RNS Number : 1893R
Charles Stanley Group PLC
13 June 2018

13 June 2018

Charles Stanley Group PLC

Results for the year ended 31 March 2018

Charles Stanley Group PLC ('the Group') or ('Charles Stanley') today announces its preliminary results for the year ended 31 March 2018:

Financial highlights:

Discretionary funds up by 7.9% to 12.3 billion (2017: 11.4 billion)

Reported revenue of 150.9 million (2017: 141.6 million), with growth in all divisions

Reported profit before tax of 11.4 million (2017: 8.8 million)

Core Business1 profit before tax of 10.9 million (2017: 9.8 million)

Core Business operating margin improved to 8.8%2 (2017: 7.1%)

Reported basic earnings per share up 40% to 17.23 pence (2017: 12.35 pence)

Total 2018 dividend increased 33.3% to 8.0 pence per share (2017: 6.0 pence per share)

Balance sheet strengthened - Group cash balance increased 12.3% to 65.6 million (2017: 58.4 million) and regulatory capital resources up 21% to 74.0 million (2017: 61.4 million)

Operational highlights:

Maintained upper quartile client satisfaction and staff engagement scores

Delivered a series of initiatives enhancing client service and improving capacity

New governance framework fully implemented and enterprise risk framework refreshed

Disposal of non-core activities completed

Paul Abberley, Chief Executive Officer, commented:

"2018 has been another year of progress for Charles Stanley. We completed the disposal of non-core activities, further built profitability and began to scale the business. The Group's transformation continues apace as we implement our strategy and deliver progress in the underlying key metrics. That said, we recognise the need to accelerate the improvement in our financial metrics to match what is being delivered qualitatively across the business.

The focus for the 2019 financial year will be on driving top line revenue growth whilst improving operational efficiency and in turn harnessing operational gearing. I am confident that we will continue to make meaningful progress toward attaining our target 15% operating margin. The speed with which we attain it will in part be dependent upon the pace of investment to develop sales channels and standardise processes, and in part on how quickly the Group assimilates change."

1 The Core Business figures represent the results of the Group's four main operating divisions, excluding held for sale activities and adjusted for one-off items.

2 The Core Business operating margin, excluding the charge in respect of share options awarded to certain investment management teams under the revised remuneration arrangements settled last year.

The information communicated in this announcement contains inside information for the purposes of Article 7 of Regulation 596/2014

Charles Stanley Group PLC LEI: 213800LBSEGKE5MCYC90

For further information, please contact:

Charles Stanley

Joanne Higginson

Via Redleaf Communication

Canaccord Genuity

Andrew Buchanan

020 7523 4661

Peel Hunt

Guy Wiehahn

020 7418 8893

Redleaf Communications

Charlie Geller

020 7382 4730

CScapitalmarkets@redleafpr.com

Notes to editors:

Charles Stanley traces its origins back directly to 1792 and is one of the oldest firms on the London Stock Exchange. Charles Stanley today provides holistic wealth management services to private clients, charities and smaller institutions. These are delivered by over 400 professionals located in 22 offices throughout the UK, both direct to clients and to intermediaries. Our services include investment portfolio management and financial planning, supported by in-house administration to enhance the quality of service provided. In addition, Charles Stanley Direct provides an award winning direct to customer execution-only dealing platform for equities and funds.

Financial highlights:

2018

2017

Profit before tax from Core Business (m)

10.9

9.8

Reported profit/(loss) before tax (m)

11.4

8.8

Basic earnings per share from Core Business (p)

16.06

15.33

Reported basic earnings per share (p)

17.23

12.35

Dividend per share (p)

8.0

6.0

Business highlights:

2018

2017

FuMA1,2 (bn)

23.8

24.0

Discretionary funds (bn)

12.3

11.4

Core Business revenue (m)

150.4

138.6

Core Business revenue by division:

2018

2017

Investment Management Services (m)3

131.2

123.8

Asset Management (m)3

7.0

5.5

Financial Planning (m)

6.3

5.0

Charles Stanley Direct (m)

5.9

4.3

Financial calendar:

Ex-dividend date for final dividend

28 June 2018

Final dividend record date

28 June 2018

Deadline for elections under DRIP4

10 July 2018

Annual General Meeting

24 July 2018

Final dividend payment date

31 July 2018

1 Funds under Management and Administration.

2 The Group's FuMA as at 31 May 2018 were 25.0 billion.

3 The 2017 figures have been restated to reflect the transfer of an investment management team from Asset Management to Investment Management Services during 2018 in order to provide more appropriate reporting.

4 Dividend Reinvestment Plan.

Chairman's statement

It is pleasing to report that 2018 has been another year of progress for Charles Stanley. This has been a year in which we completed the rationalisation of the Group's non-core activities and began to scale our holistic wealth management services to continue the improvement in profitability.

Financial results

The Group's reported revenue for the year ended 31 March 2018 was up 6.6% to 150.9 million. Reported profit before tax was up 30% on last year at 11.4 million.

Beneath the headline movements, the quality of business also improved. Total Funds under Management and Administration (FuMA) at 31 March 2018 were 23.8 billion with Discretionary funds reaching a new record of 12.3 billion, up 7.9%, despite a deterioration in market conditions experienced in the last quarter of the financial year. This reflects the Group's focus on growing its discretionary management service. At the same time our award-winning digital execution-only platform Charles Stanley Direct grew its Assets under Administration (AUA) by 21.1% in the year and moved into a profit in the second half.

The Group's cash position remained strong, ending the year 12.3% higher at 65.6 million.

Governance

To ensure that we are executing our strategic plan efficiently, we took steps to refresh Charles Stanley's governance. We produced clear mandates for each of our Boards and Committees; we filled skills gaps and improved our management information. Taken together, the restructuring we have put in place over the course of the year has significantly enhanced our strategic control.

Risk

Of course, no strategy is without risk, and we have devoted particular attention to managing this. We refreshed the enterprise risk framework to ensure that arising threats are even more closely monitored and managed. Specifically, we have reviewed in detail our tolerance for risk, which is set out in our Risk Appetite Statement (RAS), and progress is flagged in our regular risk reporting.

Culture

Underpinning our risk management is the Group's culture. It gives me great pleasure to announce that the 2017 staff engagement survey produced a top quartile engagement score of 73%. Coupled with the Group's strong client centric ethos, nothing better illustrates the responsible approach by our team of professionals to improving the business. At this point I would like to thank our staff for their dedication and effort during the year.

Board changes

This has been another very demanding year for the Board, and I should like to pay tribute to all our directors for their significant contribution to our success. Paul Abberley, our Chief Executive Officer, leads a very professional team, and on behalf of our shareholders I should like to thank him, our Chief Financial Officer, Ben Money-Coutts and the Head of our Investment Management Services division, Gary Teper, as well as the members of our Executive Committee, for driving the Group forward.

As previously announced, David Pusinelli stepped down as a Non-Executive Director on 27 July 2017, and on behalf of the Board I pass on our warmest gratitude for his contribution to the Group. Andrew Didham, who chairs our principal trading subsidiary, Charles Stanley & Co. Ltd, has replaced David as Senior Independent Non-Executive Director of Charles Stanley Group PLC.

We are delighted with the appointment of two further senior industry figures as Independent Non-Executive Directors who complement the existing team and bring our total Independent Non-Executive Directors to a team of four.

Hugh Grootenhuis joined the Group on 7 September 2017. Previously, Hugh was Chief Executive of Waverton Investment Management.

Marcia Campbell was appointed on 16 October 2017. Formerly, Marcia was Group Operations Director and CEO Asia Pacific at Standard Life.

Both appointments followed a rigorous selection process facilitated by independent consultants and were subject to the FCA's approval. Together, Hugh and Marcia bring valuable industry knowledge and expertise and are working with the rest of the Board and the Executive Committee to deliver our vision of becoming the UK's leading wealth manager.

Dividend

We have previously communicated the Group's progressive dividend policy. Based on the achieved financial results, the Board is recommending a final dividend of 5.5 pence per share. Taken together with the interim dividend of 2.5 pence per share, this equates to a total dividend for the year of 8.0 pence per share which is an increase of 33.3% on the prior year.

Outlook

Rising inflation implies that growth in the global economy is nearing the peak of the cycle. This leads us to expect greater volatility and lower returns going forward.

In the UK, political risk adds an extra dimension. Uncertainties around Brexit continue to give rise to greater economic volatility in the UK, at least in the short term. The threat of global trade barriers being raised as a result of US policy is also a concern. On the other hand, with around 70% of the FTSE-100 companies' revenues derived from abroad, sterling weakness would boost market returns. Finally, positive EPS momentum and attractive valuations give further cause for cautious optimism on a UK-centric view.

Combined, the global and UK outlooks provide a reasonably favourable backdrop for our transformation programme and should bring growth in revenues, profits and margins if well executed, which in turn will support our progressive dividend policy and thus generate long-term shareholder value.

Sir David Howard

Chairman

12 June 2018

Chief Executive Officer's report

The transformation of our Group continues apace as we implement our strategy, evidenced by further progress in our key metrics. While this includes growth in our underlying financial performance, we need to ensure this broad-based progress also powers acceleration in our profitability.

Financial performance

I am pleased to report that the Group continues to deliver improvement in profitability. Profit from the Core Business of 10.9 million represents a 1.1 million or 11.2% increase on the previous year. Core Business earnings per share increased by 4.8% to 16.06 pence.

