TIDMPCF
RNS Number : 2399D
PCF Group PLC
28 June 2021
28 June 2021
PCF Group plc
("PCF" and together with its subsidiaries "PCF Group")
Update on review of financial controls and reporting processes
and timing of completion of the annual report and accounts for the
financial year ended 30 September 2020
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES
OF ARTICLE 7 OF THE MARKET ABUSE REGULATION (EU) 596/2014 AS IT
FORMS PART OF UK DOMESTIC LAW BY VIRTUE OF THE EUROPEAN UNION
(WITHDRAWAL) ACT 2018
Introduction
Further to the announcement of 19 May 2021 (the "Announcement")
PCF Group plc is providing an update on its review in relation to
its financial controls and reporting processes.
As part of an internal review emanating from enquiries raised as
part of the audit of PCF's Full Year 2020 financial statements, the
new leadership of PCF's finance team became aware of a number of
accounting entries in PCF Bank Limited's ("PCF Bank") books and
records that suggested errors and misstatements. As a result, the
Board of Directors of PCF (the "Board") decided to engage
PricewaterhouseCoopers LLP ("PwC") to undertake a review (the
"Independent Review").
The errors and misstatements referred to above related to the
treatment of certain intercompany transfers and balances, as well
as a failure to properly report exposures arising from funding
provided by PCF Bank to its wholly owned subsidiary Azule Limited
("Azule") under the Prudential Regulation Authority's ("PRA") Large
Exposure reporting framework between December 2018 and June 2019.
This specific issue had no impact on the consolidated PCF Group
financial statements for the financial year ending 30 September
2019 previously published.
The significance and implications of these matters, related
employee conduct issues and the governance environment in which
they arose ultimately led to discussions between the Board and Peel
Hunt LLP, in its capacity as Nominated Adviser, and shortly
thereafter trading in PCF's shares was suspended and the
Announcement made on the 19 May 2021.
Following 19 May 2021, the Board requested PwC to extend its
scope under the Independent Review so as to further investigate the
potential issues identified in the initial review undertaken by it.
This related to specific employee conduct identified in the initial
review which suggested to the Board possible collusion by employees
of the PCF Group, in the making of deliberate misstatements.
The PCF Group has notified these issues and the commissioning of
the Independent Review to the PRA and the Financial Conduct
Authority.
Key findings of and conclusions arrived at from the Independent
Review
The Independent Review noted that, owing to a combination of
omissions of certain intercompany lending positions from regulatory
returns and certain intercompany transfers between PCF Bank and
Azule that were not supported by legal assignments, over the period
between December 2018 to October 2019, funding provided to Azule by
PCF Bank was not correctly reflected in the calculations of Large
Exposures within the regulatory returns for PCF Bank during that
period (specifically as at each calendar quarter-end from 31
December 2018, up to and including 30 June 2019) and therefore was
incorrectly reported to the PRA. In addition, PCF Bank has
determined that, had the Large Exposure been reported correctly,
breaches of PCF Bank's regulatory Large Exposure limits would have
occurred at this time by reason of the same.
The second phase work of the Independent Review identified the
potentially incorrect application of certain unaudited profits when
reporting PCF Group's and PCF Bank's capital position to the PRA as
at 30 September 2019 as part of its regulatory reporting. On having
been made aware of documents relating to these issues by the
Independent Review PCF has been able to review and calculate that
this misreporting led to an overstatement of both PCF's Common
Equity Tier 1 ("CET1") Ratio and Total Capital Ratio ("TCR") by 1
percentage point in the 30 September 2019 regulatory reporting (the
CET1 and TCR reported were 18.1% and should have been 17.1%). This
related to the premature addition of profits to capital resources,
before the audited Annual Report and Accounts for year to 30
September 2019 had been approved (which it subsequently was). Again
PCF notified these breaches to the PRA upon discovery. The reported
capital positions in the PCF Group and PCF Bank's Annual Report and
Accounts for year to 30 September 2019 were not affected by this
issue.
