Operating and Financial Review

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Assets Under Administration (AUA) and Net New Business (NNB)

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The diversified nature of Hargreaves Lansdown, the breadth of our product offering and provision of high quality services tailored to the needs of our clients has allowed us to deliver a record year for NNB inflows. This has been achieved against a backdrop of uncertainty around UK politics and Brexit in the first half and the unprecedented issues relating to the COVID-19 in the second half. The Group's relentless focus on client service has been core to our success as a business and positions us well for the structural growth opportunity in the UK savings and investments market.

NNB for the year totalled �7.7 billion (2019:�7.3bn) driven by increased client numbers, continued wealth consolidation onto our platform and strong trading through the COVID-19 period. The first half of the year saw difficult external market conditions, with concerns over global trade wars, Brexit and the UK general election all weighing on investor confidence. The first half benefited from new business from direct books totalling �0.9 billion.

Following the general election, we saw an increase in client confidence, engagement and activity levels. As the world became disrupted by COVID-19, the benefits of our investments over the past few years became clear. Whilst being focused on colleague welfare throughout, we remained open for business through the crucial tax year end period. We were able to cope with a surge in net new clients, NNB and record activity levels. An ISA focused advertising campaign helped drive significant new ISA clients and our stockbroking capabilities helped attract many new younger clients who were particularly engaged with share dealing.

During the year to 30 June 2020, we introduced 188,000 (2019: 133,000) net new clients to our services and grew our active client base by 15% to 1,412,000.

This increased client population underpins future growth as clients add new money to their accounts, particularly through the use of annual tax free allowances in the SIPP and ISA products. Over a period of time, clients also typically consolidate their investments through transfers onto our platform. This growth was supported by our continued high retention rates.

Our focus on service and the value our clients place on our offering is evidenced by client and asset retention rates remaining strong at 92.8% and 92.1% respectively. The client retention rate is quoted on our historic measure where we define active clients as those with over �100 on the platform. We note that other providers quote this measure with active clients defined as those with over 1 pence on their platform. For comparative purposes, the HL client retention rate on this basis would have been 95.7% (2019: 96.1%, 2018: 95.8%). Our increased focus on digital marketing has been key in winning new and engaging with existing clients, ensuring we become integral to their lives in terms of saving and investing for the future.

Total AUA increased by 5% to �104.0 billion as at 30 June 2020 (�99.3 bn as at 30 June 2019). This was driven by �7.7 billion of NNB offset by negative market movement of �3.0 billion.

Financial performance

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Income Statement

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2020 profit before tax grew by 24% to �378.3 million. This included a gain on disposal of �38.8 million relating to FundsLibrary Limited, which if removed, would give an 11% increase in underlying profit before tax. The increase was driven by continued NNB-driven revenue growth and strong share dealing volumes in the second half of the year.

Revenue

Revenue for the year was �550.9 million, up 15% (2019: �480.5m), driven by higher asset levels and record share dealing volumes seen in the second half of the year. This more than offset a fall in annual management charges on the HL Funds which fell in line with their lower average asset values seen this year. This strong revenue result in a period of difficult external conditions clearly shows the benefit of the Group's diversified market-leading presence across our range of chosen asset classes. Our market share of the UK execution only market continued to grow, hitting a new high of 39.5% (as measured by Compeer's XO Quarterly Benchmarking Report Q1 2020).

The table below breaks down revenue, average AUA and margins earned across the main asset classes which our clients hold with us.

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1�Platform fees and renewal commission.

2 Stockbroking commission and equity holding charges.

3� Net�interest�earned�on�client�money.

4� Annual�management�charge�on�HL�Funds,�i.e.�excluding�the�platform�fee, which is�included�in�revenue�on�Funds.

5� Advisory�fees,�FundsLibrary�revenues, Active Savings�and�ancillary�services�(e.g.�annuity�broking,�distribution�of�VCTs�and�Hargreaves�Lansdown�Currency�and�Market�Services).

6� Average cash held via Active Savings

7� HL�Funds�AUM�included�in�Funds�AUA�for�platform�fee�and�in�HL�Funds�for�annual�management�charge.�Total�average�AUA�excludes�HL�Fund�AUM�to�avoid�double-counting.

