Notice of AGM and Annual Financial Report

Key risk

Key mitigating actions

Strategic risk

A. Macro and political

Geographic and asset class diversification, in-country expertise

B. Target operating model

Updated organisational design, realignment of senior roles and responsibilities, governance and delegated authorities

Financial risk

C. Liquidity/funding

High levels of liquidity headroom, no debt maturities until 2024, Fund and Investment Management business reduces bond and debt market reliance, short-term pressure eased through covenant restructure

D. Capital allocation
and investment returns

Risk appetite framework, due diligence and underwriting track record, significant off-market purchases, adaptable investment strategy

Operational risk

E. Regulatory scrutiny

Three lines of defence, policy, processes and training, local expertise, stakeholder engagement

F. Operational resilience

Testing, business continuity and disaster recovery plans, information security standards

G. Fund and investment management execution and business transformation

Organisational design, infrastructure, change management, process improvement, governance

H. Scalability

Targeted investment in people, processes and systems to support strategy

I. Fund management personnel

Attracting new talent, and retaining and incentivising existing fund management personnel, to support current performance and deliver strategy for Fund and Investment Management business

1

Live and breathe our purpose and culture, supported by clear and ambitious ESG goals

2

Allocate capital dynamically to drive outsize returns while effectively managing risk

3

Prioritise investments in high-value, granular niche products in our core markets whilst creating opportunities for platform servicing revenue

4

Build a scalable and sustainable fund management platform with a diverse spread of global investors

5

Develop industry-leading asset management and servicing expertise which supports our investment ambitions, clients and customers

6

Create a simple, efficient and flexible organisation by deploying agile practices, supported by strong leadership and a commitment to develop our people to reach their full potential

> 

Risk increased from 31 December 2019 to 31 December 2020

–

Risk stable from 31 December 2019 to 31 December 2020

< 

Risk decreased from 31 December 2019 to 31 December 2020

Key risk

Description

Mitigating actions

Strategic risk

A. Macro and political

Changes in the competitive, economic or political environment in the UK or Eurozone, which could impact our ability to collect from portfolios, or competitively purchase and invest in line with our strategic objectives, consolidation or changing appetite within the sector.

2 3 4

> 

Management monitor the competitive, economic and political environments in which we operate to influence future strategy. The board regularly carry out reviews of the markets and strategy, with impacts managed through our governance activities in accordance with regulatory requirements and industry best practice in each jurisdiction.

The Group has included known economic impacts of COVID-19 on legacy collections and near-term underlying collateral valuations, while acknowledging downstream economic impacts of COVID-19 that are yet to materialise fully.

The Group has continued to assess the risks associated with Brexit, including disruption within the UK political landscape, ensuring that procedural and strategic mitigants are in place.

Arrow’s geographic and asset class diversification allows the Group to respond to market opportunities arising from possible disruption, including market downturn scenarios driven by macroeconomic factors. This is informed by in-country expertise across investments, operational execution and regulatory compliance, ensuring that both the opportunity pipeline and horizon scanning inform decision-making Group-wide.

The Group is ready for opportunities arising from COVID-19 in the form of future portfolios using the strategic positioning of the Fund and Investment Management business to benefit across asset classes and geographies. A comprehensive review and consequent ERC adjustment ensures legacy portfolio impacts of COVID-19 have been absorbed, based on the known and expected effects over the medium-term horizon.

A Brexit working group made up of cross-functional senior management has continued to monitor Brexit-related risks; specifically, in relation to people and data with mitigants in place.

B. Target operating model

The need to ensure enterprise-wide alignment of the updated model, including fund and investment management capabilities, to prevent gaps between plans and performance.

1 2 5 6

–

Long-term strategy, risk appetite and financial planning are aligned with the aim of providing greater depth of analysis and management tools for decision-making, all of which inform the necessary business structures and operating model. The next step in Arrow’s corporate evolution is the addition of Fund and Investment Management operations as a core part of an enhanced offering to deliver the strategic vision.

The strategic plan has been supported by an organisation-wide review of the target operating model, the outputs of which are now being embedded through a series of initiatives including:

updated organisational design of three distinct but interdependent business lines, supported by central functions;

realignment of senior leadership team roles and responsibilities and incentives; and

review of governance arrangements to ensure the three lines of defence model remains robust and aligned to the risk profile of the Group.

This remains underpinned by a common set of values and a Group-wide culture statement, which informs our performance management process.

Key risk

Description

Mitigating actions

Financial risk

C. Liquidity/funding risk

The risk that the Group is unable to meet its obligations as they fall due.

2 3 4

> 

Despite the unprecedented impact of COVID-19, the Group has maintained a strong and secure balance sheet.

