loans and advances to customers (continued)
The sensitivity of calculated impairment loss provisions at 31 December 2021 to changes in key individual macroeconomic
variables, with all other assumptions held constant, is illustrated below. Note that due to the interaction between different economic
variables within the impairment loss provision models, the impacts of such single variable sensitivities may be distorted and are not
representative of realistic alternative scenarios.
The impact of changing the assumption for annual house price inflation in each of the first two years of the central scenario is as follows:
+ 10.0
percentage
points
+ 5.0
percentage
points
- 5.0
percentage
points
- 10.0
percentage
points
(Decrease) / increase in impairment loss provisions (£M) (0.6) (0.3) 0.4 0.8
The impact of changing the assumption for unemployment in each of the first two years of the central scenario is as follows:
+ 2.0
percentage
points
+ 1.0
percentage
point
- 1.0
percentage
point
- 2.0
percentage
points
Increase / (decrease) in impairment loss provisions (£M) 1.7 0.3 (0.1) (0.1)
In practice the above variables are unlikely to move in isolation. The combined impact of movements in a number of variables can be
illustrated by the sensitivity of calculated provisions to scenario weightings. The table below shows the movement in impairment loss
provisions if each of the scenarios were weighted 100%:
2021
£M
2020
£M
(Decrease) / increase in impairment loss provisions if scenarios are weighted 100%:
Central (12.6) (8.8)
Downside (0.1) 10.0
Alternative Downside* 98.0 66.5
Growth (13.5) (14.7)
* The macroeconomic variables assumed in the alternative downside scenario are outside of the range of actual historic observations
used in the development of the ECL models and therefore there is a risk that the model output for this scenario is over-sensitive to
particular variables.
The total impairment loss provisions if the central scenario were weighted 100% would be £24.6m (2020: £34.0m).
Changes to macroeconomic assumptions, as expectations change over time, are likely to lead to volatility in impairment loss provisions,
and may lead to pro-cyclicality in the recognition of impairment losses.
Modelperformancepostmodeladjustments–£5.0m(2020:£3.2m)
The PMA reflecting the continued impact of government interventions as a result of the pandemic is focused on those borrowers who
took mortgage payment deferral extensions when these were available in 2020 since there has not yet been a sufficient period since the
end of the extension for credit deterioration to emerge completely. The PMA has been estimated by applying a high level uplift to the
provision coverage rate. The continued impact of the possessions moratorium, which delayed sales and recoveries, has been estimated
by increasing the assumed time from default to possession by 24 months. The combined value of these PMAs is £1.1m.
The potential impact of inflationary pressures has been estimated by applying increases of between 3% and 5% to customers’ recorded
expenditure and identifying those at risk of affordability concerns. The PMA has then been estimated as the additional impairment loss
provisions which would be required should those ‘at risk’ accounts migrate from Stage 1 to Stage 2 or from Stage 2 to Stage 3 (depending
on their staging at the date of the Statement of Financial Position), based on weighted coverage rates by stage. The resultant PMA is in a
range of £1.3m to £2.3m with the final PMA set at £2.3m.
2. Critical accounting estimates and judgements (continued)
(b) Significant accounting estimates and assumptions (continued)
(i) Impairment losses on loans and advances to customers (continued)
Possible house price inflation bias has been estimated by comparing the increases in indexed valuations on the Group’s portfolio with
alternative third party data for the period of the pandemic and applying a haircut to collateral valuations. The resulting PMA is calculated
as £0.8m. A further PMA of £0.8m is also in place to reflect the possible differential performance of a small segment of the Group’s book
in a downturn scenario for which there is insufficient data on which to base the modelling since the Group’s controls around this segment
have tightened since the previous downturn.
Inadequatecladdingpostmodeladjustment–£4.4m(2020:£2.0m)
As in the prior year, this PMA has been estimated by identifying properties at the highest risk of cladding issues by matching the Group’s
portfolio to third party postcode data where unacceptable valuations have been returned and applying a range of haircuts to property
valuations and making an allowance for remediation costs. The PMA has been revised based on updated market information and
guidance from the Royal Institution of Chartered Surveyors, resulting in an increased population of ‘at risk’ properties. A judgemental
uplift has also been applied to allow for the future identification of further ‘at risk’ properties. The judgemental nature of some of
the assumptions used results in a range for the PMA of £3.4m to £5.1m, with a PMA of £4.4m considered to be appropriate as at
31 December 2021.
The economic uncertainty post model adjustment of £4.3m in the prior year is no longer considered necessary as the modelled
macroeconomic scenarios are considered to appropriately reflect the range of possible outcomes. The overall value of post model
adjustments at 31 December 2021 is therefore £9.4m (2020: £9.5m).
(ii) Fair value of the collateral loan
The Group measures the collateral loan which represents a pool of equity release mortgages at FVTPL. The fair value of this loan is
calculated using a model which uses a combination of observable market data (such as interest rate curves and RPI swap prices) and
unobservable inputs which require estimation, such as the discount rate, property price volatility and the haircut applied to individual
sales prices. The model projects the future cash flows anticipated from the loan based on the contractual terms with the third party from
which the mortgages were acquired, with the timing of those cash flows determined with reference to mortality tables (which are subject
to estimation uncertainty). The model also calculates a value for the ‘no negative equity guarantee’ provided to the customer using a
stochastic methodology applying a variant of the Black-Scholes formula.
The key estimates used in the model and the basis of estimation are summarised below:
Assumption Basis of estimation
Discount rate Derived from current market rates for new equity release loans adjusted for the specific profile of the Group’s portfolio;
also reflects liquidity term premium in current market funding costs
Property price volatility Analysis of historic property price volatility and third party research with judgemental overlay giving estimate of 10%
Sales price haircut
Average actual discounts observed on the portfolio during the 2021 financial year, with judgemental uplift to reflect
anticipated future increases in discount
At 31 December 2021 the carrying value of the collateral loan was £215.5m (2020: £222.0m). The sensitivity of this value to the
estimates shown above is as follows:
Assumption Change to current assumption (Decrease) / increase in fair value of collateral loan (£M)
Discount rate + / - 0.5 percentage points (floored at the risk free rate) (10.9) / 7.3
Property price volatility + / - 3 percentage points (5.6) / 4.4
Sales price haircut + / - 5 percentage points (6.6) / 5.9
The sensitivities shown reflect a range of alternative assumptions based on observed historic data and regulatory guidance. The
discount rate sensitivity has been floored at the risk free rate because using a lower rate would imply that the collateral loan was less
risky than ‘risk free’ which is not considered appropriate.
A post model adjustment was applied to the modelled valuation at 31 December 2021 to reflect management’s judgement that current
market conditions, used to derive the discount rate, include some short term, transitory factors which should not be reflected in the
valuation of this long term asset. The PMA was estimated by calculating the impact of a 0.2 percentage point increase in the discount
rate and reduced the value of the collateral loan by £4.5m (2020: £nil).
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
191
Year ended 31 December 2021
2. Critical accounting estimates and judgements (continued)
(b) Significant accounting estimates and assumptions (continued)
(ii) Fair value of the collateral loan (continued)
At 31 December 2020, a post model adjustment of £(3.3m) was applied to the modelled valuation to reflect economic uncertainty, with
the calculation of the adjustment focused on consideration of the reversal of a proportion of the growth in house prices. We have
re-assessed the post model adjustment at the current year end and have determined that the risk of material short term reductions in
house prices beyond the sales price haircut for these properties applied in the model has reduced and have therefore removed the PMA.
(iii) Fair value of the RPI-linked equity release swap
During the year the Group has changed how it calculates the fair value of the equity release swap which is linked to the retail price index
(RPI). In previous years, the Group has used the valuation of the RPI-linked equity release swap obtained from the swap counterparty as
the fair value of the swap in the Statement of Financial Position. During the financial year we have developed our own internal valuation
model which uses a materially consistent valuation approach to that used by the counterparty. We have also updated the assumptions
for the swap valuation to align to those used for the valuation of the collateral loan and this has resulted in an increase in the fair value
liability and consequent charge to the Income Statement of £21.1m.
This is considered to be a change in accounting estimate as the material impact of the change results from changes in the expected
future cash flows from the swap as a result of a change in assumptions. The underlying modelling approach is materially unchanged and
therefore this is not considered a change in accounting policy.
The valuation uses market observable inputs where possible, with the significant unobservable input being the future profile of the swap
notional balance. Since this is a ‘balance guaranteed’ swap, this is assumed to match the profile of the corresponding equity release
mortgages underlying the collateral loan, which is a function of mortality rates and prepayment rate. A 1 percentage point increase in
the assumed prepayment rate would increase the value of the swap by £6.8m, resulting in a corresponding fair value gain in the Income
Statement. A 1 percentage point reduction in the assumed prepayment rate would reduce the value of the swap by £7.8m, resulting in a
corresponding fair value loss in the Income Statement.
3. Interest receivable and similar income
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
Interest receivable calculated using the effective interest rate method:
On instruments held at amortised cost:
On loans fully secured on residential property 456.5 447.1 456.5 447.1
On other loans and advances to customers 0.6 0.7 0.6 0.7
On liquid assets 2.1 4.2 2.1 4.2
Total interest receivable on instruments held at amortised cost 459.2 452.0 459.2 452.0
On instruments held at fair value through other comprehensive income:
On investment securities 4.8 9.6 5.5 11.2
Total interest receivable calculated using the effective interest rate method 464.0 461.6 464.7 463.2
Similar income / (expense) on instruments held at fair value through profit or loss:
On other loans and advances to customers 13.2 10.2 13.2 10.2
Net expense on derivatives that hedge financial assets and are designated in accounting
hedge relationships (42.2) (31.4) (42.2) (31.4)
Net expense on derivatives that hedge financial assets and are not designated in
accounting hedge relationships (10.3) (37.8) (12.5) (40.7)
Total similar income on instruments held at fair value through profit or loss (39.3) (59.0) (41.5) (61.9)
Total interest receivable and similar income 424.7 402.6 423.2 401.3
Included in the above is:
Interest receivable on impaired financial assets 8.2 6.8 8.2 6.8
4. Interest payable and similar charges
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
Interest payable on instruments held at amortised cost:
On shares held by individuals 110.2 163.1 110.2 163.1
On deposits and other borrowings:
Wholesale and other funding 26.2 50.8 25.0 49.9
Lease liabilities 0.3 0.3 0.3 0.3
On subordinated liabilities 4.6 – 4.6
–
On subscribed capital 10.9 10.8 10.9 10.8
Total interest payable on instruments held at amortised cost 152.2 225.0 151.0 224.1
Similar (income) / charges on instruments held at fair value through profit or loss:
Net income on derivatives which hedge financial liabilities and are designated in
accounting hedge relationships (18.1) (12.3) (16.0) (9.6)
Net charges / (income) on derivatives which hedge financial liabilities and are not
designated in accounting hedge relationships 8.4 (15.5) 6.4 (18.2)
Total similar charges on instruments held at fair value through profit or loss (9.7) (27.8) (9.6) (27.8)
Total interest payable and similar charges 142.5 197.2 141.4 196.3
5. Fair value losses from financial instruments
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
Fair value hedge relationships
Derivatives designated in fair value hedge relationships 168.8 (58.2) 174.2 (55.3)
Fair value adjustment for hedged risk of hedged items (166.2) 51.1 (171.6) 48.7
Derivatives not designated in fair value hedge relationships
Equity release swaps (7.2) (11.2) (7.2) (11.2)
Cross currency swaps net of retranslation on matched Euro liabilities 3.5 (0.7) 1.6 (0.6)
Other derivatives – (4.0) (2.2) (1.5)
Other financial instruments measured at fair value through profit or loss
Collateral loan which represents a pool of equity release mortgages 0.6 6.2 0.6 6.2
Total fair value losses from financial instruments (0.5) (16.8) (4.6) (13.7)
The fair value accounting volatility loss arises due to accounting ineffectiveness on designated hedges, or because hedge accounting
could not be applied to certain items. Volatility also arises from the collateral loan which represents a pool of equity release mortgages
which is measured at FVTPL. For further information refer to notes 36 and 37.
The cross currency swaps were entered into to reduce the exchange rate risk from funding in foreign currency; however they are not in
accounting hedge relationships.
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
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193
Year ended 31 December 2021
6. Administrative expenses
Group &
Society
2021
£M
Group &
Society
2020
£M
Staff costs
Wages and salaries 56.0 50.4
Social security costs 5.5 5.0
Pension costs 7.1 6.8
Temporary staff 3.7 1.5
Other staff costs 1.4 1.3
Less capitalised staff costs (0.7) (3.9)
Remuneration of auditor (see below) 0.8 0.6
Other administrative expenses
Technology 12.0 10.4
Development activity 8.3 4.1
Property 6.8 4.9
Legal and professional fees 4.0 1.8
Marketing 3.1 2.5
Regulatory fees 2.5 2.5
Other 6.4 5.0
Total administrative expenses 116.9 92.9
There are 27 directors, senior management and colleagues whose actions have a material impact on the risk profile of the Group, with
fixed remuneration of £5.4m and variable remuneration of £0.5m (2020: 26 individuals, £4.4m and £1.0m). Further details of directors’
remuneration can be found on page 149 of the Directors’ Remuneration Report.
Capitalised staff costs represent the costs of colleagues directly involved in the development of intangible assets or items of property,
plant and equipment. These costs are included in the capital cost of such assets and are included within additions during the year.
The analysis of auditor’s remuneration is as follows:
Group &
Society
2021
£‘000
Group &
Society
2020
£‘000
Fee payable to the Society’s auditor for the audit of the Society’s annual accounts 617.0 460.0
Fees payable to the Society’s auditor for the audit of the Society’s subsidiaries 43.0 27.0
Total audit fees 660.0 487.0
Assurance services 170.2 142.8
Total non-audit fees 170.2 142.8
Total auditor’s remuneration 830.2 629.8
Fees payable to the Society’s auditor and its associates in respect of associated pension schemes 11.6 11.8
The above figures relating to auditor’s remuneration exclude value added tax.
7. Staff numbers
The average number of people employed during the year was as follows:
Group &
Society
2021
Number
Group &
Society
2020
Number
Central administration 1,181 1,118
Branches 293 314
Total monthly average number of people employed 1,474 1,432
Total monthly average number of full time equivalent employees 1,361 1,313
At 31 December 2021 the total number of people employed by the Group and the Society was 1,485 (2020: 1,439).
8. Impairment on loans and advances to customers
Group & Society 2021
Loans fully
secured on
residential
property
£M
Loans fully
secured on
land
£M
Other
loans
£M
Total
£M
Impairment loss provision:
At 1 January 2021 42.8 1.9 2.5 47.2
Release for the year (3.6) (0.2) – (3.8)
Amount written off during the year (1.6) – – (1.6)
Movement in foreign exchange rate (0.3) – – (0.3)
At 31 December 2021 37.3 1.7 2.5 41.5
Income Statement
Release for the year (3.6) (0.2) – (3.8)
Recoveries of amounts previously written off (0.3) – – (0.3)
Total income statement credit (3.9) (0.2) – (4.1)
Group & Society 2020
Loans fully
secured on
residential
property
£M
Loans fully
secured on
land
£M
Other
loans
£M
Total
£M
Impairment loss provision:
At 1 January 2020 28.7 2.0 2.5 33.2
Charge / (release) for the year 15.0 (0.1) – 14.9
Amount written off during the year (1.3) – – (1.3)
Movement in foreign exchange rate 0.4 – – 0.4
At 31 December 2020 42.8 1.9 2.5 47.2
Income Statement
Charge / (release) for the year 15.0 (0.1) – 14.9
Recoveries of amounts previously written off (0.3) – – (0.3)
Total income statement charge / (credit) 14.7 (0.1) – 14.6
The Group’s policy for calculating impairment of loans and advances to customers (including retail mortgages and loan commitments)
is detailed in note 1e. Details of the significant accounting estimates and judgements required in the calculation of impairment loss
provisions, including the incorporation of forward looking information, are provided in note 2.
Notes to the Accounts continued
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Leeds Building Society | Annual Report and Accounts 2021
195
Year ended 31 December 2021
8. Impairment on loans and advances to customers (continued)
The table below summarises the Group’s retail mortgage balances, loan commitments and associated impairment loss provisions. The
classification of loans into stages for impairment purposes is explained in note 1e.
Group & Society 2021 Group & Society 2020
Gross
exposure
£M
Impairment
loss
provision
£M
Provision
coverage
%
Gross
exposure
£M
Impairment
loss
provision
£M
Provision
coverage
%
Retail mortgages
Stage 1 16,208.6 9.3 0.06 14,287.6 7.7 0.05
Stage 2 and <30 days past due 1,824.2 9.8 0.54 2,243.1 15.1 0.67
Stage 2 and 30+ days past due 79.1 1.8 2.28 83.9 1.8 2.15
Stage 3 and <90 days past due 113.1 6.6 5.84 78.3 6.0 7.66
Stage 3 and 90+ days past due 115.3 9.5 8.24 102.4 12.2 11.91
Total retail mortgages 18,340.3 37.0 0.20 16,795.3 42.8 0.25
Loan commitments
Stage 1 1,328.4 0.3 0.02 651.8 – 0.01
Total impairment loss provision 19,668.7 37.3 0.19 17,447.1 42.8 0.25
The tables below provide information on movements in the gross retail mortgage exposures and associated impairment loss provisions
during the year:
Stage 1 Stage 2 Stage 3 Total
Group & Society 2021
Gross
exposure
£M
Provision
12m ECL
£M
Gross
exposure
£M
Provision
Lifetime
ECL
£M
Gross
exposure
£M
Provision
Lifetime
ECL
£M
Gross
exposure
£M
Provision
£M
At 1 January 2021 14,287.6 7.7 2,327.0 16.9 180.7 18.2 16,795.3 42.8
Transfers resulting in increased
impairment loss provision
From Stage 1 to Stage 2 (850.7) (0.5) 850.7 1.8 – – – 1.3
From Stage 1 to Stage 3 (33.4) (0.2) – – 33.4 0.7 – 0.5
From Stage 2 to Stage 3 – – (74.6) (1.6) 74.6 3.5 – 1.9
Transfers resulting in reduced
impairment loss provision
From Stage 2 to Stage 1 985.8 0.4 (985.8) (2.6) – – – (2.2)
From Stage 3 to Stage 1 4.5 – – – (4.5) (0.1) – (0.1)
From Stage 3 to Stage 2 – – 31.3 0.3 (31.3) (0.6) – (0.3)
Change in impairment loss
provision resulting from loan
modifications – 0.1 – 0.2 – (0.2) – 0.1
Other remeasurement of
impairment loss provision (no
movement in stage) – – – (2.2) – (2.6) – (4.8)
New advances 4,632.8 2.3 – – – – 4,632.8 2.3
Redemptions and repayments (2,818.0) (0.5) (245.3) (1.2) (24.5) (1.2) (3,087.8) (2.9)
Write offs – – – – – (1.6) – (1.6)
At 31 December 2021 16,208.6 9.3 1,903.3 11.6 228.4 16.1 18,340.3 37.0
The change in the Group’s definition of default implemented in 2021 (see note 1e) increased Stage 3 exposures by £35.0 million.