In addition, the Independent Review has enabled the Board and
the executive management team to identify a number of deficiencies
and failures in PCF Bank's financial control and reporting
function, including members of the finance team, under instruction,
manually adjusting certain accounting entries for both financial
and regulatory reporting purposes which appear to the Board to have
been a deliberate effort to facilitate specific results or
compliance with rules regarding Large Exposure limits. Based on the
findings of the Independent Review, the Board believes that these
matters may be driven by possible collusion by some members of the
finance team, under resourcing, an inadequate level of skill and
experience within the finance team, technological limitations and a
poor culture in the finance team resulting in a lack of, and a
reluctance to, challenge its leadership.
Although a number of specific findings from the Independent
Review remain under ongoing investigation, to date none of them
indicate to the Board that any monies have inappropriately left the
PCF Group directly as a consequence of these failings. However
there will be costs associated with the investigation and
remediation of these findings.
Remediation plan
The Board is very disappointed and concerned by these findings
and is determined to ensure that the PCF Group adheres fully to the
high standards of financial control and reporting expected by it
and also by its regulators, shareholders and other key
stakeholders.
The Board is urgently taking steps to remediate the deficiencies
identified in financial controls and corporate governance and has
commenced work to ensure that a clear plan is in place to enhance
PCF Group's corporate governance and the supporting framework
together with the financial control and reporting environment
including increasing resources in the Finance function. With
oversight from the Audit Committee and the Board, the PCF Group's
recently appointed Chief Financial Officer, Caroline Richardson,
has taken executive responsibilty for delivery of this plan and has
already made progress in improving the position principally through
the recruitment of new members of the finance team with strong
skills and experience, enhanced controls and improvements to both
financial and regulatory reporting processes.
The Board has also instigated the following initiatives to
improve PCF Group's financial reporting and control
environment:
-- The restructuring of the Senior Leadership Team led by Garry
Stran, the interim CEO, together with Caroline Richardson, the CFO,
including the appointment of a new and experienced Chief Risk
Officer and a General Counsel
-- The recruitment of additional colleagues across PCF who have
the skills and experience required for a listed bank
-- The commissioning (subject to contract) of an independent
forensic review of the PCF Group's accounting records
-- The continued transformation of the finance processes,
controls, organisational and governance structures and team culture
to increase the focus on transparency, challenge and compliance
with all accounting, governance, regulatory and legal standards of
conduct
-- The improved utilisation of the existing systems to ensure
more efficient and robust record keeping and reporting
-- The commissioning of an independent report on the Group's
financial position and prospects procedures (FPPP) with the
intention of expeditiously fulfilling any resulting recommendations
for further improvement
-- An investment in enhanced technical training, in particular
in respect of embedding a culture of risk awareness, excellence,
transparency and a 'speak up and challenge' culture
-- A commitment to reinforcing a culture of compliance with
appropriate regulatory conduct standards for all employees now and
in the future
Engagement with the PRA
Since reporting PCF Bank's breaches of the Large Exposure rules
to the PRA, the PCF Group has maintained a close and constructive
dialogue with the regulator. Discussions are ongoing to ensure the
remedial plan addresses all matters to the PRA's satisfaction.
Annual report and accounts and lifting of trading suspension
Whilst implementing the overall remediation plan is a core focus
and overall priority of the PCF Group, in the near term the PCF
Group is focused on completing its investigations, and other
workstreams to enable the publishing and filing of its annual
report and accounts for the financial year ended 30 September 2020.
Given the increased complexities arising from the issues noted
above, the Group will be unable to publish and file its annual
report and accounts by the due dates required by the Companies Act
and the AIM Rules for Companies. Once there is greater certainty
over the timing of the publication of the annual report and
accounts PCF will provide an update accordingly.