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Revenue on Funds increased by 2% to �210.6 million (2019: �206.2m) due to AUA growth primarily from net new business. Funds remain our largest client asset class at 52% of average AUA (2019: 55%), and the revenue margin earned on these this year was 40bps (2019: 41bps). As anticipated the fund margin was slightly impacted as we waived the platform fee throughout the period on holdings in the Woodford Equity Income Fund and on the Woodford Income Focus Fund during its suspension from October 2019 to February 2020. The revenue impact from the waivers is estimated at �2.6 million and had it not been incurred the margin would have been 41bps. Revenue margins on Funds have been broadly stable following the completion of RDR in 2014 and we expect them to remain at similar levels over the next 12 months. Funds AUA at the end of 2020 was �51.7 billion (2019: �53.8bn).

Revenue on Shares increased by 72% to �148.5 million (2019: �86.2m) and the revenue margin was 43bps (2019: 27bps), ahead of our expected range of 35bps to 40 bps given at the trading update on 14 May 2020. This margin is primarily a result of the ratio of dealing volumes to average AUA, and whilst the first half saw AUA increase faster than dealing volumes and the subsequent revenues, the situation in the second half changed dramatically. Post the General Election result in December 2019 and into the COVID-19 period, dealing volumes increased to record levels on our platform at a time when the average AUA was impacted by significant market falls. This resulted in the second half margin being unusually high at 61bps compared to 26bps in the first half, giving an overall margin of 43bps. Total client driven deal volumes increased 95% to 8.2 million (2019: 4.2m). March to June recorded volumes of 1.1 million to 1.3 million deals per month compared to a monthly average of 0.37 million for the same months in the past three years.

Management fees for shares charged in the SIPP and Stocks and Share ISA accounts are capped once holdings are above �44,444 in a SIPP and �10,000 in an ISA. This causes some dilution to the margin over time as clients grow their portfolio of shares. Shares account for 34% of the average AUA (2019: 34%). Given recent experience, it is difficult to know what the margin of Shares might be over the next 12 months given it is primarily driven by actual dealing volume levels. However, our current expectation is that it will be in the range of 30 to 50bps. Shares AUA at the end of 2020 was �36.4 billion (2019: �33.7bn).

Revenue on Cash increased by 24% to �91.1 million (2019: �73.2m) as a result of increased cash levels combined with a slight increase in the interest margin to 74bps (2019: 72bps). This is in line with our communicated expectations of between 70bps and 75bps given at the trading update announced on 14 May 2020. Cash accounts for 12% of the average AUA (2019: 11%). At the start of the year the Bank of England base rate was 0.75% but then emergency rate cuts of 0.50% and then a further 0.15% in March 2020 took us to an all-time low of 0.10%. With the majority of clients' SIPP money placed on rolling 13 month term deposits, and non-SIPP money on terms of up to 95 days, the full impact of the rate rise takes over a year to flow through. We anticipate the cash interest margin for the 2021 financial year will be in the range of 40bps to 50bps, although given how the yield curve took a couple of months to reflect the cuts in base rate we expect margins in the first half of the year to be higher than the second half as higher rate deposits roll off and are replaced at a lower rate. Cash AUA at the end of 2020 was �13.6 billion (2019: �10.7bn).

HL Funds consist of 10 Multi-Manager funds, on which the management fee is 75bps per annum, and three Select equity funds, on which the management fee is 60bps. Revenue from these funds has fallen by 7% this year to �63.6 million (2019: �68.3m) due to modest net outflows as we have not actively marketed the Multi-Manager funds whilst the Woodford Equity Income Fund has been suspended combined with their lower market valuations resulting from COVID-19. These fees are collected on a daily basis whereas the Group calculates average AUM on a month end basis, resulting in a headline margin for the period of 73bps (2019: 74bps). Note that the platform fees on these assets are included in the Funds line and hence total average AUA of �100.6 billion (2019: �92.8bn) excludes HL Funds AUM to avoid double-counting. HL Funds AUM at the end of 2020 was �8.0 billion (2019: �9.4bn).