8. Impairment on loans and advances to customers (continued)
Stage 1 Stage 2 Stage 3 Total
Group & Society 2020
Gross
exposure
£M
Provision
12m ECL
£M
Gross
exposure
£M
Provision
Lifetime
ECL
£M
Gross
exposure
£M
Provision
Lifetime
ECL
£M
Gross
exposure
£M
Provision
£M
At 1 January 2020 15,048.1 3.7 1,548.3 9.9 172.1 15.1 16,768.5 28.7
Transfers resulting in increased
impairment loss provision
From Stage 1 to Stage 2 (1,338.9) (0.7) 1,338.9 4.4 – – – 3.7
From Stage 1 to Stage 3 (22.9) – – – 22.9 1.5 – 1.5
From Stage 2 to Stage 3 – – (40.3) (0.6) 40.3 3.1 – 2.5
Transfers resulting in reduced
impairment loss provision
From Stage 2 to Stage 1 446.9 0.2 (446.9) (1.2) – – – (1.0)
From Stage 3 to Stage 1 4.5 – – – (4.5) – – –
From Stage 3 to Stage 2 – – 28.9 0.4 (28.9) (1.7) – (1.3)
Change in impairment loss
provision resulting from loan
modifications – – – 0.1 – 0.2 – 0.3
Other remeasurement of
impairment loss provision (no
movement in stage) – 3.9 – 4.4 – 2.5 – 10.8
New advances 2,562.2 0.9 – – – –2,562.2 0.9
Redemptions and repayments (2,412.3) (0.3) (101.9) (0.5) (21.2) (1.2) (2,535.4) (2.0)
Write offs – – – – – (1.3) – (1.3)
At 31 December 2020 14,287.6 7.7 2,327.0 16.9 180.7 18.2 16,795.3 42.8
In the above tables, the impact of changes to accounting estimates and judgements, including macroeconomic scenarios and probability
weightings, is included within ‘other remeasurement of impairment loss provision’ unless the change results in the transfer of a loan
between stages in which case it is included in the relevant transfer row.
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
197
Year ended 31 December 2021
9. Tax expense
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
Analysis of charge in the year
Current tax
UK corporation tax on profits for the year 42.7 20.7 42.7 20.7
Adjustments in respect of prior year (1.3) (0.2) (1.3) (0.2)
Total current tax 41.4 20.5 41.4 20.5
Deferred tax
Origination and reversal of timing differences 0.2 (0.3) (0.5) (0.2)
Adjustments in respect of prior year 1.7 (1.5) 2.4 0.1
Adjustments for changes in tax rates 0.2 – 0.2 –
Total deferred tax 2.1 (1.8) 2.1 (0.1)
Tax on profit on ordinary activities 43.5 18.7 43.5 20.4
Factors affecting total tax charge for the year:
Profit on ordinary activities before tax 163.7 80.7 160.7 82.8
Profit on ordinary activities multiplied by standard rate of corporation tax in the UK of 19%
(2020: 19%) 31.1 15.3 30.5 15.7
Effects of:
Banking surcharge 11.1 4.6 11.1 4.6
Adjustments in respect of prior year (current tax) (1.3) (0.2) (1.3) (0.2)
Tax on profits of Leeds Building Society Covered Bonds LLP – – 0.2 0.1
Expenses not deductible for tax purposes 0.3 0.1 0.3 0.1
Other differences 0.2 0.7 0.6 0.2
Total current tax 41.4 20.5 41.4 20.5
Origination and reversal of timing differences 0.2 (0.3) (0.5) (0.2)
Adjustments in respect of prior year (deferred tax) 1.7 (1.5) 2.4 0.1
Adjustments for changes in tax rates (deferred tax) 0.2 – 0.2 –
Tax on profit on ordinary activities 43.5 18.7 43.5 20.4
Adjustments in respect of prior year primarily relate to differences between the balances in the prior year’s Statements of Financial
Position and the finalised balances upon completion of the prior year tax return.
The standard rate of corporation tax applicable to the Group for the year ended 31 December 2021 was 19% (year ended 31 December
2020: 19%). An increase in the UK corporation tax rate to 25% with effect from 1 April 2023 was substantively enacted on 24 May 2021.
The Finance (No. 2) Act 2015 introduced an additional surcharge of 8% on banking profits (including those of building societies) above a
£25m threshold from 1 January 2016. In the Autumn Budget 2021, the Government announced that with effect from 1 April 2023, this
surcharge would be 3% of banking profits above a £100m threshold. This amendment had not been substantively enacted by the date of
the Statement of Financial Position.
Deferred tax balances have been calculated at a rate of 33% (2020: 27%), reflecting the increased corporation tax rate from 2023 but not
the unenacted reduction in the banking surcharge.
10. Classification of financial assets and liabilities
The following tables summarise the classification and carrying value of the Group’s and Society’s financial assets and liabilities:
Group 2021
Amortised
cost
£M
FVOCI
£M
FVTPL
£M
Total
£M
Financial assets:
Cash in hand and balances with the Bank of England 2,538.7 – – 2,538.7
Loans and advances to credit institutions 159.0 – – 159.0
Investment securities – 949.1 – 949.1
Derivative financial instruments – – 219.3 219.3
Loans and advances to customers:
Loans fully secured on residential property 18,303.0 – – 18,303.0
Other loans 8.7 – 215.5 224.2
Fair value adjustment for hedged risk on loans and advances to customers – – (169.1) (169.1)
Total financial assets 21,009.4 949.1 265.7 22,224.2
Financial liabilities:
Shares 15,258.0 – – 15,258.0
Fair value adjustment for hedged risk on shares – – (72.9) (72.9)
Derivative financial instruments – – 166.8 166.8
Amounts owed to credit institutions 2,258.9 – – 2,258.9
Amounts owed to other customers 297.5 – – 297.5
Debt securities in issue 2,554.6 – – 2,554.6
Subordinated liabilities 339.4 – – 339.4
Subscribed capital 227.3 – – 227.3
Total financial liabilities 20,935.7 – 93.9 21,029.6
Group 2020
Amortised
cost
£M
FVOCI
£M
FVTPL
£M
Total
£M
Financial assets:
Cash in hand and balances with the Bank of England 1,823.2 – –1,823.2
Loans and advances to credit institutions 201.9 – –201.9
Investment securities –949.7 –949.7
Derivative financial instruments – –192.8 192.8
Loans and advances to customers:
Loans fully secured on residential property 16,752.5 – –16,752.5
Other loans 14.4 –222.0 236.4
Fair value adjustment for hedged risk on loans and advances to customers – – 96.1 96.1
Total financial assets 18,792.0 949.7 510.9 20,252.6
Financial liabilities:
Shares 14,162.7 – –14,162.7
Fair value adjustment for hedged risk on shares – – (13.5) (13.5)
Derivative financial instruments – –237.9 237.9
Amounts owed to credit institutions 1,497.3 – –1,497.3
Amounts owed to other customers 256.7 – –256.7
Debt securities in issue 2,900.7 – –2,900.7
Subscribed capital 241.5 – –241.5
Total financial liabilities 19,058.9 –224.4 19,283.3
Notes to the Accounts continued
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Leeds Building Society | Annual Report and Accounts 2021
199
Year ended 31 December 2021
10. Classification of financial assets and liabilities (continued)
Society 2021
Amortised
cost
£M
FVOCI
£M
FVTPL
£M
Total
£M
Financial assets:
Cash in hand and balances with the Bank of England 2,538.7 – – 2,538.7
Loans and advances to credit institutions 96.5 – – 96.5
Investment securities – 1,040.4 – 1,040.4
Derivative financial instruments – – 210.4 210.4
Loans and advances to customers:
Loans fully secured on residential property 18,303.0 – – 18,303.0
Other loans 8.7 – 215.5 224.2
Fair value adjustment for hedged risk on loans and advances to customers – – (169.1) (169.1)
Total financial assets 20,946.9 1,040.4 256.8 22,244.1
Financial liabilities:
Shares 15,258.0 – – 15,258.0
Fair value adjustment for hedged risk on shares – – (72.9) (72.9)
Derivative financial instruments – – 141.2 141.2
Amounts owed to credit institutions 2,258.9 – – 2,258.9
Amounts owed to other customers 540.9 – – 540.9
Debt securities in issue 2,395.2 – – 2,395.2
Subordinated liabilities 339.4 – – 339.4
Subscribed capital 227.3 – – 227.3
Total financial liabilities 21,019.7 – 68.3 21,088.0
Society 2020
Amortised
cost
£M
FVOCI
£M
FVTPL
£M
Total
£M
Financial assets:
Cash in hand and balances with the Bank of England 1,823.2 – –1,823.2
Loans and advances to credit institutions 86.2 – – 86.2
Investment securities –1,071.0 –1,071.0
Derivative financial instruments – –179.3 179.3
Loans and advances to customers:
Loans fully secured on residential property 16,752.5 – –16,752.5
Other loans 14.4 –222.0 236.4
Fair value adjustment for hedged risk on loans and advances to customers – – 96.1 96.1
Total financial assets 18,676.3 1,071.0 497.4 20,244.7
Financial liabilities:
Shares 14,162.7 – –14,162.7
Fair value adjustment for hedged risk on shares – – (13.5) (13.5)
Derivative financial instruments – –235.4 235.4
Amounts owed to credit institutions 1,497.3 – –1,497.3
Amounts owed to other customers 580.5 – –580.5
Debt securities in issue 2,685.8 – –2,685.8
Subscribed capital 241.5 – –241.5
Total financial liabilities 19,167.8 –221.9 19,389.7
11. Cash in hand and balances with the Bank of England
Group &
Society
2021
£M
Group &
Society
2020
£M
Cash in hand 2.0 2.1
Balances with the Bank of England 2,536.7 1,821.1
Included in cash and cash equivalents (see note 29) 2,538.7 1,823.2
Balances with the Bank of England do not include mandatory reserve deposits of £62.1m (2020: £53.9m) which are not available for use
in the Group’s day to day operations. Such deposits are included within loans and advances to credit institutions in the Statement of
Financial Position.
12. Investment securities
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
Debt securities
Listed 949.1 949.7 1,040.4 1,071.0
In addition to those securities held by the Group, the Society has purchased investment securities issued by other Group entities.
Investment securities held by the Group and the Society are measured at fair value through OCI. The tables below show the changes
in fair value during the year. All of the Group’s and Society’s investment securities at 31 December 2021 are of investment grade. No
impairment loss provision is held against these assets since calculated ECL is immaterial (2020: no provision).
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
At 1 January 949.7 1,708.1 1,071.0 2,128.2
Additions 511.8 796.3 511.8 796.3
Disposals (sale and redemption) (504.7) (1,562.4) (534.7) (1,861.2)
Movement in fair value (7.7) 7.7 (7.7) 7.7
At 31 December 949.1 949.7 1,040.4 1,071.0
At 31 December 2021, no investment securities were pledged as collateral under sale and repurchase agreements (2020: none).
13. Loans and advances to customers
Group & Society 2021
Gross
exposure
£M
Impairment
loss
provision
£M
Total
£M
Loans fully secured on residential property 18,340.3 (37.3) 18,303.0
Loans fully secured on land 10.4 (1.7) 8.7
Other loans 218.0 (2.5) 215.5
Total loans and advances to customers 18,568.7 (41.5) 18,527.2
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
201
Year ended 31 December 2021
13. Loans and advances to customers (continued)
Group & Society 2020
Gross
exposure
£M
Impairment
loss
provision
£M
Total
£M
Loans fully secured on residential property 16,795.3 (42.8) 16,752.5
Loans fully secured on land 16.3 (1.9) 14.4
Other loans 224.5 (2.5) 222.0
Total loans and advances to customers 17,036.1 (47.2) 16,988.9
The Group has previously acquired a pool of equity release mortgages from a third party. The Group assumed certain, but not all,
risks arising from these loans with the remainder retained by the third party, which also retained a proportion of the income from the
underlying equity release mortgages. As a consequence these mortgages have been recognised as a collateral loan to the third party
within other loans in the table above. This loan is measured at fair value through profit or loss. The net fair value movement on loans and
advances to customers at fair value through profit or loss was a gain of £0.6m (2020: £6.2m) for both the Group and Society.
Loans and advances to customers, for both the Group and Society, include £2,575.5m (2020: £2,914.1m) of loans which have been
ringfenced from the Society for its associated secured funding vehicles.
The following transfers have been made:
2021
LBS
Covered
Bonds
LLP
£M
Albion
No. 4 plc
£M
Total
£M
Loans and advances transferred from the Society to securitisation vehicles 2,304.7 270.8 2,575.5
Loan notes issued by securitisation vehicles 1,640.5 287.1 1,927.6
2020
LBS
Covered
Bonds
LLP
£M
Albion
No. 4 plc
£M
Total
£M
Loans and advances transferred from the Society to securitisation vehicles 2,567.4 346.7 2,914.1
Loan notes issued by securitisation vehicles 1,640.5 367.2 2,007.7
The covered bonds and residential mortgage backed securities issued have been used to secure long term funding from other financial
institutions. The loans are retained in the Society’s Statement of Financial Position as the Society continues to control the loans and
substantially retains the risks and rewards relating to them.
14. Other assets, prepayments and accrued income
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
Collateral 159.1 256.9 159.1 256.9
Prepayments 5.0 5.1 5.0 5.1
Other assets 2.4 8.4 41.1 99.4
Total other assets, prepayments and accrued income 166.5 270.4 205.2 361.4
In the above table, collateral represents amounts owed by credit institutions on cash collateralisation of derivatives.
15. Investments in subsidiary undertakings
At 31 December 2021, the value of shares in subsidiaries was £2,040 (2020: £2,040).
(a) Loans to subsidiary undertakings
Society
2021
£M
Society
2020
£M
At 1 January 1.9 1.9
Net movement during the year –
–
At 31 December 1.9 1.9
Total investments in subsidiary undertakings 1.9 1.9
(b) Interest in subsidiary undertakings
The Society holds the following interests in subsidiary undertakings at 31 December 2021, all of which are incorporated in the United
Kingdom and registered in England.
Name Major Activities Class of Shares held Interest of Society Address
Leeds Financial Services Limited Non-trading Ordinary £1 shares 100% 26 Sovereign Street, Leeds, LS1 4BJ
Leeds Mortgage Funding Limited Non-trading Ordinary £1 shares 100% 26 Sovereign Street, Leeds, LS1 4BJ
Leeds Building Society Covered
Bonds LLP
Provision of mortgage assets and
guarantor of covered bonds
* * 26 Sovereign Street, Leeds, LS1 4BJ
Leeds Covered Bonds Designated
Member (No. 1) Limited
First designated member of
Leeds Building Society Covered
Bonds LLP
* * 1 Bartholomew Lane, London,
EC2N 2AX
Leeds Covered Bonds Designated
Member (No. 2) Limited
Second designated member of
Leeds Building Society Covered
Bonds LLP
* * 1 Bartholomew Lane, London,
EC2N 2AX
Leeds Covered Bonds Holdings
Limited
Holding company to both Leeds
Covered Bonds Designated
Member (No. 1) & (No. 2) Limited
* * 1 Bartholomew Lane, London,
EC2N 2AX
Albion No. 3 Holdings Limited
(dissolved 4 January 2022)
Holding company to Albion
No. 3 plc
* * 1 Bartholomew Lane, London,
EC2N 2AX
Albion No. 4 plc Provision of residential mortgage
backed securities
* * 11th Floor, 200 Aldersgate Street,
London, EC1A 4HD
Albion No. 4 Holdings Limited Holding company to Albion
No. 4 plc
* * 11th Floor, 200 Aldersgate Street,
London, EC1A 4HD
Guildford No.1 plc
(liquidated 3 February 2022)
Provision of residential mortgage
backed securities
* * 7th Floor, 21 Lombard Street,
London, EC3V 9AH
Guildford No. 1 Holdings Limited
(liquidated 3 February 2022)
Holding company to Guildford
No.1 plc
* * 7th Floor, 21 Lombard Street,
London, EC3V 9AH
* The Society’s interest is equal to being a 100% owned subsidiary as these entities pass the test of control under IFRS 10. Consequently
they have been consolidated in the Group accounts in accordance with IFRS 10 Consolidated Financial Statements. Although the Society
does not legally own these entities, it is deemed to control them, as it has power over the activities undertaken by the subsidiaries
through the management and operational structures in place, and it has exposure to variable returns through the purchase of loan notes,
deferred consideration and intragroup loans.
Notes to the Accounts continued
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203
Year ended 31 December 2021
16. Intangible assets
Group & Society 2021
New core
systems
£M
System
enhancements
£M
Total
£M
Cost
At 1 January 2021 16.9 19.8 36.7
Additions – 1.7 1.7
Adjustments (0.8) – (0.8)
At 31 December 2021 16.1 21.5 37.6
Amortisation and impairment
At 1 January 2021 0.5 7.4 7.9
Amortisation charged in the year 1.6 3.1 4.7
At 31 December 2021 2.1 10.5 12.6
Net book value
At 31 December 2021 14.0 11.0 25.0
Group & Society 2020
New core
systems
£M
System
enhancements
£M
Total
£M
Cost
At 1 January 2020 9.1 15.9 25.0
Additions 7.8 3.9 11.7
At 31 December 2020 16.9 19.8 36.7
Amortisation and impairment
At 1 January 2020 – 5.4 5.4
Amortisation charged in the year 0.5 2.0 2.5
At 31 December 2020 0.5 7.4 7.9
Net book value
At 31 December 2020 16.4 12.4 28.8
During 2021 the Group continued its programme of works that met the definition of an intangible asset. This included software licences,
IT development service costs and certain colleague costs. Amortisation of such assets is charged to the Income Statement on a straight
line basis over the useful life of the asset once it is brought into use. The useful life of such assets is determined to be ten years for new
core systems and five years for system enhancements as stated in note 1h.
The only individually material intangible asset is the Mortgage Hub mortgage origination system, with a net book value of £14.0m
(2020: £18.4m).
Intangible assets are reviewed annually for indications of impairment. This review includes an assessment of whether it is probable that
future economic benefits will be realised from the asset, and whether the value in use of the asset is in excess of the carrying value. In
2021 no impairment (2020: none) was recognised in the Income Statement.
In 2021 the cost of new core systems was adjusted by £0.8m to transfer previously capitalised costs to the Income Statement as it is
considered to be more appropriate to recognise them as administrative expenses.
17. Property, plant and equipment
Group & Society 2021
Freehold
premises
£M
Long
leasehold
premises
£M
Short
leasehold
premises
£M
Office &
computer
equipment
£M
Right-of-
use assets
£M
Total
£M
Cost or valuation
At 1 January 2021 61.6 0.2 1.0 39.9 13.3 116.0
Additions 1.0 – – 4.5 1.3 6.8
Disposals (0.2) – (0.1) (0.3) (1.0) (1.6)
Decrease in value reported in Other Comprehensive Income (1.0) – – – – (1.0)
At 31 December 2021 61.4 0.2 0.9 44.1 13.6 120.2
Depreciation and impairment
At 1 January 2021 1.0 – 1.0 29.5 3.2 34.7
Disposals – – (0.1) (0.3) (0.9) (1.3)
Depreciation charged in the year – – – 2.6 1.8 4.4
At 31 December 2021 1.0 – 0.9 31.8 4.1 37.8
Net book value
At 31 December 2021 60.4 0.2 – 12.3 9.5 82.4
Group & Society 2020
Freehold
premises
£M
Long
leasehold
premises
£M
Short
leasehold
premises
£M
Office &
computer
equipment
£M
Right-of-
use assets
£M
Total
£M
Cost or valuation
At 1 January 2020 44.2 0.2 1.0 35.5 13.2 94.1
Additions 14.7 – – 4.4 0.9 20.0
Disposals – – – – (0.8) (0.8)
Increase in value reported in Other Comprehensive Income 2.7 – – – – 2.7
At 31 December 2020 61.6 0.2 1.0 39.9 13.3 116.0
Depreciation and impairment
At 1 January 2020 1.0 – 1.0 26.3 1.6 29.9
Disposals – – – – (0.2) (0.2)
Depreciation charged in the year – – – 3.2 1.8 5.0
At 31 December 2020 1.0 – 1.0 29.5 3.2 34.7
Net book value
At 31 December 2020 60.6 0.2 – 10.4 10.1 81.3
The Group’s accounting policy is for all freehold and long leasehold premises to be revalued at least every three years, with the latest full
valuation undertaken as at 31 December 2019. In the periods between formal valuations, an assessment is made to ascertain whether
there are indications of material changes in property values. Details of the judgements involved in this assessment can be found in note
2a(iv).
