Annual Report and Accounts 2016 Enabling growth. Driving momentum.

Contents

Chairman’s statement 2

Chief Executive’s statement 4

Strategic report 6

Directors’ report 35

Corporate governance statement 40

Risk management report 45

Directors’ remuneration report 51

Directors’ responsibilities 62

Independent auditor’s report 63

Consolidated fnancial statements 68

Notes to the consolidated fnancial statements 72

Company fnancial statements 103

1 Chairman’s statement

Chairman’s statement From start-up to delivery

When frst appointed Chairman of the British Business Bank in October 2013, I said that this was an idea of its time – with the potential to be a key catalyst in producing a more efective set of fnancing options for smaller businesses.

As we fle our second set of accounts, The way we formulate our solutions it is clear that we are continuing to – from our dynamic, iterative process to make signifcant progress along the put in place the Northern Powerhouse road to fulflling that aim. Investment Fund, to the open nature of our Help to Grow initial phase – In 2015–16, it would be fair to say helps us build fruitful partnerships that we have gone from start-up that bring to bear our own expertise phase to delivery. While the fgures and money, and that of our partners. in this report largely speak for themselves, it is worth reiterating We have done this by building a the efort and thought that has gone powerful and talented platform of Ron Emerson into making that happen. people which has the capability to Chairman develop a wide range of innovative This kind of success doesn’t happen by and relevant solutions. Increasingly, British Business Bank accident – we’ve specifcally set out to we are recognised across government do this in a collaborative way, holding and our stakeholders as agents for two-way conversations with the change who get things done. market, businesses and stakeholders across the range of our work. A recent But it’s not just about commercial example of this is the revised version partnerships – our public sector of the Business Finance Guide that we partners include the Department for have launched which involved more Communities and Local Government, than twenty partner organisations. UK Export Finance, the Local Enterprise Partnerships and HM Treasury – in addition to our ‘home’ Department for Business, Energy and Industrial Strategy – as we work together to bring about real and lasting improvements in markets for smaller business fnance.

2 British Business Bank — Annual Report and Accounts 2016 Chairman’s statement

One thing that really shines through about our organisation is the shared sense of purpose and mission that runs through it.

With such success we are being through it. This drive to improve, Bank since October 2013 and approached to do still more, and while and belief in what we are doing, overseen its setup, I feel this is a good we have had to deal with the many helps us to thrive as we deliver our time for me to hand over the reins to challenges that an increased role expanded agenda. a successor to take the business brings, we can look back over the past through to the next stage, which I will We are taking on new staf to deliver year with a great deal of pride in what do in October. It has been a delight to these new priorities, and colleagues we have achieved. work with Keith Morgan during this across the British Business Bank are very busy and formative time, and the being recognised, for example, the market can be confdent that he will European Referendum annual Fintech innovation award for continue to develop the capabilities Result alternative debt fnance, In-house and efectiveness of the bank. I would innovation award for our Legal team at On 23 June the United Kingdom also like to thank all of the staf for the British Legal Awards and individual voted to leave the European Union. what has been a truly remarkable recognition for Shanika Amarasekara, This generates some uncertainty performance on their part in creating our General Counsel and Keith Morgan, for the Bank, as some of our this powerful new platform to support our Chief Executive. programmes rely on EU funding the SME sector. or guarantees, but also creates opportunity for us to respond to the The Board changing environment, building on During the year, Maria Turner gave the platform we have established. notifcation of her intention to resign We are in close contact with our from the Board as she moved to an stakeholders and are monitoring Ron Emerson overseas assignment. One of our market conditions to ensure that non-executives, Teresa Graham, Chairman we respond as appropriate. stepped in as the interim Chair of the Risk Committee, and we have recently People welcomed Neeta Atkar to the role on a permanent basis. I’ve said before that one thing that really shines through about our And fnally, there will shortly be organisation is the shared sense another change at Board level. Having of purpose and mission that runs been Chairman of the British Business

British Business Bank — Annual Report and Accounts 2016 3 Chief Executive’s statement

Chief Executive’s statement Our balance sheet has shown substantial growth A year of growth – confrming that we ourselves are a fast- and momentum growing business in scale-up mode.

As highlighted in the Chairman’s report, this year has been a story of being asked to do more, deliver more, and develop more to help scale-ups, as well as continuing to deliver for start-ups and stable and sustainably growing businesses.

Against our four Key Performance These provisions are unwound as Indicators we have delivered in funds are deployed over future years. 2015-16: These are not provisions for bad debts and are expected to unwind over — an increase of 45% in the total future years. stock of fnance ofered through the Bank’s programmes; We’ve always said that we will adapt to market conditions, fexing our ofering — increased support for diversity to best serve the needs of the UK’s in the market by working smaller businesses. Our Small Business overwhelmingly through smaller Finance Market report, published this banks, non-banks, alternative Keith Morgan February, indicated that business lenders and equity investors; Chief Executive requirements were changing from British Business Bank — better information on fnance working to growth capital. As a result, options, contributing to an we dedicated more of our resources increased awareness of alternative to asset fnance and growth fnance, fnance options amongst SMEs; including early stage venture capital. During the year, we have developed The report also illustrated that more new fnance initiatives which both — a 2.0% return on capital deployed, needs to be done to build a diverse serve the needs of smaller businesses exceeding the target set by marketplace for fnance, ofering and support the Government’s key Government. smaller companies more choice. priorities – including the new Northern Through our ENABLE programmes Powerhouse and Midlands Engine The fnancial statements for British and British Business Bank Investments Investment Funds and the Help to Business Bank plc show a net we are now supporting challenger Grow programme. operating proft of £31.8m. Although we expect to make a positive return banks, a range of asset fnance Our balance sheet has shown on our Enterprise Capital Funds, providers and a growing number of substantial growth – confrming that accounting standards require us private debt funds, as well as fast we ourselves are a fast-growing to recognise up-front provisions on growing marketplace lenders. business in scale-up mode. new commitments in this programme.

4 British Business Bank — Annual Report and Accounts 2016 Chief Executive’s statement

1. Increase the 2. Help to create 3. Promote better 4. Achieve this supply of a more diverse information whilst managing fnance fnance market in the market taxpayers’ money efciently £7.5bn 90% 79% 48% 2.0% 43% £5.1bn 1.3%

2014–15 2015–16 2014–15 2015–16 2014–15 2015–16 2014–15 2015–16 This target is defned as a mean awareness Stock of fnance Percentage through Awareness of diferent Return on capital deployed non-Big Four banks forms of fnance

But larger lenders are important credit reference agencies that will use partners, also – Lloyds Banking Group increased information from banks to has recently led the way on our Help make credit score data more widely to Grow ofering by becoming the frst available to a broader range of lenders. partner under the programme – and We were also pleased to recently we continue to work with the larger update our popular Business Finance banks in providing much needed Guide, which we publish jointly with debt to companies with less collateral ICAEW’s Corporate Finance Faculty, or a short track record through the with a new digital presence at Enterprise Finance Guarantee thebusinessfnanceguide.co.uk. programme. Recommendations from The guide is already accessible to more the programme’s recent review will than a million smaller businesses, enable us to make it more widely helping them understand and access accessible, benefting smaller the type of fnance they need. businesses, our partners, and the wider economy. 2015-16 has been a year of growth and momentum. As we enter a period Alongside our activities on the supply of increased uncertainty following the side, we have been closely involved EU referendum, we will redouble our in delivering measures to increase eforts to support key segments of the smaller business demand for, and small business fnance market, helping confdence in, a wider variety of fnance the UK’s smaller businesses realise options. In 2015-16, we advised their potential. HM Treasury on the designation of new fnance platforms that will accept referrals of smaller businesses that have been declined facilities by their bank. The frst three platforms were announced at Budget 2016 – a world Keith Morgan frst for an initiative of this sort. Chief Executive In addition, we provided advice to HM Treasury on the designation of

British Business Bank — Annual Report and Accounts 2016 5 Strategic report

Strategic report

The British Business Bank is a national economic development bank with a remit to design, deliver and efciently manage UK-wide smaller business access to fnance programmes for the UK government. Established in November 2014, it is an operationally-independent, wholly government-owned plc.

Our mission and objectives The British Business Bank’s mission is to make fnance markets for smaller businesses work more efectively, allowing those businesses to prosper, grow and build UK economic activity.

6 Strategic report

1. Increase the supply of fnance to smaller businesses where markets don’t work well

2. Help to create a more diverse fnance market for smaller businesses, with greater choice of options and provider

3. Promote better information in the market building confdence among SMEs in their understanding of the fnance options available to them

4. Achieve this whilst managing taxpayers’ money efciently and within a robust risk management framework

British Business Bank — Annual Report and Accounts 2016 7 Strategic report

State of the market Access to fnance was an acute Over problem for smaller UK businesses The British Business Bank aims to following the most recent fnancial improve fnance markets for smaller crisis and recession, but is now fnally 1 businesses. We provide policy improving as credit conditions have 4 8 , 0 0 0 advice direct to ministers on access eased. Flows of fnance to smaller small businesses supported to fnance interventions, drawing businesses increased over the last on our market insight and analysis, year as the UK economy expanded. Another important feature of UK and leverage our proximity to the Net bank lending has now increased smaller business fnance markets is market. We work collaboratively for six consecutive quarters, asset that the four largest UK banks have across government, to ensure their fnance has continued to grow a combined market share of around interventions for smaller businesses strongly, and equity fnance also grew 80% for general-purpose business are rapid, relevant and efective. healthily overall in 2015 – although it loans. The Competition and Markets Government-funded access to fnance did show signs of slowing towards the Authority is conducting a retail banking programmes are required because second half of the fnancial year. market investigation to explore further fnance markets for smaller businesses how this market concentration impacts do not work as well as they should. We participate in a further on choice of fnance for businesses. This is primarily due to problems Our research indicates that over half of with getting the right information UK smaller businesses still go only to to the right decision-maker quickly their own bank and do not shop around and cost-efectively. As a result, £4.4bn for fnance. This may be because UK businesses underinvest for lack of of fnance to small mid-cap businesses smaller businesses have limited fnance, meaning UK economic activity awareness and understanding of their is held back and businesses’ growth Our 2016 Small Business Finance options, or are unwilling to try some ambitions are not fulflled based on Markets Report found, however, that of the better-publicised alternatives, our market analysis. The British structural problems and localised such as peer to peer lending, that have Business Bank intervenes at key market weaknesses remain. Some seen rapid growth in recent years. We points, unlocking fnance for viable viable smaller businesses applying for are beginning to see impact from some smaller businesses to support their fnance are still rejected – particularly of our measures to address these growth and that of the UK economy. start-ups seeking new loans and issues, but much more can be done. We monitor the development of ambitious high growth potential markets closely, responding to scale-ups. Liquidity has returned to Looking ahead to the coming fnancial changing market conditions and the fnance markets serving small year, while conditions have improved refocus our interventions where mid-cap businesses leading to a for smaller businesses since the depth they are most appropriate. decreased focus on the segment. of the fnancial crisis, headwinds are Regional patterns are also uneven – gathering strength. The current UK We currently support over despite greater availability of fnance economic expansion is vulnerable nationally – with both debt and equity to global slowdown and any shocks less easily accessible for smaller to confdence following the result businesses in regions outside of of the EU referendum. We are closely £3.1bn London and the South East. In monitoring the situation and will of fnance to SMEs response to our market analysis we consider taking required action to continue to develop new programmes address any immediate access to – particularly in growth, innovation fnance issues. and the regions.