On the basis of the Board's current understanding and internal
reviews undertaken so far, the previous guidance on the revised
preliminary profits estimate for the year to 30 September 2020
issued on 11 March 2021 remains valid. However, it should be noted
that the additional audit fees, which have to be recognised in the
period to which the audit relates are continuing to accumulate and,
depending on their eventual amount, could negatively impact this
current view. Furthermore, findings from the ongoing investigations
or audit could further impact the Group's previously reported
results for the year ended 30 September 2020, issued on 11 March
2021.
Other ongoing investigation and remediation costs will impact
the PCF Group's cost base in the current year to 30 September 2021
and beyond.
While the PCF Group continues its work in relation to the
remediation plan on the financial controls environment described
above, the shares will remain suspended. When the PCF Group and its
NOMAD, are satisfied with the outcome of this work, they will seek
for the share trading suspension to be lifted.
Trading update and outlook
PCF Group continues to operate as normal, has received planned
levels of inflows in respect of its deposit taking activity and is
carefully and prudently managing its loan originations, capital and
liquidity position.
Covid-related payment deferral levels continue to reduce and the
performance of its lending portfolio is in line with
expectations.
Tim Franklin, Chairman of PCF, said: "The Board acknowledges the
significant deficiencies identified in the PCF Group's financial
control and reporting environment and is determined to devote the
time and resources required to remediate these failings. The Board
notes that recent progress has already been made in this regard and
the PCF Group will provide further updates on progress in due
course.
The Board is also conscious of the anxiety and frustration
experienced by shareholders caused by the delay to the publication
of its annual report and accounts and the suspension of trading in
PCF's shares. The PCF Group is working tirelessly towards lifting
the trading suspension as soon as possible as well as publishing
its annual report as soon as the Board is satisfied that all
relevant matters have been identified and addressed, and that the
PCF Group's auditor is also satisfied with such matters.
In addition the Board wishes to reassure shareholders that the
Board has, and will continue to, authorise actions which are
required to protect shareholder value including where appropriate
and legally possible the invocation of its contractual and legal
rights in respect of the recovery of remuneration-related payments
and any other consequential losses suffered as a result of these
matters.
The Board wishes to thank its shareholders, customers and other
stakeholders for their patience and the valued support they have
provided to the PCF Group during this difficult time and wishes to
reaffirm that it is committed to provide updates in a timely,
transparent and comprehensive manner."
end
For further information, please visit https://pcf.bank/ or
contact:
PCF Group (via Tavistock Communicatons) Tel: +44 (0) 20 7920
Garry Stran, Interim Chief Executive 3150
Officer
Caroline Richardson, Chief Financial
Officer
Tavistock Communications Tel: +44 (0) 20 7920
Simon Hudson / Tim Pearson 3150
PCF@tavistock.co.uk
Peel Hunt (Nominated Adviser and Broker) Tel: +44 (0) 20 7418
Andrew Buchanan / Rishi Shah / 8900
Duncan Littlejohns / Jasmine Kanish
Shore Capital (Joint Broker) Tel: +44 (0) 20 7408
Henry Willcocks / Guy Wiehahn 4080
About PCF Group plc ( www.pcf.bank )
Established in 1994, PCF Group plc is the AIM-quoted parent of
the specialist bank, PCF Bank Limited. Since commencing operations
as a bank in 2017. The Group continues to focus on portfolio
quality and lending to the prime segments of its existing markets.
The Group will continue to identify opportunities to diversify its
lending products and asset classes by setting up new organic
operations or through acquistion.
PCF Bank currently offers retail savings products for
individuals and then deploys those funds through its four lending
divisions:
-- Business asset finance which provides finance for vehicles, plant and equipment to SMEs;
-- Consumer motor finance which provides finance for motor vehicles to consumers;
-- Azule which provides finance to the broadcast and media industry; and
-- Property bridging finance which provides loans to companies
and sole traders investing in residential and commercial
property.
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END
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