Principal risks

The condition of the economies in which we operate and in particular changes in general levels of unemployment is likely to have a significant impact on business performance.

Customers may be less willing to borrow and less able to repay loans. Reduced demand, reduced revenue and increased impairment may result.

Mitigation
We have a resilient business model. Our loan book is short-term, on average just under six months repayments are outstanding, which means we can quickly change the risk-return profile of our lending, and our close customer relationships allow us to rapidly detect, and respond to, changes in customers’ circumstances.

Credit controls have been tightened, costs reduced and expansion plans in new markets put on hold in the short-term.

Increased competition may reduce market share leading to increased costs of customer acquisition and retention or reduced credit issued, lower revenue and lower profitability.

Mitigation
There are few providers of home collected credit in our markets. Our distinctive operating model engenders high levels of customer satisfaction. Market research is continually undertaken to monitor satisfaction levels, identify usage of other financial products and monitor competitor activity. In addition, this risk has been reduced by diversification of customer acquisition channels, and less competition and reducing costs of media as a result of the economic downturn.

Failure to effectively develop the business and achieve strategic aims because management resources, IT and operational systems or long-term funding prove inadequate or insufficient.

Mitigation
A formal talent development programme aimed at delivering sufficient high-quality managers to meet future plans is in place. The Group has a clear strategy for the development of its IT systems and operational processes.

The strategically important development of the Mexican business, proving the ability to bring a large market in a new continent into profit, is progressing well.

Insufficient liquid funds to meet the short-term or strategic requirements of the business. This is particularly relevant following the significant reduction in the general availability of bank and capital markets funding.

At extreme this could lead to a breach of banking covenants causing all outstanding facilities to fall due for repayment or the going concern status of the business being called into question.

Mitigation
The business is well capitalised with equity representing 45.1% of net customer receivables. At 31 December 2008 there was headroom of £229.5 million on £663.8 million of syndicated and bilateral banking facilities, of which £422.8 million were extended in October 2008 to October 2011. The remainder expires with various maturing dates before then, the bulk expiring in March 2010.

This is forecast to be sufficient bank funding to meet the requirements of the existing markets through to October 2011 but insufficient to allow entry into new territories or the roll-out of operations in the Russian market.

We will work to secure additional funding.

The risk that a key supplier or operational partner ceases to operate.

Banks: Loss of funding lines or cash balances for withdrawal by agents to use in providing loans to customers are unavailable.

Other: Business failure of a counterparty such as an IT services outsourcer that causes significant disruption or impact on our ability to operate.

Mitigation
Cash is held only with A3 rated financial institutions. Institutions with lower credit ratings can only be used with full board approval.

There are regular risk assessments of other key counterparties.

All of the banks who provide us with funding or other services have continued to function.

Reported results and related assets and liabilities are at risk of adverse exchange rate fluctuations.

Earnings are adversely affected by currency movements.

Mitigation
The foreign exchange rates used to translate the majority of reported earnings within a financial reporting period are hedged.

No loans are issued in a currency other than the functional currency of the relevant market.

Funds are borrowed in, or swapped into, the same local currencies as customer net receivables so far as possible. Currently, the capital markets in Romania are not operating effectively with the result that the receivables in this market are partly funded in equity from the Parent Company which is denominated in Sterling.

Adverse changes in, or conflicting interpretations of, the different countries’ tax legislation and practice may lead to an increase in the Group’s taxation liabilities and effective tax rate.

Mitigation
External professional advice for all material transactions is taken and supported by strong internal tax experts both in-country and in the UK.

Where possible, tax treatments are agreed in advance with relevant authorities.

Changes to the regulation of credit or the sale of credit by intermediaries or other laws may impact the operation of the business and / or result in higher costs.

Breaches of regulation may result in fines or the withdrawal of operating licences.

Mitigation
We foster open relationships with regulatory bodies and closely monitor developments in all markets in which the business operates, and in respect of the EU as a whole.

We work proactively with opinion formers to ensure the businesses are well understood. This is facilitated by membership of the British Chamber of Commerce and / or relevant local trade bodies along with the Consumer Credit Association in the UK.

We operate a legal affairs committee to oversee legal risks across the Group and take external legal advice to ensure we remain compliant.

Our good reputation is adversely affected by ill-informed comment or malpractice. Damage to our brand and customer satisfaction ratings reduces customer demand.

Mitigation
We have an established corporate social responsibility programme. This includes continued investment in community initiatives to foster good relations with customers and the areas in which they live along with the implementation of the FSA’s Treating Customers Fairly principles.

We have clear operating guidelines to ensure consistency and compliance with Group values.

An active communications programme is in place to foster a better understanding of the Group’s products.

The failure to respond appropriately to changes in the credit risk profile of our target market and existing customer base.

Performance not optimised through failure to lend to good quality customers.

Increased impairment impacts profitability and staff and agent engagement leading to increased turnover.

Mitigation
We have effective credit management systems in place for evaluating and controlling the risk from lending to new and existing customers. This is supplemented by the weekly contact between our agents and customers allowing a regular assessment of credit risk. Our agents are incentivised to collect not lend.

Credit controls were tightened in October 2008 in anticipation of the impact of the downturn in world economies.

Day-to-day operations disrupted in the event of damage to, or interruption or failure of, information and communication systems.

Failure to provide quality service to customers and loss of data.

Disruption of activities increases costs or reduces potential net revenues.

Mitigation
Robust business continuity process, procedures and reporting framework in place to enable us to continue trading in the event of such an occurrence. These are regularly tested and reviewed.

Continuous investment in, and development of, IT platforms.

The failure to provide an appropriate working environment to our staff and agents.

Staff and agents have safety concerns that impact engagement and productivity.

Mitigation
Health and safety policies in place.

Formal safety guidance provided to staff and agents as part of induction programme together with ongoing safety awareness refreshers.

Directors’ report and business review

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