1. Small and Medium sized Enterprises (SMEs) and small mid-cap businesses.

8 British Business Bank — Annual Report and Accounts 2016 Strategic report

Our business model — across all three in a way that still which undertakes policy-driven and how we are set up achieves a target positive return, service driven activities or government measured through our fourth key (on a pass-through cost basis) that We take a targeted approach to performance indicator, our fnancial can at times be loss-making. The making fnance markets work better return to the taxpayer. This is service arm can work directly with for smaller businesses in the UK, deliberately in tension with our the government’s balance sheet as based on our in-depth knowledge more purely policy-driven and second well as purely rendering services. of the market. and third performance indicators Finally, we seek to help smaller (increasing diversity of choice and Firstly, we acknowledge that the UK businesses in the right way and awareness of options amongst smaller has a highly developed fnancial market therefore always with a strong set of businesses) and ensures that we that already distributes deep pools public service values. We are ultimately constantly seek balance. of private capital. We therefore don’t funded by HM Government (HMG). seek to replicate or compete with the We have a commercial arm (British We operate of both our own balance private sector, but rather work through Business Bank Investment sheet (which is ultimately consolidated existing private sector channels. Programme), which pursues both with HMG) and HMG’s balance sheet We don’t deal directly with smaller policy goals and a market rate of as a service provider. This gives us businesses, but only indirectly through return. Its profts support both the the dual advantages of both the UK’s our partners, meaning we can be a operational costs of the entire Bank sovereign credit rating and its cost of nimble, lean but efective organisation and any losses from the Bank’s long term capital. Alongside, we are with a modest cost base. Each pound mandated arm (British Business also obliged to serve the policy goals of public money we commit unlocks Finance Ltd), which pursues policy of HM Government whilst responsibly several pounds of fnance into the goals through delivery of State Aid. exercising the rights of our operational market, and we measure this through We also have a service arm (British independence to fnd the most efcient our frst key performance indicator. Business Financial Services Ltd), ways to deliver policy objectives. Secondly, we only intervene, or continue to intervene, where we can identify a failure in the market that The British Business Bank plc, principal subsidiaries we can measure in scope and size, and business activities understand its root cause, and robustly assess how well we improve it. As a result, our programmes are subject to eligibility criteria aimed at making sure that only those smaller businesses that really need help get it, and that our programmes are compliant with Principal subsidiaries State aid laws. We maintain a rigorous 2. British Business 3. British Business programme of evidence-based 1. British Business Bank Investments Financial Services evaluations so our interventions Finance Ltd remain as relevant and efcient as Ltd Ltd possible. We then use this data and latest market conditions to re-allocate Business activity our capital to where we can have the biggest impact. Communications and information Thirdly, we aim to deliver solutions Venture capital solutions that are efective both commercially and from a policy point of view. To Investment programmes achieve this, we employ a mix of staf with experience in both the public and the private sector. We also operate Wholesale through three diferent legal entities, solutions each of which has a diferent focus – some more returns-driven and some Lending solutions more policy-driven. We measure our success in balancing our activities

British Business Bank — Annual Report and Accounts 2016 9 Strategic report

Performance review

What we did to achieve We have achieved this in the our goals in the last year British Business Bank’s frst year of operation. We continue In 2015–16, against our four £64m to develop new programmes Key Performance Indicators Total value of the 9,170 Start Up to ensure we are responsive Loans drawn in 2015–16, making a we have delivered: to market needs and total of over 37,000 loans worth — an increase of 45% in Government priorities – over £210m drawn since the the total stock of fnance particularly in growth, programme began. ofered through the innovation and the regions. Bank’s programmes — increased support for diversity in the market by working overwhelmingly through smaller banks, £527m non-banks, alternative Total commitments made across all lenders and equity our programmes in 2015–16. investors — better information on fnance options, contributing to an increased £255m awareness of alternative Value of our Enterprise Finance 90 partners fnance options amongst Guarantee-enabled loans ofered Total number of British Business SMEs in 2015–16. Banks partners now delivering our — a 2.0% return on capital, programmes, having taken on nine exceeding the target set new partners in 2015–16. by Government.

10 British Business Bank — Annual Report and Accounts 2016 Strategic report

Our highlights 2015–16

Over £85m £151m 4 8 , 0 0 0 Amount of new investment capacity Total fnance our ENABLE Funding Small businesses supported. enabled by our Enterprise Capital facilities supported in 2015–16: Funds programme we announced in a £100m facility for Hitachi Capital 2015–16, bringing its total investment and a £51m facility for LDF. capacity to over £650m.

£150m Total funding enabled by the Angel Co-Fund since it began, which supports a portfolio of over 65 high-growth businesses.

We participate in a further £4.4bn of fnance to small mid-cap businesses.

We currently support over £185m £3.1bn Total commitments made through our of fnance to SMEs. commercial arm’s Investment Programme in 2015–16, making a total of £413m since it began.

British Business Bank — Annual Report and Accounts 2016 11 Strategic report

Objective 1. Increase supply

Stock of fnance of fnance in the UK (£bn) 8

6 Why it is important: When we make markets work better and help smaller business get 4 fnance that they otherwise wouldn’t get, we 2 enable investment in hiring people, buying 0 equipment, and general growth that benefts 2014–15 2015–16 the entire UK economy. BFP mid-cap SME

Under its frst Key Performance In order to increase supply we have Our Enterprise Finance Guarantee Indicator (KPI), the British Business built up a wide range of delivery continues to be a fagship debt Bank measures itself on the total partners who can get that fnance to intervention for the British Business stock of fnance ofered by its the market (see KPI 2 for diversity of Bank, and we expect changes to the programmes. This is a combination of supply). Over the past year we have programme to make it more widely funds that we have directly deployed made commitments of £527m. accessible in 2016-17. Activity in our as well as private funds which our Investment Programme in a leading The Bank’s total stock of fnance participation has unlocked. UK challenger bank, also increased grew 45% from £5.1bn to £7.5bn from our stock substantially. Within a given year, the Bank will March 2015 to April 2016. We did this infuence this metric by working by committing 75% more in 2015–16 to commit funding through its as in the previous year. The increase programmes. Once the funding is was achieved against a backdrop of committed, our partners will then improving commercial conditions that typically take some time (between resulted in accelerated repayments in one and 10 years) to draw the our large Business Finance Partnership funding down as they invest in it with portfolios combined with lower than smaller businesses. The combined expected drawdowns. funds become added to the stock of Much of the increase came from our fnance. When a borrower repays ENABLE programmes, which added a loan or an investment is monetised, a £100m lease fnance facility with then funds can be returned to the Hitachi Capital and a £51m facility Bank and other investors and will be for LDF under the ENABLE Funding taken out of the stock of fnance programme, following a £125m measure. Therefore, the net stock guarantee facility for Clydesdale and fgure is subject to several Yorkshire Banks towards the end of countervailing factors. 2014–15. These deals also strongly support our diversity agenda as represented by our second KPI. Bill Dyson Skip hire received fnance from Business Enterprise Fund (W&N Yorks and the NE), a British Business Bank partner

12 British Business Bank — Annual Report and Accounts 2016 Strategic report

Start-Up Loans – enabling Lending Solutions Enterprise Finance the successful businesses Enterprise Finance Guarantee Guarantee review of the future The British Business Bank’s Enterprise In 2015/16 the Board conducted The Start-Up Loans programme Finance Guarantee (EFG) improves a strategic and operational design delivered through the Start-Up the availability of working capital review of EFG, covering the Loans Company aims to increase and investment funding for smaller efectiveness of the programme the rate of business creation and businesses. It encourages lending and its impact on the UK small to promote entrepreneurship in institutions, including banks, to lend business landscape. the UK, with a target of delivering to viable smaller businesses that The review found that EFG 75,000 Start-Up Loans by 2020. would otherwise be declined for lacking adequate security or a proven continues to meet a need in the Entrepreneurs with a business idea track record. market for smaller business can apply for a Start-Up Loan of up fnance, and is broadly efective to £25,000, and they also get help In 2015–16, EFG volumes declined as currently confgured. and mentoring along the way. compared to previous years, as lending conditions improved. EFG is a demand- Following the review’s During 2015–16, 9,170 new led programme largely dictated by recommendations, we will be Start Up Loans were drawn for economic conditions but despite this, exploring an asset fnance variant, over £64m, making a total of the current value of loans ofered re-opening the programme’s 37,077 loans worth over £210m (£255m in 2015–16) demonstrates lender accreditation process to since the programme began. there is still a need for the programme, increase the number and diversity of participating lenders, and The British Business Bank advises to correct a structural problem in enhancing our engagement with on the programme’s design and the market. the advisor community to raise funding, and oversees its delivery. We have been reviewing the operation awareness of EFG amongst This year we published a frst of EFG and are taking forward a smaller businesses. year evaluation, confrming number of enhancements to the that the programme is meeting programme. its objectives.

How the Enterprise Finance Guarantee enables additional lending

Acting as guarantor Guarantee in lieu of sufcient security Payment (Premium)

Loan or other debt facility not otherwise available

Lender Borrower

Payment Kokoso Baby received funding from (Capital, interest and fees) Start Up Loans, supported by the British Business Bank

British Business Bank — Annual Report and Accounts 2016 13 Strategic report

EFG case study Mango Bikes

Mango Bikes, one of the UK’s fastest growing direct-to-customer bike frms, secured a £150k funding package with Lloyds Bank through the British Business Bank’s Enterprise Finance Guarantee.

The fnance is enabling them to launch an innovative new range of road bikes, and they expect their product range to quadruple within the next four years.

Ben Harrison, director at Mango Bikes, said: “The support has been an integral part of the latest stage of the businesses expansion, and our relationship manager really understood how investing in research and development would help us to achieve our long term ambitions.”

14 British Business Bank — Annual Report and Accounts 2016 Strategic report

An Angel CoFund case study Fertility Focus

Fertility Focus is a consumer Rob Milnes, CEO of Fertility Focus healthcare start-up with said: groundbreaking women’s health “The funding provided essential products and IP, currently capital for a critical phase of concentrating on diagnosis and intellectual property and product monitoring treatment for the development, regulatory approvals 30% of women who experience and initial sales growth. ovulatory issues. “Without it, our rounds would have When it needed fnance to bring had signifcantly less momentum its OvuSense product to market and the company would have really and create initial rapid sales growth, struggled to achieve what it has they approached the Angel CoFund over the past three years.” for funding to match incoming angel investment.

The Angel CoFund was involved in two rounds totalling £2.1m, of which it contributed £700k – including a convertible loan of £185k.

British Business Bank — Annual Report and Accounts 2016 15 Strategic report

The Angel CoFund’s continuing strong performance places it comfortably at the upper end of the range when benchmarked against European Venture Capital for both early stage and later stage funds.

Venture Capital Focused primarily on highly innovative and export-orientated early stage On the equity side, our Enterprise businesses. It acts as a catalyst to Capital Funds (ECF) programme better practice and increased committed to two new funds over the long-term capital in the UK angel year – a £17.5m commitment to the market, and as a stepping stone into Passion Capital II Fund and a £24m wider and later-stage venture capital investment into the £40m Edge (which is supported by our ECFs and Creative Enterprise fund. The ECF VC Catalyst Fund). programme now has an overall investment capacity of over £650m. The Angel CoFund’s continuing strong We have also continued to invest performance places it comfortably at through the VC Catalyst Fund, with the upper end of the range when around £68m now committed to eight benchmarked against European funds. We committed £36m to four Venture Capital for both early stage funds through the commercial arm and later stage funds. In 2015–16, the during 2015–16 – Notion Capital III, Angel CoFund took its high-growth Nauta Capital IV, Atlantic Bridge and business portfolio to above 60, with Panoramic II. £150m of funding enabled. It secured a partial realisation from one The British Business Bank-backed investment during the period, recycling Angel CoFund improves the availability the profts for further investment. of equity investment capital supporting high-growth smaller businesses. It works alongside syndicates of private individual investors, business angels, and other investors to ensure high potential businesses can efciently secure funding to drive their growth.

16 British Business Bank — Annual Report and Accounts 2016 Strategic report

Wholesale Solutions – how the British Business Bank’s ENABLE Guarantee programme helped Clydesdale Bank launch a new tech start-up investment arm

Our ENABLE Guarantees Enterprise Capital Funds case study programme encourages participating banks to lend more Heck Foods to smaller businesses by reducing Heck Foods, a family-run premium Andrew Keeble, founder and the capital they need to hold to sausage maker, was founded by MD said: support such lending. Yorkshire farmers Andrew and “Securing the funding through the The programme helped Clydesdale Debbie Keeble in 2012. Heck’s British Business Bank’s Enterprise set up their new ‘Emerging brands are sold throughout in Capital Funds programme has given Technology Unit’ (ETU) in 2015–16. UK supermarkets and via their our business the boost it needed to This focuses on established, own website. take us to the next level. We have fast-growing technology startups, When Heck needed fnance to increased our profts and are able providing them with £500k–£1m in help them raise their consumer to focus on building a business of debt fnance. brand awareness, Panoramic some scale.” A portion of the £125m transaction Growth Equity – supported by is expected to go to this or other the British Business Bank’s ECF products and industry segments programme – invested £1m of Clydesdale and Yorkshire haven’t equity growth capital. previously covered, such as cash fow lending specifcally for SMEs, automotive tooling fnance and introducing a new renewables fnance ofering.

