International Personal Finance The human face of finance

Group risk framework

The Group takes the identification and management of its key risks very seriously, under the governance of the audit and risk committee. The schedule of risks is formally updated and presented to the committee twice a year, although key risks are monitored on an ongoing basis, with developments reported to the board.

Risks are managed at a country level, with the local management teams responsible for the identification and mitigation of risks specific to their country. However, some risks are pertinent across all markets and are managed on a consistent basis, with support provided by the central team in the UK.

These risks are wide ranging but can be broadly categorised as financial, reputational, regulatory, strategic and operational risks.

Financial risks

The Group's main financial risks and policies are discussed in more detail in the financial review. However, the main financial risks facing the Group are as follows:

Counterparty risk

International Personal Finance ('IPF') does not hold significant investments. However, as a cash business, it does hold cash balances in operational bank accounts for withdrawal by agents to use in providing loans to customers. Where possible, IPF holds cash only with A3 rated financial institutions. Balances held at institutions with a lower credit rating are classified as 'excess risk' and are subject to board approval.

Currency risk

All of the Group's trading operations are denominated in currencies other than sterling. This means that the value of the reported results and related assets and liabilities, as well as cross border transactions, are at risk of adverse exchange rate fluctuations. This is mitigated by borrowing in the same local currencies as customer net receivables and where possible, by fixing rates to provide certainty.

Interest rate risk

Financing costs represent only around 5% of revenues and therefore, changes in interest rates do not represent a significant risk. However, the Group seeks to manage this risk through the use of interest rate swaps.

Funding and liquidity risk

This is the risk that the Group may not have sufficient liquid funds to repay its liabilities as they fall due, or that funding is withdrawn as a result of a breach of financial covenants. This is managed through the preparation and review of a rolling 12-week cash flow forecast for all operations, along with regular monitoring of relevant KPIs in comparison with budgets and forecasts. As a policy, IPF seeks to ensure that it has sufficient dedicated funding in place for all of its businesses such that it is able to fund the peak borrowing requirement for the following 12 months, with additional headroom of 5%. The latest five-year plan indicates that the Group has sufficient funding through to 2010 and will not breach any covenant.

Credit risk

The management of customer credit risk is of particular importance. This is managed through a combination of application scoring for new customers, behavioural scoring for repeat lending and centralised collections units which are used in some markets to support arrears management. Additional control is provided by the agent, through the discipline of face-to-face contact with the customer.

Credit trends are closely monitored by credit committees in each country, comprising both local and UK-based senior management.

Tax risk

Like any business, changes in tax legislation and practice could materially affect the Group's taxation liabilities. This risk is heightened because the Group operates in a number of different countries, where tax legislation and practice can vary significantly. In many cases in these countries, tax treatments cannot be agreed in advance or determined precisely until tax audits or enquiries have been completed by the tax authorities, which in some cases can be several years after the transaction concerned.

Tax risks are mitigated by using the best external professional advice for all material transactions, supported by strong internal tax expertise both in-country and in the UK. Where possible, tax treatments are agreed in advance with relevant authorities.

Reputational risk

Reputational damage is a significant risk in a financial services business.

The board mitigates this risk in a number of ways. There are established procedures for dealing with media issues and an active communication programme to foster a better understanding of the Group's products is targeted at key opinion formers. The Group has a corporate responsibility management framework led by the Chief Operating Officer. Continued investment in our community schemes helps to foster good relations with customers and the areas in which they live.

Regulatory risks

The Group's operations are subject to various forms of regulation in the jurisdictions in which it operates and these regulations may change and adversely impact the Group's operations.

The Group monitors regulatory developments in all of its markets and, in respect of the European Union, in Brussels. IPF works actively with opinion formers in all markets to ensure its businesses are well understood to mitigate this risk. This is facilitated by membership of the British Chamber of Commerce in most markets and membership of relevant local trade bodies, along with the Consumer Credit Association in the UK.

Strategic risks

Competition

IPF operates in emerging markets because of their strong growth characteristics, coupled with a lower level of penetration of financial products. They are, therefore, very attractive and are subject to increasing levels of competition. As for any business, an increase in competition will place greater pressure upon the Group to retain its existing customers, attract new customers and to recruit and retain high calibre employees and agents.

This risk is mitigated by the Group's distinctive operating model that engenders high levels of customer satisfaction and by continuous use of market research to assess the satisfaction levels of our customers and to identify usage of other financial products. We also monitor competitor activity in terms of product offer and media usage to identify appropriate products and marketing strategies.

Business development

A key strategic aim of the Group is to enter new emerging markets in addition to the countries it currently operates in. To mitigate the risks involved with entering a new geographic area, the Group uses a formal country selection model which applies a number of benchmark tests. These are as follows:

Safety - is the country safe enough for a home-based financial service?

Stability - is the country politically and economically stable enough?

Size - is it large enough to support the fixed costs and earn suitable returns?

Regulation - does the legal and regulatory environment support home credit?

Demand - is demand for financial products growing?

Local funding - can we fund in local currency to manage currency risk?

If these tests are passed, the country will be submitted to the board for investment approval. If successful, a pilot operation will be opened to test our ability to recruit customers cost-effectively, and their related credit performance and propensity to repay. This would typically be 12 to 18 months in duration and only if successful will full roll-out occur.

In addition, to deliver new products, enter new countries, improve operational efficiencies or react to any other changes required by the countries means significant changes to information technology systems. This risk is mitigated by the requirement that all strategic IT projects require approved business cases and are monitored both by a steering group and the relevant operational board, along with the fact that IPF uses professional third parties for delivery of the Group's IT services.

Operational risks

Recruiting and retaining highly skilled management, employees and agents

As the Group continues to grow, it will need to recruit and retain additional suitable personnel, as well as retaining key existing employees, in order to develop its operations further. This is probably the biggest risk that the Group faces.

To mitigate this risk the Group has developed bespoke leadership development programmes to identify and develop its top internal talent.

This is also supported by the use of effective recruitment, retention and succession planning strategies. IPF monitors remuneration and incentive structures to ensure they are appropriate and competitive, and ensures there are training and development opportunities and effective employee communication throughout.

Service disruption

The Group's ability to operate effectively depends on information and communication systems. Such reliance on technology exposes the Group to risk in the event of damage, interruption or failure.

The Group has detailed business continuity procedures and policies in place which are designed to allow the Group to continue trading in the event of such an occurrence. These policies and procedures are tested on a regular basis.

Political and economic instability in operating markets

Each country in which the Group operates will be exposed to its own specific risks. Adverse political, economic, regulatory or social developments in such territories could have a material effect on the development of the Group.

These risks are specifically addressed by the new country entry model, as discussed above. For existing operations, these risks are monitored by the local management teams as well as the Group board.

In the current climate, it is likely that the risk of an economic downturn has increased. The key risk for a consumer lending business is unemployment. The Group monitors trends in this, as well as detailed management information on customer repayment patterns and feedback from agents, which could provide an early warning.

In the event of a recession, the Group believes its risk is mitigated by the short-term nature of its lending, with the average remaining duration of customer receivables being around six months. The risk is also mitigated by credit management systems which would enable the Group to tighten its lending criteria quickly.

Health and safety

The health and safety of all our employees and agents is a key area of importance for the Group.

Consequently, the Group invests a considerable amount of resource ensuring employees and agents are safety conscious. Safety awareness is fully integrated into the agent induction programme and we provide ongoing safety awareness training, holding two dedicated employee and agent 'safety weeks' in every market each year.