Where portions of freehold premises are leased out, these properties do not meet the definition of investment property under IAS 40 as
the leased out portions could not be sold separately and the Group retains the use of a significant portion of the property.
Notes to the Accounts continued
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205
Year ended 31 December 2021
17. Property, plant and equipment (continued)
The amount of freehold and long leasehold premises (included above at valuation) determined according to the historical cost
convention is as follows:
Group &
Society
2021
£M
Group &
Society
2020
£M
Freehold premises 47.9 47.7
Long leasehold premises 0.2 0.1
Net book value 48.1 47.8
Land and buildings occupied by the Group and Society for its own activities
Net book value 50.7 55.1
The average remaining lease term of right-of-use assets is 5.9 years (2020: 6.5 years).
18. Shares
Group &
Society
2021
£M
Group &
Society
2020
£M
Held by individuals 15,251.6 14,155.9
Other shares 6.4 6.8
Total shares 15,258.0 14,162.7
19. Amounts owed to other customers
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
Amounts owed to subsidiary undertakings – –243.4 323.8
Other deposits 297.5 256.7 297.5 256.7
Total amounts owed to other customers 297.5 256.7 540.9 580.5
20. Debt securities in issue
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
Certificates of deposit 6.0 126.9 6.0 126.9
Senior unsecured debt 768.8 912.2 768.8 912.2
Covered bonds 1,627.6 1,659.3 1,620.4 1,646.7
Residential mortgage backed securities 152.2 202.3 – –
Total debt securities in issue 2,554.6 2,900.7 2,395.2 2,685.8
The underlying security for the covered bonds and residential mortgage backed securities (RMBS) is certain loans and advances to
customers (see note 13 for further detail).
21. Other liabilities and accruals
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
Accruals 22.7 19.9 22.0 19.3
Lease liabilities
Current 1.3 1.7 1.3 1.7
Non-current 8.6 8.7 8.6 8.7
Other payables 168.8 162.6 165.8 133.0
Total other liabilities and accruals 201.4 192.9 197.7 162.7
Other payables within Group includes £165.6m (2020: £162.0m) owed to credit institutions on cash collateralisation of derivatives,
Society £165.6m (2020: £129.3m).
The maturity of lease liabilities is shown below.
Maturity analysis – contractual undiscounted cash flows
Group &
Society
2021
£M
Group &
Society
2020
£M
Less than one year 1.6 1.9
One to five years 5.3 4.9
More than five years 4.3 4.9
Total undiscounted cash flows at 31 December 11.2 11.7
At 31 December 2021, the Group and Society have no commitments under short term leases (2020: none). Total lease commitments for
low value assets were less than £0.1m (2020: less than £0.1m).
Amounts recognised in Income Statement in respect of leases
Group &
Society
2021
£M
Group &
Society
2020
£M
Interest payable on lease liabilities 0.3 0.3
Depreciation of right-of-use assets 1.8 1.8
Expenses relating to short term leases 0.1 0.1
Expenses relating to leases of low value assets, excluding short term leases of low value assets 0.1 0.1
Total recognised in Income Statement in the year 2.3 2.3
Amounts recognised in the Statement of Cash Flows in respect of leases
Group &
Society
2021
£M
Group &
Society
2020
£M
Total cash outflow for leases 2.4 2.8
Notes to the Accounts continued
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Leeds Building Society | Annual Report and Accounts 2021
207
Year ended 31 December 2021
22. Provisions for liabilities and charges
Group & Society 2021
FSCS
Levy
£M
Customer
redress
and
related
provisions
£M
Commission
clawback
£M
Property
related
£M
Other
provisions
£M
Total
£M
At 1 January 2021 – 0.8 0.1 0.3 0.6 1.8
Amounts paid during the year (0.2) (0.1) – (0.9) (0.1) (1.3)
Provision charge in the year 0.4 – – 0.9 0.1 1.4
At 31 December 2021 0.2 0.7 0.1 0.3 0.6 1.9
Group & Society 2020
FSCS
Levy
£M
Customer
redress
and
related
provisions
£M
Commission
clawback
£M
Property
related
£M
Other
provisions
£M
Total
£M
At 1 January 2020 – 0.5 0.2 0.3 0.2 1.2
Amounts paid during the year – (0.3) – – (0.2) (0.5)
Provision charge / (release) in the year – 0.6 (0.1) – 0.6 1.1
At 31 December 2020 – 0.8 0.1 0.3 0.6 1.8
Financial Services Compensation Scheme (FSCS) levy
The Group has a contingent liability in respect of FSCS levies (see note 30). A provision is made for levies payable in 2022.
Customer redress and related provisions
This provision is made in respect of redress payments to customers, including potential claims on payment protection insurance (PPI)
sold by the Group. The deadline for such claims passed in August 2019, however, there remains the potential for claims to be received via
legal cases through the courts.
Commission clawback
This provision has been made for the potential clawback of commission on assurance policies sold.
Property related provisions
A provision has been made for potential dilapidations on leased premises.
Other provisions
This includes provisions in respect of individual customer accounts where it is probable that there will be an outflow of funds, such as in
relation to financial crime investigations.
23. Subordinated liabilities
In March 2021, the Group issued £350m of senior non-preferred fixed rate reset notes under its £2bn Euro Medium Term Note
Programme. The notes are denominated in sterling and have a fixed interest rate of 1.5% payable semi-annually to 16 March 2026,
followed by a further year at the benchmark gilt rate plus 1.3% until maturity on 16 March 2027.
The accounting policy, presentation and method of computation adopted for subordinated liabilities are consistent with those applied by
the Group for other financial liabilities that are classified as ‘at amortised cost’ (see note 1d for further details).
The total amount reported in the Statement of Financial Position represents the nominal value plus accrued interest and a fair value
adjustment for hedged risk.
The notes rank behind the claims of all other creditors and members of the Society, other than holders of permanent interest bearing
shares (PIBS) and tier 2 capital.
24. Subscribed capital
Group &
Society
2021
£M
Group &
Society
2020
£M
13
3/8
% permanent interest bearing shares 25.0 25.0
3
3/4
% tier 2 capital 202.3 216.5
Total 227.3 241.5
The PIBS, which are denominated in sterling, were issued for an indeterminate period and are only repayable in the event of the winding
up of the Society. The PIBS have a fixed rate of interest of 13
3/8
% payable semi-annually for an indeterminate period.
In April 2018 the Society issued £200m of tier 2 capital with a maturity date of 2029 to allow it to meet its projected Minimum
Requirement for Own Funds and Eligible Liabilities (MREL). This requirement ensures that institutions have a minimum amount of
liabilities that can bear losses before and in resolution, allowing the resolution authority to use these financial resources to absorb losses
and recapitalise the continuing business.
25. Retirement benefit surplus
(a) Overview of the Society’s pension arrangements
The Group operates both defined benefit and defined contribution schemes. In addition, the Group has, for one individual (2020: one
individual) in the UK, an employer funded retirement benefits scheme. The schemes have been accounted for under IAS19, which covers
employee benefits.
The defined benefit scheme provides benefits based on final salary for certain employees. The assets of the scheme are held in a
separate trustee-administered fund. Contributions to the defined benefit section are assessed in accordance with the advice of an
independent qualified actuary using the projected unit method. The defined benefit section was closed to new entrants from 1 January
2000, and closed to future benefit accrual from 31 December 2014. As at 31 December 2021 there were 287 deferred defined benefit
members (2020: 287). The Society’s unfunded liability is £0.8m (2020: £0.9m) and is detailed below.
The defined benefit scheme operates under UK trust law and the trust is a separate legal entity from the Society. The scheme is
governed by a Trustee company, Leeds Building Society Staff Pension Scheme Limited. Directors of the Trustee company are required
by law to act in the best interests of scheme members and are responsible for setting certain policies, such as investment and funding,
together with the Society. Trustees are appointed in line with UK law and the Trustee Deed and Rules.
The scheme’s adopted and agreed funding target is 100% of its technical provisions. The Society and the trustees have implemented a
lower risk investment strategy which comprises a variety of credit assets, such as corporate bonds and gilts, and aims to eliminate risks
to the scheme associated with equity investments and the inherent volatility this entails, and move towards a self-sufficient position.
The trustees make annual checks on the funding position of the scheme to confirm whether or not the scheme is still on track to meet
this objective by the end of the set recovery period.
The average duration of the benefit obligation is estimated to be 20 years (2020: 20 years).
The scheme is funded by the Society. Funding of the scheme is based on a separate actuarial valuation for funding purposes for which
the assumptions may differ from the assumptions below. The last actuarial valuation of the scheme was undertaken at 31 December
2020. Funding requirements are formally set out in the Statement of Funding Principles, Schedule of Contributions and Recovery Plan
agreed between the trustees and the Society.
The defined benefit obligation at 31 December 2021 can be approximately attributed to the scheme members as follows:
– Deferred members: 54% (2020: 51%)
– Pensioner members: 46% (2020: 49%)
GMP equalisation
On 20 November 2020, the High Court issued a supplementary ruling in relation to the equalisation of benefits for the effect of unequal
Guaranteed Minimum Pensions between men and women, following its initial ruling in 2018. This further ruling applies the original
findings to former members who have transferred out of a scheme and meant that the Society’s pension scheme had additional liabilities
with effect from 20 November 2020. The increase in liabilities was treated as a past service cost (change in benefit entitlement), with an
amount of £0.2m charged to the Income Statement in 2020.
Notes to the Accounts continued
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Leeds Building Society | Annual Report and Accounts 2021
209
Year ended 31 December 2021
25. Retirement benefit surplus (continued)
(b) Actuarial risks
The defined benefit scheme exposes the Group to actuarial risks, as detailed below:
Risk Impact
Interest rate risk A decrease in corporate bond yields results in an increase in the present value of the scheme liabilities
Inflation risk An increase in inflation results in higher benefit increases for scheme members, increasing the scheme’s liabilities
Longevity risk An increase in life expectancies results in a longer benefit payment period which in turn increases the scheme liabilities
Investment market risk The value of the scheme’s assets is impacted by the market prices of those assets
Actuarial gains and losses are recognised immediately in full through the Statements of Comprehensive Income.
(c) Valuation assumptions
Principal actuarial assumptions at the balance sheet date (expressed as weighted averages):
2021 2020
Discount rate 1.85% 1.35%
Price inflation
RPI 3.50% 3.10%
CPI 2.90% 2.50%
Future salary increases N/A N/A
Future pension increases
RPI max 5% 3.40% 3.05%
RPI min 3% max 5% 3.75% 3.55%
Cash commutation 100% of members assumed to take
80% of maximum tax free cash
75% of members assumed to take
75% of maximum tax free cash
Mortality
Actuarial base table S2PMA/S2PFA tables S2PMA/S2PFA tables
Future improvements CMI_2020 with 1.25% p.a. long term
trend, smoothing factor of 7, initial
addition of 0 and w2020 parameter of
10%
CMI_2019 with 1.25% p.a. long term
trend, smoothing factor of 7 and initial
addition of 0
Life expectancy
Male at age 63 23.2 years 23.4 years
Female at age 63 25.3 years 25.4 years
Male at age 63 (currently aged 43) 24.6 years 24.8 years
Female at age 63 (current age 43) 26.9 years 27.0 years
The table above includes the life expectancy assumptions used in the accounting assessments. Pensioner life expectancies are for a
member currently aged 63 retiring now. Non-pensioner life expectancies are for a member retiring at age 63 currently aged 43.
(d) Reconciliation of funded statement
Group &
Society
2021
£M
Group &
Society
2020
£M
Present value of funded obligations (112.1) (124.1)
Present value of unfunded obligations (0.8) (0.9)
Assets at fair value 121.2 126.0
Surplus 8.3 1.0
25. Retirement benefit surplus (continued)
(d) Reconciliation of funded statement (continued)
Changes in the present value of the scheme’s liabilities are as follows:
Group &
Society
2021
£M
Group &
Society
2020
£M
At 1 January 125.0 116.3
Interest cost 1.6 2.2
Actuarial (gains) / losses arising from changes in demographic assumptions (2.2) 0.4
Actuarial (gains) / losses arising from changes in financial assumptions (3.7) 13.7
Actuarial gains on experience adjustment (2.8) (0.3)
Benefits paid (5.0) (7.5)
Past service cost – 0.2
At 31 December 112.9 125.0
Changes in the present value of the scheme’s assets are as follows:
Group &
Society
2021
£M
Group &
Society
2020
£M
At 1 January 126.0 119.3
Interest income 1.7 2.3
Return on scheme assets excluding interest income (1.6) 11.9
Contribution by employer 0.4 0.4
Contribution by scheme members –
–
Administrative expenses (0.3) (0.4)
Benefits paid (5.0) (7.5)
At 31 December 121.2 126.0
(e) Scheme assets
The major categories of scheme assets are as follows:
Group &
Society
2021
£M
Group &
Society
2020
£M
Corporate bonds 51.9 55.7
Index-linked government bonds 25.6 27.3
Absolute return bonds 19.7 20.0
Liability driven investments 21.2 19.8
Fixed-interest government bonds 1.9 2.1
Cash and cash equivalents 0.9 1.1
Total assets 121.2 126.0
All assets have quoted market prices in active markets. The pension scheme assets include no assets from the Society’s own financial
instruments (unchanged from 2020). The pension scheme assets include no property occupied by, or other assets used by, the Society
(unchanged from 2020).
Notes to the Accounts continued
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211
Year ended 31 December 2021
25. Retirement benefit surplus (continued)
(f) Amounts recognised in the Income Statements
Group &
Society
2021
£M
Group &
Society
2020
£M
Past service cost – 0.2
Administration expenses 0.3 0.4
Net interest on the defined benefit asset (0.1) (0.1)
Total cost – defined benefit scheme 0.2 0.5
(g) Amounts recognised in the Statements of Comprehensive Income (SOCI)
Group &
Society
2021
£M
Group &
Society
2020
£M
Actuarial gains on experience adjustment 2.8 0.3
Actuarial gains / (losses) arising from changes in demographic assumptions 2.2 (0.4)
Actuarial gains / (losses) arising from changes in financial assumptions 3.7 (13.7)
Percentage of scheme liabilities (%) 7.7% 10.9%
Return on scheme assets excluding interest income (1.6) 11.9
Percentage of scheme assets (%) (1.3)% 9.4%
Total gain / (loss) recognised in SOCI during the year 7.1 (1.9)
The cumulative amount of actuarial gains and losses recognised in the Statements of Other Comprehensive Income since the date of
transition to IFRS is a net loss of £16.8m (2020: £23.9m loss).
(h) Sensitivity to changes in key assumptions
The table below gives a broad indication of the impact on the pension surplus to changes in assumptions and experience. All figures
are before allowing for deferred tax. Although the analysis does not take account of the full distribution of cash flows expected, it does
provide an approximation of the sensitivity of the assumptions shown.
Approximate impact on defined benefit surplus
Group &
Society
2021
£M
Increase discount rate by 0.25% 4.7
Increase inflation assumption by 0.25% (3.7)
Change long term trend of increases in mortality improvement from 1.25% to 1.50% (1.1)
(i) Estimated contributions for 2022 financial year
Group &
Society
2021
£M
Estimated employer normal contributions in financial year 2022 0.4
Annual agreed contributions will remain at this level until they are reviewed following the next actuarial valuation to be undertaken based
on the position at 31 December 2023.
26. Deferred tax
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
Deferred tax
At 1 January 0.9 2.4 0.5 3.6
Adjustment in respect of prior years (1.7) 1.2 (2.4) (0.3)
Amount recognised directly in equity (0.5) (3.0) (0.5) (3.0)
Income and expenditure movement during the year (0.4) 0.3 0.3 0.2
At 31 December (1.7) 0.9 (2.1) 0.5
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
Deferred tax assets
IFRS9 transitional adjustments 5.3 5.0 5.3 5.0
Differences relating to fixed assets (0.8) 0.6 (0.8) 0.6
Total deferred tax assets 4.5 5.6 4.5 5.6
Deferred tax liabilities
Revaluation reserve 4.1 3.6 4.1 3.6
Pensions 2.7 0.3 2.7 0.3
Temporary differences relating to trading items (0.4) (0.8) (0.4) (0.8)
Fair value reserve (0.3) 2.0 0.2 2.0
Other temporary differences 0.1 (0.4) –
–
Total deferred tax liabilities 6.2 4.7 6.6 5.1
27. Tax effects relating to each component of other comprehensive income
Group 2021 Society 2021
Before tax
amount
£M
Tax
benefit/
(expense)
£M
Net of tax
amount
£M
Before tax
amount
£M
Tax
benefit/
(expense)
£M
Net of tax
amount
£M
Investment securities at FVOCI (6.5) 1.8 (4.7) (6.5) 1.8 (4.7)
Revaluation loss on properties (1.0) (0.4) (1.4) (1.0) (0.4) (1.4)
Actuarial gains / (losses) on retirement benefit obligations 7.1 (2.0) 5.1 7.1 (2.0) 5.1
IFRS9 transitional adjustment – 0.7 0.7 – 0.7 0.7
Other comprehensive income (0.4) 0.1 (0.3) (0.4) 0.1 (0.3)
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
213
Year ended 31 December 2021
27. Tax effects relating to each component of other comprehensive income (continued)
Group 2020 Society 2020
Before tax
amount
£M
Tax
benefit/
(expense)
£M
Net of tax
amount
£M
Before tax
amount
£M
Tax
benefit/
(expense)
£M
Net of tax
amount
£M
Investment securities at FVOCI 8.6 (2.3) 6.3 8.6 (2.3) 6.3
Revaluation gain on properties 2.7 (0.9) 1.8 2.7 (0.9) 1.8
Actuarial gains / (losses) on retirement benefit obligations (1.9) 0.5 (1.4) (1.9) 0.5 (1.4)
IFRS9 transitional adjustment – (0.3) (0.3) – (0.3) (0.3)
Adjustment to tax in relation to prior periods – 0.2 0.2 – 0.4 0.4
Other comprehensive income 9.4 (2.8) 6.6 9.4 (2.6) 6.8
28. Cash flows from financing activities
For the purposes of the Statements of Cash Flows, debt securities in issue, subordinated liabilities and subscribed capital are classified
as liabilities arising from financing activities. The table below provides a reconciliation of movements in liabilities arising from financing
activities:
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
At 1 January 3,142.2 3,204.6 2,927.3 2,939.0
Cash flows:
Net proceeds from issue of debt securities 508.7 2,427.2 508.7 2,427.2
Repayments of debt securities in issue (804.8) (2,541.4) (754.8) (2,493.5)
Net proceeds from issue of subordinated liabilities 346.9 –346.9 –
Non-cash flows:
Amortisation of discount on issue 0.2 2.4 0.2 2.4
Accrued interest movements (6.1) (1.9) (6.1) (1.1)
Foreign exchange movements (26.1) 48.1 (26.1) 47.5
Movement in fair value (39.7) 3.2 (34.2) 5.8
At 31 December 3,121.3 3,142.2 2,961.9 2,927.3
29. Cash and cash equivalents
For the purposes of the Statements of Cash Flows, cash and cash equivalents comprise the following balances with a maturity of less
than three months.