British Business Bank — Annual Report and Accounts 2016 17 Strategic report

Objective 2. Increase diversity of SME fnance in the UK Percentage through non-Big Four banks (%) 100

Why it is important: When we support a 80 non-standard small business fnance product 60 or help an alternative provider, smaller 40 businesses beneft from better choices 20 and better terms that increased competition 0 can deliver. 2014–15 2015–16

Against its second Key Performance than 75% of our stock is delivered Finance Guarantee and, more Indicator, the British Business Bank through providers outside the Big recently, Help to Grow are the measures itself on the value of its Four banks. notable exceptions. These two activity which is channelled through programmes use both Big Four and For most new and existing fnance providers other than the non-Big Four partners because programmes, we work exclusively ‘Big Four’ banks – Barclays, Lloyds they address borrowing needs with non-Big Four delivery partners Banking Group, HSBC and RBS. immediately adjacent to mainstream such as challenger banks, asset lending, and tapping into the Big Our objective is to increase the choice fnance providers, peer to peer and Four’s extensive distribution network of fnance for smaller UK businesses other technology based providers, is the best way to reach signifcant – both in terms of supplier and fnance debts funds and other non-bank numbers of smaller businesses. This type. Our aim is to ensure that more fnance companies. Enterprise in turn helps us produce a greater impact for the UK economy. Promoting diversity – our support for challenger banks

Enterprise Finance ENABLE Investment Guarantee Guarantee Programme

‘Guarantees for SMEs lacking ‘Reduces capital banks have ‘Invests through new collateral or a track record’ to hold against SME lending’ providers of fnance’

accredited 15 challenger banks

SMEs SMEs transaction 600 supported 350 supported £30m c£70m £125m c£160m of fnance transaction of lending supported

18 British Business Bank — Annual Report and Accounts 2016 Strategic report

Supporting diversity – our support for Fintech businesses

Angel Venture Capital Investment Co-Fund Solutions Programme

‘Matching equity investment from ‘Encourages investments in the ‘Invests through new business angels’ early stage VC market’ providers of fnance’

Fintech businesses 12 supported £20m Over £20m invested

invested in £3m the businesses £330m fnance to 7,500 SMEs

—We also supported debt funds – Importance of building ENABLE Funding – two new a type of fnance well-established partnerships partners, £151m of funding in the USA but relatively new to agreed in 2015–16 In 2015–16 we took on nine new the UK marketplace. partnerships across the business – In October 2015, we agreed to —We supported asset fnance three in Venture Capital and six provide a £100m facility to Hitachi providers through our programmes through our commercial arm’s Capital UK to fund a portfolio of (ENABLE Funding and the Investment Programme. One of our newly originated small business Investment Programme) and are main ways of increasing diversity is asset fnance receivables. LDF, a looking at introducing an asset to support new entrants and increase non-bank fnance provider, became fnance variant for Enterprise the capacity of existing lenders across the second partner under the Finance Guarantee. the scope of the fnance markets. programme in February 2016. —Across the bank and its Introducing and supporting These were the frst two subsidiaries, in 2015–16 we new types of fnance transactions of our innovative partnered with challenger banks, ENABLE Funding programme, including Clydesdale and We also supported some types of which aims to increase signifcantly Yorkshire as part of our ENABLE fnance that are less well established the supply of leasing and asset Guarantee programme and as options in the UK fnance markets fnance to smaller businesses participated in Shawbrook’s in 2015–16, including merchant cash in the UK. tier two debt issuance. advances and private debt. We also increased our commitment to supporting asset fnance provision.

British Business Bank — Annual Report and Accounts 2016 19 Strategic report

Diversifying the geographical New equity fnance delivery British Business Bank spread of fnance and addressing this partner case study – a creative Investments Ltd – championing weakness is therefore important to solution diversity in fnance provision support these businesses. In 2015–16, In November, we announced that the British Business Bank announced Our commercial subsidiary plays we were committing £24m from two major initiatives to support this aim. a key role in increasing diversity our Enterprise Capital Funds of lenders and types of fnance. Firstly, at Autumn Statement 2015, an programme to the new Edge It makes loans or investments agreement was announced between Creative Enterprise Fund. of between £5m and £200m the British Business Bank and Local in fnance providers to smaller Edge Investments, a leading Enterprise Partnerships in the North businesses. creative industries investor, raised West, Yorkshire and the Humber, and a £40m fund to invest in high Tees Valley to create a Northern In 2015–16, it made commitments growth companies in the creative Powerhouse Investment Fund of over totalling £185m through its industries. The fund, also bringing £400m, subject to meeting European Investment Programme. together private sector funding funding requirements. These included investments in from leading institutions and high a challenger bank (Shawbrook), net worth individuals, nurtures Northern a merchant cash advance and assists creative businesses Powerhouse provider (Liberis), private debt to grow. Investment Fund funds (Cordet, Muzinich, The creative and cultural economy Beechbrook), and an asset is an important and growing part fnance provider (Haydock). of the global economy, and Britain’s Its VC Catalyst Fund committed creative industries sector is £36m to four funds during thriving. The creative economy 2015–16 – Notion Capital III, Nauta accounts for approximately 10% The Fund will produce greater levels Capital IV, Atlantic Bridge and of the entire UK economy and of investment, increase the focus on Panoramic II. provides 2.55 million jobs, with the potential opportunities across the jobs growth four times faster Northern Powerhouse Region and than the economy as a whole. provide increased fexibility in the type of funding provided. Together these will contribute to better economic Midlands outcomes for the regions’ businesses, Engine growth and jobs. Investment Fund Secondly, a new £250m Midlands 90 Engine Investment Fund – again, a Total number of British Business collaboration between British Business Bank partners now delivering our Bank and the region’s Local Enterprise programmes, having taken on Partnerships, was announced at Going forward, we expect Help to nine new partners in 2015–16 Budget 2016 – will further contribute Grow and some variations of ENABLE to eforts to rebalance the UK economy to be distributed in part through the Geographical diversity across the regions. Big Four banks, in order to rapidly reach nationwide availability. It’s very important to us that businesses Focused on the Midlands’ 460,000 However, we anticipate that the located outside London and the South smaller businesses, this initiative will majority of our interventions will East can access the fnance they need bring together legacy funding from remain with challengers and to fulfl their growth ambitions. It is existing programmes, funding from alternative providers, given that concerning, for example, that regions the British Business Bank and new all other prospective and existing outside of London received only 53% European funding. programmes work through smaller of equity deals in the UK in 2015, Following the results of the EU debt and equity fnance providers. despite being home to 79% of the referendum we are seeking to confrm country’s high-growth businesses. European commitments but are currently working on the basis that both of these proceed.

20 British Business Bank — Annual Report and Accounts 2016 Strategic report

Geographic diversity by number of companies (%) Muzinich & Co’s new debt fund 20 – based in the North-West, developing private debt funding across the UK

15 In January, British Business Bank Investments Ltd, our commercial arm, invested £30m in Muzinich’s new £350m private debt fund, 10 as part of our commitment to develop new and diverse sources of debt fnance for smaller and medium-sized UK businesses. 5 Muzinich & Co expanded into the North West of England with the 0 opening of a Manchester ofce London South North South East of West Yorks East Scotland Wales North Northern whose primary purpose is to ofer East West West England Midlands and Midlands East Ireland growth capital to mid-sized Humber UK BBB companies located in the heart of the UK’s Northern Powerhouse. Investment Programme case study Muzinich Chief Executive and Chairman George Muzinich said: Lumenata Lighting Design “Many of the businesses that drive the UK economy lie far beyond the M25. We opened an ofce in Manchester with a particular remit to establish a private debt fund backed by pension funds and other institutions that reached beyond the South East. The involvement of British Business Bank Investments Ltd at a very early stage in the process made a Lumenata Lighting Design provides “Ultimate Finance quickly signifcant contribution in lighting design and installations understood the business, saw our success.” for both commercial and domestic the potential for growth and had applications. no hesitation in coming to my assistance by quickly providing When its bank withdrew its funding, the new facility, which saved us.” British Business Bank partner Ultimate Finance Group saved the The company is now expecting to company from redundancies or increase turnover from £240,000 possible closure by quickly providing to more than £600,000 in a new factoring facility of £100,000. 12 months leading to the £30m This enabled Lumenata Lighting creation of new jobs. British Business Bank Investments Design to win a number of major Ltd, our commercial arm, invested contracts, leading to the dramatic £30m in Muzinich’s new £350m increase in turnover. private debt fund Director of Lumenata Lighting Design, Paul Hindle said:

British Business Bank — Annual Report and Accounts 2016 21 Strategic report

Objective Awareness of diferent forms of fnance (%) 3. Improve SME 60

50 understanding 40 of fnance options 30 20 Why it is important: When we make better 10 information available to smaller businesses, 0 2014–15 2015–16 we help them make better choices about This target is defned as a mean awareness fnance. This means they are more likely level of a basket of fnance types which BBB supports or intends to support in the future. to invest, knowing that they have the right This includes Leasing/HP, Venture Capital, Business Angels, P2P lending, Crowd Funding kind of fnance for what they need. and Mezzanine Finance.

Eforts to increase fnance and diversify sources are one part of the Bank’s activity to improve fnance markets for smaller businesses. The Bank is keenly aware that to function efciently, markets require good levels of information to allow participants to make informed choices.

The Bank has therefore measured the awareness of diferent fnance options by SMEs through our annual survey, where we looked at the average awareness for six diferent fnance products. This was 48% in our November 2015 survey, mirroring other evidence that awareness and use of providers other than their main bank amongst smaller businesses is low.

We know from our research that around 60% of SMEs only contact one provider when looking for fnance – generally their own bank – and around a third of these will cancel their plans if they receive a ‘no’. We need to make sure that as many businesses as possible become not only aware of, but confdent in the wide choice of supplier and fnance options available to them.

22 British Business Bank — Annual Report and Accounts 2016 Strategic report

To increase awareness of fnance The Start-Up Loans programme helps Our survey on SME Business Finance options for smaller business, we jointly applicants with writing their business complements other data sources such published a Business Finance Guide plans, and once the recipient has as the SME Finance Monitor, to give a with ICAEW’s Corporate Finance drawn down their loan, they are richer understanding of small business Faculty, with contributions from a ofered one year of mentoring to experience in accessing fnance. further 17 partner organisations help their business succeed. We take regular opportunities to representing the fnance and business present at conferences and seminars, sectors. The guide was updated in Researching our markets ensuring that our understanding August 2015. For the new edition and of small business fnance is digital version being published in early Our unique position enables us to communicated to fnance providers, summer 2016, we have been working work with a range of partners to small businesses and the research with four additional partners to gather better information about community. provide additional input and reach, the market. Our fagship publication, levering our convening capability to the annual Small Business Finance bring together an unprecedented Markets report 2015–16, highlighted Improving fnance markets spread of organisations for a venture the fundamental importance of To help overcome information of this nature. start-ups and scale-ups to the UK asymmetries faced by smaller lenders, economy, showing the continued we have advised HM Treasury on We have maintained distribution of growth in those markets and drawing the designation of Credit Reference the Business Finance Guide through out the implications for the future Agencies (CRAs) which can share events, conferences, direct email direction of our activities. marketing, media coverage and by SME credit data for the beneft of engaging with partners – both the Our other reports provide more a wide range of banks and lenders. signatories to the guide and other detailed analysis. For example, HM Treasury announced the three channels to smaller businesses. the Small Business Equity Tracker designated CRAs at Autumn analysed the continued growth Statement and the system went The digital version enhances the in volume of equity fnance, but live in April 2016. ofering, featuring videos about also drew attention to regional We have also advised HM Treasury on fnance choices and making the imbalances, with London-based the designation of Finance Platforms information more easily accessible. small businesses receiving the to refer SMEs who get rejected by the It will also provide an easy flter largest share of equity fnance. whereby users will be able to use a larger banks. The fnance platforms simple engine to hone in on the most We work with a range of research seek to match alternative sources of suitable type of fnance for their partners, including this year Goldman fnance from a broader range of lender. business stage and future plans. Sachs and the Enterprise Research The frst three platforms were Centre on ‘Unlocking Productivity: announced at Budget 2016, and the Internationalisation and Innovation system will go live later in 2016. in SMEs’ which highlighted the important role that SMEs can play in closing the UK’s productivity gap.

Our survey on SME Business Finance complements other data sources such as the SME Finance Monitor, to give a richer understanding of small business experience in accessing fnance.

British Business Bank — Annual Report and Accounts 2016 23 Strategic report

Objective 4. Manage Taxpayer money efciently Return on capital employed (%) 2.5 Why it is important: When we manage our 2.0 programmes efciently, we deliver value for 1.5 money. All UK taxpayers beneft from our 1.0 ability to deliver the most positive outcomes 0.5 with the least amount of Government 0 resources. 2014–15 2015–16

All our programmes, with the exception of the grant funding and Enterprise Capital Funds case study operating costs element for Start-Up Loans, count towards our fnancial Mimecast return target. The Bank targets In November 2015, Mimecast, achieving a return on capital at least one of the businesses supported equivalent to the Government’s by funding through the British medium term cost of capital. We have Business Bank’s Enterprise a target for the end of March 2019 Capital Funds programme, listed of 2.525%. on NASDAQ. The British Business Bank achieved The company received £3m funding a 2.0% return on capital employed from British Business Bank partner in 2015–16, which was up on the 1.3% Dawn Capital in 2008 – a difcult time generated in 2014–15 and signifcantly for the economy during which such higher than our target for the year. early-stage investment was hard to This rise was generated by lower come by. The investment helped operating costs and strong cost them to expand internationally, most control across the Bank, a drop in importantly in the US, to develop the expected losses from Start Up Loans core platform further and to add a due to improved credit performance, number of new products. and a fall in the value of claims from EFG partners stemming from better At listing, Mimecast’s 7.75 million- underlying credit performance. share IPO was priced at $10, making the company’s total share value $540m.

