PCF Group PLC Market Update (2399D)

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RNS Number : 2399D

PCF Group PLC

28 June 2021

28 June 2021

PCF Group plc

("PCF" and together with its subsidiaries "PCF Group")

Update on review of financial controls and reporting processes and timing of completion of the annual report and accounts for the financial year ended 30 September 2020

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF THE MARKET ABUSE REGULATION (EU) 596/2014 AS IT FORMS PART OF UK DOMESTIC LAW BY VIRTUE OF THE EUROPEAN UNION (WITHDRAWAL) ACT 2018

Introduction

Further to the announcement of 19 May 2021 (the "Announcement") PCF Group plc is providing an update on its review in relation to its financial controls and reporting processes.

As part of an internal review emanating from enquiries raised as part of the audit of PCF's Full Year 2020 financial statements, the new leadership of PCF's finance team became aware of a number of accounting entries in PCF Bank Limited's ("PCF Bank") books and records that suggested errors and misstatements. As a result, the Board of Directors of PCF (the "Board") decided to engage PricewaterhouseCoopers LLP ("PwC") to undertake a review (the "Independent Review").

The errors and misstatements referred to above related to the treatment of certain intercompany transfers and balances, as well as a failure to properly report exposures arising from funding provided by PCF Bank to its wholly owned subsidiary Azule Limited ("Azule") under the Prudential Regulation Authority's ("PRA") Large Exposure reporting framework between December 2018 and June 2019. This specific issue had no impact on the consolidated PCF Group financial statements for the financial year ending 30 September 2019 previously published.

The significance and implications of these matters, related employee conduct issues and the governance environment in which they arose ultimately led to discussions between the Board and Peel Hunt LLP, in its capacity as Nominated Adviser, and shortly thereafter trading in PCF's shares was suspended and the Announcement made on the 19 May 2021.

Following 19 May 2021, the Board requested PwC to extend its scope under the Independent Review so as to further investigate the potential issues identified in the initial review undertaken by it. This related to specific employee conduct identified in the initial review which suggested to the Board possible collusion by employees of the PCF Group, in the making of deliberate misstatements.

The PCF Group has notified these issues and the commissioning of the Independent Review to the PRA and the Financial Conduct Authority.

Key findings of and conclusions arrived at from the Independent Review

The Independent Review noted that, owing to a combination of omissions of certain intercompany lending positions from regulatory returns and certain intercompany transfers between PCF Bank and Azule that were not supported by legal assignments, over the period between December 2018 to October 2019, funding provided to Azule by PCF Bank was not correctly reflected in the calculations of Large Exposures within the regulatory returns for PCF Bank during that period (specifically as at each calendar quarter-end from 31 December 2018, up to and including 30 June 2019) and therefore was incorrectly reported to the PRA. In addition, PCF Bank has determined that, had the Large Exposure been reported correctly, breaches of PCF Bank's regulatory Large Exposure limits would have occurred at this time by reason of the same.

The second phase work of the Independent Review identified the potentially incorrect application of certain unaudited profits when reporting PCF Group's and PCF Bank's capital position to the PRA as at 30 September 2019 as part of its regulatory reporting. On having been made aware of documents relating to these issues by the Independent Review PCF has been able to review and calculate that this misreporting led to an overstatement of both PCF's Common Equity Tier 1 ("CET1") Ratio and Total Capital Ratio ("TCR") by 1 percentage point in the 30 September 2019 regulatory reporting (the CET1 and TCR reported were 18.1% and should have been 17.1%). This related to the premature addition of profits to capital resources, before the audited Annual Report and Accounts for year to 30 September 2019 had been approved (which it subsequently was). Again PCF notified these breaches to the PRA upon discovery. The reported capital positions in the PCF Group and PCF Bank's Annual Report and Accounts for year to 30 September 2019 were not affected by this issue.

In addition, the Independent Review has enabled the Board and the executive management team to identify a number of deficiencies and failures in PCF Bank's financial control and reporting function, including members of the finance team, under instruction, manually adjusting certain accounting entries for both financial and regulatory reporting purposes which appear to the Board to have been a deliberate effort to facilitate specific results or compliance with rules regarding Large Exposure limits. Based on the findings of the Independent Review, the Board believes that these matters may be driven by possible collusion by some members of the finance team, under resourcing, an inadequate level of skill and experience within the finance team, technological limitations and a poor culture in the finance team resulting in a lack of, and a reluctance to, challenge its leadership.

Although a number of specific findings from the Independent Review remain under ongoing investigation, to date none of them indicate to the Board that any monies have inappropriately left the PCF Group directly as a consequence of these failings. However there will be costs associated with the investigation and remediation of these findings.

Remediation plan

The Board is very disappointed and concerned by these findings and is determined to ensure that the PCF Group adheres fully to the high standards of financial control and reporting expected by it and also by its regulators, shareholders and other key stakeholders.

The Board is urgently taking steps to remediate the deficiencies identified in financial controls and corporate governance and has commenced work to ensure that a clear plan is in place to enhance PCF Group's corporate governance and the supporting framework together with the financial control and reporting environment including increasing resources in the Finance function. With oversight from the Audit Committee and the Board, the PCF Group's recently appointed Chief Financial Officer, Caroline Richardson, has taken executive responsibilty for delivery of this plan and has already made progress in improving the position principally through the recruitment of new members of the finance team with strong skills and experience, enhanced controls and improvements to both financial and regulatory reporting processes.