That said, we recognise the need to accelerate the improvement in our financial metrics to match the quality of what is being delivered qualitatively across the business.

Strategy implementation

At the start of financial year 2018, we completed the disposal of non-core activities thus enabling us to focus exclusively on our full-service holistic wealth management business. With appropriate incentive structures in place, our objective has been to invigorate asset growth and improve operational efficiency.

New asset inflows of 1.5 billion were recorded during the year, with over half placed in discretionary mandates. Service level reviews with our clients led to a further 1.0 billion of advisory mandates moving to discretionary or execution-only services. While service types will be matched with client needs, my perception is that clients are drawn increasingly to discretionary services and it is gratifying that our business mix shifts inexorably in that direction.

Inflows were partly offset though by client losses as we continued to consolidate our investment management teams. Overall, and together with streamlining our client charging structure, these trends have proven revenue enhancing. There is more to be done. We have an excellent proposition, frequently acknowledged by our clients, but we need to become more effective in delivering these services to new clients.

Turning to operational efficiency we have delivered a series of initiatives which have both enhanced client service and improved capacity. These include improved digital access, completely redesigned portfolio valuation reports and enhanced delivery of investment research to our investment managers.

More broadly, we have embedded our wholly new governance and administration architecture, which both transforms our broad risk-management effectiveness and underpins strong client outcomes. This is not cost free however and when combined with a substantial agenda of new regulation, does limit the financial impact of the new business flows. However, with much of this work behind us, we can increase the operational gearing of the business.

The year ahead

The focus for the 2019 financial year will be on driving top line revenue growth whilst improving operational efficiency and in turn harnessing operational gearing.

As the balance of revenues shifts from commission to fees the Group is more exposed to stock market volatility, which can be expected to be more frequent given the stage of the global economic cycle. Regulatory change will continue to absorb key resources.

So as ever, headwinds are likely. That said, I approach the current financial year with quiet optimism. Continuing the commercial transformation of the firm while sustaining high and stable levels of customer service will not be easy, but our staff are focused and determined to deliver our vision

of becoming the leading UK wealth manager.

Paul Abberley

Chief Executive Officer

12 June 2018

The Chief Financial Officer's review of the year

Charles Stanley achieved growth in both revenues and profits during 2018 and the balance sheet continued to strengthen. We exited the last of our non-core activities at the beginning of the year and all our ongoing divisions contributed to the improved performance.

Overview of 2018 full year results

The Group's reported revenues for 2018 were 150.9 million, representing an increase of 6.6% (9.3 million) on the prior year. Revenues for the Core Business (comprising the Investment Management Services, Asset Management, Financial Planning and Charles Stanley Direct divisions) were up 8.5% to 150.4 million, predominantly driven by higher investment management fees. This increase in revenues was offset by a loss of income from EBS Management PLC (EBS) following the completion of its disposal at the end of May 2017.

Overall expenditure increased by 3.9% (5.4 million) to 142.2 million (2017: 136.8 million). During the course of the year, the Group recognised a number of one-off gains and losses shown within net finance income and other non-operating income of 2.5 million (2017: 3.8 million). These mainly comprised gains realised from the sale of EBS (0.7 million) and certain corporate investments (2.4 million), off-set by a one-off impairment charge on one of the Group's freehold properties (1.0 million). Details of these one-off items are set out later on in this section.

The above factors contributed to the Group achieving a reported profit before tax of 11.4 million representing a 29.5% increase on the prior year reported profit of 8.8 million.

The adjusted profit before tax from the Core Business of 10.9 million is 11.2% ahead of the 9.8 million profit achieved in the previous financial year, demonstrating reasonable progress.

The Core Business profit before tax margin was of 7.2% (2017: 7.1%). This improvement is certainly less than we had hoped, though to some extent performance was hampered by the charge in respect of non-cash, share-based option arrangements associated with the remuneration agreement settled with our investment management teams. Excluding this charge the underlying margin was 8.8%.

Funds under Management and Administration

The Group's revenue is substantially driven by the level of its FuMA. These stood at 23.8 billion at 31 March 2018, representing a 0.8% decrease from the 24.0 billion held at 31 March 2017. During the same period the market movement as measured by the FTSE UK Private Investor Balanced Index was down 1.7%.

Of course these figures simply represent the point in time levels of FuMA. By comparison, average FuMA during the year were 24.3 billion, a 10.5% increase on the previous year.

FuMA movement

2018

2017

Change

bn

bn

%

As at 31 March

Discretionary funds

12.3

11.4

7.9

Advisory Managed funds

1.8

2.4

(25.0)

Total managed funds

14.1

13.8

2.2

Advisory Dealing funds

1.4

1.8

(22.2)

Execution-only funds

8.3

8.4

(1.2)

Total administered funds

9.7

10.2

(4.9)

Total Funds under Management and Administration

23.8

24.0

(0.8)

FTSE UK Private Investor Balanced Index

4,050

4,122

(1.7)

Discretionary funds were up 0.9 billion or 7.9%, continuing the trend seen in recent years where the Group has focused on building scale in this service category. This increase is partly driven by net inflows from new clients and partially from upgrading existing Advisory Managed clients.

Whilst Execution-only funds fell 1.2% overall, our online execution-only platform Charles Stanley Direct continues to outperform and increased its AUA by 21.1% to 2.3 billion. Advisory Dealing and brokered Execution-only funds have both reduced on prior year as investment managers continue to focus more on managed accounts and transfer smaller accounts to Charles Stanley Direct. The Group expects this polarisation into Discretionary and online execution-only services to continue.

Inflows from new clients of 1.5 billion were offset by outflows from existing (0.3 billion) and lost (1.0 billion) clients, and negative market performance of 0.4 billion, resulting in a 0.2 billion net decrease in FuMA since 31 March 2017.

Results and performance

The Group's financial performance for the year ended 31 March 2018 and for the prior year are summarised in the tables below. These tables show the results of the Core Business, the held for sale activities (EBS Management PLC disposed on 31 May 2017), and various adjusting items which are added back to arrive at the Core Business results so as not to distort underlying performance, details of which are set out later in this section.

Core

Held

Adjusting

Reported

Business

for sale

items

performance

m

m

m

m

31 March 2018

Revenue

150.4

0.5

-

150.9

Expenses

(140.1)

(0.5)

(1.6)

(142.2)

Other income

0.2

-

-

0.2

Operating profit/(loss)

10.5

-

(1.6)

8.9

Net finance income and

other non-operating income

0.4

-

2.1

2.5

Profit before tax

10.9

-

0.5

11.4

Tax (expense)/credit

(2.8)

-

0.1

(2.7)

Profit after tax

8.1

-

0.6

8.7

Basic earnings per share (p)

16.06

-

-

17.23

31 March 2017

Revenue

138.6

3.0

-

141.6

Expenses

(129.1)

(3.0)

(4.7)

(136.8)

Other income

0.2

-

-

0.2

Operating profit/(loss)

9.7

-

(4.7)

5.0

Net finance income and

other non-operating income

0.1

-

3.7

3.8

Profit/(loss) before tax

9.8

-

(1.0)

8.8

Tax expense

(2.0)

-

(0.5)

(2.5)

Profit/(loss) after tax

7.8

-

(1.5)

6.3

Basic earnings per share (p)

15.33

-

-

12.35

Core Business revenues

Revenues from the Core Business grew by 8.5% (11.8 million) to 150.4 million in 2018. The change in composition of the Group's revenues compared to the prior year saw the continued increase in the proportion represented by fees, now 68.9%.

Core Business expenditure

Expenditure within the Core Business has increased by 11.0 million (8.5%) on prior year to 140.1 million.

The Group's single largest cost is staff costs and these increased by 1.8 million on the fixed element and 7.0 million on the variable element. Fixed employment costs increased principally due to a number of new hires within the management team of the Investment Management Services division and within the Financial Planning division.

The increase in the variable staff costs is mainly driven by reward for higher revenues in the year (4.4 million) and by the charge associated with share options granted to certain investment management teams under the revised remuneration arrangements settled last year (2.3 million).

IT & Communications are 0.9 million higher compared to prior year. Additional project-related costs worked on during the year, in particular MiFiD II, contributed to this. Marketing and entertainment costs have risen by 1.1 million representing additional spend on marketing campaigns and brand awareness initiated by the Group to promote new business.

Core Business pre-tax profit

The Core Business pre-tax profit increased from 9.8 million to 10.9 million, representing a margin of 7.2% (2017: 7.1%). Whilst this continues to show some progress on prior years, it is still a long way from our stated medium-term target of 15%. To achieve this, the Group will seek to continue to increase discretionary assets in its Investment Management Services division, the model portfolios in the Asset Management division, online execution-only funds in Charles Stanley Direct and Financial Planning revenues in that division, whilst across the business improving productivity in both the front office and back office.

Divisional review

The table below shows the Core Business results broken into the Group's four main operating divisions: Investment Management Services, Asset Management, Financial Planning and Charles Stanley Direct.