24 British Business Bank — Annual Report and Accounts 2016 Strategic report

Summary of fnance performance and position Financial performance Programmes For the period ended 31 March 2016 British managed on Business behalf of BEIS Total Bank plc (unaudited) £m Investment income Investment Programmes 31.0 1.3 32.3 Lending Solutions – 15.6 15.6 Venture Capital Solutions 8.4 – 8.4 Wholesale Solutions – 0.7 0.7 39.5 17.6 57.1 Management fee income 11.6 (10.7) 0.9 Total operating income 51.1 6.9 58.0

Net investment costs Investment Programmes 1.5 – 1.5 Lending Solutions – (5.0) (5.0) Venture Capital Solutions (1.0) – (1.0) Wholesale Solutions – – 0.0 0.5 (5.0) (4.5) Other operating costs Staf Costs (12.2) – (12.2) Other operating expenditure (7.2) – (7.2) Depreciation and amortisation (0.3) – (0.3)

Total operating expenditure (19.7) 0.0 (19.7) Net operating proft 31.8 2.0 33.8

Add: ECF fair value derivative gains 6.6 6.6 Less: Impairment of ECF investment assets (32.6) (32.6) Add back: impairment on new ECF drawdowns 10.2 – 10.2

Adjusted return 16.0 2.0 18.0 Average capital employed 910.6 Adjusted return on average capital employed 2.0%

2.0% The British Business Bank achieved a 2.0% return on capital.

British Business Bank — Annual Report and Accounts 2016 25 Strategic report

Financial position Programmes As at 31 March 2016 British managed on Business behalf of BEIS Bank plc (unaudited) Total Investment assets Investment Programmes 702.0 – 702.0 Lending Solutions – 45.0 45.0 Venture Capital Solutions 165.6 175.8 341.4 Enable Funding – 93.2 93.2 867.6 314.0 1,181.6 Investment liabilities Lending Solutions – (59.9) (59.9) Venture Capital Solutions (108.2) – (108.2) (108.2) (59.9) (168.1) Net investment assets 759.4 254.0 1,013.5 Other assets liabilities Cash 58.4 58.4 Tangible and intangible assets 0.5 0.5 Net other payables (6.1) (6.1) 52.8 52.8 Total net assets 812.2 254.0 1,066.2

The Bank manages a number of Key drivers of fnancial ECFs are funds that combine public programmes on behalf of BEIS, our performance and private money to make Shareholder. These include UK investments in businesses. The British Innovation Investment Fund, Angel As an investment business focusing on Business Bank accepts a lower return Co-fund, Start-up Loans, ENABLE generating appropriate risk-adjusted from ECF in order to encourage private funding and EFG. We also administer returns on our capital investment, our sector investment in SMEs. The Bank the assets and liabilities included on fnancial performance is dependent on takes a prioritised return which is due BEIS’s balance sheet relating to these a number of signifcant items, including: regardless of performance and in programmes and their performance return the private investor receives — the amount of capital we have is taken into account in our a bigger share of any upside returns. committed and the time period performance measures. This means that although the Bank over which that funding is deployed expects ECFs to make a positive return Overall results for British — the underlying performance of our to us, the return is less than typically Business Bank plc group investments and their ability to sought by a private investor and this make interest and debt repayments diference in return is recognised as 2015–16 an impairment. The impairment then — over time the ability to exit — The Bank generated a net reverses over the life of the ECF. investments successfully and operating proft of £31.8m. The Bank has therefore recognised a make a capital proft. provision totalling £37m in the year — The value of our investments Our net operating proft was mainly ended 31 March 2016. This provision increased by £209m. driven by £31.0m of income from the doesn’t relate to an underlying loss — We made new commitments investment programme, cost control on our investments and is therefore of £527m. over our operating costs and the excluded from the calculation of management fees earned from a adjusted notional return on equity — Net assets increased by £164m number of our products including the (as is the reversal over time of the to £812m. assets we manage on behalf of BEIS. associated impairment). Although the Bank generated net operating proft of £31.8m, it made an overall loss of £9.3m before tax. This is as a result of the required accounting treatment for Enterprise Capital Funds (ECF).

26 British Business Bank — Annual Report and Accounts 2016 Strategic report

Funding Our assets We require funding to make Our programmes invest in a wide investments and run our operations. range of fnancial instruments through Depending on our requirements private sector partners, to enable us these can be met from two sources: to achieve our objective of providing our investment earnings and greater volume and choice of fnance our shareholder. to SMEs and small mid-caps.

To fund our capital investments This is refected in the split of these we issue shares to our shareholder investments: MDive received fnance from DSL Business and utilise available cash from Finance (Central Scotland), a British — loans and receivables £72.9m our operations, including asset Business Bank partner repayments. At 31 March 2016, UK — held to maturity assets £31.1m Government held shares totalling £838m in British Business Bank plc, — available-for-sale assets £729.7m comprising the entire share capital — assets designated at fair value of the Company. through the proft and loss £15m

Our operating costs are funded — derivative fnancial instruments through investment income plus a £18.9m. management fee that BEIS pays us for managing assets on their behalf For many investments we make (£10.7m in 2015–16). commitments to a fund and the fund draws down cash as it is needed. At 31 March 2016, British Business This means there is, generally, a delay Bank plc held £58.4m in cash, between our investment commitment generated partly through its own and capital being drawn. operations and partly through shareholder funding. The Bank During the period to 31 March 2016 maintains a cash balance of at least we invested £288m in assets included £50m to fund investments and can on our balance sheet. This included increase this balance in line with the acquisition of £36m of peer to investment demands. The majority peer investments from BEIS plus of these funds (£55.8m) are held additional investment of £25m from within the Government Banking the Bank, £30m in Shawbrook (a Service to ensure that there is minimal specialist Challenger Bank), £113m in cost to the Exchequer. the existing mid-cap portfolio, £30m in the Investment Programme and £35m in ECFs. As at 31 March 2016, British Business Bank plc had further undrawn commitments of £800m to be invested across its portfolio.

British Business Bank — Annual Report and Accounts 2016 27 Strategic report

Strategic risks Issues that could prevent us from successfully delivering our future plans

Our future plans represent European Union an ambitious growth agenda Referendum The macro-economic environment for the British Business Bank. may be further afected by the result of the United Kingdom’s decision to leave the European Union. The Bank is monitoring the changing market need and will respond as needed.

People and processes In order to both deliver on existing commitments and responsibly develop Over the course of 2016–17, we will Macro-economic actions to address new requirements, increase the amount of fnance that environment we need to have the right staf with we facilitate for smaller businesses the right capabilities, in the right roles, while still delivering policy objectives We see headwinds in the coming managed by the right leadership. for our Shareholder in an efcient fnancial year. In addition the current The growth required to achieve this way within a strong risk management UK economic expansion is vulnerable carries signifcant operational risk framework. to global slowdown and uncertainty. Further shocks to consumer and as well as business risk if a delay in The Directors confrm that they have investor confdence could afect both adding resources causes the Bank carried out a robust assessment of the the fow of fnance to and demand to miss delivery deadlines for core principal risks facing the company. We from smaller businesses. programmes and policies, particularly reviewed our risk framework in 2015 where signifcant new features must to improve upon it further. Given our In such case, the Bank could be developed and implemented. strategy, we see a number of critical experience losses from credit and The Bank also faces the challenge of risks that we are maintaining a close investment risk as end borrowers delivering a number of key initiatives watch upon going forward. struggle and potential losses from in parallel within ambitious timelines market risk factors such as interest that in turn places a stretch on Bank rate or foreign exchange movements resources and also relies on the Bank’s that would afect our rate of return. internal processes and controls being Simultaneously, the Bank might need sufciently robust. quickly and strategically to redeploy resources to meet shifts in policy priorities as new market gaps open up.

We will increase the amount of fnance that we facilitate for smaller businesses in an efcient way within a strong risk management framework.

28 British Business Bank — Annual Report and Accounts 2016 Strategic report

Delivery partners Stakeholder engagement In 2015–16, the Board managed and and delivery on objectives monitored governance and risk and The British Business Bank’s business internal control matters through: model is reliant upon our delivery As a national development Bank partners for efcient execution of wholly owned by the UK Government, — the Board Risk Committee the Bank’s interventions. Notably, our the British Business Bank has a — the Board Audit Committee target capital deployment volumes requirement to deliver on a number of depend upon the success of our initiatives to meet government policy — the Risk and Compliance, Finance, delivery partners as we do not seek objectives in relation to small business HR, IT and Legal functions to operate through a direct fnancing fnancing. The British Business Bank — policies for risk management relationship with end benefciaries. We must engage with government and, also take reputational risks linked to despite being operationally — the independent review of choosing appropriate partners that independent, does rely on government proposed investments by the consistently operate in a way that interaction and approvals on a number Investment Committee. meets our stakeholders’ expectations. of programmes, both existing and During the year the Board reviewed Although we have many strong new. This raises a risk that there the efectiveness of the company’s mitigating factors in place, we may be delays in decision making that risk management and internal control delegate credit and investment impact on the British Business Bank systems. decisions to our delivery partners being able to operate efciently and within agreed frameworks. efectively. Given the use of taxpayer funds in the delivery of our programmes Viability statement Compliance with State aid we also face the risk that the UK The British Business Bank Board and other regulation taxpayer may not view the interventions undertakes a business planning that we take as being good value exercise each year to outline the The UK remains a member of the for money. fve year plan for the organisation. European Union, whilst it negotiates The Board believes it possible to form the terms of its exit and therefore it The British Business Bank operates a a reasonable expectation of the British currently remains subject to the laws Risk and Control Assessment process Business Bank’s long term viability governing State aid. As we modify to identify and register key and during that planning period of fve existing programmes such as the emerging risks within each functional years taking into account the principal Enterprise Finance Guarantee, as well area and across the organisation at a risks faced by the company and its key as design new programmes such as more strategic level. Risk Registers are objectives. It should be noted that Help to Grow, the Bank must constantly also in place, in line with appropriate the British Business Bank is 100% review its policies to ensure that we governance, for signifcant projects. funded by the UK Government and and our partners continue to be The overall Strategic Risk Register the Board assumes that this funding compliant with relevant regulation. is reviewed in detail by senior arrangement will continue. We have Non-compliance can also bring management and the Board. a fnancial framework in place that reputational and business risk through allows us to alter the allocation of negative publicity and/or disruptions to This enables them to carry out a robust funding between programmes and our ability to serve smaller businesses. assessment of the principal risks facing the Company. A summary of years, subject to staying within agreed parameters. Additionally, the British Information management the key risks that the British Business Bank is facing and monitoring closely Business Bank has undertaken a and security is outlined within the Directors’ Report. stress scenario analysis of its portfolio and the Board assumes that in the The range and scope of data that the event of a downturn that the Bank will collect, collate, and control shareholder will continue to support will rise as the Bank’s operations grow the British Business Bank in delivering to encompass both new and existing its policy objectives in relation to programmes. We are conscious that smaller businesses. this increases our information and data risk and have moved to strengthen our systems and protections to match.

British Business Bank — Annual Report and Accounts 2016 29 Strategic report

Our people

The British Business Bank has an HR strategy in place to enable it to achieve its overall goals, by making it a great place to work. With a strong sense of purpose and opportunities for all, we will attract the best people to deliver our goals.

The HR strategy refects the size where people can make a real The survey showed that overall and needs of the organisation, and diference. Our annual employee employee engagement is signifcantly demonstrates value for money. engagement survey showed that higher than comparable fnancial 94% of colleagues said they were services and public sector The Bank ofers a unique employment proud to work for the organisation, organisations. proposition and a strong purpose – and 85% felt they could personally an opportunity to transform the make a real diference to the success fnance landscape for SMEs – and a of the business and its overall purpose. range of broad and interesting roles

Our strategy Our diferentiators: Our goal The employee experience

Change the structure of — Strong purpose fnance markets for smaller — Commercial FS and public business, so markets work sector mix more efectively and An inspiring — Interesting work dynamically culture where Values based culture employees fourish — Make a major impact — Transform UK economy — Broad roles Increased business — Senior stakeholders investment, growth — Accountability and jobs across the UK — Flexibility — Exposure to government

30 British Business Bank — Annual Report and Accounts 2016 Strategic report

Alignment with — Ensuring we have a culture that — Supporting ongoing learning business priorities makes the British Business Bank and development to empower a great place to work: colleagues to have real The HR strategy supports the accountability and provide timely — The culture gives the British Business Bank’s four core and relevant expertise based on organisation and its staf a business goals. market requirements. clear identity and reinforces We will support the achievement the strong purpose and social In addition to supporting existing of these objectives by: beneft of the bank both colleagues with their learning and internally and externally. development, and ofering broad and — Attracting and retaining the right interesting roles, from this summer skills and diversity; demonstrating — We take the best elements the British Business Bank will launch leadership; having the right from public and private sectors its summer internship programme, organisational design in place and to make the British Business with an aim to developing young executing a robust performance Bank both successful and a peoples’ skills and experience to and remuneration strategy. great culture in which to work. succeed in their future careers. — Developing an efcient and — Whilst staying true to our efective business model with the values, we promote diversity correct structure, resource, skills and recognise that people work mix and succession plans in place. at their best in diferent ways, We are moving from a start-up encourage them to express operating model to a steady alternative points of view and workforce that is agile enough to adapt working practices to respond to future requirements. accommodate people’s needs where possible. — Establishing the British Business Bank as a credible organisation by — Values are role modelled and measuring our performance recognised across all levels against our goals and objectives. and teams in the organisation.