The Board has also instigated the following initiatives to improve PCF Group's financial reporting and control environment:

-- The restructuring of the Senior Leadership Team led by Garry Stran, the interim CEO, together with Caroline Richardson, the CFO, including the appointment of a new and experienced Chief Risk Officer and a General Counsel

-- The recruitment of additional colleagues across PCF who have the skills and experience required for a listed bank

-- The commissioning (subject to contract) of an independent forensic review of the PCF Group's accounting records

-- The continued transformation of the finance processes, controls, organisational and governance structures and team culture to increase the focus on transparency, challenge and compliance with all accounting, governance, regulatory and legal standards of conduct

-- The improved utilisation of the existing systems to ensure more efficient and robust record keeping and reporting

-- The commissioning of an independent report on the Group's financial position and prospects procedures (FPPP) with the intention of expeditiously fulfilling any resulting recommendations for further improvement

-- An investment in enhanced technical training, in particular in respect of embedding a culture of risk awareness, excellence, transparency and a 'speak up and challenge' culture

-- A commitment to reinforcing a culture of compliance with appropriate regulatory conduct standards for all employees now and in the future

Engagement with the PRA

Since reporting PCF Bank's breaches of the Large Exposure rules to the PRA, the PCF Group has maintained a close and constructive dialogue with the regulator. Discussions are ongoing to ensure the remedial plan addresses all matters to the PRA's satisfaction.

Annual report and accounts and lifting of trading suspension

Whilst implementing the overall remediation plan is a core focus and overall priority of the PCF Group, in the near term the PCF Group is focused on completing its investigations, and other workstreams to enable the publishing and filing of its annual report and accounts for the financial year ended 30 September 2020. Given the increased complexities arising from the issues noted above, the Group will be unable to publish and file its annual report and accounts by the due dates required by the Companies Act and the AIM Rules for Companies. Once there is greater certainty over the timing of the publication of the annual report and accounts PCF will provide an update accordingly.

On the basis of the Board's current understanding and internal reviews undertaken so far, the previous guidance on the revised preliminary profits estimate for the year to 30 September 2020 issued on 11 March 2021 remains valid. However, it should be noted that the additional audit fees, which have to be recognised in the period to which the audit relates are continuing to accumulate and, depending on their eventual amount, could negatively impact this current view. Furthermore, findings from the ongoing investigations or audit could further impact the Group's previously reported results for the year ended 30 September 2020, issued on 11 March 2021.

Other ongoing investigation and remediation costs will impact the PCF Group's cost base in the current year to 30 September 2021 and beyond.

While the PCF Group continues its work in relation to the remediation plan on the financial controls environment described above, the shares will remain suspended. When the PCF Group and its NOMAD, are satisfied with the outcome of this work, they will seek for the share trading suspension to be lifted.

Trading update and outlook

PCF Group continues to operate as normal, has received planned levels of inflows in respect of its deposit taking activity and is carefully and prudently managing its loan originations, capital and liquidity position.

Covid-related payment deferral levels continue to reduce and the performance of its lending portfolio is in line with expectations.

Tim Franklin, Chairman of PCF, said: "The Board acknowledges the significant deficiencies identified in the PCF Group's financial control and reporting environment and is determined to devote the time and resources required to remediate these failings. The Board notes that recent progress has already been made in this regard and the PCF Group will provide further updates on progress in due course.

The Board is also conscious of the anxiety and frustration experienced by shareholders caused by the delay to the publication of its annual report and accounts and the suspension of trading in PCF's shares. The PCF Group is working tirelessly towards lifting the trading suspension as soon as possible as well as publishing its annual report as soon as the Board is satisfied that all relevant matters have been identified and addressed, and that the PCF Group's auditor is also satisfied with such matters.

In addition the Board wishes to reassure shareholders that the Board has, and will continue to, authorise actions which are required to protect shareholder value including where appropriate and legally possible the invocation of its contractual and legal rights in respect of the recovery of remuneration-related payments and any other consequential losses suffered as a result of these matters.

The Board wishes to thank its shareholders, customers and other stakeholders for their patience and the valued support they have provided to the PCF Group during this difficult time and wishes to reaffirm that it is committed to provide updates in a timely, transparent and comprehensive manner."

end

For further information, please visit https://pcf.bank/ or contact:

 
 PCF Group (via Tavistock Communicatons)       Tel: [phone] 
  Garry Stran, Interim Chief Executive          3150 
  Officer 
  Caroline Richardson, Chief Financial 
  Officer 
 Tavistock Communications                     Tel: [phone] 
  Simon Hudson / Tim Pearson                   3150 
                                               [e-mail] 
 Peel Hunt (Nominated Adviser and Broker)     Tel: [phone] 
  Andrew Buchanan / Rishi Shah /               8900 
  Duncan Littlejohns / Jasmine Kanish 
 Shore Capital (Joint Broker)                 Tel: [phone] 
  Henry Willcocks / Guy Wiehahn                4080 
 

About PCF Group plc ( www.pcf.bank )

Established in 1994, PCF Group plc is the AIM-quoted parent of the specialist bank, PCF Bank Limited. Since commencing operations as a bank in 2017. The Group continues to focus on portfolio quality and lending to the prime segments of its existing markets. The Group will continue to identify opportunities to diversify its lending products and asset classes by setting up new organic operations or through acquistion.

PCF Bank currently offers retail savings products for individuals and then deploys those funds through its four lending divisions:

   --     Business asset finance which provides finance for vehicles, plant and equipment to SMEs; 
   --     Consumer motor finance which provides finance for motor vehicles to consumers; 
   --     Azule which provides finance to the broadcast and media industry; and 

-- Property bridging finance which provides loans to companies and sole traders investing in residential and commercial property.

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June 28, 2021 02:00 ET (06:00 GMT)