Investment Management Services

Asset Management

Financial Planning

Charles Stanley Direct

Core Business

m

m

m

m

m

31 March 2018

Revenue

131.2

7.0

6.3

5.9

150.4

Expenditure

(118.0)

(6.9)

(9.0)

(6.2)

(140.1)

Other income

0.2

-

-

-

0.2

Operating profit/(loss)

13.4

0.1

(2.7)

(0.3)

10.5

Net finance income

0.4

-

-

-

0.4

Profit/(loss) before tax

13.8

0.1

(2.7)

(0.3)

10.9

31 March 20171

Revenue

123.8

5.5

5.0

4.3

138.6

Expenditure

(109.3)

(5.8)

(7.8)

(6.2)

(129.1)

Other income

0.2

-

-

-

0.2

Operating profit/(loss)

14.7

(0.3)

(2.8)

(1.9)

9.7

Net finance income

0.1

-

-

-

0.1

Profit/(loss) before tax

14.8

(0.3)

(2.8)

(1.9)

9.8

1 The 2017 figures have been restated to reflect the transfer of an investment management team from Asset Management to Investment Management Services during 2018 in order to provide more appropriate reporting.

Investment Management Services

Trading review

The financial performance of the Investment Management Services division is largely driven by the value and mix of FuMA, the revenue margin earned on these assets and the operating costs associated with managing them comprising both fixed and variable costs.

2018

2017

bn

bn

FuMA

19.6

20.3

2018

2017

m

m

Revenue

131.2

123.8

Direct costs:

?Fixed staff costs

(20.4)

(19.2)

?Variable staff costs

(39.4)

(36.1)

IMs share option charge

(2.3)

-

?Other direct operating expenses

(11.5)

(10.0)

Other income

0.2

0.2

Contribution

57.8

58.7

Allocated costs

(44.4)

(44.0)

Operating profit

13.4

14.7

KPIs:

2018

2017

Discretionary funds per CF30

49.5m

42.6m

Discretionary funds as a percent of total FuMA

64.8%

61.1%

Discretionary average client account size

304k

300k

Discretionary revenue margin

85bps

85bps

Total revenue margin

64bps

65bps

Staff costs to revenue ratio 1

45.6%

44.7%

Other costs to revenue ratio

42.6%

43.6%

Operating margin 1

12.0%

11.9%

1 Excluding the charge for the investment managers' share options

The division's FuMA decreased by 3.4% to 19.6 billion as a result of the decline in stock market values experienced in the fourth quarter of the financial year.

Looking at the division's asset mix, the higher margin Discretionary service is up 7.7% on the prior year driven by net new inflows (0.4 billion) and from service upgrades (0.6 billion) offset by negative market movement of 0.2 billion. This has also contributed to a higher discretionary funds per CF30 of 49.5 million, a key measure for the division.

The other service levels have all decreased during the year as the division focuses on growing its Discretionary assets and restructuring its legacy Execution-only book. As part of this exercise, the division has transferred 0.1 billion of assets to the Charles Stanley Direct platform.

Revenues for the division increased by 6.0% through the combination of higher average fund levels, improved assets mix and the benefits of the rolling repricing exercise. We continue to see a switch from commission income to investment management fees as more clients elect for a clean fee-only charge.

The division's total costs increased by 8.0% during the year to 118.0 million. The principal reason for this was an increase in staff costs, up 8.1%. Variable staff compensation increased by 3.3 million or 9.1% as a result of the overall growth in revenue. Moreover, during the year the Group introduced a share option plan for employed investment managers in consideration for them agreeing to a change in their contractual terms. The non-cash cost of these options is being amortised over the three years to June 2020 and the charge recognised in 2018, which has not been treated as exceptional, was 2.3 million.

The above factors, and excluding the impact of the charge of the investment managers' share options, have led to an operating margin for the division of 12.0% (2017: 11.9%).

Asset Management

Trading review

The Asset Management division's performance is driven by Funds under Management (FuM) and the revenue margin earned on these assets.

2018

2017

bn

bn

FuM - on platform

0.9

0.9

FuM - off platform1

0.4

0.2

FuM - total

1.3

1.1

1 Off platform FuM comprises model portfolios on third party platforms and Open Ended Investment Companies (OEICs) or other clients whose assets are held by a third party custodian.

2018

2017

m

m

Revenue

7.0

5.5

Direct costs:

?Fixed staff costs

(1.7)

(1.5)

?Variable staff costs

(1.2)

(1.1)

?Other direct operating expenses

(1.6)

(0.7)

Contribution

2.5

2.2

Allocated costs

(2.4)

(2.5)

Operating profit/(loss)

0.1

(0.3)

KPIs:

2018

2017

Revenue margin2

56bps

60bps

Operating margin

1.4%

(5.5%)

2 Revenue margin calculated on total average funds (including both on and off platform FuM) .

The division's FuM increased by 18.2% to 1.3 billion. The main increase was recorded within the model funds and the Inheritance Tax Portolfio service driven from a combination of net inflows and investment performance.

The Asset Management division achieved an overall improvement in profitability year-on-year of 0.4 million as it moved from a loss in 2017 to a small profit of 0.1 million in 2018. This was a direct result of its revenue increasing 27.3% but its total costs by 19.0%.

During the year the Asset Management division established a range of risk-rated funds for the launch of Charles Stanley's Personal Portfolio Service. This service is designed with our smaller clients in mind for whom a full discretionary service is not economic. Until the funds reach critical mass, estimated at approximately 100 million, their operational costs are being subsidised to keep them to an acceptable level for investors. In the current year the cost to the division was 0.6 million. At 31 March 2018 there was 43 million invested in the funds and focus will be given in the current year to grow these further.

Financial Planning

Trading review

The principal driver of the Financial Planning division's performance is its revenue per financial planner.

2018

2017

m

m

Revenue

6.3

5.0

Direct costs:

?Fixed staff costs

(3.9)

(3.5)

?Variable staff costs

(1.5)

(0.6)

?Other direct operating expenses

(1.5)

(1.1)

Contribution

(0.6)

(0.2)

Allocated costs

(2.1)

(2.6)

Operating loss

(2.7)

(2.8)

KPIs:

2018

2017

Number of financial planners

21

18

Revenue per financial planner 1

369k

268k

Operating margin

(42.9%)

(56.0%)

1 This calculation is based on annualised revenues divided by average number of financial planners in the year.

Financial Planning's revenues increased 26.0% to 6.3 million as a direct result of its roll-out of a new value proposition and pricing model for clients. Encouragingly the revenues per financial planner (based on annualised figures to take account of people who left and joined during the year) increased markedly from 268,000 to 369,000. These figures give us confidence in the validity of the model which we will continue to scale up through the recruitment of more financial planners.

Looking forward, our ambition for the division is to grow it to represent at least 10% of the Group's revenues. At this level, it will be of sufficient scale to contribute to the Group's goal of being a holistic wealth manager. The additional investment required to recruit new financial planners to meet this goal is likely to lead to an increase in the division's losses in the near term. This is for two reasons.

First because of the cost of recruitment. Secondly because it typically takes a period of 18 to 24 months for a new financial planner to get their revenues up to our target levels which historically have been set, on average, at 300,000, but have now been moved to 350,000. In the longer term we believe this investment will lead to greater asset inflows, greater share of wallet, enhanced customer retention and better defensibility of revenue margins because the service meets a fundamental client demand. In the process we expect it to enhance the Group's profitability and quality of earnings.

Charles Stanley Direct

Trading review

Charles Stanley Direct's financial performance is driven by the value of Assets under Administration (AuA) on which a platform fee is charged and by the number of commission-earning bargains undertaken by clients.

2018

2017

bn

bn

AuA

Charles Stanley Direct

2.3

1.9

Charles Stanley Investment Choices

0.4

0.4

Total

2.7

2.3

The division's AuA grew by 17.4% to 2.7 billion (2017: 2.3 billion). The assets on the Charles Stanley Direct online platform increased by 21.1% from 1.9 billion to 2.3 billion during the year. The significant uplift was driven by new client take-on of 0.3 billion and internal transfers primarily from the Investment Management Services division of 0.1 billion. The platform now services over 50,000 accounts. Charles Stanley Investment Choices, our paper-based fund broking business, maintained its assets over the year.

2018

2017

m

m

Revenue

5.9

4.3

Direct costs:

?Fixed staff costs

(1.3)

(1.5)

Variable staff costs

-

(0.1)

?Other direct operating expenses

(2.0)

(1.4)

Contribution

2.6

1.3

Allocated costs

(2.9)

(3.2)

Operating loss

(0.3)

(1.9)

KPIs:

2018

2017

AuA growth

17.4%

27.8%

Revenue margin

24bps

22bps

Operating margin

(5.1%)

(44.2%)

Charles Stanley Direct continues to make very encouraging progress and although it reported a small loss for the year of 0.3 million, it achieved a profit of 0.2 million in the second half. This was driven by a combination of ongoing growth in its customers and AuA on a relatively static cost base.

The main focus for the division in the near term is to enhance further the platform's mobile application and improve its website interface creating a full digital experience for both existing and new customers.

Support Functions

The costs incurred by the Group's Support Functions are either charged directly to the four main operating divisions, such as for market data costs, or recharged as an allocated cost. Ongoing costs for all Support Functions were 49.1 million in 2018, reflecting a marginal net increase of 0.6% on the prior year. The main increase was in respect of project-related spend including 0.8 million for the implementation of MiFiD II and GDPR. Cost reductions in other areas, notably professional fees, marketing and administration expenses, helped minimise the overall increase in the Support Functions costs.

Looking forward, we see further opportunities to reduce Support Functions' operating costs by reviewing and streamlining process flows between the front to middle and back office functions. Conversely, we expect to see continued cost pressure in a number of areas including IT and regulation whilst also increasing spend on marketing and training.