British Business Bank — Annual Report and Accounts 2016 31 Strategic report

Our values

The British business Our values were developed from The Bank’s Colleague Forum meets the views and input of colleagues monthly to discuss our values with Bank has fve shared across the organisation. They are colleagues from Shefeld and values, each of which a foundation for what we stand for London representing teams across as a business, and will continue to the business. support our key positively shape our corporate culture theme, ‘Enabling’. and behaviours as we grow.

Integrity Improving Acting with a shared sense Challenging and innovating of purpose, an abiding duty to create efective solutions of care, and serving our that meet the objectives market, stakeholders and of our stakeholders and employees with fairness, ensuring that fnance honesty and transparency. markets for smaller businesses work efectively. Enabling

Delivering Connecting Commitment to delivering a Collaborating across the professional, quality service organisation, engaging with to all our stakeholders and stakeholders, Government, colleagues, whilst and markets to better employing taxpayer understand the challenges resources responsibly faced by smaller businesses. to provide solutions. Commercially Minded Exercising good commercial judgement to meet the needs of our market while also staying focused on the need to drive economic beneft.

32 British Business Bank — Annual Report and Accounts 2016 Strategic report

Our people Corporate Social Procurement and our suppliers Policies towards smaller businesses We recruit a diverse workforce to Responsibility (CSR) are in place to ensure our procurement ensure we make the most of the We take seriously our responsibility processes are accessible to smaller talents available from all parts of to make a positive contribution to businesses, including posting society. We live and refect those the communities and environment opportunities on the Government’s values through our existing staf. in which we operate, and undertake ‘Contracts Finder’ portal; and we aim We are proud that our General Counsel, a variety of Corporate Social to meet to Government best practice Shanika Amarasekara, is a recognised Responsibility (CSR) activities to do so. in terms of payment days for suppliers. champion of diversity. In 2016 she was recognised in the top 100 ethnic The CSR strategy is operated on Charity work an entirely voluntary basis by our minority leaders by the Sunday Colleagues at the British Business staf across our four areas of action: Times and as one of Financial Times’ Bank regularly give their time and environment; procurement and ‘UPstanding’s’ top 100 ethnic-minority money for good causes. Our ofcial suppliers; charity work; and executives. nominated charity for 2016 is the education outreach. Our ‘Managing Diversity and Equal Prince’s Trust. The Trust works with Opportunities’ policy lays out the need Environment young people to advise frst time to promote and implement equality of We act responsibly to manage entrepreneurs and support young opportunity and to manage diversity, our impact on the environment. people back into work. The Prince’s in such a manner that people are able We are also working towards an Trust is also a delivery partner for our to maximise both their potential and environmental audit and operating successful Start Up Loans programme, their contribution. a formal Environment Management which provides loans to individuals System (EMS). looking to start a business. To further support our activities, colleagues are ofered 1 day’s paid Male and female split of British Business Bank colleagues leave per year or equivalent for voluntary work. We also operate a 7: Non Executive Directors ‘Give As You Earn’ scheme for tax efcient fnancial donations. 1: CEO Education Our teams work in their local 4: CRO, CFO, COO and General Counsel communities to increase fnancial literacy and entrepreneurial awareness 9: SMT incl MDs through presentations to secondary schools. Many of our staf are formally 25: Directors enrolled volunteers on the Mosaic Mentoring education outreach, which 35: Senior Managers provides young people a package of opportunities to raise their aspirations and close the gap between those 13: Manager aspirations and their attainment.

18: Analysts

Male Female

British Business Bank — Annual Report and Accounts 2016 33 Strategic report

Future developments What we will do to achieve our goals in the coming year and beyond

The British Business Bank will continue All of these segments have specifc Similarly, we will promote diversity to build on the strong momentum of needs – we aim to unlock their access in fnance markets by continuing to our frst full year and continue to to fnance with a simple, streamlined expand our support for challenger increase our impact. We will seek to and interlocking set of interventions. banks and innovative fnancial resolve access to fnance issues for providers such as marketplace lenders, Likewise, because we continue to see smaller businesses, with some short invoice discounters and asset fnance evidence of long-standing structural term (over the coming year) and providers. Our ENABLE programme gaps in the fnance market for smaller medium term (over the next fve years) has now committed over £300m businesses seeking to stay ahead, the strategic realignment to respond to our and we are investigating how to British Business Bank will continue to latest assessments of the state of the develop the programme still further. deliver as well as refne those of our market and shifts in political priorities. programmes designed to address The Bank’s Investment Programme This includes assessing the best path these. For example, we will be will continue to seek out commercial forward for our interventions following deploying updates over 2016–17 to opportunities to catalyse and support the UK’s referendum on European our long-running Enterprise Finance a diversity of supply of fnance in the Union membership. Although most Guarantee programme which helps UK for smaller businesses. of our programmes are unafected, viable smaller businesses that lack a number do include European funds Finally, better and increased sufcient collateral to borrow. We will and guarantees and may require information – for smaller businesses in continue to maintain and grow other evaluation and adjustment. making more informed choices about programmes that address the equity their fnance options, for fnance The British Business Bank remains gap for smaller businesses such as the providers in making credit decision, committed to supporting the Start Up Angel Co-Fund, Enterprise Capital and in terms of research into fnance Loans Company so that it can expand Funds, and the Venture Capital markets overall – has a pivotal role in the number of loans provided and Catalyst Fund. improving how these markets work. continue to address the structural We will add resources to addressing disadvantage that some of the UK’s We therefore remain committed to the structurally-driven regional newest businesses face in securing delivering improved information disparities in access to fnance in the fnance. However, we also intend to through collaboration with partners immediate term by executing the focus more of our attention and to develop and distribute educational Northern Powerhouse Investment resources towards fnding efective guides, with HM Treasury on credit Fund and Midlands Engine Investment fnancing solutions for scale-ups reference agency data and referral of Fund subject to confrmation of EU (smaller businesses with material rejected smaller business applicants funding commitments. growth potential). to fnance platforms, and with our research partners to increase In particular, an important milestone knowledge about the markets. for 2016–17 is the launch of phase 1 of the Help to Grow scheme targeted Approved by the Board of Directors, towards high growth smaller All of these segments have businesses – a manifesto commitment specifc needs – we aim to for the Government. There will also unlock their access to fnance be further medium term work to evaluate the needs of smaller frst- with a simple, streamlined and time exporters, smaller intensive interlocking set of interventions. Keith Morgan innovators, and smaller intellectual Chief Executive Ofcer property rich businesses.

34 British Business Bank — Annual Report and Accounts 2016 Directors’ report

Directors’ report The Directors present their annual report on the afairs of the Group, together with the fnancial statements and auditor’s report for the year ended 31 March 2016.

The Corporate Governance Statement — Keith Morgan Greenhouse gas is set out on pages 40 to 44 and forms — Christopher Fox emission reporting part of this report. The following — Patrick Magee information required by the Companies Scope of disclosure — Maria Turner Act 2006 can be found in the following The British Business Bank reports its (resigned in May 2015). sections of the Annual Report, which Scope 1 and Scope 2 emissions based are incorporated by reference into this on its property portfolio. The British report: Appointment and removal Business Bank plc occupies two foors of ofce space and is able to provide — a description of the principal of Directors emission reporting for 2015–16 in activities of the Group during the The appointment and removal of respect of its premises and company course of this year, an indication directors is set out in the Corporate travel activities. Reported Scope 1 of the future developments in Governance Statement found on emissions cover emissions generated the business and boardroom page 40. from the gas and oil used in all diversity matters buildings from which the Group — the narrative on fnancial risk Directors’ indemnities operates and Scope 2 includes its management is contained in the emissions from electricity. The fgures The Company has granted indemnities risk management report on pages provided in Scope 1 and Scope 2 in the to each of its Directors in respect of all 45 to 50 and forms part of this table below are estimated emissions losses arising out of, or in connection report relating to energy consumed in with, the execution of their powers, properties where the landlord controls — details of the signifcant events duties and responsibilities as Directors the supply and recharges the British since the balance sheet date to the extent permitted by law and Business Bank. are contained in note 24 to the the Company’s Articles of Association. fnancial statements The Company provides Directors’ and Reported Scope 3 emissions relate Ofcers’ liability insurance. to business travel undertaken by all — information about the use of colleagues using rail and air travel fnancial instruments by the which has been booked through our Company and its subsidiaries is Going concern corporate travel agent. These results given in note 22 to the fnancial The Directors who served during the are summarised in the table below. statements. year have a reasonable expectation Currently we do not report on any that the Company and the Group other Scope 3 emissions. Directors have adequate resources to continue in operational existence for the GHG Emissions 2015–16 During 1 April 2015 – 31 March 2016, foreseeable future. It should be noted Scope CO2 (tonnes) the directors were as follows: that the British Business Bank is 100% — Ronald Emerson funded by the UK Government and the Scope 1 (Gas) 4 — Jonathan Britton Board assumes that this funding Scope 2 (Electricity) 106 arrangement will continue. Thus — Colin Glass they continue to adopt the going Scope 3 (Travel) 9 — Teresa Graham concern basis in preparing the Total 119 — Caroline Green fnancial statements. Further Total per average — Christina McComb details can be found in the principal number of employees 1.1 — Ceri Smith accounting policies notes in the fnancial statements.

British Business Bank — Annual Report and Accounts 2016 35 Directors’ report

Sustainability principles Auditors Directors’ biographies The British Business Bank is Each of the persons who are a Director committed to promoting sustainability. at the date of approval of this annual Concern for the environment and report confrms that: promoting a broader sustainability agenda are integral to our professional —so far as the Director is aware, activities and the management of the there is no relevant audit organisation. We aim to follow and to information of which the promote good sustainability practice, Company’s auditors are unaware to reduce the environmental impacts of all our activities and to help our —the Director has taken all the steps clients and partners to do the same. that he/she ought to have taken as a Director in order to make himself/ Ron Emerson herself aware of any relevant audit Non-executive Chair Modern Slavery Act 2015 information and to establish that The British Business Bank plc the Company’s auditors are aware Ron brings a broad range of business welcomes the new legislation, the of that information. skills and experience to the board. He spent his early career in international Modern Slavery Act 2015, to combat This information is given and should banking where he held a number of slavery and human trafcking. We are be interpreted in accordance with the senior management positions with obliged to produce a public statement provisions of s418 of the Companies Bank of America and Standard under this Act for the reporting year Act 2006. 2016 and we are identifying the Chartered Bank, where he was a steps necessary to ensure that there Approved by the Board of Directors, member of the group management is no modern slavery within our committee and Group Head of supply chain. Corporate Banking. Since 1996 he has divided his time between Non-executive Directorships, business Our shareholder advisory work and as an active member On 14 July 2016, following a machinery Keith Morgan of the Faculty of Management Studies of Government change it was Chief Executive Ofcer at Oxford University, where he was an announced that the British Business Associate Fellow. 20th July 2016 Bank’s shareholder, the Department As a non-executive he has served on a for Business, Innovation and Skills variety of boards ranging across, listed (BIS), is having its responsibilities (main board and AIM), private equity changed. Our shareholder is now the funded, large, high impact subsidiaries, Department for Business, Energy and private family owned, and regulated Industrial Strategy (BEIS). and unregulated sectors. He has also acted as a Senior Advisor at the Bank of England and the Financial Services Authority. Ron holds degrees from Manchester, Durham and Oxford universities.