Other revenues are made up of advisory fees, our Funds Library data services, Active Savings and ancillary services such as annuity broking, distribution of Venture Capital Trusts and the Hargreaves Lansdown Currency and Market Services. These revenues are primarily transactional and not impacted by market growth. They declined by 20% in the year mainly because of the disposal of our subsidiary business, FundsLibrary Limited, on 28 February 2020, the removal of various fees such as exit charges and a fall in advisor fees as a result of COVID-19.

Assets held within Active Savings on the platform and the related revenue are not broken out into a separate category in the previous table. As highlighted before, we believe it is strategically imperative to capture the scale advantage of being a first mover. Consequently our focus remains on growing AUA at present. Our chosen route for achieving this in the current low interest rate environment is via reducing our revenue margins to ensure the rates offered on Active Savings are highly competitive. This will attract new clients and assets into the service that we need to capitalise on the opportunity. In addition we have been developing the proposition further and we will be launching a Cash ISA offering soon. This will initially be made available to existing Active Savings clients before we market it more widely. In the coming months we will also add the ability for clients to transfer existing Cash ISAs that they hold elsewhere into Active Savings, which provides a significant opportunity given that UK Cash ISAs total approximately �270 billion. As at 30 June 2020, Active Savings AUA was �2.2 billion. The associated revenue is included in the category "Other", such that the total revenue reconciles back to the income statement.

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The Group's revenues are largely recurring in nature, as shown in the table above. The proportion of recurring revenue has decreased to 73% (2019: 81%) as the transactional stockbroking commission increased significantly in the second half of the year, whilst at the same time lower market values and a reduction in the base rate of interest impacted recurring revenue streams.

Recurring revenue is primarily comprised of platform fees, Hargreaves Lansdown fund management fees, interest on client money, equity holding charges and ongoing advisory fees. It grew by 4% to �404.3 million (2019: �387.3m) due to increased average AUA from continued net new business and higher interest rates earned on client money. Recurring revenues provide greater profit resilience and hence we believe they are of higher quality than non-recurring revenues.

Transactional revenue is primarily made up of stockbroking commission and advisory event-driven fees. This increased by 66% to �140.1 million (2019: �84.3m) with a 95% increase in client driven equity deal volumes being the key driver.

Other revenue is derived from the provision of funds data services and research to external parties through Funds Library. This was down 27% from �8.9 million to �6.5 million as the subsidiary company FundsLibrary Limited was sold on 28 February 2020.

Operating costs

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Operating costs increased by 20% to �214.9 million (2019: �179.4m) to support higher client activity levels, maintain client service and invest in the significant growth opportunities we see ahead for Hargreaves Lansdown. In addition there was a significant increase in regulatory fees relating to the Financial Services Compensation Scheme (FSCS). The growth rate in costs, excluding the FSCS levy, was 17% for the year

Over the past three years we have deliberately invested into our service, marketing capabilities technology, scalability and efficiency as the Group's focus on client service is core to our success and necessary to capture the structural growth opportunity in the UK savings and investments market. This investment has been validated in 2020 by record NNB, record levels of net new clients, increased market shares, attractive client retention rates, the continued development of our product set and growth capabilities and the resilience of our platform through COVID-19.

Key drivers of the cost growth were marketing and distribution, particularly in the second half. These rose by �11.2 million this year as we capitalised on the opportunity to accelerate new client acquisition and invested in our brand awareness campaign. At current revenue margins and activity levels, the �7.7 billion of NNB this generated is equivalent to c�40 million of future annual revenues. Activity based costs also rose by �6.9 million. These are primarily dealing costs linked to the additional �60 million of Shares revenue and debit card fees linked to elevated levels of cash paid onto the platform.

Looking forward we would anticipate that costs will grow broadly in line with the growth of client numbers. Cost growth in 2020 was marginally ahead of this due to the unusual marketing opportunity to acquire new clients and exceptional dealing volume costs.