Held for sale activities - EBS Management PLC (EBS)

The Group completed the sale of EBS to Embark Group Limited on 31 May 2017. Consequently, two months' worth of trading activities are included within the 2018 results compared to a full year of trading in 2017. For this purpose, it is being presented as held for sale and stripped out from the Core Business year-on-year results comparison. However, in both years, EBS broke even and therefore has no impact on the Core Business profit comparison.

Adjusting items

The Board considers the Core Business profit before tax and earnings per share to be a better reflection of underlying business performance than the statutory figures reported in the consolidated financial statements. To calculate the Core Business results the Board has excluded certain adjusting items totalling a net credit of 0.5 million. An explanation of these adjusting items, together with a reconciliation of profits, is provided below:

2018

2017

m

m

Reported profit before tax

11.4

8.8

Gain on part sale of shares held in Euroclear PLC

(1.9)

-

Gain on sale of EBS Management PLC

(0.7)

-

Profit on disposal of investment in Runpath Group Limited

(0.5)

(0.4)

Recovery on prior years FSCS levy1

(0.1)

-

Amortisation of client relationships1

1.1

1.6

Impairment of freehold property

1.0

-

Accelerated amortisation of leasehold improvements1

0.6

-

London office rationalisation:

?1. Net gain on surrender of long term lease

-

(3.2)

?2. Overlapping rent and occupancy costs1

-

3.1

?3. Dilapidations1

-

(0.1)

Impairment of intangible assets

-

0.7

Refund of under-recovered VAT in prior years1

-

(0.7)

Net credit/(charge) from adjusting items

(0.5)

1.0

Profits from held for sale activities

-

-

Core Business profit before tax

10.9

9.8

1 These adjusting items are included within administrative expenses in the consolidated income statement.

Gain on part sale of shares held in Euroclear PLC: (1.9 million credit)

In April 2017, the Group participated in a share buy-back tender offer by Euroclear PLC. This resulted in the sale of approximately 60% of the Group's holding in Euroclear PLC, giving rise to a profit on disposal of 1.9 million.

Gain on sale of EBS Management PLC: (0.7 million credit)

On 31 May 2017, the Group completed the disposal of EBS Management PLC to Embark Group Limited for an initial cash consideration of 2.0 million and a deferred consideration of up to 2.0 million payable on the first and second anniversary of the completion date. A profit on disposal of 0.7 million was recognised from the transaction.

Profit on disposal of investment in Runpath Group Limited: (0.5 million credit)

In October 2017, the Group entered into a sale and purchase agreement to dispose of its remaining holding in Runpath Group Limited to Experian for a consideration of 0.8 million resulting in an overall gain of 0.5 million.

Recovery on prior year FSCS levy: (0.1 million credit)

During the year the Group received a refund of 0.1 million in respect of compensation paid in 2011 in connection with the KeyData case.

Amortisation of client relationships: (1.1 million charge)

Payments made for the introduction of customer relationships that are deemed to be intangible assets are capitalised and amortised over their useful life, which has been assessed to be 10 years. This amortisation charge has been excluded from the Core Business profit since it is a significant non-cash item.

Impairment of freehold property: (1.0 million charge)

In accordance with IAS 16, the Group carried out an independent valuation of its freehold properties during the year. The updated valuation of one of these properties indicated that its fair value was impacted by the location and current condition of the building and was below the carrying value in the books. This resulted in a one-off impairment charge to the profit and loss account of 1.0 million.

Accelerated amortisation of leasehold improvements: (0.6 million charge)

Following the recognition of leasehold dilapidations in respect of the Group's London headquarters in the year ended 31 March 2017, the Group undertook a review of its branch network and obligations for dilapidations. Consequently, a provision of 0.9 million for leasehold dilapidations in respect of the Group's branch network was recognised in the statement of financial position, with a corresponding amount shown as an addition to leasehold improvements. The charge of 0.6 million recognised in the year represents the accelerated depreciation of these leasehold improvements, for the expired portion of the various branch leases relating to prior years and therefore is shown as an adjusting item.

Taxation

The corporation tax charge for the year was 2.7 million (2017: 2.5 million) representing an effective tax rate of 23.7% (2017: 28.4%). The prior year effective tax rate was higher due to the disposal of fixed assets not allowable for tax purposes following the London office relocation. A detailed reconciliation between the standard and effective rate of corporation tax is provided in note 12 of the Consolidated financial statements.

Earnings per share

The Group's reported basic earnings per share for the year were 17.23 pence (2017: 12.35 pence). The Core Business basic earnings per share increased from 15.33 pence to 16.06 pence in 2018.

Dividends

The Board has proposed a final dividend of 5.5 pence per share (2017: 4.5 pence per share). Taking into account the interim dividend of 2.5 pence per share, this results in a total dividend for the year of 8.0 pence per share (2017: 6.0 pence per share), an increase of 33.3%. The proposed total dividend is 2.2x times covered by basic reported earnings and 2.1x times covered by basic Core Business earnings. The recommended final dividend is subject to shareholders' approval, which will be sought

at the Company's Annual General Meeting on 24 July 2018.

Financial position

The Group maintained its strong financial position with total net assets at 31 March 2018 of 97.8 million (2017: 89.1 million) including 65.6 million of cash resources.

The Group operates a defined benefit pension scheme which was closed to new members in 1998 and also closed to further accruals for the remaining 25 active members at 31 March 2016. The most recent actuarial assessment of the Group's defined benefit scheme's liabilities shows a deficit at 31 March 2018 of 6.5 million (31 March 2017: 10.5 million). The reduction in the scheme's deficit is attributable to a combination of liabilities extinguished on transfers out of the scheme, investment performance, actuarial gains and contributions made by the Group to the scheme.

Regulatory capital resources

Charles Stanley & Co. Limited, the Group's main operating subsidiary, is an IFPRU 125k Limited Licence Firm regulated by the FCA. In view of this, the Group is classified as a regulated group and subject to the same regime.

At 31 March 2018, the Group had regulatory capital resources of 74.0 million (2017: 61.4 million):

2018

m

2017

m

Ordinary share capital

12.6

12.7

Share premium

4.6

4.4

Retained earnings

61.1

51.1

Other reserves

15.2

16.0

Regulatory adjustments

(19.5)

(22.8)

Total regulatory capital resources

74.0

61.4

The Group monitors a range of capital and liquidity statistics on a daily, weekly and monthly basis.

As required under FCA rules, the Group maintains an Internal Capital Adequacy Assessment Process (ICAAP), which includes performing a range of stress tests to determine the appropriate level of regulatory capital and liquidity that the Group needs to hold. The last review of the ICAAP conducted and signed off by the Board was in November 2017. Regulatory capital forecasts are performed monthly and take into account expected dividends and intangible asset acquisitions and disposals as well as budgeted and forecast trading results.

The Group's Pillar III disclosures are published annually on the Group's website (www.charles-stanley.co.uk) and provide further details about the Group's regulatory capital resources and requirements.

Financial outlook

Since the year end the markets have recovered strongly and our FuMA stood at 25.0 billion at the end of May 2018. If these conditions persist then they should provide a helpful tailwind for an improving performance.

The financial challenge for the Group, both for the 2019 financial year and beyond, is to achieve a greater rate of organic growth of funds under management, to improve the revenues we achieve from these assets and to translate more of this top line growth into bottom line profit. Whilst we achieved many important milestones in 2018 and overall made good financial progress, the increase in the operating margin from 7.1% to 8.8% (excluding the charge in respect of investment managers share options) was less than we had expected.

There are three principal reasons for this. Firstly, we are having to invest to ensure we are capable of delivering profitable future growth. This has a near term cost but a longer term payback. An example of this dynamic is the investment made in our Financial Planning division, both in the form of replacing the operating system and in the recruitment of new financial planners. Secondly, we have had to invest to ensure compliance with incoming regulatory standards. Although this is an ongoing feature for the industry as a whole, the 2018 financial year was particularly active with MiFID II and GDPR. The Governance overhaul referred to in the Chairman's statement also alluded to this. Thirdly, we have been reviewing the way we process business, both in the front and back offices, with a view to standardising many activities and maximising what we already have.

This process review is an ongoing major project, the benefits of which we believe will be to create more capacity in the Group, improve productivity and also make future development cycles quicker and cheaper because we will have less complexity to deal with than is currently the case. For example, we are looking to bring together the separate Charles Stanley and Charles Stanley Direct online platforms so that the underlying code is common and the user experience, whether via a PC or an App, is both the same and improved. Not only should this help us attract more new clients to Charles Stanley Direct, but also enable us to convert many managed clients online for communication and reporting purposes.

To summarise, we are confident that we will continue to make meaningful progress toward attaining our target 15% operating margin. This will be achieved by a combination of revenue growth and productivity gains. The speed with which we attain it will in part be dependent upon the pace of investment to develop sales channels and standardise processes, and in part on how quickly the Group assimilates change. With an engaged workforce we believe we can achieve a lot more and this is what we will pursue.

Risk management and principal risks

The Group's risk management framework is a fundamental component of the operating model and is embedded across all processes and controls. This section sets out an assessment of the principal risks relevant to the Group's long-term performance, which is then followed with the Director's Viability statement covering the three years to 31 March 2021.

The Chief Risk Officer (CRO), under the supervision of the Risk Committee, has the principal responsibility for risk awareness, monitoring and management across all areas of the business.