36 British Business Bank — Annual Report and Accounts 2016 Directors’ report

Jonathan Britton Colin Glass Teresa Graham Independent Non-executive Independent Non-executive Independent Non-executive Director – Audit Committee Director Director and Interim Risk Chair Colin is a Chartered Accountant with Committee Chair Jonathan has extensive experience his own practice, Winburn Glass Teresa graduated from Newcastle in banking, spanning corporate, SME Norfolk (WGN). He is or has been a University. During her time working and investment banking businesses. Non-executive Director of several in a Big Four accounting practice, she Jonathan is currently a Non-executive companies, some of which are quoted was seconded to the UK Government’s Director and Chair of the Audit on AIM and which came out of the Enterprise and Deregulation Unit. In Committee of ICICI Bank UK Limited WGN portfolio. He has always been March 1988 she was appointed to the and a Non-executive Director for passionately interested in helping Government’s Deregulation Advisory Nomura European Holdings Limited, small businesses develop to their full Panel for a two year term and served whose Audit Committee he also chairs. potential. He was a Non-executive through two decades of administrations. Since 2006, he has also been a Director of Partnership Investment She was the frst female winner of Director of Sparks, a leading children’s Finance (PIF), a fund set up with the Young Accountant of the Year medical research charity, becoming funding from Europe and Barclays Award for 1988 in recognition of her Chairman in 2012. Most recently, he Bank, to support SMEs and social contribution to the small frms sector, was Divisional Finance Director and achievement in the areas of Yorkshire her profession and work with Head of Strategy for the Wholesale and The Humber. He acts as a mentor Government. Division at Lloyds Banking Group and to early stage SMEs with high-growth She was also the frst female prior to that, Global Controller and potential. Through his deep interest laureate of the Institute of Head of Treasury at Barclays Bank plc and experience in SMEs, he was Chartered Accountants. Teresa from 2006 to 2008. He previously awarded the Star in Practice Award in now works independently focusing held senior posts in UBS’s Investment 2006 from the West Yorkshire Society on her three passions – strategic Banking Business. Jonathan holds an of Chartered Accountants and also advice to ambitious, growing MA in Engineering Science from Keble was awarded Business Adviser of the businesses, liberating these College, Oxford and is a qualifed Year in 2007 and Non-executive businesses from the fetters of red chartered accountant. Director of the year in 2008 both by the Institute of Directors Yorkshire tape and running The Lexi Cinema and Humber. In January 2011 he was and The Nomad, both social awarded Non-executive Director enterprises in the cinema space of the Year in the Grant Thornton covenanting 100% of their profts to sponsored Quoted Company Awards a charity in South Africa. She holds a for his work with AIM-quoted SMEs. number of appointments, including non-executive, mentoring and In 2016 he was included in the advisory roles in growth businesses. Maserati 100, which was established She was awarded a CBE in 2007 and to recognise those who are helping to an OBE in 1997. support the next generation of young entrepreneurs in the country.

British Business Bank — Annual Report and Accounts 2016 37 Directors’ report

Caroline Green Christina McComb Ceri Smith Independent Non-executive Senior Independent Director Shareholder Representative Director Christina has held a number of senior Director Caroline is COO and CFO of ProLabs roles in public and private sector Ceri Smith is the Director at UK Limited, the global leader in the supply organisations and has a successful Government Investments for of compatible network infrastructure track record in private equity and overseeing the British Business Bank and connectivity products. She was Venture Capital investment. on behalf of its Shareholder, the formerly CFO and Head of Shared Supporting and advising growth Secretary of State for Business, Services for the security and risk businesses is at the heart of Christina’s Innovation and Skills. He was mitigation company PGI Limited. career. She is a former director of 3i plc responsible for the successful Caroline has experience of working and was a founding director in the delivery of the project that created in VC-backed businesses as well as Shareholder Executive. Christina the British Business Bank. having eight years in private equity, currently holds a number of non- He previously worked in HM Treasury, initially at 3i plc. She started her career executive Board positions; she is the Department for Business and the at Xerox Corp where she spent nine Chairman of Engage Mutual Assurance, Foreign Ofce. Responsibilities have years in a variety of roles including Senior Independent Director of included advising on business fnance, supply chain, manufacturing and Standard Life European Private Equity employment law, SME taxation and fnance. Previously Caroline spent fve Trust plc and a Non-executive Director developing the government’s years as a trustee of the MS Society of Baronsmead VCT2 plc and Nexeon Enterprise Capital Fund Programme. and currently sits on the board of Limited. Christina has a BA Hons from unseen (UK), the charity dedicated London School of Economics and an to eradication of human trafcking MBA from London Business School. and slavery.

38 British Business Bank — Annual Report and Accounts 2016 Directors’ report

Keith Morgan Christopher Fox Patrick Magee Chief Executive Ofcer Chief Financial Ofcer and Chief Operating Ofcer, Head of Central Services, Executive Director Keith led the planning and Executive Director Patrick joined the British Business establishment of the British Business Bank as Chief Operating Ofcer in Bank from January 2013, and was Christopher is Chief Financial Ofcer October 2014. He had previously appointed Chief Executive Ofcer in and is also responsible for central represented the Government’s December 2013. Prior to this, Keith functions including HR, IT and Admin. shareholder interests on its Board. was a Director and Head of Wholly- Prior to joining the British Business Before joining the Shareholder Owned Investments at UK Financial Bank, Christopher was Head of Executive in June 2012, Patrick was Investments, joining in 2009 to Banking at UK Financial Investments, a Managing Director of Corporate manage the UK Government’s where he was responsible for Finance at JP Morgan Cazenove, having shareholdings in Bradford & Bingley, overseeing HM Government’s worked at the predecessor frms for Northern Rock and Northern Rock shareholdings in Lloyds Banking almost 18 years. During his career Asset Management. Keith joined UKFI Group, Royal Bank of Scotland and Patrick has advised on a broad range from Banco Santander where he was UK Asset Resolution. He was also a of M&A, capital markets and corporate a Director of Sovereign Bancorp in Non-executive Director at UK Asset broking assignments for a range of the US, focusing on retail and SME Resolution, Bradford & Bingley and clients in the General Industrial, strategy and the integration of NRAM. Christopher joined UKFI from Energy/Utility, Support Services and Sovereign into Santander. He was UBS, where he gained extensive Financial Services areas. Patrick also previously Director of Strategy and experience of fnancial services over spent two years on secondment to the Planning at Abbey National and a nearly 20 years, having provided Panel for Takeovers and Mergers. member of the Executive Committee, capital markets and investment During his time at the Shareholder and also served as Chairman of banking advice to a range of Executive Patrick was involved in Santander’s Asset Management and governments and fnancial institutions assisting with the establishment of Credit Card businesses in the UK. around the world. He joined UBS in The Green Deal Finance Company, the Before joining Abbey in 2004, Keith 1993 and is a qualifed accountant. set-up and governance of the British spent 18 years at LEK Consulting, Business Bank as well as work on a where he was a partner specialising range of the companies in the in fnancial services. Shareholder Executive portfolio.

British Business Bank — Annual Report and Accounts 2016 39 Corporate governance statement

Corporate governance statement

The British Business Bank is committed to ensuring the best standards of corporate governance and is supported in this by the Board of Directors and Board Committees.

British Business Bank plc’s constitution Role and responsibility Our Non-executive Directors scrutinise consists of its Articles of Association of the Board of Directors the performance of management in and a Shareholder Relationship of the company meeting agreed goals and objectives. Framework Document which requires As part of their Remuneration that the British Business Bank plc British Business Bank plc is led by its Committee membership, they are operates, so far as is practicable, a Board of Directors which is collectively responsible for setting appropriate corporate governance framework responsible for the long-term success, levels of remuneration for executive that accords with best practice and and in consultation with BEIS, the directors and staf in consultation to comply with the provisions of the strategy of the British Business with our Shareholder. This is further UK Corporate Governance Code 2012 Bank plc. explained in the Directors’ (other than Section E Relations with Remuneration Report at page 51. As set out in the Shareholder Shareholders) or to specify and Relationship Framework Document, The Chairman is responsible for explain any non-compliance in its the Board requires no fewer than eight leading the Board and its discussions Annual Report. The 2012 Corporate Directors including six Non-executive and for encouraging open debate Governance Code is freely available Directors. Independent Non-executive and challenge. The Chief Executive is from the Financial Reporting Council. Directors are to constitute the the Accounting Ofcer and leads the The Corporate Governance Code acts as majority of the Board. Our Board and Executive in the day to day running of a guide to a range of key issues to ensure Committees have the appropriate the business and the implementation efective Board practice. The Code is balance of skills, experience and of strategy and is supported in this by split between a number of chapters independence to enable them the Senior Management Team (SMT). and the principles of leadership, to discharge their duties and The Senior Independent Director efectiveness and accountability are responsibilities efectively. is Christina McComb whose values that the Board considers to be Matters reserved for the Board include responsibilities are to work closely critical to the success of our business. approving the strategic direction of with the Chair, act as an intermediary Apart from as set out in this Annual the business, signifcant investments, for other Directors as and when Report, the Board is not aware of any terms of reference of all committees, necessary, and meet with other deviations from the relevant aspects of risk management and internal/ Non-executive Directors to review the Code in the period since 1 April 2015 external controls and appointments the Chair’s performance. insofar as it applies to the British to the Board and Committees. Business Bank plc.

40 British Business Bank — Annual Report and Accounts 2016 Corporate governance statement

Appointment and removal In April 2015, Maria Turner gave Board information of Directors notifcation of her intention to resign from the Board with efect from All Directors are provided with Appointments to the Board are made May 2015 and Teresa Graham was updates on corporate governance in accordance with the UK Corporate appointed by the Board as interim developments, legislative and Governance Code guidelines for Chair of the Risk Committee in place regulatory changes, and relevant Nomination Committees. In of Maria Turner. industry and technical information. accordance with the Bank’s The Board is supplied in a timely constitutional documents, the Chair In September 2015, Ridgeway manner with the appropriate and the Senior Independent Director Partners were appointed by the Board information to enable it to discharge were appointed in a process chaired in respect of the recruitment of a its duties, and any further back-up by a commissioner from the Ofce new Chair of the Risk Committee. papers and information are readily of the Commissioner for Public Pursuant to the process carried out available to all Directors on request Appointments. by Ridgeway, Neeta Atkar has been to the Company Secretary. In 2015 appointed as a Director with efect the Board decided to use electronic The Board comprises the following from 1 July 2016. She has taken delivery and format for board papers directors, who served throughout the over the role as the Chair of the Risk and information, to increase efciency, period 1 April 2015 – 31 March 2016 Committee and Teresa Graham has confdentiality and sustainability. except as noted: stepped down from her position as interim Chair of the Risk Committee. — Mr Ronald Emerson (Chairman) Executive committees In addition, as described in the — Mr Jonathan Britton British Business Bank plc has a Chairman’s statement on page 2 (Non-executive Director) number of Executive Committees Ron Emerson is not intending to namely Investment Committees for — Mr Colin Glass (Non-executive extend his term as Chairman of the each subsidiary and the Product Director) British Business Bank and plans to Development Committees. Each of step down from the role in October — Mrs Teresa Graham (Non-executive these consists of various members 2016. The process for appointment Director) of British Business Bank’s senior of a new Chairman will involve a management together with Board commissioner from the Ofce of Public — Mrs Caroline Green (Non-executive members when it is required for Appointments and will be managed Director) particular investment decisions. by the Shareholder. — Ms Christina McComb The Board, the Board Committees The names and biographical details of (Senior Independent Director) and the Executive Committees have our Directors can be found on pages been structured to provide a strong — Mr Ceri Smith (Shareholder 36 to 39. Representative Director) governance framework. Each committee has Terms of Reference — Mr Keith Morgan (Chief Executive Annual Director election which set out respective duties and Ofcer) responsibilities. All appointments to All Non-Executive Directors were the Board, the Board Committees and — Mr Christopher Fox appointed for a three year term at their the Executive Committees are based (Executive Director) original appointment and there was no on diversity of contribution, re-election which was required during — Mr Patrick Magee experience and required skills, the year ended 31 March 2016. (Executive Director) irrespective of gender.

— Ms Maria Turner (Non-executive Director until May 2015).