Staff costs remain our largest expense and rose by 4% to �101.2 million (2019: �97.2m). Average staff numbers increased by 2% from 1,574 in 2019 to 1,599 in 2020 with the key increases being on the Helpdesk and in Operations, in line with higher client activity levels. Hargreaves Lansdown is a growing business and higher client numbers and associated activity levels will continue to require investment in our servicing functions as we look forward. Technology and efficiency programmes improve our scalability, thereby allowing us to invest productivity gains into extending our proposition and our platform functionality. We believe this reinvestment cycle underpins our future growth.

Marketing and distribution costs increased by 88% to �23.9 million (2019: �12.7m). In the first half of the year, spend focused on targeted marketing campaigns for the likes of Active Savings and engagement with existing and target clients around Brexit and the general election. Investor confidence and engagement, however, were low and hence spend was largely held back until the second half when there was a significant increase in client engagement post the general election and the decision on Brexit. This provided a better backdrop for marketing spend and also coincided with the build up to the all-important tax year end period where the UK tends to see significant activity amongst retail investors. In addition, February saw the launch of a brand marketing campaign centred on London and the South-East. The campaign, "Switch your money on", was particularly aimed at the ISA market along with overall brand awareness. This together with our digital marketing expertise, resulted in substantial net new clients of 138,000 for the second half and a total for the year of 188,000.

Depreciation, amortisation and financial costs increased by �5.2 million to �17.6 million. The adoption of IFRS 16 "Leases" meant operating leases relating to the offices of Group companies were brought on to the balance sheet as right of use assets which are now depreciated. The impact of this accounting change was an additional �3.0 million of depreciation in the year. In addition, bank charges increased by �1.5 million as there were significantly more debit card transactions as clients added money to their accounts.

Total capitalised expenditure was �15.9 million this year (2019: �17.1m). This expenditure was from cyclical replacement of IT hardware, the continuing project to enhance the capacity and capability of our key administration systems and the ongoing development of the Active Savings platform.

Other costs rose by �8.2 million to �58.5 million (2019: �50.3m). The key drivers of this were increased computer maintenance and office costs driven by higher employee numbers and additional office space, increased professional fees and irrecoverable VAT on non-staff expenses.

The Financial Services Compensation Scheme (FSCS) levy rebased upwards by �6.9 million or 101% to �13.7 million. This was caused by a combination of a �1.5 million interim levy relating to last year, which was only raised in December 2019, plus a significant increase in the amounts being raised in both the life distribution and investment intermediation categories. Much of our revenue falls into these two categories and with our revenue growth being above the wider market we bear a higher proportion of the amounts being raised. The FSCS is the compensation fund of last resort for customers of authorised financial services firms. All authorised firms are required to contribute to the running of the scheme and the levy reflects the cost of compensation payments paid by the industry in proportion to the amount of each participant's relevant eligible income. At present we anticipate that this levy will continue at a similar level.

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Profit before tax

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The Group's profit before tax grew by 24% to �378.4 million (2019: �305.8m) due to strong trading and a �38.8 million gain from the disposal of FundsLibrary. The Board believes it is important to present an underlying result excluding this disposal gain to assist investors with their understanding of the Group's trading performance. On this basis, underlying profit before tax grew 11% to �339.5 million. Profits after tax grew by 26% to �313.2 million as the effective rate of corporation tax rate decreased to 17.2% (2019: 19.0%).

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Tax

The effective tax rate for the year was 17.2% (2019: 19.0%). This was below the standard rate of UK corporation tax as the gain on disposal of FundsLibrary was exempt as it met the conditions of the Substantial Shareholder Exemption. The Group's tax strategy is published on our website at www.hl.co.uk

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Earnings per share

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Diluted EPS increased by 27% from 52.0 pence to 65.9 pence, reflecting the Group's growth in profit after tax. The Group's Basic EPS was 66.1 pence compared with 52.1 pence in 2019. By removing the profit on disposal of FundsLibrary we arrive at an underlying diluted EPS which has increased by 11% from 52.0 pence to 57.8 pence.

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Liquidity and capital management

Hargreaves Lansdown looks to create long-term value for shareholders by balancing our desire to deliver profit growth, capital appreciation and an attractive dividend stream to shareholders with the need to maintain a market-leading offering and high service standards for our clients.