Charles Stanley's approach to risk management is documented in the Group Risk Policy and the Risk

Appetite Statement (RAS), which is reviewed, challenged and approved by the Board on an annual basis. The RAS takes into consideration the Group's strategic objectives, strategy and business plans, and underpins the implementation of robust risk monitoring and risk reporting processes which

continue to evolve.

The RAS sets out the Group's tolerance to various types of risk and includes both quantitative and qualitative measures against which Management and the Board monitor risk on a periodic basis.

The Board has carried out a robust assessment of the principal risks of the Group including those that may threaten its business model, performance, solvency and liquidity. The Board agrees that the information it receives allows it to monitor and review the efficiency of the Group's Internal Control Framework in line with the FRC's guidance relating to Risk Management and Internal Control presented in the UK Corporate Governance code covering all material controls, including financial, operational and compliance controls.

Principal risks

Key mitigants and controls

Business Model and Strategy

The risk that the business model and strategy do not respond in an optimal manner to changing market conditions such that sustainable growth, market share or profitability is adversely impacted.

The Group Chief Risk Officer participates in the setting of Group strategic plans from the beginning and has a voice from the early stage of strategy development.

As part of the strategy setting process, the Board is provided with a summary outlining the risks to the business model including an analysis of internal and external pressures on the Group strategy and the potential threats to its business model.

The report is presented to the Executive Committee and the Board alongside the proposed business plan to support the decision making.

Financial Strength Risk

Failing to maintain financial strength in order to support business objectives, meet regulatory capital requirements, and provide shareholders with an acceptable return.

To achieve our financial goals, a series of risk appetite limits have been set around operating margin, cash balances, regulatory capital and dividend cover.


These are monitored by the Board on a regular basis.

The Group is exposed to interest rate movements directly through its variable rate assets and liabilities. This is tracked by reporting on exposure levels at the Treasury Committee.

Credit and Counterparty Risk

The potential failure of clients or counterparties to fulfil their contractual obligations.

Charles Stanley does not offer any formal lines of credit to clients. The Group however has an exposure to counterparty failures and late payment and settlement. It therefore establishes clear risk appetite limits for client and Group cash placed and maintained with authorised institutions and for trading purposes which must be adhered to by the business.


The Group's Treasury Committee is responsible for the initial assessment and ongoing monitoring of deposit-taking counterparties. The following criteria govern how the Group's credit and counterparty risk is managed:

- Assets will only be placed and maintained with counterparties deemed to be financially sound


- Client and Group cash held at any individual counterparty should not exceed its respective limit set by the Treasury Committee unless written approval has been provided

Counterparty limits for the purpose of trading are set by the Market Exposure Committee (MEC):


- Counterparties with no set trading limits should be assessed on an individual basis on the day of the trade by the MEC


- Breaches of any counterparty trading limits without approval must be escalated immediately to the MEC.

Market risk

The risk of losses arising as a result of exposure to market movements, including foreign exchange and interest rates.

Charles Stanley does not hold any proprietary positions other than those arising from incidental dealing errors. The Group does hold some investments within model portfolios for the purpose of establishing and maintaining an auditable track record for these models, however this exposure is not seen as material and therefore reflects minimal market risks. Any Market risk arising from incidental dealing errors are captured as operational losses.

The majority of the Group's cash is kept in GBP across a number of banks. Limited foreign currency is held only to facilitate settlement and dealing activity on behalf of clients. The Treasury Committee manages the Group's account balances both in GBP and foreign currencies to our requirements and limits exposures

to the Group's operational needs.

Liquidity Risk

The risk that the Group, although solvent, either does not have available sufficient financial resources to enable it to meet its obligations as they fall due, or can only secure such resources at excessive cost.

Charles Stanley's Liquidity risk is overwhelmingly short-term in nature and arises predominantly from the settlement of trades within the stockbroking business. The Treasury Committee operates within strict policies and procedures approved by the Board to manage the Group's liquidity risk. These include:

- The Group ensuring that all legal entities have sufficient funds to meet their liabilities as they fall due, with surplus cash transferred on a monthly basis to Charles Stanley & Co. Limited.

- Utilising financial instruments, which include borrowings, cash and liquid resources, and various items including trade debtors and trade creditors that arise directly from its operations. The credit quality of counterparties is reviewed frequently and we limit aggregate credit exposures accordingly.

The Group has, for many years, not used overdraft facilities for working capital purpose as it has not required such a facility.

Pension Risk

The risk that the cost of the Group's defined benefit pension scheme increases, or its valuation affects dividends, reserves and capital. This would materialise when the pension obligations exceed the assets set aside to cover them.

Charles Stanley continues to support a defined benefit pension scheme ("the scheme") which is closed to new members and ceased accruing for existing members in April 2016. It is reviewed regularly for viability and to remain within an agreed deficit level.

Through a combination of investment performance, transfers out from the scheme and the introduction of liability driven investments, the scheme's deficit has reduced from 10.5 million as at 31 March 2017 to 6.5 million as at 31 March 2018. The Group is working closely with the trustees of the scheme to reduce the deficit further and, where possible, match investments with future liabilities.

Charles Stanley has constructed its framework of internal controls to minimise the risk of unanticipated financial loss or damage to its reputation. However, no system of internal control can completely eliminate the risk of error, financial loss, fraudulent actions or reputational damage. The Group records and monitors

operational losses and near misses which are reviewed at the Enterprise Risk Committee, with reporting to the Joint Risk Committee and the Board, where required.

Insurance cover is in place and reviewed on an annual basis to ensure that there is an appropriate amount of cover to manage the impact of operational losses against capital reserves.

The continuing incidence of low level technical and operational issues are driving the Groups risk exposure up. Charles Stanley's strategic change programme and its plans to continue growing the business also inherently lead to an increase to the operational risk profile of the Group, which will continue to invest in its system capabilities and business processes to ensure that it meets the expectations of its customers, complies with regulatory, legal and financial reporting requirements, and mitigates the risk of loss or reputational damage from operational risk events and

external threats.

IT Security and Cyber Security Risk

The risk that Charles Stanley's system infrastructure is breached by external counterparties with or without malicious intention. Possible breaches could involve data theft, ransomware or a shutdown of systems.

Charles Stanley has limited appetite for unauthorised or

inappropriate access to its IT systems due to the potential disruption to its business operations, adverse customer impacts and damage to its reputation. Similarly, the Group wishes to minimise the threat to its business activities from third party actions such as denial of service attacks.

Alongside setting a framework to prevent and detect unauthorised access attempts to its business systems, Charles Stanley seeks to ensure that the systems are resilient to current and emerging threats and maintains a rolling programme of activity which is informed by the day-to-day experience, threat intelligence and any emerging vulnerabilities identified.

People and Conduct Risk

The risk that clients or the wider market, as opposed to the firm, suffer detriment as a result of the Group's services, products or activities.

The Group recognises that its reputation and financial success is dependent on the performance and conduct of its staff. Charles Stanley's client-centric culture is founded on the Group's core values of being Caring, Fair and Progressive. It is committed to delivering good outcomes for clients by communicating effectively and providing products and services that meet their needs throughout the customer journey. It acts with integrity in the market, and operates in line with the agreed strategy and within the risk appetite.


Eighteen Conduct Outcomes have been identified and will be monitored and reported via various metrics through to the Conduct dashboards. A Conduct and Culture Committee has been instituted in May 2017 to provide enhanced oversight.


All clients are risk profiled to ensure that we clearly define, agree and manage our clients' portfolios in accordance with these risk profiles, investment objectives and capacity for loss. Suitability is a major focus which has quality assurance processes in place to assess suitability reviews performed by our staff. Careful monitoring of investment decision-making against the risk profile helps ensure that we achieve appropriate and suitable outcomes for our clients.

Legal & Regulatory Risk

The risk of breaching, or non-compliance with, regulations and restrictions enforced on the industry and the Group, resulting in regulatory censure and/or fines.

The Group has built a reputation as a high-quality provider of wealth management services. This has been carefully developed over many years. The risk is monitored and managed by emphasis on compliance with all aspects of relevant regulation, including those of the FCA.

There remains a significant regulatory change agenda with the Senior Managers and Certification Regime (SMCR), the Markets in Financial Instruments Directive (MIFID II), the Packaged Retail Investment and Insurance-based Products (PRIIPS) and the General Data Protection Regulation (GDPR) which came into force on 25 May 2018. The Group ran a programme to ensure all policies, operating procedures and processes are compliant with the new data protection requirements.

While in the longer term, although the UK exit from the EU will potentially lead to a rewriting of some legislation, most EU legislation is being transposed into UK law.

Charles Stanley monitors changes in the regulatory and legal agenda and has formal projects for major changes to ensure their successful implementation.

Viability statement

In accordance with the revised UK Corporate Governance Code, the Directors have carried out a robust assessment of the prospects of the Group over the three-year period from 31 March 2018 to 31 March 2021. The of the Group's viability over a three-year time period is in alignment with the Group's strategy, budgeting process and the scenarios set out in the ICAAP.

The Directors consider a three-year time horizon appropriate as it is most meaningful in planning the Group's long-term strategy; a five-year horizon would stretch forecasting inputs and assumptions beyond a realistic threshold.

In assessing the future viability of the overall business, the Directors have considered the corporate strategy and the changes within the business executed in the last two years, including the significant business divisional restructuring and changes to reward arrangements. They have also considered the business environment of the Group and the potential threats to its business model arising from progressive technological, sectorial, demographic and regulatory changes.