Biowise (trading as Wastewise) received fnance from Yorkshire Bank, a British Business Bank partner

British Business Bank — Annual Report and Accounts 2016 41 Corporate governance statement

Board committees During the fnancial year 2015–16, The signifcant issues considered the Audit Committee considered by the Committee, with input from The Board has a number of and approved the following matters: the External Auditor, during the committees all of which are governed year included methodologies and — the oversight of the British by the principles and remit set out in procedures for determining asset Business Bank’s fnancial the UK Corporate Governance Code valuations and provisions, the reporting process and the and whose terms of reference can be signifcant accounting policies, process for preparation of the found on the British Business Bank decisions and judgments, the consolidated accounts website. contents of the Annual Report and — reviewed the accounting policies Accounts of the Company and Audit Committee adopted to ensure the British resourcing plans for the fnance Business Bank as a whole team. The Committee also considered Under the Chairmanship of Jonathan complies with the applicable the Internal Audit Planning and the Britton, the Audit Committee also Accounting Standards and interaction with the External Auditor comprises further independent presents consolidated accounts of the Bank. Non-executive Directors, Teresa that are true and fair, reviewed Graham and Caroline Green. Maria The Committee will undertake methods used to account Turner was a member until her an evaluation to assess the for signifcant or unusual resignation in May 2015. efectiveness of both the internal transactions where diferent and external audit processes and The Chief Executive, Chief Financial approaches are possible approaches as part of its agenda Ofcer, Chief Risk Ofcer, General — assessed and approved the during 2016 to ensure they are both Counsel and Head of Internal Audit process for preparing the adequate and appropriate for the attend Committee meetings along consolidated accounts organisation. In assessing the with the external auditors who are efectiveness of the External Auditor, invited to attend and report at all — assessed the extent to which the Audit Committee will have regard meetings. The Committee also the British Business Bank has to the scope of the audit work meets privately with both internal complied with Shareholder planned and executed, standards of and external audit. fnancial reporting requirements, communication and reporting, quality the annual internal audit The Committee met fve times during of insights on the internal control programme and an evaluation to the year in May 2015, June 2015, environment and independence. assess the efectiveness of both September 2015, December 2015 the internal and external audit and March 2016) and attendance processes and approaches as part can be found on page 44. of its agenda during 2016–17 to Role ensure they are both adequate The Committee’s role is to review, and appropriate for the monitor and make recommendations organisation. to the Board relating to the going- As required by our Shareholder, the concern nature of the British Bank is audited by the Comptroller Business Bank, the integrity of and Auditor General. The National fnancial reporting, the fnancial Audit Ofce carries out the external statements and any issues and audit for and on behalf of the judgements they contain, the Comptroller and Auditor General. The adequacy and efectiveness of the external auditors have not conducted internal and external controls and any non-audit services during the overseeing the relationship with fnancial year and the Committee the British Business Bank’s external considers that the external auditor auditor. The Committee also has is both objective and independent. oversight of the Internal Audit and Audit Planning process of the British Business Bank.

42 British Business Bank — Annual Report and Accounts 2016 Corporate governance statement

Remuneration Committee Risk Committee Nomination Committee Under the Chairmanship of the Under the chairmanship of Teresa Under the Chairmanship of Ron Senior Independent Director, Graham in an interim capacity, the Emerson the Nomination Committee Christina McComb, the Remuneration Risk Committee also comprises also comprises Non-executive Committee also comprises the independent Non-executive Directors, Christina McComb and Chairman Ron Emerson, Teresa Directors, Christina McComb, Colin Ceri Smith. Graham and Ceri Smith. The Glass, Ceri Smith and Jonathan Role Committee met four times during Britton. The Committee met four the year in May 2015, July 2015, times during the year in May 2015, The Committee met during November, 2015 and March 2016. July 2015, October 2015 and February November 2015 and attendance 2016 and attendance can be found details can be found on page 44. Role on page 44. At the Committee meeting, The Committee’s role is to set the nominations of potential Directors remuneration policy for all executive Role were considered and recommended directors, the Chairman and all The Committee’s role is to advise to the Board. other senior management, including the Board on the key risks to the During the fnancial year 2015–16, pension rights and any compensation Bank in the pursuit of its objectives, the Nomination Committee payments, and to set the terms of the appropriateness of the Bank’s considered and approved the the Long and Short-Term Incentive risk management framework and to succession planning for Executive Plans and any incentive schemes undertake a full review of the Bank’s Directors and the SMT, appointment British Business Bank plc and its appetite for risk as defned in the of further Non-Executive Directors to subsidiaries may operate. Bank’s risk appetite statement and the Board and the board evaluation according to the Bank’s business During the fnancial year 2015–16, process. It also followed the Bank’s plan. It reviews the risk management the Remuneration Committee policy on diversity and equality. As framework, benchmarked against considered and approved the highlighted in the corporate fnancial services companies in the structure of all compensation statement the Bank used the private sector. payments to directors and all other services of Ridgeway Partners senior management, the setting-up During the fnancial year 2015–16, to appoint Non-executive Directors. of the Long-Term Incentive Plan of the Risk Committee considered and The Bank has no other connection the Company and reviewed market approved the Bank’s strategic risk with Ridgeway Partners. benchmarks for remuneration and register, looked into conduct and the performance evaluation of senior reputational risks associated with management. individual delivery partners as well as credit performance across a whole Further information on the role the range of programmes, reviewed and remuneration committee performed approved policies on Financial Crime, during the year is contained in the Information Risk Management and Directors Remuneration Report on Business Continuity and assessed the page 51. wider macro-economic environment for risks specifc to the Bank and the fulflment of its objectives.

Solo Building Supplies received fnance from SWIG Finance, a British Business Bank partner

British Business Bank — Annual Report and Accounts 2016 43 Corporate governance statement

Board and committee attendance This table sets out the attendance of Directors since 1 April 2015 who attended each Board and Committee:

Date of appointment Board Audit Risk Remuneration Nomination Total number of meetings 9 5 4 4 1

Chair Ron Emerson 29 October 2013 9/9 – – 4/4 1/1

Non-executive Directors Jonathan Britton 28 April 2014 9/9 5/5 4/4 – – Colin Glass 24 June 2014 9/9 – 4/4 – – Teresa Graham 24 June 2014 8/9 5/5 4/4 4/4 – Caroline Green 24 June 2014 9/9 4/5 – – – Christina McComb 29 October 2013 9/9 – 4/4 4/4 1/1 Ceri Smith 29 October 2013 9/9 – 4/4 4/4 1/1

Executive Directors Keith Morgan 10 December 2013 9/9 Christopher Fox 13 January 2015 9/9 Patrick Magee 10 March 2015 9/9

Board performance The Board is committed to ensure to the Bank, or of any material change the diversity of its membership. in existing or potential conficts that The British Business Bank is All appointments to the Board are may have been authorised by the committed to ensuring that the Board based on merit and on the experience Board. The Board is of the belief that and its Committees operate efectively and skills required, with due regard outside interests can be benefcial for and are continually improving. During to the benefts of diversity. both the Executive and Company and the year the Chairman conducted an has authorised the outside interest of internal Board evaluation to monitor Conficts of interest the Chief Executive Ofcer in his role their efective operation. All Directors as a Non-executive Director at UK and the Company Secretary Each Director has a duty under the Asset Resolution. participated in the annual review to Companies Act 2006 to avoid a ensure a rigorous and full evaluation situation where they have, or can The Bank has not make any political of the operation of the Board and have, a direct or indirect interest that donations or incurred any political its Committees. This process was conficts, or possibly may confict with expenditure during the fnancial year. composed of questionnaires that the Company’s interests. As part of our asked for the Directors’ views on a Conficts of Interest Policy, the Bank number of matters including Board has adopted a formal procedure for efectiveness and process, disclosure, review and authorisation Committees interaction and roles, of Directors’ confict of interest, which efectiveness of the chairman and requires written disclosure of any governance function and Board actual or potential conficts of interest composition. The outcome of the for all Directors and staf. The exercise showed no areas of concern procedure requires Directors to notify and the feedback received will be formally the Chair or the Company reviewed by the Board and Chairman Secretary as soon as they become as part of our commitment to maintain aware of any actual or potential ongoing improvement. conficts of interest with their duties

44 British Business Bank — Annual Report and Accounts 2016 Risk management report

Risk management and internal control

Our Risk Management Framework is a collection of tools, processes and methodologies that support the British Business Bank in identifying, assessing, monitoring and controlling the risks it faces.

The Board has overall accountability The Risk Management Framework: A yearly external review of the and responsibility for the management Risk Management Framework — demonstrates a clear link to the of risk within the British Business is undertaken to assess the overall strategy and business plan Bank. The British Business Bank is not efectiveness of risk management of the British Business Bank a FCA/PRA regulated entity, though a within the British Business Bank. subsidiary representing approximately — is owned by the Chief Risk Ofcer This review, carried out by third party 1% of the portfolio, Capital for (CRO) and approved by the British advisers, was last completed in July Enterprise Fund Management, is Business Bank Board. Any changes 2015. It benchmarked the target regulated by the FCA for controlling to the Risk Management operating model of the risk function but not holding client money. We have Framework are recommended by and outlined the key development policies and procedures in place to the Board Risk Committee to the actions for the function in 2015–16. ensure compliance with applicable Board for approval The fndings of this review were laws and regulations and we aspire to presented to the Board Risk follow best practice where appropriate — outlines the risk management Committee and the Board. The next and applicable. vision and objectives, and the review of the Risk Management approach for evolving the risk Framework will take place in the A discussion of how the Bank handles management capability of the third quarter of 2016. its risks in relation to fnancial British Business Bank instruments is set out in note 22 Key elements of our Risk Management of the fnancial statements. — is reviewed on an annual basis and, Framework include Risk Appetite and if required, more frequently to Risk Governance. The Risk Management Framework refect any signifcant material describes the overall strategy changes to the business, economic towards the acceptance, avoidance, or regulatory outlook. management and control of risks, as well as the development of risk capabilities aligned to the business goals and objectives.

British Business Bank — Annual Report and Accounts 2016 45 Risk management report

Risk appetite The Board undertook a review of the British Business Bank’s Risk Appetite Risk appetite is the level of risk Statement in March 2016. the Board of the British Business Bank is willing to accept in order to This statement summarise the deliver its public policy objectives. Board’s appetite for the principal risks that the British Business Bank The British Business Bank’s Risk is exposed to. It is tied to the risk Appetite Policy acts as the link categorisations detailed in the Risk between overall business strategy, Management Framework which the risk strategy and the Risk outlines seven broad categories Management Framework by bringing of Level 1 Risks. The Risk Appetite strategic context to identifed risks, Statement can be found on page 47. adopting clear escalation criteria, and informing the processes for the The British Business Bank also identifcation, assessment, control undertook an exercise to quantify the and monitoring of risk exposures. potential downside risks of a severe downturn against our Business Plan. The Risk Appetite Policy allows the This assessed the likely impact on Board to articulate the appetite for our portfolio assuming a 1 in 20 year risks that are specifc to their concerns, scenario across the various such as risks to the reputation of the programmes, and the outcomes were British Business Bank. considered by both the Board Risk Committee and the Board.

46 British Business Bank — Annual Report and Accounts 2016 Risk management report

Risk appetite statement

Level 1 risk Risk appetite Defnition Credit and investment risk Medium–High The risk of direct or indirect losses in on and of-balance sheet positions as a result of the failure of a borrower or counterparty to meet its obligations in accordance with agreed terms, or loss of value in equity investments. Market risk Low–Medium The risk of direct or indirect losses that arise from fuctuations in values of, or income from, assets or in movements in interest or exchange rates or credit spreads. Operational risk Low–Medium The risk of direct losses resulting from inadequate or failed internal processes, people and systems or indirect losses resulting from relationships with third parties or from external events. Information and data risk Low Information risk encompasses all the challenges that result from the our need to control and protect our information. Compliance and conduct risk Low–Medium Risk of breaching UK or EU regulations, internal policies or conduct standards, which exposes us to regulatory fnes and penalties, fnancial losses and reputational risk. Strategic and business risk Low–Medium The risks arising from a suboptimal business strategy or business model that may lead to fnancial loss, inappropriate management of public money, reputational damage or failure to meet internal and/or public policy objectives. Reputational risk Low–Medium The risk that the frm will act in a way which falls short of stakeholder expectations.

Risk governance — second line of defence is The British Business Bank encourages responsible for designing risk a strong culture of risk awareness The British Business Bank Risk and policies and methodologies, and transparency which is supported Compliance function is based upon monitoring performance and through regular intranet updates a ‘three lines of defence’ model as compliance, identifying and and in-house training. outlined in our Risk Management reporting risks and providing Framework, where the: independent and appropriate — frst line of defence is responsible challenge to the frst line for the day to day identifcation, of defence reporting and management of — third line of defence provides their own risks independent assurance of the overall system of internal control including assessment of the risk governance framework.

British Business Bank — Annual Report and Accounts 2016 47 Risk management report

Policies form an integral part of The key principles of this model, managing risk within British Business as demonstrated by the diagram Bank. They outline how we intend to below, are: function, taking account of regulatory — The Board has overall or legal requirements and industry accountability and responsibility best practice. Policies are approved for the management of risk within by the appropriate committees and the British Business Bank. communicated to staf. We have in place an enterprise wide set of — The Board delegates specifc policies, frameworks and procedures risk management roles and covering the major parts of our responsibilities to the Board Risk business. Colleagues are also subject Committee, the Audit Committee to the British Business Bank Code and CEO and the CRO. of Conduct and annual compliance declarations. — The CEO is supported in delivery of these responsibilities through direct reports from the senior team.

— The CRO is a member of the senior team and is also supported by the Risk and Compliance function in the delivery of their responsibilities.