Group
2021
£M
Group
2020
£M
Society
2021
£M
Society
2020
£M
Cash in hand and balances with the Bank of England (note 11) 2,538.7 1,823.2 2,538.7 1,823.2
Loans and advances to credit institutions 159.0 201.9 96.5 86.2
Total cash and cash equivalents 2,697.7 2,025.1 2,635.2 1,909.4
The Group’s loans and advances to credit institutions includes £62.5m (2020: £115.7m) of balances belonging to the Society’s
securitisation programmes which are not available for general use by the Society.
30. Guarantees and other financial commitments
(a) Financial Services Compensation Scheme
The Group has a contingent liability in respect of contributions to the Financial Services Compensation Scheme provided by the Financial
Services and Markets Act 2000. The FSCS provides compensation to depositors in the event that a financial institution is unable to repay
amounts due and is funded by contributions from the financial services industry.
(b) Subsidiary undertakings
The Society is obliged under the Building Societies Act 1986 to discharge the liabilities of its subsidiary undertakings to the extent they
were incurred before 11 June 1996 and in so far as those bodies are unable to discharge the liabilities out of their own assets.
(c) Capital commitments
The Group has capital commitments contracted for but not accrued for under executory contracts of £0.3m (2020: £2.3m) relating to
technology investment programmes (intangible assets and property, plant and equipment) and £nil (2020: £3.0m) relating to the fit out of
the Society’s new head office and Leeds city centre branch (property, plant and equipment). This amount is inclusive of value added tax.
(d) Other commitments
The Group is committed to a multi-year service contract for the provision and maintenance of its IT infrastructure. The remaining
commitment at 31 December 2021 is £17.2m (2020: £22.7m). This service contract does not meet the definition of a lease under IFRS 16
– Leases since it does not give the Group the right to control the assets used to provide the service.
31. Related party transactions
Group
Key management personnel comprise the executive directors and non-executive directors, who are responsible for ensuring that the
Society and its subsidiary undertakings meet their strategic and operational objectives. The Group enters into transactions in the ordinary
course of business with directors of the Group and persons connected with the directors of the Group, on normal commercial terms.
Society
Details of the Society’s shares in group undertakings and subsidiaries are given in note 15. A number of transactions are entered
into with these related parties in the normal course of business. These include loans, deposits, and the payment and recharge of
administrative expenses.
The volumes of related party transactions, outstanding balances at the year end, and the related income and expenses for the year are
as follows:
Society subsidiaries
Directors and connected
persons
2021
£M
2020
£M
2021
£M
2020
£M
Loans payable to the Society
Loans outstanding at 1 January 1.9 1.9 0.8 1.0
Net movement during the year – – (0.8) (0.2)
Loans outstanding at 31 December 1.9 1.9 – 0.8
Deposits payable by the Society
Deposits outstanding at 1 January 323.8 642.9 0.2 0.6
Net movement during the year (80.4) (319.1) – (0.4)
Deposits outstanding at 31 December 243.4 323.8 0.2 0.2
Directors’ emoluments
Group &
Society
2021
£M
Group &
Society
2020
£M
Total remuneration 2.4 2.1
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
215
Year ended 31 December 2021
31. Related party transactions (continued)
Directors’ emoluments include those emoluments received by directors from the Society and its associated bodies. Further information
on directors’ emoluments is included in the Directors’ Remuneration Report on pages 144 to 158. No directors are active members
of the defined benefit section of the Leeds Building Society Pension Scheme (2020: none). Two directors were active members of the
defined contribution section of the Leeds Building Society Pension Scheme during 2021 (2020: two).
32. Credit risk on loans and advances to customers
(a) Credit risk management
Credit risk is defined as the current or prospective loss of earnings and impact on capital (expected and unexpected loss) arising from
lending, as a result of borrowers defaulting on their credit obligations as they fall due.
Credit risk identification, measurement and management are integrated into a Board approved framework that covers all strategic
risks. Credit risk is measured using a range of appropriate key performance indicators, largely underpinned by modelling techniques
that are themselves developed and maintained in line with the Model Risk Policy. Key performance indicators are assessed across both
new lending and stock and include: risk weighted assets, impairment charge ratio, expected credit losses (ECL), loan to value (LTV),
Probability of Default (PD), in addition to a broad range of concentration limits that cover a number of dimensions.
The Group employs a ‘three lines of defence’ credit risk management approach which includes a dedicated Credit Risk function that is
independent from the areas responsible for originating or renewing exposures. The Group uses a range of approaches to support credit
risk management which include the use of ‘through the cycle’ principles and regular stress testing to understand the impacts of credit
volatility. Oversight of first line activity is provided to support credit risk mitigation and a broad range of quantitative and qualitative
benchmarking is undertaken. This is supplemented with external independent assurance where required.
Comprehensive management insight and information enable the prevailing, future and stressed levels of credit risk within the Group’s
credit portfolios to be understood and any adverse trends to be identified before impacting on performance.
Further information on the Group’s management of retail credit risk during 2021 can be found on page 66 of the Strategic Report.
The Group’s exposure to credit risk on loans and advances to customers can be broken down as below:
Group &
Society
2021
£M
Group &
Society
2020
£M
Retail mortgages 18,340.3 16,795.3
Commercial lending 10.4 16.3
Other loans 157.6 164.7
Total gross exposure (contractual amounts) 18,508.3 16,976.3
Impairment loss provisions (41.5) (47.2)
Fair value adjustments 60.4 59.8
Total net exposure 18,527.2 16,988.9
The Group’s retail mortgage exposures are analysed in note 32b below. The Group’s commercial lending balances are not past due. The
overall indexed loan to value of commercial lending is 53% (2020: 62%).
Other loans includes a collateral loan which represents a pool of equity release mortgages of £155.1m (2020: £162.2m) and an other loan
of £2.5m (2020: £2.5m). The collateral loan is measured at FVTPL and is neither past due nor impaired. The risk relating to this balance
arises due to the presence of a guarantee to the equity release mortgage customer whereby any shortfall in the value of the property
on redemption of the loan is not pursued. The expected impact of this guarantee on the Group is reflected in the calculated fair value of
the loan. The overall indexed loan to value of the collateral loan is 35% (2020: 35%) with the value of property on which the equity release
mortgages are secured totalling £503m (2020: £516m).
The other loan is not past due but is impaired and is fully provided for.
In addition to the above exposures which are recorded in the Statement of Financial Position, the analysis below also considers undrawn
loan commitments where a loan offer has been issued to a customer and remains unexpired but the loan has not yet completed and so
has not yet been recognised in the Statement of Financial Position.
32. Credit risk on loans and advances to customers (continued)
(b) Retail credit risk
The Group is firmly committed to the management of credit risk at all stages of the lending cycle. The Group maintains appropriate
policies which set out acceptable lending and debt management activity. The Group originates first charge, prime residential mortgage
assets in the UK. Bespoke scorecards and affordability assessments are applied alongside appropriate underwriting and fraud detection
techniques to manage losses. It also takes a proactive approach to the management of customer arrears which is undertaken by a
specialist team dedicated solely to the collections and recovery process.
The Group monitors individual borrowers but also sets and applies limits to manage concentration risk. The limits are managed through
the mortgage application process and monitored throughout the life of the products to ensure that new lending complements the risk
profile of loans already within the Group’s portfolio. This mitigates the risk that the Group is overexposed to borrowers with similar
characteristics, for example properties in similar locations where local housing market fluctuations may arise. The use of distributional
new lending and portfolio policy limits provides additional resilience to stress and prevents an over-concentration of marginal risk
exposures.
The Group’s retail mortgage exposures are predominantly in the UK, with some legacy exposure from historic lending in Spain.
(i) Credit quality
The following table sets out information about the credit quality of the Group’s retail mortgages, which are all fully secured on residential
property and are measured at amortised cost, and loan commitments where the amounts in the table represent the amounts
committed. Classification into low, medium or high is based on internal rating grades which approximately translate into the IRB
probabilities of default (PD) shown in the table. Explanation of the classification of loans into Stages 1 to 3 can be found in note 1e.
Group & Society 2021
Stage 1
£M
Stage 2
£M
Stage 3
£M
Total
£M
Retail mortgages
Low IRB PD < 2.02% 15,327.6 1,106.2 19.2 16,453.0
Medium IRB PD ≥ 2.02% and < 25.97% 863.5 583.1 26.9 1,473.5
High IRB PD ≥ 25.97% 17.5 214.0 182.3 413.8
Total gross exposure 16,208.6 1,903.3 228.4 18,340.3
Impairment loss provision (9.3) (11.6) (16.1) (37.0)
Net exposure 16,199.3 1,891.7 212.3 18,303.3
Loan commitments
Low IRB PD < 2.02% 1,285.6 – – 1,285.6
Medium IRB PD ≥ 2.02% and < 25.97% 42.2 – – 42.2
High IRB PD ≥ 25.97% 0.6 – – 0.6
Total gross exposure 1,328.4 – – 1,328.4
Impairment loss provision (0.3) – – (0.3)
Net exposure 1,328.1 – – 1,328.1
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
217
Year ended 31 December 2021
32. Credit risk on loans and advances to customers (continued)
(b) Retail credit risk (continued)
(i) Credit quality (continued)
Group & Society 2020
Stage 1
£M
Stage 2
£M
Stage 3
£M
Total
£M
Retail mortgages
Low IRB PD < 2.02% 13,738.0 1,064.5 0.7 14,803.2
Medium IRB PD ≥ 2.02% and < 25.97% 485.1 1,048.8 7.7 1,541.6
High IRB PD ≥ 25.97% 64.5 213.7 172.3 450.5
Total gross exposure 14,287.6 2,327.0 180.7 16,795.3
Impairment loss provision (7.7) (16.9) (18.2) (42.8)
Net exposure 14,279.9 2,310.1 162.5 16,752.5
Loan commitments
Low IRB PD < 2.02% 454.3 – –454.3
Medium IRB PD ≥ 2.02% and < 25.97% 22.6 – – 22.6
High IRB PD ≥ 25.97% 174.9 – –174.9
Total gross exposure 651.8 – –651.8
Impairment loss provision – – – –
Net exposure 651.8 – –651.8
The table below provides further information on the Group’s retail mortgages by payment due status as at 31 December 2021, excluding
impairment loss provisions. The table includes £4.8m (2020: £8.6m) of loans and advances secured on residential property in Spain that
are past due and £1.0m (2020: £1.0m) that are in possession.
Group &
Society
2021
£M
Group &
Society
2021
%
Group &
Society
2020
£M
Group &
Society
2020
£M
Not past due 18,105.8 98.8 16,567.4 98.7
Past due up to 3 months 115.2 0.6 121.0 0.7
Past due 3 to 6 months 43.2 0.2 49.1 0.3
Past due 6 to 12 months 39.8 0.2 33.9 0.2
Past due over 12 months 31.0 0.2 19.4 0.1
Possessions 5.3 – 4.5 –
Total gross exposure 18,340.3 100.0 16,795.3 100.0
During the year, we have changed the reporting of arrears and have therefore restated the prior year comparatives.
32. Credit risk on loans and advances to customers (continued)
(b) Retail credit risk (continued)
(ii) Geographical analysis
The geographical distribution of retail mortgages is as follows:
Group &
Society
2021
%
Group &
Society
2020
%
Scotland 8.3 8.2
North East 3.7 3.9
Yorkshire and Humberside 8.8 8.9
North West 8.9 8.4
Midlands 14.0 15.1
East of England 9.9 4.9
South West 10.0 9.2
Greater London 14.0 16.3
South East 15.7 18.8
Wales 3.5 3.1
Northern Ireland 2.8 2.7
Spain 0.3 0.4
Other 0.1 0.1
Total 100.0 100.0
(iii) Collateral
Retail mortgages are all fully secured on residential property. Collateral values are assessed at the point of origination and in line with the
Group’s lending policy. The Group requires collateral to be valued by an appropriately qualified source, independent of both the credit
decisioning team and the customer, at the time of borrowing. This includes the selected use of automated valuation models. These are
developed on market data and usage is subject to accuracy and criteria thresholds.
One of the key indicators of the credit risk associated with a mortgage book is the relationship between the amount of the loan made
and the value of the underlying security, which is known as the loan to value percentage (LTV). In general the lower the LTV the greater
the equity within the property, and the lower the losses expected to be realised in the event of default and subsequent repossession.
The Group’s lending policy permits owner occupier applications with a maximum LTV of 95 per cent and buy to let mortgages with a
maximum LTV of 80 per cent, with scope to tighten these criteria if required, as occurred following the outbreak of COVID-19 in 2020.
Higher LTV lending is subject to enhanced underwriting criteria.
The loan to value profile of the Group’s book is monitored closely against the limits set by the Credit Committee.
The indexed loan to value analysis of the Group’s retail mortgage portfolio is as follows:
Group &
Society
2021
£M
Group &
Society
2021
%
Group &
Society
2020
£M
Group &
Society
2020
%
Less than 10% 169.4 0.9 138.1 0.8
10% to 20% 802.7 4.4 685.7 4.1
20% to 30% 1,704.4 9.3 1,451.9 8.7
30% to 40% 2,787.8 15.2 2,274.9 13.6
40% to 50% 3,737.0 20.4 3,310.8 19.7
50% to 60% 3,580.6 19.5 3,651.3 21.8
60% to 70% 2,459.8 13.4 2,877.2 17.1
70% to 80% 1,879.2 10.2 1,553.8 9.2
80% to 90% 915.0 5.0 751.7 4.4
90% to 100% 295.7 1.6 82.7 0.5
Over 100% 8.7 0.1 17.2 0.1
Total 18,340.3 100.0 16,795.3 100.0
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
219
Year ended 31 December 2021
32. Credit risk on loans and advances to customers (continued)
(b) Retail credit risk (continued)
(iii) Collateral (continued)
The overall weighted average loan to value of the retail mortgage portfolio is 50.5% (2020: 50.9%). The weighted average loan to value of
new lending in 2021 was 67.4% (2020: 59.0%).
Upon initial recognition of loans and advances, the fair value of collateral is based on the valuation of the property undertaken as part
of the application process. In subsequent periods, the fair value is updated to reflect current market price using regional house price
indices. The table below shows the value of collateral held, capped at 100% of the individual loan amount:
Group &
Society
2021
£M
Group &
Society
2020
£M
Not past due 18,109.5 16,474.9
Past due up to 3 months 77.2 177.6
Past due over 3 months 112.7 102.0
Possessions 5.3 4.4
Total collateral 18,304.7 16,758.9
The fair value of collateral for loans in stage 3 for impairment provisioning (capped at 100% of the individual loan amount) is £224.9m
(2020: £179.9m).
(iv) Forbearance
The Group continues to invest in developing and enhancing its arrears management strategies to minimise credit risk losses, whilst
ensuring that customers are treated fairly. The Group has a wide range of forbearance options which can be offered to customers in
financial distress. Forbearance is intended to support both the customer and the Group and the primary aim of a forbearance facility is to
enable a complete recovery of the mortgage through the full repayment of arrears and to minimise the risk of the customer losing their
property. Forbearance typically consists of modifications to previous conditions of a contract or a total or partial refinancing of debt,
either of which would not have been required had the customer not been experiencing financial difficulties.
The table below provides further information on loans existing at the 2021 reporting date which have had their terms renegotiated in the
last 24 months, regardless of whether the renegotiation is still in place or whether the loan has reverted to its original terms.
Mortgage payment deferrals offered to customers as a result of the COVID-19 pandemic are not considered to be forbearance and are
therefore excluded from the tables below.
Group & Society 2021
Capitalisation
£M
Transfer to
interest only
£M
Term
extension
£M
Other
payment
arrangements
£M
Total
forbearance
£M
Not past due 7.9 8.2 107.1 29.3 152.5
Past due up to 3 months 3.8 1.3 – 21.0 26.1
Past due over 3 months 6.5 1.3 – 37.6 45.4
Total forbearance 18.2 10.8 107.1 87.9 224.0
Group & Society 2020
Capitalisation
£M
Transfer to
interest only
£M
Term
extension
£M
Other
payment
arrangements
£M
Total
forbearance
£M
Not past due 11.9 10.3 85.8 22.8 130.8
Past due up to 3 months 6.5 2.4 – 19.8 28.7
Past due over 3 months 7.4 2.7 – 24.4 34.5
Total forbearance 25.8 15.4 85.8 67.0 194.0
33. Wholesale credit risk
(a) Summary
The Group holds various investments (liquid assets) in order to satisfy operational demand and to meet current and future liquidity
requirements. Credit risk arises because of the risk of factors such as deterioration in the individual investee’s financial health and
uncertainty within the wholesale market generally. Wholesale credit risk is managed through setting strict upper and lower limits to each
type of investment that are dependent on criteria such as: time to maturity, credit rating and originating country. These limits are set by
ALCO and monitored by the Treasury function on a continuous basis.
Wholesale credit risk also arises on the Group’s derivative portfolio, which is used for hedging market risk. This is mitigated through the
exchange of collateral through clearing and other netting arrangements.
Comprehensive management information on movement and performance within the wholesale portfolios means that credit risk is
effectively controlled and any adverse trends are identified before they impact on performance.
Further details on the Group’s management of wholesale credit risk are available on page 67 of the Strategic Report.
(b) Credit quality analysis
Counterparty credit ratings are used to inform the Group’s assessment of wholesale credit risk. The table below shows the liquid assets
impacted by wholesale credit risk and provides credit rating details for each exposure. The table shows exposures external to the Group
only and does not include debt securities issued by Group entities and retained by the Society.
Group 2021
Aaa
£M
Aa1-Aa3
£M
A1-A3
£M
Unrated
£M
Total
£M
Cash in hand and balances with the Bank of England – 2,538.7 – – 2,538.7
Loans and advances to credit instuitutions – 62.2 96.8 – 159.0
Investment securities
UK Government securities – 215.1 – – 215.1
Government agency debt 186.6 – – – 186.6
Supranational bonds 184.6 – – – 184.6
Covered bonds 273.7 – – – 273.7
Residential mortgage backed securities 89.1 – – – 89.1
Total liquid assets 734.0 2,816.0 96.8 – 3,646.8
20.1% 77.2% 2.7% – 100.0%
Group 2020
Aaa
£M
Aa1-Aa3
£M
A1-A3
£M
Unrated
£M
Total
£M
Cash in hand and balances with the Bank of England –1,823.2 – –1,823.2
Loans and advances to credit instuitutions – 95.3 106.5 0.1 201.9
Investment securities
UK Government securities – 57.1 – – 57.1
Government agency debt 245.3 – – –245.3
Supranational bonds 218.5 – – –218.5
Covered bonds 322.2 – – –322.2
Residential mortgage backed securities 104.1 2.5 – –106.6
Total liquid assets 890.1 1,978.1 106.5 0.1 2,974.8
29.9% 66.5% 3.6% –100.0%
All wholesale exposures are to financial institutions in major industrial countries. The largest exposure to a single institution other than
the UK Government was £68.8m (2020: £109.1m).