The Group seeks to maintain a strong net cash position and a robust balance sheet with sufficient capital and liquidity to fund ongoing trading and future growth, in line with our strategy of offering a lifelong, secure home for people's savings and investments. The Group has a high conversion rate of operating profits to cash and its net cash position at 30 June 2020 was �462.8 million (2019: �394.0m). Cash generated through trading and the disposal of FundsLibrary Limited more than offset the payments of the 2019 final dividend and the 2020 interim dividend. This includes cash on longer-term deposit and is before funding the 2020 final dividend of �125 million and special dividend of �82 million.

The Group has a Revolving Credit Facility agreement with Barclays Bank to provide access to a further �75 million of liquidity. This is currently undrawn and was put in place to further strengthen the Group's liquidity position and increase our cash management flexibility. The Group also funds a share purchase programme to ensure we avoid any dilution from operating our share-based compensation schemes.

The healthy net cash position provides both a source of competitive advantage and support to our client offering. It provides security to our clients, giving them confidence to manage their money through us over many years, and allows us to provide them with an excellent service, for example through using surplus liquidity to allow same day switching between products that have mismatched settlement dates.

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Capital

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Total attributable shareholders' equity, as at 30 June 2020, made up of share capital, share premium, retained earnings and other reserves increased to �558.3 million (2019: �457.8m) as continued profitability more than offset payment of the 2019 final and special dividends and the 2020 interim dividend. Having made appropriate deductions as shown in the table above, surplus capital amounts to �139 million.

The Group has three subsidiary companies authorised and regulated by the FCA and one subsidiary authorised by the FCA under the Payment Services Regulations 2017. These firms have capital resources at a level which satisfies both their regulatory capital requirements and their working capital requirements and, as a Group, we maintain a robust balance sheet retaining a capital base over and above regulatory capital requirements. Further disclosures are published in the Pillar 3 document on the Group's website at www.hl.co.uk

Dividend policy and 2020 declarations

Hargreaves Lansdown has a progressive ordinary dividend policy. The Board considers the dividend on a total basis, with the intention of maintaining the ordinary dividend payout ratio at around 65% across the market cycle and looking to return excess cash to shareholders in the form of a special dividend after the year end. Any such return will be determined according to market conditions and after taking account of the Group's growth, investment and regulatory capital requirements at the time.

Dividend (pence per share)

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When applying this policy in 2020, the Board has chosen to treat the gain on disposal as distinct from the underlying trading performance of the Group. The Group's total dividend of 54.9 pence per share is therefore made up of the following components:

- A total ordinary dividend of 37.5 pence per share (2019: 33.7p), 11% ahead of last year. This is in line with underlying EPS growth and maintains the ordinary dividend payout ratio at 65% of underlying EPS.

- A special dividend of 17.4 pence per share (2019: 8.3p) made up of two parts.

Firstly, the Board has considered the Group's capital and cash position in light of its stated dividend policy and is recommending 9.2 pence of the special dividend is paid from the underlying earnings of the Group. In effect, this results in 46.7 pence of the total dividend per share being generated from underlying earnings and results in a total dividend payout ratio from underlying earnings of 81%, in line with previous periods.

Secondly, the Board consider the Group to have a robust capital and liquidity position with sufficient resources to fund its current growth and investment requirements. As a result, it has concluded that the gain on disposal of FundsLibrary should be distributed to shareholders and this makes up 8.2 pence of the special dividend.

This results in a total special dividend of 17.4 pence per share and a total 2020 dividend for the year of 54.9 pence per share (2019: 42.0p).

Subject to shareholder approval of the final dividend at the 2020 AGM, the final and special dividends will be paid on 16 October 2020 to all shareholders on the register at the close of business on 25 September 2020.

The Board is confident that Hargreaves Lansdown has sufficiently strong financial, liquidity and capital positions to execute its strategy without constraints and can operate a sustainable and progressive ordinary dividend policy going forward. The Board remains committed to paying special dividends in future years should sufficient excess cash and capital exist after taking account of market conditions and the Group's growth, investment and regulatory capital requirements at the time.

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Philip Johnson

Chief Financial Officer

6 August 2020