Funding and liquidity risks are managed by the central treasury team, with the Group seeking to maintain minimum levels of liquidity headroom, leverage of between 3.0 to 3.5 times, diverse funding sources and a balanced maturity profile of its debt facilities.

Whilst leverage has risen to above the Group’s target due to the impact of COVID-19, the Group remains highly cash generative. The strong focus on collections and reduced investment in new portfolios has enabled the Group to preserve liquidity and generate free cash flow of £156.6 million for the year.

The healthy liquidity position, alongside the renegotiation of its financial covenants over the medium term, the additional €104.7 million of funding raised and the maturity profile of the Group’s bonds, with no maturities until 2024, all serve to reduce the liquidity risk of the Group.

Strong governance and alignment with risk appetite is managed via the ALCO committee, with regular reporting of the key metrics.

Through the regular budgeting and forecasting processes, the Group continues to assess the required level of liquid resources, funding plans and risk appetite.

At the year end, the liquidity headroom was £174.6 million, leverage was 5.1 times and, except for the amortisation of the asset-backed securitisation, the Group has no contractual debt maturities until 2024.

Going forward, the Group has increased flexibility regarding investment levels, as it is able to increase investments through third-party funds it manages. This enables the Group to curtail investment volumes funded by the Group and conserve liquid resources, without impacting the franchise of the businesses. Overall, the Group is well positioned take advantage of investment opportunities as they arise, given the profile of its liabilities.

D. Capital allocation and investment returns

The risk that investments generate adverse returns against forecast and/or are outside risk appetite limits due to inadequate portfolio purchase analysis and consequent mispricing, or inadequate assessment of cost to collect and/or subsequent portfolio performance impacting estimated remaining collections.

2 3 4

–

With the launch of the Fund and Investment Management business, the Group now typically invests alongside the Fund and successful investments are the culmination of a series of activities spanning first and second line teams.

The Group has a risk appetite framework and seeks to deploy capital across the five geographies and asset classes with a balanced approach to maximise returns.

Newly proposed investments are subject to legal and regulatory due diligence, challenge to models and assumptions to help accurately price new investment opportunities, second line oversight by Group risk and executive review through an investment committee process in accordance with agreed mandate levels prior to purchase.

Given the uncertainty created as a result of the pandemic, there has been a heightened risk that portfolio investments may be mispriced due to incorrect assumptions and, as such, the Group has adopted a cautious approach to capital deployment. Committed portfolio investments were £109.9 million during the year compared with £303.7 million in 2019.

In addition, the Group has sought to further minimise risk on portfolio investments by undertaking additional due diligence procedures, focusing on shorter life investments with portfolios containing predominantly secured or lower risk assets, whilst also raising the target IRRs expected.

Key risk

Description

Mitigating actions

Operational risk

E. Regulatory scrutiny

Risk of non-compliance with regulatory obligations, increased regulatory scrutiny and inappropriate conduct and customer treatment.

1 5

–

We operate in increasingly highly regulated environments in both the UK and across our European locations, this having extended as a result of the launch of the Fund and Investment Management business. Any actions leading to poor customer outcomes or customer detriment could lead to a breach of regulations, resulting in censure, financial loss and reputational damage.

Poor customer outcomes or customer detriment could arise through the debt collection activities within our in-house operations or the third-party servicer network of collection agencies, whether we are collecting debt we have acquired or whilst working on behalf of clients.

Best-in-class Group-wide standards continue to be applied across all jurisdictions.

Regulatory conduct and Treating Customers Fairly (TCF) are at the heart of our business and Arrow has clearly defined, documented and communicated policies and procedures in place to guide colleagues on the required standards for customer outcomes. Employees and third parties acting on our behalf receive mandatory training, with particular emphasis on vulnerable customers especially during the pandemic through our established Group-wide customer experience forums.

Horizon scanning and industry body presence helps to influence best practice across the sector and ensures our internal practices and training are updated accordingly. The cross-sector bodies have been especially helpful in achieving a consensus approach to our COVID-19 customer responses which in turn has helped develop a deeper understanding of the sector and its challenges by regulators.

We maintain increasingly proactive relationships with our key regulators in all locations where there is continued evidence of the approach of FCA being adopted by other jurisdictions including the Senior Managers and Certification Regime.

F. Operational resilience

Risk that the business is unable to withstand significant business disruption that could pose a threat to customer outcomes, corporate reputation and/or financial performance.

4 5

–

The Group relies on core systems and processes for customer and data management, including data analytics. Should these systems experience performance issues or outage through, for example, cyber attack, our customers would be impacted, and we could experience financial loss and/or reputational damage. Business and wider economic disruption from external events such as COVID-19 places a sharp focus on the Group’s ability to provide the necessary resilience for the wellbeing of all stakeholders.