At 31 December 2021 none of the Group’s wholesale portfolio exposure was either past due or impaired (2020: none). There are no
assets that would otherwise be past due or impaired whose terms have been renegotiated.
The Group has implemented a policy that initial investments in liquid assets must be grade A3 or above. At 31 December 2021 100%
(2020: 100%) of the Group’s investments are rated single A or better.
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
221
Year ended 31 December 2021
33. Wholesale credit risk (continued)
(b) Credit quality analysis (continued)
The Group’s accounting policy for the calculation of impairment on liquid assets is detailed in note 1e. All liquid assets were classified
as at Stage 1 at 31 December 2021 and throughout the year. No impairment loss provision is held against these assets at 31 December
2021 or throughout the year since calculated ECLs are immaterial.
(c) Concentration risk
The Group’s exposure to counterparty concentrations is also kept under watch. Limits exist to mitigate the risk of overexposure to
geographical areas, and these are continuously reviewed and updated. At 31 December 2021, the Group had exposures to the following
geographical regions:
Group
2021
£M
Group
2021
%
Group
2020
£M
Group
2020
%
UK 3,275.4 89.8 2,478.1 83.2
Germany 136.6 3.7 195.2 6.6
Canada 50.0 1.4 50.0 1.7
USA 0.2 – 33.0 1.1
Global Supranational 119.5 3.3 136.9 4.6
European Supranational 36.0 1.0 44.1 1.5
Asia Supranational 29.1 0.8 37.5 1.3
Total liquid assets 3,646.8 100.0 2,974.8 100.0
(d) Collateral
The nature of the instrument determines the level of collateral held. Loans and debt securities are generally unsecured with the
exception of asset-backed securities which are secured by a collection of financial assets. The Group prefers to document its derivative
activity via the International Swaps and Derivatives Association (ISDA) Master Agreement. The majority of the Group’s derivatives
are transacted through a central clearing house. In conjunction with this the Group has executed with some counterparties a Credit
Support Annex (CSA). Under a CSA, cash is posted as collateral between the counterparties of the transaction to mitigate some of
the counterparty credit risk inherent in outstanding derivative positions, as well as credit risk exposure arising on sale and repurchase
transactions.
Transactions are usually settled on a gross basis, and therefore there is no netting in the financial statements. Legally the Group does
have a right of set-off for those transactions. Accordingly, the credit risk associated with such contracts is reduced to the extent that
negative mark-to-market valuations on derivatives will offset positive mark-to-market values on derivatives, subject to an absolute
of zero.
34. Liquidity risk
(a) Summary
Liquidity risk is the risk that the Group is unable to meet its financial obligations as they fall due, or can only do so at excessive cost. The
Group’s business model is to fund long term mortgages through short term retail customer deposits. In practice, although mortgages
may have long legal contractual maturities and customer deposits may have short notice periods, customer behaviour tends to shorten
mortgage lives and extend retail deposits. This reduces the inherent mismatch of the Group’s liquidity position, but does not eliminate
the risk and therefore the Group is required to take additional steps to manage and monitor the liquidity gap.
The Group’s liquidity policy is to maintain sufficient liquid resources to meet statutory, regulatory and operational requirements. These
requirements are designed to allow the Group to cover cash flow imbalances and fluctuations in funding, to retain full public confidence
in the solvency of the Group, and to enable the Group to meet its financial obligations. This is achieved through maintaining a prudent
level of high quality purchased liquid assets, through committed wholesale funding facilities (including securitisation arrangements) and
through management control of the growth of the business.
The development and implementation of liquidity policy is the responsibility of ALCO. The day-to-day management of liquidity is the
responsibility of the Treasury function with oversight from the Risk function.
34. Liquidity risk (continued)
(a) Summary (continued)
A series of liquidity stress tests is performed each month to confirm that the level of liquid resources remains appropriate. ALCO is
responsible for setting limits over the level and maturity profile of wholesale funding and for monitoring the composition of the Group’s
Statement of Financial Position.
Liquidity policy is approved by ALCO and agreed with the Board. Limits on potential cash flow mismatches over defined time horizons
are the principal method of liquidity control. The size of the Group’s holdings of readily realisable liquid assets is primarily driven by such
potential outflows and access to contingent funding from the Bank of England.
Further information on the Group’s management of liquidity risk in 2021 can be found on page 68 of the Strategic Report.
(b) Maturity profile of financial assets and liabilities
The table below analyses the Group’s financial assets and liabilities into relevant maturity groupings, based on the remaining period
between the date of the Statement of Financial Position and the contractual maturity date.
Group 2021
Repayable
on demand
£M
Less than
3 months
£M
3 to 12
months
£M
1 to 5
years
£M
Over 5
years
£M
Total
£M
Financial assets
Cash in hand and balances with the Bank of England 2,538.7 – – – – 2,538.7
Loans and advances to credit institutions 159.0 – – – – 159.0
Investment securities – 34.8 198.1 591.7 124.5 949.1
Derivative financial instruments – – 75.5 125.2 18.6 219.3
Loans and advances to customers
Loans fully secured on residential property 15.3 9.3 45.8 599.3 17,633.3 18,303.0
Other loans – – 0.9 0.1 223.2 224.2
Fair value adjustment for hedged risk on loans and advances
to customers (0.1) (0.1) (0.4) (5.5) (163.0) (169.1)
Total financial assets 2,712.9 44.0 319.9 1,310.8 17,836.6 22,224.2
Financial liabilities
Shares 6,659.4 1,126.6 3,442.4 4,008.6 21.0 15,258.0
Fair value adjustment for hedged risk on shares (31.8) (5.5) (16.4) (19.1) (0.1) (72.9)
Derivative financial instruments – 0.4 5.1 61.4 99.9 166.8
Amounts owed to credit institutions – 4.0 14.3 2,240.6 – 2,258.9
Amounts owed to other customers – 205.1 89.7 2.7 – 297.5
Debt securities in issue – – 427.7 1,627.6 499.3 2,554.6
Subordinated liabilities – – – – 339.4 339.4
Subscribed capital – – – – 227.3 227.3
Total financial liabilities 6,627.6 1,330.6 3,962.8 7,921.8 1,186.8 21,029.6
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
223
Year ended 31 December 2021
34. Liquidity risk (continued)
(b) Maturity profile of financial assets and liabilities (continued)
Group 2020
Repayable
on demand
£M
Less than
3 months
£M
3 to 12
months
£M
1 to 5
years
£M
Over 5
years
£M
Total
£M
Financial assets
Cash in hand and balances with the Bank of England 1,823.2 – – – –1,823.2
Loans and advances to credit institutions 201.9 – – – –201.9
Investment securities – 12.2 142.3 678.4 116.8 949.7
Derivative financial instruments – 28.4 2.5 139.4 22.5 192.8
Loans and advances to customers
Loans fully secured on residential property 8.9 9.8 43.8 590.9 16,099.1 16,752.5
Other loans 4.5 – – 0.9 231.0 236.4
Fair value adjustment for hedged risk on loans and advances
to customers – – 20.0 74.3 1.8 96.1
Total financial assets 2,038.5 50.4 208.6 1,483.9 16,471.2 20,252.6
Financial liabilities
Shares 5,794.7 944.7 3,621.5 3,784.4 17.4 14,162.7
Fair value adjustment for hedged risk on shares – (0.2) (7.3) (6.0) – (13.5)
Derivative financial instruments – 1.9 8.6 126.9 100.5 237.9
Amounts owed to credit institutions –109.5 202.6 1,185.2 –1,497.3
Amounts owed to other customers 18.6 189.1 49.0 – –256.7
Debt securities in issue – 96.3 481.2 2,120.9 202.3 2,900.7
Subscribed capital – – – –241.5 241.5
Total financial liabilities 5,813.3 1,341.3 4,355.6 7,211.4 561.7 19,283.3
Society 2021
Repayable
on demand
£M
Less than
3 months
£M
3 to 12
months
£M
1 to 5
years
£M
Over 5
years
£M
Total
£M
Financial assets
Cash in hand and balances with the Bank of England 2,538.7 – – – – 2,538.7
Loans and advances to credit institutions 96.5 – – – – 96.5
Investment securities – 34.8 198.1 591.7 215.8 1,040.4
Derivative financial instruments – – 75.5 116.6 18.3 210.4
Loans and advances to customers
Loans fully secured on residential property 15.3 9.3 45.8 599.3 17,633.3 18,303.0
Other loans – – 0.9 0.1 223.2 224.2
Fair value adjustment for hedged risk on loans and advances
to customers (0.1) (0.1) (0.4) (5.5) (163.0) (169.1)
Total financial assets 2,650.4 44.0 319.9 1,302.2 17,927.6 22,244.1
Financial liabilities
Shares 6,659.4 1,126.6 3,442.4 4,008.6 21.0 15,258.0
Fair value adjustment for hedged risk on shares (31.8) (5.5) (16.4) (19.1) (0.1) (72.9)
Derivative financial instruments – 0.4 5.1 35.8 99.9 141.2
Amounts owed to credit institutions – 4.0 14.3 2,240.6 – 2,258.9
Amounts owed to other customers – 205.1 89.7 2.7 243.4 540.9
Debt securities in issue – – 427.7 1,620.4 347.1 2,395.2
Subordinated liabilities – – – – 339.4 339.4
Subscribed capital – – – – 227.3 227.3
Total financial liabilities 6,627.6 1,330.6 3,962.8 7,889.0 1,278.0 21,088.0
34. Liquidity risk (continued)
(b) Maturity profile of financial assets and liabilities (continued)
Society 2020
Repayable
on demand
£M
Less than
3 months
£M
3 to 12
months
£M
1 to 5
years
£M
Over 5
years
£M
Total
£M
Financial assets
Cash in hand and balances with the Bank of England 1,823.2 – – – –1,823.2
Loans and advances to credit institutions 86.2 – – – – 86.2
Investment securities – 12.2 142.3 678.4 238.1 1,071.0
Derivative financial instruments – 28.4 2.5 125.9 22.5 179.3
Loans and advances to customers
Loans fully secured on residential property 8.9 9.8 43.8 590.9 16,099.1 16,752.5
Other loans 4.5 – – 0.9 231.0 236.4
Fair value adjustment for hedged risk on loans and advances
to customers – – 20.0 74.3 1.8 96.1
Total financial assets 1,922.8 50.4 208.6 1,470.4 16,592.5 20,244.7
Financial liabilities
Shares 5,794.7 944.7 3,621.5 3,784.4 17.4 14,162.7
Fair value adjustment for hedged risk on shares – (0.2) (7.3) (6.0) – (13.5)
Derivative financial instruments – 1.9 8.6 126.3 98.6 235.4
Amounts owed to credit institutions –109.5 202.6 1,185.2 –1,497.3
Amounts owed to other customers 37.9 189.1 49.0 –304.5 580.5
Debt securities in issue – 96.3 481.2 2,108.3 –2,685.8
Subscribed capital – – – –241.5 241.5
Total financial liabilities 5,832.6 1,341.3 4,355.6 7,198.2 662.0 19,389.7
(c) Gross contractual cash flows for financial liabilities
The following tables detail the Group’s remaining undiscounted contractual cash flows for its non-derivative financial liabilities including
interest that will be accrued to those instruments, except where the Group is entitled and intends to repay the liabilities before their
maturity.
Group 2021
Repayable
on demand
£M
Less than
3 months
£M
3 to 12
months
£M
1 to 5
years
£M
Over 5
years
£M
Total
£M
Shares 6,671.7 1,105.6 3,492.6 4,087.8 20.3 15,378.0
Amounts owed to credit institutions – 172.5 11.3 2,147.6 – 2,331.4
Amounts owed to other customers – 217.7 79.2 3.1 – 300.0
Debt securities in issue – 5.0 428.5 1,641.2 501.3 2,576.0
Subordinated liabilities – 2.6 2.6 21.0 352.6 378.8
Subscribed capital – 1.7 5.0 13.4 354.0 374.1
Total financial assets 6,671.7 1,505.1 4,019.2 7,914.1 1,228.2 21,338.3
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
225
Year ended 31 December 2021
34. Liquidity risk (continued)
(c) Gross contractual cash flows for financial liabilities (continued)
Group 2020
Repayable
on demand
£M
Less than
3 months
£M
3 to 12
months
£M
1 to 5
years
£M
Over 5
years
£M
Total
£M
Shares 5,797.0 990.3 3,619.6 3,867.2 16.5 14,290.6
Amounts owed to credit institutions –109.6 200.9 1,191.4 –1,501.9
Amounts owed to other customers –202.6 49.1 – –251.7
Debt securities in issue – 96.3 484.3 2,184.9 213.0 2,978.5
Subscribed capital* – 1.7 9.2 13.4 360.6 384.9
Total financial assets 5,797.0 1,400.5 4,363.1 7,256.9 590.1 19,407.6
* The prior year comparatives for subscribed capital have been restated following a re-assessment of future gross contractual cash
flows.
The following table details the Group’s contractual maturity for its derivative financial instruments. The table has been drawn up based
on the undiscounted net cash inflows / (outflows) on the derivative instruments that settle on a net basis and the undiscounted gross
inflows / (outflows) on those derivatives that require gross settlement. When the amount payable or receivable is not fixed, the amount
disclosed has been determined by reference to the conditions existing at the reporting date. For example, interest rates have been
projected as illustrated by the yield curves existing at the reporting date, and where the amount varies with changes in an index, the
amount disclosed is based on the level of the index at the reporting date.
Group 2021
Less than
3 months
£M
3 to 12
months
£M
1 to 5
years
£M
Over 5
years
£M
Total
£M
Swap contracts 4.9 9.6 (34.5) 103.3 83.3
Group 2020
Less than
3 months
£M
3 to 12
months
£M
1 to 5
years
£M
Over 5
years
£M
Total
£M
Swap contracts 20.1 47.4 69.3 143.5 280.3
(d) Pledged assets (encumbrance)
The Group has issued a number of debt instruments which are secured against its assets, specifically the retail mortgage portfolio.
These provide long term funding from institutional counterparties, either through cash realised from the sale of securities, or through
sale and repurchase agreements.
The Society established Leeds Building Society Covered Bonds LLP in 2009 and at 31 December 2021 had £1,640.5m covered bonds in
issue (2020: £1,640.5m). In addition, the Group had a further £152.1m (2020: £202.1m) of debt securities in issue through the Albion No.
4 securitisation programme.
The table below illustrates the external secured funding balances after redemptions in the mortgage pool:
2021 2020
Assets
pledged
£M
Secured
funding
£M
Assets
pledged
£M
Secured
funding
£M
Secured against loans and advances to customers – LBS Covered Bonds LLP 2,304.7 1,640.5 2,567.4 1,640.5
Secured against loans and advances to customers – Albion No.4 plc 270.8 152.1 346.7 202.1
Total 2,575.5 1,792.6 2,914.1 1,842.6
Pledged assets include those available to Leeds Building Society Covered Bonds LLP and Albion No.4 plc to provide collateral to support
external funding transactions. The secured funding balances above show issuance external to the Group, and do not include debt
securities retained by the Society.
34. Liquidity risk (continued)
(d) Pledged assets (encumbrance) (continued)
All of the assets pledged are retained in the Society’s Statement of Financial Position as it substantially retains control of the loans and
the risks and rewards associated with them.
The covered bond programme operates under a Mortgage Sale Agreement in which there is an equitable assignment of the loans
from the Society to the LLP. Legal title remains with the Society and full transfer of title is not effected until the occurrence of certain
‘perfection’ events, such as a failure to pay or breach of obligation on behalf of the Society, or the insolvency of the Society or the LLP.
The securitisation programme operates under a Mortgage Sale Agreement, where there is an equitable assignment of the loans from
the seller to the issuer, Albion No.4 plc. Legal title remains with the Society and full transfer of title is not effected until the occurrence of
certain ‘perfection’ events such as it being directed by a regulatory authority, the courts or the Society.
35. Market risk
(a) Summary
Market risk is the risk that market movements adversely impact the Group. It is the risk that the value of, or income arising from, the
Group’s assets and liabilities changes adversely due to movements in market variables, primarily interest rates (including interest bases)
or foreign currency rates. These risks are measured and managed at Group level.
The Group recognises that the effective management of market risk is essential to the maintenance of stable earnings and the
preservation of member value.
The Group’s exposure to market risk is governed by the Board approved Market Risk Policy. This policy sets out the nature of risk which
may be taken and aggregate risk limits. Based on these aggregate limits, ALCO assigns risk limits to all Group businesses and monitors
compliance with these limits. At each meeting ALCO reviews reports showing the Group’s exposure to market risks.
The Group’s exposure to market risk is managed by the Treasury function by using appropriate hedging instruments or by taking
advantage of natural hedges within the Group. Market risk is managed within a clearly defined framework of policy limits.
Market risk is measured and reported using a variety of techniques, according to the appropriateness of the technique to the exposure
concerned. The techniques used include interest rate gap analysis, duration analysis, basis point value analysis, scenario analysis, and
earnings at risk.
There has been no change in the year to the Group’s approach to managing and measuring market risk. Further details are on page 68 of
the Strategic Report.
(b) Interest rate risk
The primary market risk faced by the Group is interest rate risk. The net interest income and asset position of the Group is exposed to
movements in interest rates. This exposure is managed on a continuous basis, within limits set by the Board, using a combination of
offsetting assets and liabilities and derivatives. The Group uses interest rate stress testing and gap analysis to monitor and manage its
interest rate position.
The Group does not run a trading book and therefore does not have the type of higher risk exposure run by some banking institutions.
Given the Group’s policy of hedging fixed rate assets and liabilities back to floating rate, outright interest rate risk arises mainly from the
Board’s decision to invest the Group’s reserves according to a specified fixed rate maturity profile
The following table provides a summary of the interest rate repricing profile of the Group’s assets and liabilities as at 31 December 2021.
Assets and liabilities have been allocated to time bands by reference to the earlier of the next interest rate reset date and the contractual
maturity date. The table takes account of derivative financial instruments whose effect is to alter the interest basis of Group assets and
liabilities. The non-interest bearing balances have been included in a separate column.