The Board oversees the Group's principal risks (see the Risk Committee report in the Governance section of the Annual report and accounts) and is accountable for the Group's risk management by:

Overseeing the processes and procedures to monitor and mitigate the principal risks

Reviewing high level management information from key departments which monitor whether the Group is operating within the parameters set out in the RAS linked to the principal risks

Deciding the appropriate actions if any of the Group's risk appetites are breached.

On a detailed level, extensive management information is analysed by the Enterprise Risk Committee (ERC) which meets monthly and oversees operational risk across the Group by:

Monitoring quantitative and qualitative management information across the Group to highlight areas of risk which require enhanced or additional controls

Delegating to the appropriate committees any issues raised as part of the management information which require further action

Carrying out annual 'deep dive' risk analysis for each area of the firm including reviewing and challenging departments on their Risk and Control Self Assessment ("RCSA") which are discussed by the Committee and department heads

Reviewing the reports of the internal and external auditors concerning systems and controls, reviewing the resolution of proposed control enhancements and monitoring any remaining open issues.

The Risk Committee has oversight of the above processes, ensuring the monitoring and escalation procedures are operating effectively and completed in a timely manner (see Risk Committee report in the Governance section of the Annual report and accounts).

The Board reviews and challenges the Group's three-year strategic plan against the principal risks at least annually. Stress tests are applied to the base case projections by applying multiple shock events. These stresses have been derived from workshops attended by Senior Management, with the use of external events to substantiate the Board's comfort level that the shock events are sufficiently severe and appropriate.

The Group undertakes an ICAAP which is a detailed process owned and overseen by the CSG Board. This includes an assessment of:

the Group's processes, strategies and systems

the major sources of risks faced by the Group that may impact its ability to meet its obligations

the results of internal stress testing of these risks

the amounts and types of financial resources and internal capital, including own funds and liquidity resources, and whether these are adequate both as to amount and quality to ensure that there is not significant risk that its liabilities cannot be met as they fall due.

Scenario analysis and stress testing are performed as part of the ICAAP to assess the Group's exposure to a range of extreme but plausible situations, as well as an assessment of the Group's wind-down scenarios. There is also a review of the reverse stress tests which would cause the Group's business model to become unviable.

Based on the results of the latest ICAAP, the Board believes that, by taking the projected actions to reduce expenditure and, if required, dividends, the Group's business model is resilient and holds sufficient capital to survive a range of severe but plausible scenarios.

Given the extensive controls and procedures in place, the Directors are of the opinion that it is reasonable to conclude that the Group has sufficient resources to meet its obligations and continue business operations over the assessed three-year period.

Consolidated income statement

Year ended 31 March 2018

Notes

2018

2017

000

000

Revenue

4

150,860

141,630

Administrative expenses

4

(142,146)

(136,122)

Impairment of goodwill

4

-

(650)

Other income

4

278

186

Operating profit

8,992

5,044

Gain on surrender of lease

-

5,550

Loss on disposal of fixed assets

(45)

(2,199)

Gain on sale of business

707

148

Gain on sale of corporate investments

2,463

423

Impairment of corporate loans

-

(500)

Impairment of freehold property

(995)

-

Finance income

343

397

Finance costs

(18)

(64)

Net finance and other non-operating income

2,455

3,755

Profit before tax

11,447

8,799

Tax expense

6

(2,715)

(2,539)

Profit for the period attributable to owners of the Parent Company

8,732

6,260

Earnings per share

Basic

5

17.23p

12.35p

Diluted

5

16.93p

12.34p

Consolidated statement of comprehensive income

Year ended 31 March 2018

2018

2017

000

000

Profit for the period

8,732

6,260

Other comprehensive income

Items that will never be reclassified to profit or loss

Remeasurement of the defined benefit scheme obligation

3,863

(1,093)

Related tax

(657)

81

3,206

(1,012)

Items that are or may be reclassified to profit or loss

Available-for-sale financial assets - unrealised gains or losses

494

737

Available-for-sale financial assets - realised gains and losses reclassified to profit or loss

(2,863)

170

Related tax

398

(195)

(1,971)

712

Items that will not be reclassified to profit or loss

Revaluation of freehold properties

208

-

Related tax

(17)

-

191

-

Other comprehensive income for the period, net of tax

1,426

(300)

Total comprehensive income for the period attributable to owners of the Parent Company

10,158

5,960

Consolidated statement of financial position

As at 31 March 2018

Notes

2018

2017

Assets

000

000

Intangible assets

7

19,293

21,220

Property, plant and equipment

9,680

9,976

Net deferred tax asset

2,075

1,878

Available-for-sale financial assets

5,819

5,626

Trade and other receivables

945

-

Non-current assets

37,812

38,700

Trade and other receivables

178,024

144,673

Financial assets at fair value through profit or loss

100

73

Available-for-sale financial assets

-

2,450

Assets held for sale

-

8,965

Cash and cash equivalents

65,639

52,101

Current assets

243,763

208,262

Total assets

281,575

246,962

Equity

Share capital

12,686

12,672

Share premium

4,564

4,429

Own shares

(95)

-

Revaluation reserve

1,598

3,378

Merger relief reserve

15,167

15,167

Retained earnings

63,842

53,424

Equity attributable to owners of the Parent Company

97,762

89,070

Non-controlling interests

24

24

Total equity

97,786

89,094

Liabilities

Employee benefits

6,460

10,528

Provisions

1,813

1,108

Non-current liabilities

8,273

11,636

Trade and other payables

171,666

141,509

Current tax liabilities

1,214

994

Provisions

2,636

2,162

Liabilities held for sale

-

1,567

Current liabilities

175,516

146,232

Total liabilities

183,789

157,868

Total equity and liabilities

281,575

246,962

Approved and authorised for issue by the Board on 12 June 2018.

Consolidated statement of changes in equity

Year ended 31 March 2018

Share capital

Share premium

Own shares

Re-valuation

reserve

Merger relief reserve

Retained earnings

Total

Non-controlling interests

Total equity

000

000

000

000

000

000

000

000

000

1 April 2017

12,672

4,429

-

3,378

15,167

53,424

89,070

24

89,094

Profit for the year

-

-

-

-

-

8,732

8,732

-

8,732

Other comprehensive income:

Revaluation of available-for-sale financial assets:

- unrealised gains and losses

-

-

-

494

-

-

494

-

494

- realised gains and losses transferred to profit or loss

-

-

-

(2,863)

-

-

(2,863)

-

(2,863)

Deferred tax on available-for-sale financial assets

-

-

-

398

-

-

398

-

398

Revalutaion of freehold property

-

-

-

208

-

-

208

-

208

Deferred tax on revalutaion of freehold property

-

-

-

(17)

-

-

(17)

-

(17)

Remeasurement of defined benefit scheme liability:

- actuarial gain in the year

-

-

-

-

-

3,863

3,863

-

3,863

- deferred tax movement on scheme liability

-

-

-

-

-

(657)

(657)

-

(657)

Total other comprehensive income for the year

-

-

-

(1,780)

-

3,206

1,426

-

1,426

Total comprehensive income for the year

-

-

-

(1,780)

-

11,938

10,158

-

10,158

Dividends paid

-

-

-

-

-

(3,546)

(3,546)

-

(3,546)

Own shares acquired

-

-

(95)

-

-

-

(95)

-

(95)

Share-based payments:

- value of employee services

-

-

-

-

-

2,026

2,026

-

2,026

- issue of shares

14

135

-

-

-

-

149

-

149

31 March 2018

12,686

4,564

(95)

1,598

15,167

63,842

97,762

24

97,786

Consolidated statement of changes in equity

Year ended 31 March 2017

Share capital

Share premium

Re-valuation reserve

Merger relief reserve

Retained earnings

Total

Non-controlling interests

Total equity

000

000

000

000

000

000

000

000

1 April 2016

12,669

4,402

2,666

15,167

50,461

85,365

24

85,389

Profit for the year

-

-

-

-

6,260

6,260

-

6,260

Other comprehensive income:

Revaluation of available-for-sale financial assets:

- unrealised gains and losses

-

-

737

-

-

737

-

737

- realised gains and losses transferred or profit and loss

-

-

170

-

-

170

-

170

Deferred tax on available-for-sale financial assets

-

-

(195)

-

-

(195)

-

(195)

Remeasurement of defined benefit scheme liability:

- actuarial loss in the year

-

-

-

-

(1,093)

(1,093)

-

(1,093)

- deferred tax movement on scheme liability

-

-

-

-

(20)

(20)

-

(20)

- current tax relief

-

-

-

-

101

101

-

101

Total other comprehensive income for the period

-

-

712

-

(1,012)

(300)

-

(300)

Total comprehensive income for the period

-

-

712

-

5,248

5,960

-

5,960

Dividends paid

-

-

-

-

(2,534)

(2,534)

-

(2,534)

Share-based payments:

- value of employee services

-

-

-

-

249

-

249

- issue of shares

3

27

-

-

-

30

-

30

31 March 2017

12,672

4,429

3,378

15,167

53,424

89,070

24

89,094

Consolidated statement of cash flows

Year ended 31 March 2018

2018

2017

Notes

000

000

Cash flows from operating activities

Cash generated from operating activities

9

15,485

10,688

Interest received

297

195

Interest paid

(18)

(63)

Tax paid

(2,985)

(1,367)

Net cash generated from operating activities

12,779

9,453

Cash flows from investing activities

Proceeds from surrender of lease

-

5,550

Acquisition of intangible assets

(676)

(1,089)

Purchase of property, plant and equipment

(2,796)

(2,562)

Purchase of available-for-sale financial assets

(1,429)

(1,842)

Proceeds from disposal of property, plant and equipment

22

-

Proceeds from sale of available-for-sale financial assets

3,780

1,642

Net cash (outflow)/inflow from disposal of business

(1,256)

1,180

Dividends received

278

186

Net cash (used in)/generated from investing activities

(2,077)

3,065

Cash flows from financing activities

Proceeds from issue of ordinary share capital

149

30

Purchase of own shares

(95)

-

Dividends paid

(3,546)

(2,534)

Net cash used in financing activities

(3,492)

(2,504)

Net increase in cash and cash equivalents

7,210

10,014

Cash and cash equivalents at start of year

58,429

48,415

Cash and cash equivalents at end of year

65,639

58,429

Cash and cash equivalents shown in current assets

65,639

52,101

Cash classified as assets held for sale

-

6,328

Cash and cash equivalents at end of year

65,639

58,429

1. General information

As required by section 435 of the Companies Act 2006, the Board confirms that the financial information contained in this preliminary announcement does not constitute the Group's financial statements for the year ended 31 March 2018.

