CPPGroup Plc Replacement Half Yearly Report -7-

- Other Providers: It currently remains unclear what steps the FSA may wish to take, if any, and against whom, in relation to UK sales of CPP's Card Protection and Identity Protection products that are not within the scope of the Group's customer redress, or in respect of any similar products available to the market from other providers. There can be no guarantee that the FSA will not seek to take action on a wider industry basis. Until such time as the FSA makes a determination on these issues, and the repercussions are understood for the industry as a whole, the Group is unable to assess the potential impact on its Business Partners, or the Group's relationship with them, including any financial consequences. Should the Group's Business Partners conduct their own customer redress exercises, which the Board believes is increasingly likely, then we anticipate a material reduction in the number of Card Protection and Identity Protection customers because the Group will be unable to renew these policies in 2013.

- On-going Activity: There is a risk that the continuing investigation may result in further action which may have an adverse impact on the Group's financial performance. The investigation has created uncertainty around the UK's Identity Protection and Card Protection products which is continuing to have a material impact on the Group's ability to sell its full range of products in the UK. As noted above, enhanced governance and control arrangements are being implemented and processes reviewed. The Group may also suffer reputational damage which might have further impact on the take up of its products with its customers and on its ability to contract with its Business Partners. This could lead to reduced sales levels for the Group's products.

The investigation has placed additional pressure on management and staff in the UK, the impact of which is being actively managed.

Business Partner relationships

The Group mainly operates a 'Business to Business to Consumer' model and as such a relatively high proportion of the Group's revenue and profit is attributable to sales through relationships with its Business Partners. Future revenue and profit could be adversely impacted by deterioration of existing, or failure to develop new, Business Partner relationships. An example being that following a competitive tender in line with its normal business practice, Barclaycard informed the Group that it did not intend to renew its contract when it expired on 31 March 2012.

Relationships with key Business Partners continue to be actively managed on a local basis, and globally where appropriate, to ensure that the value to the Group of these relationships is optimised. Agreed contractual terms support the Group's operations with Business Partners which are subject to the normal course of re-negotiation when identified in the contract.

Although Group and UK management continue to work closely and actively with Business Partners in the UK, reaction of Business Partners to actions which may arise from the regulatory investigation, including any actions on a wider industry basis, and the resultant impact on the Group's Business Partner relationships remains uncertain.

A further risk is posed if the Group's Business Partners merge with, or are acquired by, other entities that are not already Business Partners, such Business Partners may reduce or discontinue their use of the Group's services. Business models in the UK retail banking sector are subject to change and adaption, which may impact the Group's revenue and profit.

A large proportion of the UK's Phonesafe business revenue is attributable to the Group's relationship with one Business Partner, T-Mobile. The current contract between the Group and T-Mobile was extended to September 2012. Following the merger between T-Mobile and Orange, Everything Everywhere Limited initiated a tender process for insurance provision to all new customers post September 2012. It has recently indicated that it is unlikely to extend the Group's contract. The impact of this decision would not result in an immediate material impact to the Group's profit or cash flow for 2012 and 2013 as the back-book of policies will still be managed and the reduction in customer acquisition costs together with expected lower claims costs due to the ageing of the book will offset the impact of the loss of new sales revenue in the short term. In order to mitigate the longer term impact the mobile team is currently engaged in advanced discussions with new Business Partners.

Across the Group, external pressures arise from competitive activities, Business Partners' pressure on commercial margins and the ability to establish and grow operations. The Group proactively addresses these competitive pressures through seeking to develop new products, enhancing existing products, delivering a high quality customer experience and operating through diverse marketing and customer acquisition channels.

Sales channel management

The Group uses a selected number of sales channels to take its products to market. A risk to revenue growth arises if existing channels cease to be available or viable and the Group is not able to identify and exploit alternative channels. Examples are: suspension of new sales of Identity Protection through its UK voice channels in response to regulatory discussions which impacted revenue growth in the UK; also changes to channel availability in Hong Kong.

The Group continues to actively explore and invest in new and alternative sales channels through which to distribute its products to end customers, a key element of which is product presence and selling on the internet.

Borrowing facilities

The Group entered into an GBP80 million Revolving Credit Facility (RCF) with Barclays Plc, The Royal Bank of Scotland Plc and Alliance & Leicester Plc (part of the Santander Group) on 17 February 2010. The RCF expires on 31 March 2013. A risk exists that one or more of the current lending banks will not wish to participate in the new facility or the Group will not be able to refinance its debt.

The Board has commenced assessing its refinancing options and intends negotiating appropriate lending facilities in advance of the maturity of the current RCF. The Group is currently in discussion with the banks about its on-going debt facilities as well as considering a number of financing and strategic options.

Geographic markets

The Group is subject to the risks inherent in operating and developing international operations. The Group has operations in several geographic markets with varying levels of business maturity in terms of size, operating model and product base.

-- Given the UK's significance in the corporate structure, the Group's operating results are at risk to fluctuations in performance of the UK business. On-going uncertainty prevails in respect of sales of Identity Protection and Card Protection products in the UK as well as some of the sales channels through which they are marketed.

-- The on-going difficult macroeconomic backdrop in Southern Europe and banking sector conditions in Spain continue to prevail in this part of the Group's business.

The Group's Risk Policy summarises the processes used to identify, evaluate, monitor and report risks faced in each of the Group's operating geographical markets as well as the Board's appetite for risk. A series of Group Board Policies and delegated responsibilities, together with on-going management oversight and support, are in place to manage the principal risks.

As part of the Group and country strategic planning, the impacts which varying economic, social and political conditions in individual countries have on the Group's risk profile are considered and appropriate management actions implemented.

Eurozone operations

With the Group operating in Euro denominated countries and reporting in Sterling, the current position with the potential for the Eurozone to break up presents risks to the Group.

-- Risks to the carrying value of the Group's Euro based subsidiaries, Euro denominated intragroup loans, translation of Euro based trading activities and other Euro based balances exist. Mitigation activities to limit exposure have been taken including asset repatriation to Sterling in the UK, holding minimum Euro balances overseas and reducing counterparty limits.

-- A Eurozone break up could precipitate a deeper recession across the whole of Europe impacting on employment and consumer spending and thus impacting demand for CPP's products in the Group's Euro countries. This may be mitigated by growth of new business streams from CPP's non Euro developing markets.

Data security, IT and telephony systems

The nature of the Group's products, sales channels and delivery models mean that its reputation, cash flows or operations could be adversely affected by failures of the Group's own IT or telephony systems or those provided by third parties. Examples of such failures include: temporary or permanent loss of customers' data, data security breaches or adverse impacts to contractual service levels.

The Group has continued to invest significant capital in the maintenance, improvement and security of its IT and data management systems (applications, databases, platforms, telephony systems and networks) for its worldwide operations and for the security and privacy of customers' data. An independent review has recently been completed to provide assurance over the Group's design of data management controls. Key performance indicators of the Group's principal supplier network, their equipment and services are actively and continuously monitored. The UK business, which operates the Group's international IT data and telephony networks, is ISO 27001 accredited and the majority of countries in the Group are certified to the payment card industry data security standard (PCI DSS).

Key supplier contracts