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
227
Year ended 31 December 2021
35. Market risk (continued)
(b) Interest rate risk (continued)
Group 2021
Less than
3 months
£M
3 to 6
months
£M
6 to 12
months
£M
1 to 5
years
£M
More than
5 years
£M
No specific
reprice
date
£M
Non-
interest
bearing
£M
Total
£M
Assets
Liquid assets 3,193.9 8.7 144.2 291.9 – – 8.1 3,646.8
Loans and advances to
customers 3,182.8 1,249.5 2,758.2 11,062.2 231.7 – 42.8 18,527.2
Total interest bearing
assets 6,376.7 1,258.2 2,902.4 11,354.1 231.7 – 50.9 22,174.0
Total non-interest bearing
assets – – – – – – 339.7 339.7
Total assets 6,376.7 1,258.2 2,902.4 11,354.1 231.7 – 390.6 22,513.7
Liabilities
Shares 7,785.9 1,175.6 2,266.9 4,008.6 21.0 – – 15,258.0
Wholesale funding 3,825.9 454.6 50.0 773.0 – – 7.5 5,111.0
Subordinated liabilities – – – – 348.9 – (9.5) 339.4
Subscribed capital – – – – 200.0 27.3 – 227.3
Total interest bearing
liabilities 11,611.8 1,630.2 2,316.9 4,781.6 569.9 27.3 (2.0) 20,935.7
Total non-interest bearing
liabilities and equity – – – – – – 1,578.0 1,578.0
Total liabilities and equity 11,611.8 1,630.2 2,316.9 4,781.6 569.9 27.3 1,576.0 22,513.7
Effect of derivatives 6,314.4 501.7 (676.4) (5,979.0) (160.7) – – –
Interest rate sensitivity
gap 1,079.3 129.7 (90.9) 593.5 (498.9) (27.3) (1,185.4) –
35. Market risk (continued)
(b) Interest rate risk (continued)
Group 2020
Less than
3 months
£M
3 to 6
months
£M
6 to 12
months
£M
1 to 5
years
£M
More than
5 years
£M
No specific
reprice
date
£M
Non-
interest
bearing
£M
Total
£M
Assets
Liquid assets 2,595.8 55.1 78.4 226.3 – – 19.2 2,974.8
Loans and advances to
customers 3,666.8 1,301.3 2,435.5 9,365.3 179.0 – 41.0 16,988.9
Total interest bearing assets 6,262.6 1,356.4 2,513.9 9,591.6 179.0 – 60.2 19,963.7
Total non-interest bearing
assets – – – – – –676.0 676.0
Total assets 6,262.6 1,356.4 2,513.9 9,591.6 179.0 –736.2 20,639.7
Liabilities
Shares 6,739.3 868.1 2,753.5 3,784.4 17.4 – –14,162.7
Wholesale funding 3,199.7 476.0 48.2 899.0 – – 31.8 4,654.7
Subscribed capital – – – –200.0 23.4 18.1 241.5
Total interest bearing
liabilities 9,939.0 1,344.1 2,801.7 4,683.4 217.4 23.4 49.9 19,058.9
Total non-interest bearing
liabilities and equity – – – – – –1,580.8 1,580.8
Total liabilities and equity 9,939.0 1,344.1 2,801.7 4,683.4 217.4 23.4 1,630.7 20,639.7
Effect of derivatives 5,691.3 224.4 (148.7) (5,524.1) (242.9) – –
–
Interest rate sensitivity gap 2,014.9 236.7 (436.5) (615.9) (281.3) (23.4) (894.5) –
The Society’s interest rate repricing profile is not materially different to the Group position.
Liquid assets comprise cash in hand and balances with the Bank of England, loans and advances to credit institutions and investment
securities. Wholesale funding comprises amounts owed to credit institutions, amounts owed to other customers and debt securities in
issue.
The Group uses derivatives to manage interest rate risk and reduce its overall interest rate gap position. The profile of the interest flows
arising from these derivatives is set out above.
The Group monitors the impact of a range of possible interest rate changes on its assets and liabilities closely and sensitivities are
reported to ALCO on a monthly basis. The following table details the sensitivity of the Group’s and Society’s annual earnings to a 200
basis point change in interest rates at the year end (with all other variables held constant), subject to floors as stated which were updated
in 2020 to reflect the possibility of negative interest rates. A positive number indicates an increase in profit or other equity.
Group
+200bps
2021
£M
+200bps
2020
£M
-200bps
Floor at
-1%
2021
£M
-200bps
Floor at
-1%
2020
£M
Impact 48.8 74.4 (101.6) (48.5)
Interest rate risk is managed on a Group basis. The Society will differ to the overall Group position as the sensitivity would generate
offsetting movements in the subsidiaries.
Other interest rate risk exposures, such as basis risk (the risk of loss arising from changes in the relationship between interest rates
which have similar but not identical characteristics – such as SONIA and Bank Base Rate) and prepayment risk (the risk of loss arising
from early repayments of fixed rate mortgages and loans) are also monitored closely and regularly reported to ALCO.
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
229
Year ended 31 December 2021
35. Market risk (continued)
(c) Foreign currency risk
Foreign currency risk arises as a result of the Group’s activities in raising funds and purchasing investment securities in foreign
currencies. This is done to allow cost effective funding to be obtained across a wider pool of providers. The Group’s policy is not to run
any speculative foreign exchange positions. The majority of the Group’s assets and liabilities are denominated in sterling; however it also
holds euro mortgages and receives funding via its debt issuance in foreign currencies, which give rise to exchange rate impacts. Cross
currency interest rate swaps are utilised to reduce both the interest rate and exchange rate risk exposures that arise from operating in
foreign currencies.
The carrying amount of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date is as
follows:
Group
Assets
2021
£M
Assets
2020
£M
Liabilities
2021
£M
Liabilities
2020
£M
Euro 824.0 1,401.7 821.9 1,404.0
At the year end the Group has hedges in place to match 100% of its foreign currency exposures, via the use of cross currency swaps
which offset the impact of foreign exchange fluctuations. Therefore any movement in foreign currency through profit or loss and other
equity will be minimised. At 31 December 2021, a 10% movement in the sterling: euro exchange rate would result in a movement of
£0.2m (2020: £0.2m) in profit or loss or other equity.
(d) Other price risk
Other price risk is the risk resulting from the possibility that the price of a security may decline.
The Group’s policy is to have no material exposure to equity markets and to purchase only high quality liquid assets. Any exposures
arising from the Group’s products are eliminated as far as it is practicable by appropriate hedging contracts.
36. Derivative financial instruments and hedge accounting
(a) Derivative financial instruments
Derivative financial instruments are contracts or arrangements whose value is derived from one or more underlying price, rate or index
inherent in the contract or arrangement, such as interest rates or foreign exchange rates. These types of instruments tend to have a
smaller or no initial net investment relative to financial assets or liabilities offering the same risk and return, as cash flows are generally
settled at a future date.
Derivatives are only used by the Group in accordance with Section 9A of the Building Societies Act 1986, to reduce the risk of loss arising
from changes in interest rates or other factors of a prescribed description which affect the business. Accordingly, such instruments are
not used in trading activity or for speculative purposes. The Group utilises its derivative instruments for hedging purposes only.
The main derivatives used by the Group are interest rate swaps and cross currency swaps. The following table describes the significant
activities undertaken by the Group, the related risks associated with such activities and the types of derivatives which are typically used
in managing such risks. These risks may alternatively be managed using natural hedges that exist in the Group Statement of Financial
Position.
Activity Risk Type of Derivative Hedge Accounting
Fixed rate mortgage lending Sensitivity to changes in interest rates Pay fixed interest rate swaps Fair value hedge
Fixed rate asset investments Sensitivity to changes in interest rates Pay fixed interest rate swaps Fair value hedge
Fixed rate savings products Sensitivity to changes in interest rates Receive fixed interest rate swaps Fair value hedge
Fixed rate wholesale funding Sensitivity to changes in interest rates Receive fixed interest rate swaps Fair value hedge
Equity release mortgages Sensitivity to changes in interest rates Pay fixed interest rate swaps –
Investment and funding in foreign
currency
Sensitivity to changes in foreign
exchange rates
Cross currency interest rate swaps
and foreign exchange contracts
–
36. Derivative financial instruments and hedge accounting (continued)
(a) Derivative financial instruments (continued)
The Group manages risk within its risk tolerance, regardless of the accounting treatment.
Derivatives are entered into only when the underlying position being hedged contains the same risk features. The derivative used will
match the risks of the underlying asset or liability and therefore hedge the associated market risk.
All derivatives entered into by the Group are used for hedging purposes, however not all are designated as such for accounting purposes.
Some derivatives are held as economic hedges to which hedge accounting does not need to be applied. In these cases a natural offset
may be achieved; these types of hedge are only entered into where a high degree of effectiveness can be achieved.
Cross currency interest rate swaps are used to reduce both the interest rate risk and exchange rate risk exposures that come from
funding in foreign currency.
The Group discounts its collateralised and un-collateralised positions based on overnight interest rate curves.
The table below shows the value of derivatives by type:
Group 2021 Group 2020
Contract or
underlying
principal
amount
£M
Positive
fair value
£M
Negative
fair value
£M
Contract or
underlying
principal
amount
£M
Positive
fair value
£M
Negative
fair value
£M
Interest rate swaps available to designate in fair value
accounting hedges 19,498.9 157.2 (48.5) 15,524.9 84.8 (149.6)
Derivatives not designated in accounting hedges:
Equity release swaps 69.9 – (92.4) 73.5 – (85.1)
Interest rate swaps – – – 682.2 1.9 (1.9)
Cross currency swaps 874.4 62.1 (25.9) 1,246.6 105.8 (0.5)
Floating swaps – – – 881.0 0.3 (0.8)
Total derivatives held for hedging purposes 20,443.2 219.3 (166.8) 18,408.2 192.8 (237.9)
Society 2021 Society 2020
Contract or
underlying
principal
amount
£M
Positive
fair value
£M
Negative
fair value
£M
Contract or
underlying
principal
amount
£M
Positive
fair value
£M
Negative
fair value
£M
Interest rate swaps available to designate in fair value
accounting hedges 19,078.7 148.3 (48.5) 15,078.0 71.3 (149.5)
Derivatives not designated in accounting hedges:
Equity release swaps 69.9 – (92.4) 73.5 – (85.1)
Interest rate swaps 267.8 – (0.3) 341.1 1.9
–
Cross currency swaps 433.9 62.1 – 799.8 105.8 –
Floating swaps – – – 881.0 0.3 (0.8)
Total derivatives held for hedging purposes 19,850.3 210.4 (141.2) 17,173.4 179.3 (235.4)
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
231
Year ended 31 December 2021
36. Derivative financial instruments and hedge accounting (continued)
(a) Derivative financial instruments (continued)
The following tables analyse derivatives by contractual and residual maturity:
Group 2021 Group 2020
Notional
principal
amount
£M
Replacement
cost
£M
Notional
principal
amount
£M
Negative fair
value
£M
Under 1 year 6,320.5 75.5 4,639.0 30.9
Between 1 and 5 years inclusive 12,369.2 125.2 12,151.0 139.4
Over 5 years 1,753.5 18.6 1,618.2 22.5
Total derivatives 20,443.2 219.3 18,408.2 192.8
Society 2021 Society 2020
Notional
principal
amount
£M
Replacement
cost
£M
Notional
principal
amount
£M
Negative fair
value
£M
Under 1 year 6,320.5 75.5 4,639.0 30.9
Between 1 and 5 years inclusive 11,508.5 116.6 11,257.3 125.9
Over 5 years 2,021.3 18.3 1,277.1 22.5
Total derivatives 19,850.3 210.4 17,173.4 179.3
(b) Hedge accounting
The Group holds a portfolio of fixed rate mortgages, savings and investments and is therefore exposed to changes in interest rate risk
(see note 35). As shown in the table on page 228 the Group manages this risk by entering into interest rate swaps that either pay or
receive a fixed rate.
By entering into these swaps the Group is hedging interest rate risk only. Other risks, such as credit risk, are managed but not hedged.
These risks are managed by entering into swap contracts with high quality counterparties, requiring the posting of collateral and clearing
swaps through central counterparties.
The interest rate risk that arises from fixed rate mortgages and savings is managed by entering into swaps on a monthly basis. The
exposure fluctuates due to new products being added, products maturing and early repayments in the case of mortgage products. For
this reason the Group utilises a dynamic hedge accounting strategy (also known as macro hedging) to manage the exposure created by
entering into swap contracts this way.
The Group uses macro fair value hedges to recognise the changes in fair value of the hedged items (the mortgage and savings products)
due to the changes in interest rates and therefore can mitigate the impact on profit and loss that would arise if only the changes in fair
value from the interest rate swaps were recognised.
In addition to the macro fair value hedges used to manage the interest rate risk of mortgages and savings, the Group also uses
one-to-one hedges, known as micro hedges, to manage the interest rate risk of fixed rate funding issuances. In this type of hedge
a single swap is matched directly against a fixed rate bond and remains matched until maturity or a de-designation event (such as
becoming ineffective). The changes in fair value are recognised in the same way as the macro hedge, with the change in the fair value of
the bond and swap being offset to reduce volatility in the Income Statement.
36. Derivative financial instruments and hedge accounting (continued)
(b) Hedge accounting (continued)
The notional value of interest rate swaps designated into hedge relationships is as follows, analysed by maturity date:
Group 2021
Less than
3 months
£M
3 to 12
months
£M
1 to 5
years
£M
Over 5
years
£M
Macro hedges of loans and advances to customers
Swap notional 5.0 2,730.8 8,162.7 464.6
Average fixed rate 0.7 0.2 0.5 0.8
Macro hedges of shares
Swap notional 504.0 1,771.5 1,161.0 –
Average fixed rate (0.1) 0.1 0.4 –
Micro hedges of wholesale funding denominated in Sterling
Swap notional – – 350.0 550.0
Average fixed rate – – 1.5 2.2
Micro hedges of wholesale funding denominated in Euros
Swap notional – 420.1 420.1 –
Average fixed rate – 1.4 0.5 –
Group 2020
Less than
3 months
£M
3 to 12
months
£M
1 to 5
years
£M
Over 5
years
£M
Macro hedges of loans and advances to customers
Swap notional 200.9 1,025.5 5,973.2 275.7
Average fixed rate 1.1 0.7 0.9 0.8
Macro hedges of shares
Swap notional 208.0 1,199.0 1,590.5
–
Average fixed rate 0.5 0.7 0.9 –
Micro hedges of wholesale funding denominated in Sterling
Swap notional – – –200.0
Average fixed rate – – – 3.8
Micro hedges of wholesale funding denominated in Euros
Swap notional – –893.7
–
Average fixed rate – – 0.9 –
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
233
Year ended 31 December 2021
36. Derivative financial instruments and hedge accounting (continued)
(b) Hedge accounting (continued)
The tables below provide analysis of the impacts of hedge accounting on the Statement of Financial Position and the Income Statement:
Notional
amount
£M
Carrying Amount
Line item in the
Statement of
Financial Position
that includes
the hedging
instrument
Change in
fair value of
the hedging
instrument used
for recognising
ineffectiveness in
the year
£M
Total
ineffectiveness
recognised
in Income
Statement
£M
Line item
in Income
Statement
that includes
hedge
effectivenessGroup 2021
Assets
£M
Liabilities
£M
Interest rate swaps
Hedge of loans
and advances to
customers
11,363.1 125.7 (9.9) Derivative financial
instruments
227.5 (54.4) Fair value
gains less
losses from
financial
instruments
Hedge of shares 3,436.5 0.3 (16.9) Derivative financial
instruments
(47.7) (17.5) Fair value
gains less
losses from
financial
instruments
Hedge of wholesale
funding denominated
in Sterling
900.0 4.1 (12.9) Derivative financial
instruments
(22.7) (0.1) Fair value
gains less
losses from
financial
instruments
Hedge of wholesale
funding denominated
in Euros
840.2 13.8 – Derivative financial
instruments
(9.3) – Fair value
gains less
losses from
financial
instruments
Carrying Amount
Accumulated amount of
fair value adjustments
on the hedged item
Line item in the
Statement of
Financial Position
which includes the
hedged item
Change in
value used to
calculate hedge
ineffectiveness
£M
Accumulated
amount of fair
value adjustments
remaining in the
Statement of
Financial Position
due to items that
have ceased to
be adjusted for
hedging gains or
losses
£MGroup 2021
Assets
£M
Liabilities
£M
Assets
£M
Liabilities
£M
Hedged items
Loans and advances
to customers
11,480.1 – 6.1 (123.0) Fair value
adjustment for
hedged risk on
loans and advances
to customers
(281.9) 14.9
Shares – 3,136.3 0.2 (17.2) Fair value
adjustment for
hedged risk on
shares
30.2 (8.2)
Wholesale funding
denominated in
Sterling
– 900.0 14.8 (3.7) Debt securities
in issue /
subordinated
liabilities /
subscribed capital
22.6 (0.9)
Wholesale funding
denominated in
Euros
– 840.2 – (8.8) Debt securities in
issue
9.3 (1.5)
36. Derivative financial instruments and hedge accounting (continued)
(b) Hedge accounting (continued)
Notional
amount
£M
Carrying Amount
Line item in the
Statement of
Financial Position
that includes the
hedging instrument
Change in
fair value of
the hedging
instrument used
for recognising
ineffectiveness in
the year
£M
Total
ineffectiveness
recognised
in Income
Statement
£M
Line item
in Income
Statement
that includes
hedge
effectivenessGroup 2020
Assets
£M
Liabilities
£M
Interest rate swaps
Hedge of loans
and advances to
customers
7,475.3 0.4 (108.5) Derivative financial
instruments
(86.6) (17.3) Fair value
gains less
losses from
financial
instruments
Hedge of shares 2,997.5 31.0 (0.2) Derivative financial
instruments
15.4 (10.1) Fair value
gains less
losses from
financial
instruments
Hedge of wholesale
funding denominated
in Sterling
200.0 18.1 –Derivative financial
instruments
4.5 (0.6) Fair value
gains less
losses from
financial
instruments
Hedge of wholesale
funding denominated
in Euros
893.7 19.2 –Derivative financial
instruments
0.6 0.1 Fair value
gains less
losses from
financial
instruments
Carrying Amount
Accumulated amount of
fair value adjustments
on the hedged item
Line item in the
Statement of
Financial Position
which includes the
hedged item
Change in
value used to
calculate hedge
ineffectiveness
£M
Accumulated
amount of fair
value adjustments
remaining in the
Statement of
Financial Position
due to items that
have ceased to
be adjusted for
hedging gains or
losses
£MGroup 2020
Assets
£M
Liabilities
£M
Assets
£M
Liabilities
£M
Hedged items
Loans and advances
to customers
11,782.8 –164.0 (0.5) Fair value
adjustment for
hedged risk on
loans and advances
to customers
103.9 45.3
Shares –2,311.3 0.2 (12.7) Fair value
adjustment for
hedged risk on
shares
(5.3) (17.0)
Wholesale funding
denominated in
Sterling
–201.4 – (18.1) Debt securities in
issue
(3.9)
–
Wholesale funding
denominated in
Euros
–1,005.8 – (19.3) Debt securities in
issue
(0.7) (1.8)
(c) IBOR reform
During 2021, the Group successfully completed its transition programme to transfer all contracts impacted by IBOR reform to an
alternative benchmark rate.
At 31 December 2021 the Group therefore had no remaining exposure to LIBOR.
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
235
Year ended 31 December 2021
37. Fair values
(a) Carrying value and fair value of financial instruments not carried at fair value
The classification and measurement categories of the Group’s financial assets and liabilities are detailed in note 10.
The following tables summarise the carrying amounts and fair values of those financial assets and liabilities not carried at fair value in the
Statement of Financial Position. Where available, market values have been used to determine fair values. Where market values are not
available, fair values have been calculated for other financial instruments by discounting cash flows at prevailing interest rates.