The financial information set out in this preliminary announcement has been extracted from the Group's 2018 Annual Report and Accounts, which have been approved by the Board of Directors and agreed with KPMG LLP, the Company's auditor. The Auditor's Report was unqualified and did not draw attention to any matters by way of emphasis and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

While the financial information has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS) this preliminary announcement does not contain sufficient information to comply with IFRS.

The accounting policies used are consistent with those set out in note 2 to the 2017 Annual Report and Accounts which have been delivered to the Registrar of Companies.

The critical accounting judgements and key sources of estimation uncertainty are set out below.

The 2018 Annual Report and Accounts will be posted to shareholders during June 2018.Copies will be available from the registered office of the Company at 55 Bishopsgate, London, EC2N 3AS. It will also be available on the Company's website www.charles-stanley.co.uk

2. Application of new and revised IFRSs and changes in accounting policy

The Group has consistently followed the same accounting policies, presentation and methods of computation in these consolidated financial statements as applied in the Group's consolidated financial statements for the year ended 31 March 2017.

A number of new standards and amendments to standards and interpretations are effective for periods beginning on or after 1 April 2018. The following new standards are not applicable to these financial statements but are expected to have an impact when they become effective. The Group plans to apply these standards in the reporting period in which they become effective, the comparative figures will be restated as required by these standards when they are applied.

2.1 IFRS 9 Financial Instruments

IFRS 9 replaces IAS 39 Financial Instruments: Recognition and measurement. It includes new guidance on the classification, measurement and impairment of financial instruments. IFRS 9 is effective for annual periods commencing on or after 1 January 2018. The Group has not adopted this standard early.

The Group has conducted an assessment of the impact of adopting IFRS 9 based on its existing financial instruments and is well advanced in its classification and measurement of financial assets under the new standard. The primary impact on the financial statements is expected to be the change in classification of financial assets. The Group has not identified any material differences in the measurement of financial assets.

The IAS 39 categories of available-for-sale, loans and receivables and held to maturity no longer exist in IFRS 9. Financial assets will fall into one of three categories: amortised cost, fair value through profit or loss, or fair value through other comprehensive income.

Based on the Group's assessment of the new standard:

All listed investments currently measured at fair value will be classified as fair value through profit or loss, except for a holding of UK government gilts which will be measured at amortised cost. The impact of this is expected to be immaterial

It is expected that an election will be made to recognise unlisted investments at fair value through other comprehensive income

Trade and other receivables will continue to be measured at amortised cost

Cash and cash equivalents will continue to be measured at amortised cost

The classification and measurement of financial liabilities remains unchanged from IAS 39, therefore no impact is anticipated on the Group's financial liabilities on adoption of the new standard.

IFRS 9 introduces a new expected credit loss impairment model to replace the incurred loss model in IAS 39. Based on both past experience and an assessment of the Group's credit risk exposures relating to its existing financial instruments, the new impairment model is not expected to have a material impact on the financial statements.

2. 2 IFRS 15 Revenue from Contracts with Customers

IFRS 15 outlines a single comprehensive model for revenue arising from contracts with customers and supersedes existing revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. IFRS 15 is effective for periods commencing on or after 1 January 2018. The Group has not adopted this standard early.

The core principle of IFRS 15 is that an entity recognises revenue to reflect the transfer of goods or services to a customer, measured as an amount that the entity expects to be entitled to in exchange for those goods or services. In addition to the guidance on recognising revenue from contracts with customers, IFRS 15 also prescribes the treatment of costs associated with obtaining contracts where they are not within the scope of another standard.

The Group has performed a review of its existing revenue streams and costs associated with obtaining contracts. Based on this review, there will be no material impact on the existing Group's revenue recognition policies. The primary impact of adopting IFRS 15 will be in respect of payments to investment managers for introducing customer relationships to the Group. These payments are currently capitalised if paid within 12 months of the investment manager joining the Group. Payments made after 12 months are expensed immediately to the income statement. Under IFRS 15 all costs of this nature, irrespective of when they are paid, will be capitalised if they are expected to be recovered. The Group has performed a preliminary assessment of the impact of this change in policy and estimates that there will be a pre-tax adjustment of approximately 0.6 million to opening retained earnings. There will be a corresponding increase in intangible assets as a result of the additional capitalisation of costs previously expensed to the income statement.

2.3 IFRS 16 Leases

IFRS 16 replaces IAS 17 Leases. It eliminates the classification of leases as either operating leases or finance leases. Any leases with more than 12 months' term are to be recognised as an asset in the statement of financial position with the related future lease obligations shown as a liability. IFRS 16 is effective for annual periods commencing on or after 1 January 2019. The Group does not intend to adopt this standard early.

On transition to IFRS 16, the Group can choose to apply either the full retrospective transition method, whereby the financial statements are prepared as if the new standard had always applied, or the modified retrospective approach with optional practical expedients.

The Group has performed a preliminary review of the impact of adopting IFRS 16 and concluded that its primary impact will be in respect of the Group's various leasehold offices. These leases will need to be shown in the statement of financial position, with a right of use asset and associated lease liability being recognised. Operating lease expenses currently recognised directly in the income statement will be replaced by depreciation and interest charges, which for individual leases will result in higher interest charges in early years of the lease compared to later years. These changes are expected

to be material to the financial statements of the Group. The amount of the impact has not yet been quantified, however the Group had non-cancellable operating lease commitments at 31 March 2018 of 19.7m.

3. Use of judgements and estimates

In the application of the Group's accounting policies, the Directors are required to make judgements, estimates and assumptions to determine the carrying amounts of certain assets and liabilities. The estimates and associated assumptions are based on the Group's historical experience and other relevant factors. Actual results may differ from the estimates applied.

Estimates and judgements are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

3.1 Major sources of estimation and uncertainty in applying the Group's accounting policies

The following key estimates have been made by the Directors in applying the Group's accounting policies:

3.1.1 Intangible assets and goodwill

For the purposes of impairment testing, the Company and the Group assess goodwill and client relationships based on the recoverable amount of individual units making up the relevant intangible asset, in accordance with the accounting policy set out in note 2 of the 2018 Annual report and accounts. Recoverable amount is calculated based on assumptions which are set out in more detail in note 7.

It was concluded that no impairments to the carrying value of goodwill or intangible assets are required.

3.1.2 Retirement benefit obligations

In consultation with an independent actuary, the Parent Company and the Group make estimates about a number of long-term trends and market conditions to determine the value of the deficit of its defined benefit pension scheme. These long-term forecasts and estimates are highly judgemental and subject to the risk that actual events may be significantly different from those forecast.

The valuation performed as at 31 March 2018 resulted in a decrease in the actuarial deficit of 4.0 million which has been reflected in these Annual report.

3.1.3 Available-for-sale assets

Unlisted available-for-sale financial assets include an investment in Euroclear PLC. The Directors have estimated the fair value of this investment based on the latest share buyback process undertaken by Euroclear PLC in which the Group sold part of its shareholding.

Further information on the Group's available-for-sale financial assets is included in note 17 of the 2018 Annual report and accounts. No new information has become available that would require a change in the valuation of any further unlisted investment.

4. Operating segments

The Group has four operating divisions, representing the Core Business, which are its reportable segments. These segments are the basis on which the Group reports its performance to the Chief Executive Officer, who is the Group's chief operating decision-maker.

Investment Management Services

Asset Management

Financial

Planning2

Charles Stanley Direct

Support Functions

Total

Year ended

000

000

000

000

000

000

31 March 2018

Investment management fees

77,218

4,395

1,302

-

-

82,915

Administration fees

13,274

1,643

5,530

4,332

-

24,779

Total fees

90,492

6,038

6,832

4,332

-

107,694

Commission

40,738

900

25

1,503

-

43,166

Total revenue

131,230

6,938

6,857

5,835

-

150,860

Administrative expenses

(73,538)

(4,404)

(7,277)

(3,407)

(53,520)

(142,146)

Other income

233

45

-

-

-

278

Operating contribution

57,925

2,579

(420)

2,428

(53,520)

8,992

Allocated costs

(46,051)

(2,412)

(2,193)

(2,864)

53,520

-

Operating profit/(loss)1

11,874

167

(2,613)

(436)

-

8,992

Segment assets

269,316

487

5,123

6,355

294

281,575

Segment liabilities

180,769

262

2,623

135

-

183,789

1 The operating profit/(loss) per the above table is different to that presented in the divisional analysis within the Review of the year as the above table includes adjusting items which are excluded from the Core Business analysis within the Review of the Year.