The Group had previously recognised the need to invest in operational resilience and business continuity mechanisms commensurate with the external and internal threats which exist. The reality of COVID-19 meant that these protocols were tested in real-time and on a scale and timescale that could not have been forecast. Being able to leverage existing planning, investment and expertise allied with a willing and agile team culture, ensured that the response to the pandemic was swift, successful and lasting. Additional command and control governance structures were deployed to fulfil dynamic, action-oriented leadership requirements which worked for the early stage response to protect colleagues and the business, before ensuring clarity of message and coordinated timing of actions to emerge well positioned to meet future challenges and opportunities.

In addition, our core systems are regularly tested, backed up and managed through a set of quality and security policies, supported by disaster recovery and business continuity plans. We are in the process of deploying a One Arrow IT infrastructure, which will enable us to be more efficient, drive process automation and manage data more effectively and securely. This is governed at a Group level, with aligned strategies for IT, digital, security and data.

Key risk

Description

Mitigating actions

Operational risk

G. Fund and investment management execution and business transformation

Risk that poorly executed or misaligned operations processes result in reputational risk, financial loss and/or poor investor outcomes.

2 3 4

–

With the additional clarity of Arrow’s evolved business line structure comes the need to carefully design and execute on more efficient and cost-effective operational processes in all areas of the business. This is especially critical in relation to the fund operations, taking into account new processes, jurisdictions and third parties.

Despite delays due to COVID-19, organisational design and process improvements have been established with governance, leadership and clarity of responsibility formalised along with progress in management oversight.

There is an ongoing focus on enhancing risk management practices into our Fund operations as our Fund and Investment Management business grows.

H. Scalability

Risk that the Group is unable to respond appropriately and efficiently to scaled opportunities as a result of the increased market opportunity arising from the Fund and Investment Management business.

4 5 6

> 

The opportunity to grow volumes in line with the updated funding model presents a risk that the necessary people, processes and systems may not be available to maximise potential demand which in turn could lead to strategic, financial or operational risks that detract from the long-term success of the Group.

The Group is focused on developing people, process and system capability to absorb new opportunities through deeper, broader and more consistent methodologies, including standardisation of data processing activities. Operational resilience is an enabler for scalability, alongside a strong risk-aware culture. This enables the Group to expand whilst deploying resource and infrastructure improvements to front line services to maximise commercial opportunities that align with customer, regulator and client expectations, whilst delivering on our financial commitments.

There are increasing opportunities for professional development across the Group, alongside the growth of our talent pool, in the context of a values-led, professional culture.

I. Fund management personnel

The risk that the Group will face challenges in attracting new talent, and retaining and incentivising existing fund management personnel, which may materially and adversely affect its ability to support current performance and achieve objectives for future expansion.

4 5 6

> 

The Group is reliant on a number of key individuals within the Fund and Investment Management business to deploy funds currently under management by the Group, to manage investments and to raise further capital.

If the Group fails to retain or adequately incentivise these key individuals, and/or is unable to attract new talent of an equivalent calibre, and complementary, to existing fund management personnel and so diversify its fund management personnel and reduce reliance on key individuals, this could have a material and adverse effect on its ability to deliver its strategy for the Fund and Investment Management business.

The board has undertaken a full market mapping of available talent and proceeded to hire several senior team members to add bench strength the fund management team. In addition, a full market benchmarking has taken place for remuneration and plans are in place to ensure that Arrow continues to offer an attractive package to all of its employees. The board expects to continue similar exercises to ensure that this risk is monitored and, where possible, mitigated on an ongoing basis.

Key management personnel
£000

Total
£000

As at 31 December 2020 and 2019:

Trade

–

–

–

–

Remuneration

2020
£000

2019
£000

Salaries and performance-related bonus

1,222

1,628

Pension-related benefits

87

110

Share-based payments

–

(306)

1,309

1,432

Arrow Global Group Holdings Limited
£000

Arrow Global Limited
£000

Arrow Global One Limited
£000

Vesting Finance Detachering B.V.
£000

Total
£000

As at 31 December 2020

Due from subsidiary undertakings

–

–

224,607

40

224,647

Due to subsidiary undertakings

(1,367)

(1,913)

–

–

(3,280)

(1,367)

(1,913)

224,607

40

221,367

Arrow Global Group Holdings
Limited
£000

Arrow Global
Limited
£000

Arrow Global
One Limited
£000

Vesting Finance
Detachering
B.V.
£000

Total
£000

As at 31 December 2019

Due from subsidiary undertakings

–

–

212,495

40

212,535

Due to subsidiary undertakings

(1,367)

(151)

–

–

(1,518)

(1,367)

(151)

212,495

40

211,017