Group 2021 Society 2021
Fair value
hierarchy
level
Carrying
value
£M
Fair
value
£M
Carrying
value
£M
Fair
value
£M
Financial assets:
Cash in hand and balances with the Bank of England Level 1 2,538.7 2,538.7 2,538.7 2,538.7
Loans and advances to credit institutions i) Level 2 159.0 159.0 96.5 96.5
Loans and advances to customers
Loans fully secured on residential property ii) Level 3 18,303.0 18,510.4 18,303.0 18,510.4
Other loans ii) Level 2 8.7 8.7 8.7 8.7
Financial liabilities:
Shares ii) Level 2 15,258.0 15,292.1 15,258.0 15,292.1
Amounts owed to credit institutions iii) Level 2 2,258.9 2,258.9 2,258.9 2,258.9
Amounts owed to other customers ii) Level 2 297.5 297.5 540.9 540.9
Debt securities in issue iv) Level 1 2,402.5 2,415.5 2,395.2 2,422.7
Debt securities in issue iv) Level 2 152.1 187.7 – –
Subordinated liabilities v) Level 1 339.4 346.1 339.4 346.1
Subscribed capital v) Level 1 227.3 294.5 227.3 294.5
Group 2020 Society 2020
Fair value
hierarchy
level
Carrying
value
£M
Fair
value
£M
Carrying
value
£M
Fair
value
£M
Financial assets:
Cash in hand and balances with the Bank of England Level 1 1,823.2 1,823.2 1,823.2 1,823.2
Loans and advances to credit institutions i) Level 2 201.9 201.9 86.2 86.2
Loans and advances to customers
Loans fully secured on residential property ii) Level 3 16,752.5 18,575.2 16,752.5 18,575.2
Other loans ii) Level 2 14.4 14.4 14.4 14.4
Financial liabilities:
Shares ii) Level 2 14,162.7 14,267.7 14,162.7 14,267.7
Amounts owed to credit institutions iii) Level 2 1,497.3 1,497.3 1,497.3 1,497.3
Amounts owed to other customers ii) Level 2 256.7 256.7 580.5 580.5
Debt securities in issue iv) Level 1 2,698.6 2,786.9 2,685.8 2,799.6
Debt securities in issue iv) Level 2 202.1 202.0 – –
Subscribed capital v) Level 1 241.5 251.8 241.5 251.8
37. Fair values (continued)
(a) Carrying value and fair value of financial instruments not carried at fair value (continued)
Fair value represents the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in
an arm’s length transaction. The following methods and assumptions have been applied in determining fair value:
i) The carrying amount of loans and advances to credit institutions, with a maturity of under 12 months, is assumed to equate to their
fair value.
ii) The fair value of loans and advances to customers, shares and amounts owed to other customers is calculated using the effective
interest rate method on the discounted cash flow basis, which also includes an assessment of future credit loss where appropriate.
iii) The fair value of floating rate and overnight deposits is approximately equal to their carrying amount. The estimated fair value of fixed
rate loans and deposits is based on discounted cash flows using prevailing money market interest rates for debts with similar credit
risk and remaining maturity.
iv) Debt securities in issue are valued by reference to their market value where an active market exists. Where no active market exists, a
discounted cash flow approach is used.
v) The fair value of subordinated liabilities and subscribed capital is obtained from market prices.
(b) Fair value measurement basis for financial instruments carried at fair value
The table below classifies all assets and liabilities carried at fair value in the Statement of Financial Position according to the method used
to establish their fair value.
Group 2021
Level 1
£M
Level 2
£M
Level 3
£M
Total
£M
Assets:
Investment securities 215.1 734.0 – 949.1
Derivative financial instruments – 219.3 – 219.3
Loans and advances to customers – – 215.5 215.5
Fair value adjustment for hedged risk on loans and advances to customers – – (169.1) (169.1)
Total assets 215.1 953.3 46.4 1,214.8
Liabilities:
Fair value adjustment for hedged risk on shares – (72.9) – (72.9)
Derivative financial instruments – 89.2 77.6 166.8
Total liabilities – 16.3 77.6 93.9
Group 2020
Level 1
£M
Level 2
£M
Level 3
£M
Total
£M
Assets:
Investment securities 57.1 892.6 –949.7
Derivative financial instruments –190.9 1.9 192.8
Loans and advances to customers – –222.0 222.0
Fair value adjustment for hedged risk on loans and advances to customers – – 96.1 96.1
Total assets 57.1 1,083.5 320.0 1,460.6
Liabilities:
Fair value adjustment for hedged risk on shares – – (13.5) (13.5)
Derivative financial instruments –171.8 66.1 237.9
Total liabilities –171.8 52.6 224.4
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
237
Year ended 31 December 2021
37. Fair values (continued)
(b) Fair value measurement basis for financial instruments carried at fair value (continued)
Society 2021
Level 1
£M
Level 2
£M
Level 3
£M
Total
£M
Assets:
Investment securities 215.1 825.3 – 1,040.4
Derivative financial instruments – 210.4 – 210.4
Loans and advances to customers – – 215.5 215.5
Fair value adjustment for hedged risk on loans and advances to customers – – (169.1) (169.1)
Total assets 215.1 1,035.7 46.4 1,297.2
Liabilities:
Fair value adjustment for hedged risk on shares – (72.9) – (72.9)
Derivative financial instruments – 63.3 77.9 141.2
Total liabilities – (9.6) 77.9 68.3
Society 2020
Level 1
£M
Level 2
£M
Level 3
£M
Total
£M
Assets:
Investment securities 57.1 1,013.9 –1,071.0
Derivative financial instruments –177.4 1.9 179.3
Loans and advances to customers – –222.0 222.0
Fair value adjustment for hedged risk on loans and advances to customers – – 96.1 96.1
Total assets 57.1 1,191.3 320.0 1,568.4
Liabilities:
Fair value adjustment for hedged risk on shares – – (13.5) (13.5)
Derivative financial instruments –171.2 64.2 235.4
Total liabilities –171.2 50.7 221.9
Level 1: Relates to financial instruments where fair values are taken from quoted prices in active markets for identical assets or liabilities,
without adjustment.
Level 2: Valuations of financial instruments for which significant inputs are taken from observable market data for the asset or liability.
These include quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or
liabilities in markets which are not active. These also include valuations where models are used to calculate the present values
of expected future cash flows, using solely inputs (such as interest rate curves) from published market observable sources.
Level 3: The valuation of the asset or liability is not solely based on observable market data and includes unobservable inputs. Valuation
techniques include net present value and discounted cash flow methods. The assumptions used in such models include
risk-free benchmark interest rates, foreign currency exchange rates and expected price volatilities. The objective of the
valuation techniques is to determine a fair value that reflects the price of the financial instrument that would have been used
by two counterparties in an arm’s length transaction.
During the year, the fair value adjustment for hedged risk on shares has been reclassified from Level 3 to Level 2 since the valuation does
not use unobservable inputs.
37. Fair values (continued)
(c) Reconciliation of level 3 fair value measurements of financial instruments
Group 2021
Derivative
financial
instruments
£M
Loans and
advances to
customers
£M
Fair value
adjustment
for hedged
risk
£M
Total
£M
At 1 January 2021 (64.2) 222.0 109.6 267.4
Total (losses) / gains in the Income Statement (13.4) 0.6 – (12.8)
Movement in fair value adjustment for hedged risk on loans and advances to customers – – (265.2) (265.2)
Reclassification of fair value adjustment for hedged risk on shares to Level 2 – – (13.5) (13.5)
Net repayment in the year – (7.1) – (7.1)
At 31 December 2021 (77.6) 215.5 (169.1) (31.2)
Group 2020
Derivative
financial
instruments
£M
Loans and
advances to
customers
£M
Fair value
adjustment
for hedged
risk
£M
Total
£M
At 1 January 2020 (54.8) 219.4 54.2 218.8
Total (losses) / gains in the Income Statement (9.4) 6.2 –(3.2)
Movement in fair value adjustment for hedged risk on loans and advances to customers – – 72.2 72.2
Movement in fair value adjustment for hedged risk on shares – – (16.8) (16.8)
Net repayment in the year – (3.6) –(3.6)
At 31 December 2020 (64.2) 222.0 109.6 267.4
Society 2021
Derivative
financial
instruments
£M
Loans and
advances to
customers
£M
Fair value
adjustment
for hedged
risk
£M
Total
£M
At 1 January 2021 (64.2) 222.0 109.6 267.4
Total (losses) / gains in the Income Statement (13.7) 0.6 – (13.1)
Movement in fair value adjustment for hedged risk on loans and advances to customers – – (265.2) (265.2)
Reclassification of fair value adjustment for hedged risk on shares to Level 2 – – (13.5) (13.5)
Net repayment in the year – (7.1) – (7.1)
At 31 December 2021 (77.9) 215.5 (169.1) (31.5)
Society 2020
Derivative
financial
instruments
£M
Loans and
advances to
customers
£M
Fair value
adjustment
for hedged
risk
£M
Total
£M
At 1 January 2020 (54.8) 219.4 54.2 218.8
Total (losses) / gains in the Income Statement (9.4) 6.2 –(3.2)
Movement in fair value adjustment for hedged risk on loans and advances to customers – – 72.2 72.2
Movement in fair value adjustment for hedged risk on shares – – (16.8) (16.8)
Net repayment in the year – (3.6) –(3.6)
At 31 December 2020 (64.2) 222.0 109.6 267.4
Total losses for the year are included in fair value losses from financial instruments in the Income Statement.
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
239
Year ended 31 December 2021
37. Fair values (continued)
(d) Recurring fair value measurement
Financial assets /
financial liabilities
Fair value at
31 December
2021
Fair value at
31 December
2020
Fair value
hierarchy
Valuation technique(s) and
key input(s)
Significant
unobservable
input(s)
Relationship of
unobservable
inputs to
fair value
Investment
securities (Gilts and
Treasury Bills)
Group
Assets –
£215.1m
Society
Assets –
£215.1m
Group
Assets –
£57.1m
Society
Assets –
£57.1m
Level 1 Quoted bid prices in an active
market sourced from third party
data providers
N/A N/A
Investment
securities
(excluding Gilts and
Treasury Bills)
Group
Assets –
£734.0m
Society
Assets –
£825.3m
Group
Assets –
£892.6m
Society
Assets –
£1,013.9m
Level 2 Valuations are sourced from third
party data providers. The nature
of these instruments means that
whilst a market exists, pricing
activity may be limited.
N/A N/A
Derivative financial
instruments
(interest rate
swaps)
Group
Assets –
£157.2m and
Liabilities –
£48.5m
Society
Assets –
£148.3m and
Liabilities –
£48.5m
Group
Assets –
£85.1m and
Liabilities –
£150.4m
Society
Assets –
£71.6m and
Liabilities –
£150.3m
Level 2 Discounted cash flow. Future
cash flows are estimated based
on forward interest rates (from
observable yield curves at the
end of the reporting period) and
contract interest rates, discounted
at a rate that reflects the credit
risk exposure to the various
counterparties.
N/A N/A
Derivative financial
instruments (cross
currency swaps)
Group
Assets –
£62.1m and
Liabilities –
£25.9m
Society
Assets –
£62.1m
Group
Assets –
£105.8m and
Liabilities –
£0.5m
Society
Assets –
£105.8m
Level 2 Discounted cash flow. Future
cash flows are estimated based
on forward interest rates (from
observable yield curves at the
end of the reporting period) and
contract interest rates discounted
at a rate that reflects the credit
risk exposure to the various
counterparties. Any foreign
currency amounts are translated
into sterling at the contract
exchange rate.
N/A N/A
Derivative financial
instruments (equity
release swaps)
(Level 2)
Group
Liabilities –
£14.8m
Society
Liabilities –
£14.8m
Group
Liabilities –
£20.9m
Society
Liabilities –
£20.9m
Level 2 Discounted cash flow. Future
cash flows are estimated based
on forward interest rates (from
observable yield curves at the
end of the reporting period) and
contract interest rates discounted
at a rate that reflects the credit
risk exposure to the counterparty.
The profile of future notional
amounts is specified in the
contract.
N/A N/A
37. Fair values (continued)
(d) Recurring fair value measurement (continued)
Financial assets /
financial liabilities
Fair value at
31 December
2021
Fair value at
31 December
2020
Fair value
hierarchy
Valuation technique(s) and
key input(s)
Significant
unobservable
input(s)
Relationship of
unobservable
inputs to
fair value
Fair value
adjustment for
hedged risk on
shares
Group
Liabilities –
£(72.9m)
Society
Liabilities –
£(72.9m)
Group
Liabilities –
£(13.5m)
Society
Liabilities –
£(13.5m)
Level 2 Discounted cash flow. Future
cash flows are estimated based
on contractal interest rates and
balances of fixed rate shares,
discounted at the risk free rate.
N/A N/A
Derivative financial
instruments (equity
release swaps)
(Level 3)
Group
Liabilities –
£77.6m
Society
Liabilities –
£77.6m
Group
Liabilities –
£64.2m
Society
Liabilities –
£64.2m
Level 3 Discounted cash flow. Future cash
flows are based on a projection of
interest rates and RPI, a discount
rate to reflect the counterparty
risk and assumptions for future
mortality and prepayment which
determine the profile of future
notional amounts.
Assumptions
on future life
expectancy of
customers based
on best estimate
mortality data.
Assumptions
on the level of
prepayment.
An increase in
life expectancy
or reduction in
prepayments will
increase the value
of the liability.
Derivative financial
instruments
(securitisation
swaps)
Society
Liabilities –
£0.3m
Society
Assets –
£1.9m
Level 3 Discounted cash flow. The
valuations are based on a
discounted cash flow model
which uses a projection of
interest rates, a discount rate
to reflect the counterparty risk
and assumptions for future
prepayment. The notional profile
of the swaps tracks the balance of
a loan portfolio which is subject to
prepayment.
Assumptions on
future notional
balances related
to mortgage
prepayment
rates.
An increase in
prepayment rates
will increase the
fair value of the
swaps.
Loans and advances
to customers
(collateral loan)
Group
Assets –
£215.5m
Society
Assets –
£215.5m
Group
Assets –
£222.0m
Society
Assets –
£222.0m
Level 3 Discounted cash flow. The
valuations are based on a
discounted cash flow model
which uses projections of
interest rates, a discount rate and
assumptions for future mortality
and prepayment. The no negative
equity component of the loan
is valued using a stochastic
modelling technique.
Assumptions
on future life
expectancy of
customers based
on best estimate
mortality data.
Assumptions
on the level of
repayment, house
price volatility and
the discount rate.
An increase in
life expectancy
or reduction in
prepayment will
increase the value
of the asset. An
increase in house
price volatility or
the discount rate
will reduce the
value of the asset.
Fair value
adjustment for
hedged risk on
loans and advances
to customers
Group
Assets –
£(169.1m)
Society
Assets –
£(169.1m)
Group
Assets –
£96.1m
Society
Assets –
£96.1m
Level 3 Discounted cash flow. Future
cash flows are estimated based
on contractal interest rates and
projected fixed rate mortgage
balances, discounted at the risk
free rate.
Assumptions on
future mortgage
balances related
to mortgage
prepayment
rates.
An increase in
prepayment rates
will reduce the
value of the fair
value adjustment.
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
241
37. Fair values (continued)
(e) Level 3 unobservable inputs
(i) Derivative financial instruments (securitisation swaps and Level 3 equity release swaps)
The valuation of securitisation swaps is performed using models which utilise a combination of observable market interest rate data and
unobservable assumptions about future mortgage prepayment. At 31 December 2021, a 20% proportionate increase in prepayments
would lead to an increase in the fair value of the swaps of £0.4m. A 20% proportionate reduction in prepayments would decrease the fair
value by £0.5m. These sensitivities reflect the variability in prepayment rates observed historically.
The deal 3 equity release swap is linked to RPI and is valued using a discounted cash flow model which uses unobservable input
assumptions for RPI, prepayment and the discount rate used to discount future cash flows. Wherever possible these input assumptions
are calculated with reference to actual historic experience. The variable which is considered to have the largest impact on the value of the
swap is the prepayment rate. At 31 December 2021, a 100 basis points increase in assumed prepayment rate would increase the value of
the swap by £6.8m and a 100 basis points decrease in assumed prepayment rates would reduce the value of the swap by £7.8m.
(ii) Loans and advances to customers (collateral loan)
The collateral loan which represents a pool of equity release mortgages is valued using a discounted cash flow model which uses
unobservable input assumptions for property price volatility, sales price haircut, mortality, prepayment and the discount rate used to
discount future cash flows. Wherever possible these input assumptions are calculated with reference to actual historic experience.
The variables which are considered to have the largest impact on the value of the loan are property price volatility, sales price haircut
and the discount rate. The sensitivities below reflect a range of alternative assumptions based on observed historic data and regulatory
guidance.
At 31 December 2021, a 300 basis points increase in assumed property price volatility would reduce the value of the collateral loan by
£5.6m and a 300 basis points decrease in assumed property price volatility would increase the value of the collateral loan by £4.4m.
A 500 basis points increase in the sales price haircut would reduce the value of the collateral loan by £6.6m and a 500 basis points
decrease in the sales price haircut would increase the value of the collateral loan by £5.9m. A 50 basis points increase in the discount rate
would reduce the value of the collateral loan by £10.9m and a 50 basis points decrease in the discount rate would increase the value of
the collateral loan by £7.3m.
(iii) Fair value adjustment for hedged risk on loans and advances to customers
The Group designates a portfolio of fixed rate mortgages into hedge relationships to mitigate interest rate risk. The calculation of the
fair value uses observable market interest rate data and assumptions about projected prepayments. These prepayment assumptions
are unobservable inputs that are calculated using historic data and reviewed periodically so that projections are broadly in line with actual
data, with sensitivities calculated based on historic observed variability.
At 31 December 2021, a 20% proportionate increase in mortgage repayments would lead to a reduction in the fair value of the
mortgages in the hedge relationship of £3.6 million. A 20% proportionate decrease in mortgage repayments would lead to an increase in
the fair value of the mortgages of £3.8 million.
38. Events after the date of the Statement of Financial Position
There have been no subsequent events between 31 December 2021 and the date of approval of these Annual Report and Accounts by
the Board which would have had a material impact on the financial position of the Group or the Society.
Year ended 31 December 2021
Annual Business Statement
Year ended 31 December 2021
1. Statutory percentages
31 December
2021
Statutory
Limit
Lending limit 2.4% 25%
Funding limit 25.1% 50%
The above percentages have been calculated in accordance with the provisions of the Building Societies Act 1986 (as amended by the
Building Societies Act 1997).
The lending limit measures the proportion of business assets not in the form of loans fully secured on residential property. Business
assets are the total assets of the Group as shown in the Statement of Financial Position, plus impairment provisions for loans and
advances to customers, less liquid assets, intangible assets and property, plant and equipment.
The funding limit measures the proportion of shares and borrowings (excluding fair value adjustment for hedged risk) not in the form of
shares held by individuals.
2. Other percentages
31 December
2021
31 December
2020
As a percentage of shares and borrowings:
Gross capital 9.04% 7.39%
Free capital 8.51% 6.81%
Liquid assets 17.90% 15.81%
Profit for the financial year as a percentage of mean total assets 0.56% 0.30%
Management expenses as a percentage of mean total assets 0.58% 0.48%
The above percentages have been prepared from the Group’s consolidated accounts and in particular:
n
‘shares and borrowings’ represent the total of shares, amounts owed to credit institutions, amounts owed to other customers and
debt securities in issue;
n
‘gross capital’ represents the aggregate of general reserve, other reserve, revaluation reserve, subordinated liabilities and subscribed
capital;
n
‘free capital’ represents the aggregate of gross capital less intangible assets and property, plant and equipment;
n
‘liquid assets’ represent the total of cash in hand and balances with the Bank of England, loans and advances to credit institutions and
investment securities;
n
‘mean total assets’ represent the amount produced by halving the aggregate of total assets at the beginning and end of the financial
year; and
n
‘management expenses’ represent the aggregate of administrative expenses, depreciation and amortisation.