2 The revenues and costs of EBS Management PLC are included within the Financial Planning division results up to the date of disposal of EBS Management PLC. The disposal of EBS Management PLC was completed on 31 May 2017.

4. Operating segments (continued)

Investment Management Services3

Asset Management3

Financial Planning2

Charles Stanley Direct

Support Functions

Total

Year ended

000

000

000

000

000

000

31 March 2017

Investment management fees

65,004

3,645

760

-

-

69,409

Administration fees

13,490

1,175

7,182

3,067

-

24,914

Total fees

78,494

4,820

7,942

3,067

-

94,323

Commission

45,303

702

25

1,277

-

47,307

Total revenue

123,797

5,522

7,967

4,344

-

141,630

Administrative expenses

(65,231)

(3,429)

(7,365)

(3,072)

(57,025)

(136,122)

Impairment of goodwill

-

-

-

-

(650)

(650)

Other income

186

-

-

-

-

186

Operating contribution

58,752

2,093

602

1,272

(57,675)

5,044

Allocated costs

(48,830)

(2,369)

(3,358)

(3,118)

57,675

-

Operating profit/(loss)1

9,922

(276)

(2,756)

(1,846)

-

5,044

Segment assets

228,453

196

9,121

9,192

-

246,962

Segment liabilities

148,880

170

6,310

2,508

-

157,868

1 The operating profit/(loss) per the above table is different to that presented in the divisional analysis within the Review of the year as the above table includes adjusting items which are excluded from the Core Business analysis within the Review of the Year.

2 The revenues, costs, assets and liabilities of EBS Management PLC are included within the Financial Planning division results. As at 31 March 2017, its assets and liabilities were classified as held for sale on the consolidated balance sheet. The disposal of EBS Management PLC was completed on 31 May 2017. See note 13 of the 2017 Annual Report and Accounts for further information.

3 The 2017 figures have been restated to reflect the transfer of an investment management team from Asset Management to Investment Management Services during 2018 in order to provide more appropriate reporting.

5. Earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to equity holders of the Parent Company by the weighted average number of ordinary shares in issue during the period.

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares to assume exercise of all potentially dilutive share options.

2018

2017

pence

pence

per share

per share

Basic earnings per share

Basic earnings per share

17.23

12.35

Diluted earnings per share

16.93

12.34

The Directors believe that a truer reflection of the performance of the Group's underlying business is given by the measure of Core Business earnings per share, which is presented in the Review of the year. This measure is also followed by the analyst community as a benchmark of the Group's underlying performance.

2018

2017

000

000

Earnings

Earnings used in the calculation of basic earnings per share

8,732

6,260

2018

2017

000

000

Number of shares

Weighted average number of ordinary shares used in the calculation of basic earnings per share

50,682

50,683

Effect of potentially dilutive share options

881

41

Weighted average number of ordinary shares used in the calculation of diluted earnings per share

51,563

50,724

6. Income taxes

Tax recognised in the income statement

2018

2017

000

000

Current taxation

Current year expense

2,703

2,283

Adjustment in respect of prior years

501

306

3,204

2,589

Deferred taxation

Credit for the year

(489)

(50)

(489)

(50)

Total tax expense

2,715

2,539

In addition to amounts charged to the consolidated income statement, a deferred tax credit of 0.4 million (2017: 0.2 million charge) relating to the revaluation of available-for-sale financial assets has been recognised directly to equity. A further credit of 0.02 million (2017: nil) in relation to deferred tax on revaluation of freehold property has been recognised directly to equity. A current tax credit of nil (2017: 0.1 million) and deferred tax charge of 0.7 million (2017: 0.02 million) in respect of the defined benefit scheme have also been charged directly to equity.

The deferred tax asset at 31 March 2018 has been calculated based on the UK corporation tax rate of 17%, as this was substantively enacted at the balance sheet date.

7. Intangible assets

Internally

Customer

generated

Goodwill

relationships

software

Total

Cost

000

000

000

000

At 1 April 2016

21,507

23,393

6,088

50,988

Additions

-

32

1,057

1,089

Transfer to held for sale

(1,294)

-

-

(1,294)

At 31 March 2017

20,213

23,425

7,145

50,783

Additions

-

350

326

676

At 31 March 2018

20,213

23,775

7,471

51,459

Amortisation

At 1 April 2016

5,511

17,133

2,944

25,588

Charge for the period

-

1,556

1,769

3,325

Impairment

650

-

-

650

At 31 March 2017

6,161

18,689

4,713

29,563

Charge for the period

-

1,083

1,520

2,603

At 31 March 2018

6,161

19,772

6,233

32,166

Net book value

At 31 March 2018

14,052

4,003

1,238

19,293

At 31 March 2017

14,052

4,736

2,432

21,220

None of the intangible assets have been pledged as security.

Goodwill is allocated to the Group's operating divisions as follows:

2018

2017

Goodwill

000

000

Investment Management Services

8,805

8,805

Charles Stanley Direct

5,247

5,247

14,052

14,052

7.1 Goodwill

The recoverable amount of goodwill allocated to a CGU1 is determined initially by calculating the CGU's fair value less costs to sell. If this is lower than the carrying amount or is not determinable, a value in use calculation is also prepared.

Fair value less costs to sell is calculated largely based on a percentage of FuMA (between 0.82% and 2.7%). Where this approach is not appropriate a turnover multiple is used. The rates used in the fair value less costs to sell calculations are those implied by recent transactions in the market or, where appropriate, based on publicly available information for similar quoted businesses. The inputs into fair value less costs to sell calculations are considered to be level 3 in the fair value hierarchy. The valuation techniques for calculating the recoverable amount are consistent with those used in prior years.

1 Cash Generating Unit

7. Intangible assets (continued)

7.1 Goodwill (continued)

At 31 March 2018, fair value less costs to sell was higher than carrying value for each CGU when applying the percentage at the lower end of the range to FuMA. Therefore, no value in use calculations have been prepared. Hence, the no impairment charge (2017: 0.7 million) has been recognised in the consolidated income statement.

7.1.1 Investment Management Services

The goodwill attributed to the Investment Management Services division of 8.8 million is represented by six underlying CGUs comprising acquired investment management teams in different locations across the UK. The largest CGUs are Edinburgh and Birmingham which represent 49% and 26% of the total goodwill held by the division respectively. The recoverable amount of goodwill related to Investment Management Services was assessed using fair value less costs to sell for the year ended 31 March 2018. The fair value was determined based on a percentage of FuMA. The recoverable amount was determined to be higher than the carrying amount of the CGU and therefore the goodwill carrying value is adequately supported.

7.1.2 Charles Stanley Direct

The recoverable amount of goodwill relating to Charles Stanley Direct was assessed using fair value less costs to sell for the year ended 31 March 2018. The recoverable amount was determined to be higher than the carrying amount of the CGU and therefore the goodwill carrying value is adequately supported.

7.2 Customer relationships

Purchases of customer relationships relate to payments made to investment managers and third parties for the introduction of customer relationships.

7.3 Internally generated software

Internally generated software is software designed, developed and commercialised by the Group.

8. Dividends

The following dividends were declared and paid by the Group in the year:

2018

2017

000

000

Final dividend paid for 2017: 4.5p per share (2016: 3.5p)

2,281

1,774

Interim dividend paid for 2018: 2.5p per share (2017: 1.5p)

1,265

760

3,546

2,534

A final dividend of 5.5 pence per share has been proposed by the Directors subject to shareholders' approval at the Annual General Meeting. Once approved, this will be paid on 31 July 2018 to shareholders on the Company's register at close of business on 28 June 2018.

9. Reconciliation of net profit to cash generated from operations

2018

2017

000

000

Profit/(loss) before tax

11,447

8,799

Adjustments for:

Depreciation

2,256

2,112

Amortisation of intangible assets

2,603

3,325

Impairment of goodwill

-

650

Impairment of corporate loans

-

500

Impairment of freehold property

995

-

Gain on surrender of long-term lease

-

(5,550)

Share-based payments - value of employee services

2,026

249

Retirement benefit scheme

(205)

(655)

Dividend income

(278)

(186)

Interest income

(297)

(195)

Interest expense

18

63

(Profit)/Loss on disposal of available-for-sale financial assets

(2,471)

-

Loss on disposal of property, plant and equipment

45

2,199

Gain on disposal of business

(707)

(148)

Changes in working capital:

(Increase)/decrease in financial assets at fair value through profit or loss

(27)

(1)

(Increase)/decrease in receivables

(33,470)

467

Decrease/(increase) in payables

33,550

(941)

Net cash inflow from operations

15,485

10,688

10. Subsequent events

There were no material adjusting events or events requiring disclosure prior to the date of this announcement.

11. Forward-looking statements

This announcement has been prepared to provide information to shareholders to assess the current position and future potential of Charles Stanley Group. It contains certain forward-looking statements with respect to the Group's financial condition, operations, and business opportunities. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements. Any forward-looking statement is made in good faith based on information available to the Directors as of the date of the statement. Past performance cannot be relied on as a guide to future performance.


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