Notes to the Accounts continued
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
243
Annual Business Statement continued
Year ended 31 December 2021
3. Information relating to the directors at 31 December 2021
Name Occupation
Date of
Birth
Date first
appointed Other directorships
Chair
I.C.A. Cornish
Chair from 3 April 2020
Chair 11.11.60 01.01.19
Macmillan Cancer Support
Vice Chair
G.J. Hoskin
Vice Chair and Senior Independent
Director from 1 January 2019
Non-Executive Director 18.09.60 16.11.15
Saga plc
Acromas Insurance Company Ltd
Chief Executive
*R G Fearon
Chief Executive from 27 February 2019
Chief Executive Officer 16.07.78 19.02.16
None
Directors
A.M. Barnes Non-Executive Director 10.11.68 01.02.19
Globaldata plc
Quilter Investment Platform Ltd
Quilter Life & Pensions Ltd
*A. P. Conroy Chief Financial Officer 11.12.75 06.01.20 Saltmine Trust (Trustee)
**Leeds Financial Services Ltd
**Leeds Mortgage Funding Ltd
Arkose Funding Ltd
D. Fisher Non-Executive Director 02.08.58 27.03.12 Tandem Bank Ltd
Tandem Money Ltd
N.A. Fuller Non-Executive Director 17.12.66 01.12.20 Aspinall Financial Services Ltd
*A.J. Greenwood Deputy Chief Executive
Officer
11.12.69 08.01.15 None
*R. J. Howse Chief Operating Officer 03.12.70 01.05.21 None
L.R. McManus Non-Executive Director 17.06.68 01.09.17 Doggy Day Care Academy Ltd
Kane LMMG Ltd
A. Tadayon Non-Executive Director 10.06.66 22.10.21 Tadayon Consulting Ltd
(*executive directors)
(**Society subsidiary)
The Society’s executive director service contracts can be terminated on twelve months’ notice by either the Society or the director.
Documents may be served on the above named directors at: c/o Deloitte LLP (Ref PB), 1 City Square, Leeds, LS1 2AL.
Country by Country Reporting
Year ended 31 December 2021
Leeds Building Society provides disclosures below in accordance
with the Capital Requirements (Country by Country Reporting)
Regulations 2013. The information below has been audited in
accordance with the standards required by Directive 2006/43/EC.
Nature and location of the Group’s activities
Leeds Building Society is the UK’s fifth largest building society with
50 branches (2020: 50), total assets of £22.5bn (2020: £20.6bn) and
788,000 members (2020: 769,000). The Society’s mortgage book
primarily relates to properties in the United Kingdom, with a small
proportion of historic balances, but no new lending, in Spain and
Gibraltar.
The Society’s subsidiary undertakings, their country of
incorporation and their principal activities are detailed in note 15
on page 201. The Society and its subsidiaries are all tax resident in
the United Kingdom.
The Society has no physical presence or regulatory branch in
Spain, with all mortgages administered from the UK. The results of
the Society’s activity in Spain are included in the results of Leeds
Building Society and subject to taxation in the UK.
The Society has no permanent establishment in Gibraltar, with all
mortgages administered from the UK. The results of the Society’s
activity in Gibraltar are included in the results of Leeds Building
Society and subject to taxation in the UK. Since a Double Taxation
Agreement between the UK and Gibraltar came in to force on 1 July
2020, Gibraltar mortgage income is no longer taxable in Gibraltar.
Results by country
The information for the year ended 31 December 2021 presented
below is at a full Group level of consolidation, which has been
prepared under IFRS. Total income is defined as net interest
income plus fees and commissions receivable (net of fees and
commissions payable), fair value gains less losses from financial
instruments, together with all other components of operating
income. Average monthly number of employees is shown on a
full time equivalent basis. Colleague costs comprise wages and
salaries, social security costs and pension costs.
Total income, profit before tax and corporation tax charge are as
disclosed in the Group’s Income Statement on page 172. Colleague
costs are as disclosed in note 6 on page 192. Corporation tax paid
represents the total payments as reported in the Statement of
Cash Flows on page 176.
2021 UK* Spain Total
*UK
includes
Gibraltar
Total income
(£m) 286.6 0.4 287.0 0.7
Profit before
tax (£m) 163.4 0.3 163.7 0.8
Total assets
(£m) 22,454.8 58.9 22,513.7 11.1
Total assets
less liabilities
(£m) 1,215.7 58.9 1,274.6 11.0
Average
number of
FTEs 1,361 –1,361
–
Staff costs
(£m) 68.6 – 68.6 –
Corporation
tax charge
(£m) 43.5 – 43.5 –
Corporation
tax paid (£m) 45.9 – 45.9 –
Return on assets
The return on assets, calculated as profit before tax divided by
mean total assets, was 0.76% (2020: 0.39%) for the year ended
31 December 2021.
Public subsidies received
The Group received no public subsidies in the year ended
31 December 2021.
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
245
Glossary of Terms
Year ended 31 December 2021
Alternative Performance Measures
The table below sets out the Alternative Performance Measures (APM) used within the Annual Report and Accounts. These are financial
measures of the Group’s performance or position which are not defined or specified under IFRS but which are useful in understanding
how the Group has performed. The measures used are common practice across the financial services industry and facilitate
comparisons with other institutions.
The table explains how the APM is calculated and provides a reconciliation to the closest equivalent statutory measure, as defined or
specified under IFRS.
Measure Definition and purpose How the measure is calculated
Reconciliation to statutory
measure under IFRS
Cost of risk A measure of the level of
impairment charges relative to the
size of the asset.
Impairment losses on loans and
advances to customers divided by
mean gross balance of loans and
advances to customers.
No equivalent statutory measure
but is calculated using amounts
disclosed in the Notes to the
Accounts.
Cost to income ratio A measure of the efficiency of the
Group in generating its income by
showing the level of costs incurred
relative to the level of income
generated. This measure is used by
the Group to monitor and manage
its cost base.
Management expenses
(administrative expenses plus
depreciation and amortisation)
divided by total income, as
recorded in the Income Statement.
No equivalent statutory measure
but all elements of the calculation
are separately disclosed in the
Income Statement.
Cost to mean asset ratio A measure of the efficiency of the
Group in maintaining its asset base,
showing the level of costs incurred
relative to the size of the Group’s
balance sheet. This measure is
used by the Group to monitor and
manage its cost base.
Management expenses
(administrative expenses plus
depreciation and amortisation)
for the period divided by the mean
of the opening and closing total
assets for the period, as recorded
in the Statement of Financial
Position.
No equivalent statutory measure,
but all elements of the calculation
are separately disclosed in the
Income Statement or Statement of
Financial Position.
Net interest margin Net interest income (the difference
between interest receivable
and interest payable) is the
primary source of income for the
Group. This is a key measure for
monitoring and managing the
level of income generated by the
Group’s balance sheet.
Net interest receivable, as recorded
in the Income Statement, divided
by the mean of the opening and
closing total assets for the period,
as recorded in the Statement of
Financial Position.
No equivalent statutory measure,
but all elements of the calculation
are separately disclosed in the
Income Statement or Statement of
Financial Position.
Net residential lending The increase in the size of the
Group’s residential mortgage book
during the year. Used by the Group
to monitor and manage the growth
of the business.
Gross residential lending less
redemptions, contractual
repayments and other capital
repayments.
This is approximately equal to
the difference between the
opening and closing balance of
loans and advances fully secured
on residential property in the
Statement of Financial Position,
adjusted for movements in
impairment loss provisions and
other accounting adjustments.
New (gross) residential lending The total amount of new loans and
advances to customers secured on
residential property advanced by
the Group during the year.
No calculation required. No equivalent statutory measure.
Glossary
Set out below are the definitions of terms used within the Annual Report and Accounts to assist the reader and to facilitate comparison
with other financial institutions.
Arrears
A customer is in arrears when they are behind in fulfilling their
obligations with the result that an outstanding loan commitment
is overdue. Such a customer can also be said to be in a state of
delinquency.
Assets and Liabilities Committee (ALCO)
This is a management committee which reports into the Board Risk
Committee and provides support in relation to balance sheet risk
matters and oversight of the Treasury operations of the Group.
Basel III
Basel III is the third capital adequacy framework issued by the
Basel Committee on Banking Supervision, which defines the
capital and liquidity rules for banks and building societies. The
framework has been embedded into UK law through the European
Capital Requirements Directive IV (CRD IV). From 1 January 2021
banks and building societies in the UK have operated under policy
statements issued by the PRA.
Basis point
One hundredth of one per cent (0.01%), so 100 basis points is
1%. Used in quoting movements in interest rates or yields on
securities.
Commercial lending
Loans secured on commercial property.
Common Equity Tier 1 (CET1) ratio
This is a regulatory ratio, calculated as the total of CET1 capital
divided by Risk Weighted Assets (RWAs). CET1 capital is the
highest quality form of capital and comprises general reserves
from retained profits, less the book values of any pension surplus,
goodwill and intangible assets and other regulatory adjustments as
defined under CRD IV.
Contractual maturity
The final payment date of a loan or other financial instrument, at
which point all the remaining outstanding principal and interest is
due to be repaid.
Covered bonds
Debt securities backed by a portfolio of mortgages that is
segregated from the issuer’s other assets solely for the benefit of
the holders of the covered bonds. The Group issues covered bonds
as part of its funding activities.
Credit risk
This is the risk that a customer or counterparty is unable to pay the
interest or to repay the capital on a loan when required.
Debt securities
Assets held by the Group representing certificates of indebtedness
of credit institutions, public bodies or other undertakings excluding
those issued by central banks.
Debt securities in issue
Transferable certificates of indebtedness of the Group to the
bearer of the certificates. These are liabilities of the Group and
include certificates of deposit.
Default
An account is classified as in default for impairment provisioning
under IFRS 9 if one or more of the following events occurs:
n
the account is more than 90 days past due;
n
the account is subject to certain forbearance activities;
n
the account is in possession;
n
the account meets ‘unlikely to pay’ criteria; or
n
the customer has been identified as being bankrupt and is in
arrears by more than a nominal amount.
Derivative financial instruments
A derivative financial instrument is a type of financial instrument
(or an agreement between two parties) whose value is based
on the underlying asset, index or reference rate to which it is
linked. The Group uses derivative financial instruments to hedge
its exposures to market risks, such as interest rate and foreign
currency risk.
Effective interest rate method (EIR)
The method used to measure the carrying value of a financial asset
or a liability and to allocate associated interest income or expense
to produce a level yield over the relevant period.
Expected credit loss (ECL)
A calculation to estimate potential losses on current exposures
due to potential defaults; the term is used in relation to
impairment loss provisioning under IFRS 9 and is derived from the
multiplication of the PD, LGD and EAD.
Exposure at default (EAD)
An estimate of the maximum loss that an entity might suffer if a
borrower or other counterparty fails to meet their obligations at
default.
Fair value
Fair value is the amount for which an asset could be exchanged,
or a liability settled, between willing parties in an arm’s length
transaction.
Financial Services Compensation Scheme (FSCS)
The UK’s compensation fund of last resort for customers
of authorised financial services firms. The FSCS may pay
compensation to customers if a firm is unable, or likely to be
unable, to pay claims against it, usually because it has stopped
trading or has been declared in default. The FSCS is funded by the
financial services industry. Every firm authorised by the FCA and
PRA is obliged to pay an annual levy, which goes towards its running
costs and compensation payments.
Strategic Report Governance Financial Statements Other Information
Leeds Building Society | Annual Report and Accounts 2021
247
Glossary of Terms continued
Year ended 31 December 2021
Forbearance strategies
Strategies to assist borrowers in financial difficulty, such as
agreeing a temporary reduction in payments, extending loan
terms and temporarily converting loans to an interest only basis.
Forbearance strategies aim to avoid repossession where it is in the
interest of the borrower.
Free capital
The aggregate of gross capital less intangible assets and property,
plant and equipment.
Funding limit
Measures the proportion of shares and borrowings (excluding the
fair value adjustment for hedged risk) not in the form of shares held
by individuals.
General reserves
The accumulation of the Group’s profit after tax since inception. It
is the Group’s main component of Common Equity Tier 1 capital
which is a measure of strength and stability.
Gross capital
The aggregate of the general reserve, other reserve, revaluation
reserve, subordinated liabilities and subscribed capital.
Impaired loans (credit impaired)
Loans where there is objective evidence that an impairment event
has occurred, meaning that the Group does not expect to collect
all the contractual cash flows or expect to collect them when they
are contractually due.
Internal Capital Adequacy Assessment Process (ICAAP)
The Group’s own assessment, as part of Basel III requirements, of
the levels of capital that it needs to hold in respect of regulatory
capital requirements for risks it faces under a business-as-usual
scenario and a number of stressed scenarios.
Internal Liquidity Adequacy Assessment Process (ILAAP)
The Group’s own internal assessment of the level of liquidity that
it needs to hold in respect of regulatory liquidity requirements in
relation to a number of stressed scenarios.
Internal Ratings Based (IRB) Approach
An approach for measuring exposure to credit risk which is
more sophisticated than the Standardised Approach, where an
entity can calculate its own risk weights for certain assets. IRB
approaches can only be used with the permission of the Prudential
Regulation Authority.
International Swaps and Derivatives Association (ISDA)
master agreement
A standardised contract developed by ISDA and used to enter into
bilateral derivative transactions granting legal rights of offsetting
for derivative transactions with the same counterparty.
Lending limit
Measures the proportion of business assets not in the form of
loans fully secured on residential property.
Leverage ratio
A regulatory ratio which measures the value of the Society’s Tier 1
capital as a proportion of total relevant non-risk weighted assets.
The CRR leverage ratio is defined by the EU’s Capital Requirements
Regulation, while the UK leverage ratio modifies this ratio to
exclude central bank reserves. The UK regime does not apply to
the Society due to its size (less than £50 billion of retail deposits).
LIBOR
The London Inter-Bank Offered Rate, the average interest rate
estimated by lending banks in London that the average lending
bank would be charged if borrowing from other banks. The
publication of LIBOR ceased from 31 December 2021.
Liquid assets
Assets which are either in the form of cash or are readily
convertible into cash. Total of cash in hand and balances with the
Bank of England, loans and advances to credit institutions, and
investment securities.
Liquidity Coverage Ratio (LCR)
A regulatory standard ratio implemented by the Basel III Reforms.
It is calculated as the stock of high quality liquid assets divided by
the total net stressed cash outflows over the next 30 calendar days
expressed as a percentage.
Liquidity risk
The risk that the Group is not able to meet its financial obligations
as they fall due, or will only be able to do so at an excessive cost.
This risk arises from timing mismatches of cash inflows and
outflows.
Loan to value ratio (LTV)
A ratio which expresses the amount of a mortgage as a
percentage of the value of the property. The Group calculates
residential mortgage LTV on an indexed basis (the value of the
property is updated on a quarterly basis to reflect changes in the
house price index).
Loans past due/past due loans
Loans are past due when a counterparty has failed to make a
payment when contractually due.
Loss given default (LGD)
A parameter used in relation to credit risk exposures modelled
under the IRB approach and IFRS 9; an estimate of the difference
between the EAD and the net amount recovered, expressed as a
percentage of the EAD.
Management expenses
Management expenses represent the aggregate of administrative
expenses, depreciation and amortisation as recorded in the
Income Statement.
Market risk
The risk that movements in market risk factors, including foreign
exchange rates, interest rates and customer-driven factors will
create losses or decrease portfolio values.
Mean total assets
Represents the amount produced by halving the aggregate of total
assets at the beginning and end of the financial year.
Member
A person who has a share investment or a mortgage loan with the
Society which satisfies the Society’s rules for membership.
Minimum Requirements for Own Funds and Eligible
Liabilities (MREL)
MREL is the total loss absorbing capital a financial institution must
hold to facilitate the recapitalisation of the institution in resolution.
Mortgage backed securities (MBS)
A category of asset backed security that represents interests in
a group of mortgages. Investors in these securities have the right
to cash received from future mortgage payments (interest and/or
principal).
Net interest income
The difference between interest received on assets and similar
income and interest paid on liabilities and similar charges. This is
the same as net interest receivable in the Income Statement.
Net Promoter Score®
The Net Promoter Score® is a measure of customer loyalty to the
Group.
Net Stable Funding Ratio (NSFR)
A regulatory standard ratio implemented by the Basel III reforms
which is the total amount of stable funding divided by the total
amount of required stable funding, expressed as a percentage.
The NSFR is currently an observable measure which is intended to
become a minimum standard in 2022 with the implementation of
CRR2.
Notional principal amount
The notional principal amount indicates the amount on which cash
flows on derivative financial instruments are calculated and does
not represent amounts at risk.
Operational risk
The risk of loss arising from inadequate or failed internal processes,
people and systems or from external events.
Probability of default (PD)
An estimate of the likelihood a borrower will not be able to meet
their debt obligations as they fall due.
Permanent interest bearing shares (PIBS)
Unsecured deferred shares that are a form of capital. PIBS rank
behind the claims of all subordinated debt holders, depositors,
payables and investing members of the Group.
Replacement cost
The amount the Group would need to pay to replace derivative
contracts that are favourable to the Group if the counterparty
with whom the contract was held were unable to honour their
obligation.
Repurchase agreements (Repo)
A repurchase agreement allows a borrower to use a financial
security as collateral for a cash loan at a fixed rate of interest. In
a repo, the borrower agrees to sell a commitment to repurchase
the asset at a specified price on a given future date. For the party
selling the security and agreeing to repurchase the asset in the
future, it is a repo, for the party purchasing the security and
agreeing to resell, it is a reverse repo.
Residential loans
Loans which are secured against residential property.
Residential mortgage backed securities (RMBS)
A category of asset backed security that represents interests in
a group of residential mortgages. Investors in these securities
have the right to cash received from future mortgage payments
(interest and/or principal).
Risk appetite
The articulation of the level of risk that the Group is willing to take
(or not take) in order to safeguard the interests of the Society’s
members whilst achieving business objectives.
Risk Weighted Assets (RWAs)
A regulatory measure which adjusts the value of assets as recorded
in the Statement of Financial Position to reflect the relative level
of risk. This measure is used in calculating regulatory capital
requirements.
Securitisation
The process in which the parent company sells a group of
mortgages to a special purpose vehicle (SPV). The SPV then uses
the mortgages to issue mortgage backed securities in the form of
class A and Z notes.
Shares
Money deposited by a person in a retail savings account with the
Group. Such funds are recorded as liabilities for the Group.
Shares and borrowings
The total of shares, amounts owed to credit institutions, amounts
owed to other customers and debt securities in issue.
SONIA
The Sterling Over Night Index Average rate. The risk free rate
calculated as the weighted average overnight sterling deposit rate
for each business day.
Sovereign debt
Bonds issued by a national government. Historically sovereign debt
has been viewed as less risky than other forms of debt issued.
Subordinated liabilities
Debt securities issued by the Group which have certain terms
and conditions attached relating to the payment of interest and
principal such that they are ranked behind the claims of all other
creditors and members of the Society, other than subscribed
capital.
Strategic Report Governance Financial Statements Other Information
Subscribed capital
Debt securities issued by the Group which have certain terms
and conditions attached relating to the payment of interest and
principal such that they are treated as capital.
Tier 1 capital
A measure of financial strength as defined by the PRA. Tier 1
capital is divided into Common Equity Tier 1 and other Tier 1
capital. Common Equity Tier 1 capital is defined above, while other
Tier 1 capital includes qualifying capital instruments such as PIBS.
Tier 2 capital
A further component of regulatory and financial capital as
defined by CRD IV which for the Society is represented by certain
impairment provisions.
Wholesale funding
The total of amounts owed to credit institutions, amounts owed
to other customers and debt securities in issue less balances
deposited by offshore customers.
Glossary of Terms continued
Year ended 31 December 2021
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Leeds Building Society Annual Report and Accounts 2021
Annual Report and
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