Three lines of defence model

First line of defence Second line of defence Third line of defence

Day to day management and Risk policies, methodologies and Independent assurance risk control independent oversight and challenge

The Board

Chief Board Risk Audit Executive Committee Committee

Senior Investment Chief Head of Team Committees Risk Ofcer Internal Audit

Risk and Business Control Internal Compliance Functions Functions Audit Function

48 British Business Bank — Annual Report and Accounts 2016 Risk management report

Principal risks and uncertainties

Risk Defnition Categories Example mitigants Compliance and Risk of breaching — Risk that British Business Bank’s — The British Business Bank is not conduct risk UK or EU regulated entity breaches regulated except for its subsidiary regulations, regulatory requirements. Capital for Enterprise Fund Managers. internal policies or — Breach of applicable laws. — New products and programmes are conduct standards, — Risk that British Business Bank assessed against the UK and EU which exposes the enters into regulated activities regulatory environments. British Business within its programmes, without — All new investments are subject Bank to regulatory being regulated. to Know Your Customer and anti- fnes and penalties, — British Business Bank employees money laundering reviews. fnancial losses and breach compliance standards. — British Business Bank has a reputational risk. Compliance Risk Management Framework and a suite of Compliance related policies. — Employees are subject to a Code of Conduct and annual Compliance Declaration. Credit and The risk of direct — Risk of end borrower default, — Delivery partner selection process investment risk or indirect losses in for example as a result of includes robust due diligence, on and of-balance poor trading, or defects in assessment of underwriting and sheet positions as a the delivery process. sanctioning processes, and thereafter result of the failure — Whilst the majority of individual is subject to portfolio monitoring and of a borrower or exposures to end borrowers are regular review. counterparty to small, exposures to mid-cap — The credit quality of exposures is meet its obligations companies are typically larger. monitored closely. in accordance with — Delivery partner default or closure. — The British Business Bank aims agreed terms, or — Venture Capital is subject to to continue to invest throughout the loss of value in vintage risk with the year the economic cycle, therefore minimising equity investments. investment was made the largest the vintage risk. single risk driver. — The portfolio is monitored closely — Concentration within one industry for concentration risk. or location creates a portfolio that is subject to greater risk than a more evenly balanced one. Information Information risk — Breach of legal requirements — Information Security and Information and data risk encompasses all relating to safe-keeping and Assurance policies are in place the challenges disclosure of information. to manage information risk. that result from the — Risk of business sensitive — The Data Protection Policy ensures our need to control information being leaked or that the British Business Bank and protect our accidentally made available complies with the Data Protection Act. information. in public domain. — The British Business Bank realises — Threats of cyber-attacks that the threats of cyber-attacks and steal sensitive data relating to is developing a robust incident the British Business Bank or response plan. its delivery partners as well as disrupt the British Business Bank’s functionality.

British Business Bank — Annual Report and Accounts 2016 49 Risk management report

Principal risks and uncertainties

Risk Defnition Categories Example mitigants Market risk The risk of direct — The British Business Bank makes — The British Business Bank has minor or indirect losses material losses due to foreign foreign exchange exposure, less than that arise from exchange movements through 4% of its portfolio, and does not hedge fuctuations in its investments. these exposures. This is in line with values of, or income — The British Business Bank government policy. from, assets or investments are subject to — British Business Bank conducts in movements interest rate fuctuations. scenario testing of exposures sensitive in interest or to interest rate market valuation exchange rates movements. or credit spreads. — We require some delivery partners to manage market risk directly within the terms of the investment. Operational risk The risk of direct — Errors in execution, delivery, — Risk and Control Assessments with losses resulting and processing. functional teams are held to assess from inadequate — Failure of internal controls. risks and associated internal controls. or failed internal — External or internal frauds. — Operational Incidents management processes, people — Damage to physical assets, utilities process in place. and systems or disruption or systems failure. — Close liaison with BEIS counter fraud indirect losses network and regular interaction with resulting from key business partners. relationships with third parties or from external events. Reputational The risk that — The British Business Bank — A Reputational Risk Policy is in place. risk the frm will act operates a business model which — The British Business Bank undertakes in a way which is subject to Delivery Partner extensive due diligence on new falls short of conduct and performance. delivery partners and monitors stakeholder existing delivery partners. expectations. — Service Level Agreements are in place with Delivery Partners. — The British Business Bank has a Complaints Policy in place. Strategic and The risks arising — Risk that the British Business — A clearly defned set of objectives business risk from a suboptimal Bank’s current and planned and a robust governance model are business strategy products may not be ft for in place. or business model purpose. — New products are subject to market that may lead — Risk that the British Business Bank assessment and a new product to fnancial loss, does not meet its deployment or approval process. inappropriate commitment targets. — Regular review of the Strategic management — The British Business Bank is not Risk Register by the senior team of public money, efective in meeting its objectives. and Board members. reputational — Risk that the British Business Bank — Regular review of market conditions, damage or failure is impacted by the implementation impact on SMEs and ongoing to meet internal of the result of the EU communication with stakeholders. and/or public Referendum. policy objectives.

50 British Business Bank — Annual Report and Accounts 2016 Directors’ remuneration report

Chair’s foreword Directors’ remuneration report

On behalf of the Board, I am pleased to present the Remuneration Report for the British Business Bank for the year ended 31 March 2016. Those sections of the report that have been audited by the National Audit Ofce have been identifed as such.

The Committee’s primary role is During the fnancial year 2015–16, The Remuneration Committee has to provide robust, independent its frst full year of operation, the continued to take an interest in governance for executive remuneration, Bank made signifcant progress, as broader market trends and carried out to ensure that reward for the Bank’s outlined in the Chairman’s statement. benchmarking of salaries and other executive team: The Committee has also played an reward mechanisms in 2015. In the important role in monitoring and context of the Bank’s policy remit, — supports the Bank’s long term reviewing a remuneration framework the Committee recognises that business strategy and values that refects the particular remuneration policy will need to be — enables the Bank to recruit, circumstances of the Bank as a public reviewed from time to time to ensure motivate and retain talented owned company operating in a that it is meeting the requirements of individuals with appropriate skills commercial environment. Accordingly, our shareholder and is ft for purpose. and experience the Committee has continued with an Where appropriate, the Committee incentive scheme that is designed to will seek relevant external advice and — links executive reward to the reward senior employees based on guidance. Looking ahead to 2016–17, Bank’s performance against its the long-term sustainable success of the Committee will be reviewing the long term business plan. the Bank. Key decisions made by the business targets for the next period This report is divided into two parts: Committee and recommended to the and setting stretching business and Board during the year were: personal targets for the executive, 1. Policy on Executive Directors’ and in particular in the context of any new — agreeing the annual pay review senior management remuneration. policy initiatives which the Bank has for 2016 been asked to undertake. 2. Annual report on remuneration – this section outlines how the — reviewing the long term incentive policy has been applied and plan (LTIP) appropriate to the includes details of remuneration particular circumstances of for the senior team. the Bank

— measuring corporate and individual Christina McComb performance targets for 2015–16 Chair of the Remuneration Committee and the frst cycle LTIP

— reviewing the overall remuneration policy and strategy for the Bank.

British Business Bank — Annual Report and Accounts 2016 51 Directors’ remuneration report

Remuneration policy report

Policy overview How the views of the The Bank has not consulted its employees on this policy, although it The Remuneration Committee shareholder have been taken into account has considered the reward philosophy determines, on behalf of the Board, for employees in general. The focus the Bank’s policy on the remuneration The shareholder-appointed Non- for employees is on rewarding of the Chairman, Executive Directors executive Director is a member of the performance over the longer term and other members of the senior team. Remuneration Committee. In addition, and to have reward packages which The Committee’s terms of reference specifc approval has been obtained attract high-calibre candidates, are available on the Bank’s website. from the shareholder for Executive while delivering value for money. Director remuneration and individual Table 1 summarises the key elements While not covered by the FCA/PRA objectives and for the LTIP terms. Remuneration Code for banks, of the Bank’s remuneration policy for Executive Directors and the senior the British Business Bank has The remuneration policy sought where appropriate to meet team, taking into account the factors these governance requirements, for directors and the above. The Executive Directors’ service in addition to The Large and senior team contracts are available for inspection at the Bank’s registered ofce. Medium-sized Companies and In setting remuneration policy for Groups Regulations 2013. the senior team, the Remuneration Under the remuneration policy, the The Committee will continue to Committee has taken into account total remuneration for each Executive review the remuneration strategy and the following key factors: Director depends on their own and the Bank’s performance. approach in order to ensure that the — the need to attract and retain a Bank adopts leading practice with high-calibre senior team to deliver respect to its remuneration policy and the Bank’s strategy in alignment can respond to the business priorities. with the interests of the shareholder

— the requirement to reward long-term performance and incentivise the right behaviours

— the efcient use of taxpayer resources and the requirement to deliver good value for money for the Exchequer as a whole.

52 British Business Bank — Annual Report and Accounts 2016 Directors’ remuneration report

Table 1: Remuneration policy

Element Operation, opportunity and performance framework Base salary Objective Base salaries are reviewed annually taking into account the nature of the role To attract and retain high-calibre and responsibilities. Roles are benchmarked against relevant comparator senior leaders organisations in the public and private sectors. The Remuneration Committee also takes into account the external environment and views of the shareholder. Long Term Incentive Plan (LTIP) Objective Executive Directors and certain members of the senior team are eligible to To reward performance over the participate in the Long Term Incentive Plan (LTIP). longer term The LTIP operates as a series of three year cycles. Objectives are set at the beginning of each cycle and progress is reviewed by the Committee on an annual basis. Objectives are set in two categories: corporate and personal. The weighting between these categories may be varied over time, at the discretion of the Committee, taking into account the requirements of the business and any relevant external factors. The weighting for the 2015–16 LTIP is 60% to corporate targets and 40% to personal targets. Corporate targets cover rolling three year periods and will generally be in line with the Bank’s business plan objectives. The current targets for the most recent LTIP and the threshold levels are set out in Annual Report on Remuneration. Personal targets are designed to take into account the specifc responsibilities of individual senior leaders in the Bank. The current incentive is a maximum cash award of 50% of base salary. In the case of Executive Directors, awards are paid at the end of the relevant three year cycle; in the case of the frst cycle LTIP, in August 2017. In the case of other members of the LTIP, any awards in respect of personal objectives may be paid after two years. There is no annual bonus award for Executive Directors and the senior team. Although the Company is not governed by the Financial Conduct Authority or Prudential Regulation Authority, the Committee has determined that the regulatory best practice should be adopted with regard to Recovery and Withholding Provisions and such provisions shall apply for a period of seven years from the start of the performance period. Recovery and Withholding shall apply in a range of adverse circumstances, at the Committee’s discretion, including fnancial accounts mis-statement, signifcant failure of risk management, regulatory censure or breach of policy and procedures. As a general rule, if a participant ceases employment within the Company’s Group before an award is paid, then the award opportunity shall normally be forfeited and lapse in full, although there are exceptions for participants categorised as ‘good leavers’. The Remuneration Committee has ultimate discretion over the levels and payment of any awards, taking into account factors it considers relevant including the overall performance of the Bank.

British Business Bank — Annual Report and Accounts 2016 53 Directors’ remuneration report

Table 1 continued: Remuneration policy

Element Operation, opportunity and performance framework Pension and other benefts Objective The Bank contributes up to 15% of base salary to its defned contribution To provide an attractive and scheme or an approved personal pension scheme, subject to a minimum cost-efective package employee contribution of 3%. The CEO receives a cash-in-lieu allowance of 10%. Current benefts provided are private medical insurance (commencing in September 2016), illness income protection and life assurance. These are subject to review on an annual basis. Loss of ofce payments Objective There are no defned terms for loss of ofce within service contracts. In line with To provide fair but not excessive policy, Executive Directors and the senior team are on six months’ notice either contract features side. Provision may be made for payment in lieu of notice, where this is deemed to be in the interest of the business. Any situation will be considered by the Committee on its merits. Should an individual be considered a ‘good leaver’ under the LTIP rules, an appropriate portion of their LTIPs may, at the discretion of the Remuneration Committee, be retained. All termination payments are subject to Cabinet Ofce Guidelines. New Executive Director remuneration Objective Remuneration for any new appointments will be set in accordance with the To attract and retain high-calibre policy set out in this table. The same approach will be taken with respect to senior leaders any internal appointments. We do not ofer any signing-on payments or other compensation for loss of deferred compensation from previous employment.

54 British Business Bank — Annual Report and Accounts 2016 Directors’ remuneration report

Table 2: Scenarios chart: Ranges for Executive Director remuneration

The following chart shows how £000 executives’ remuneration could vary according to performance and assumes 500 that the Directors are employed by 31% 400 25% the Bank for a whole fnancial year. The variable pay element is measured 300 100% 75% 69% 33% 33% 25% over a three year period and is paid out 27% after the end of the third year, subject 200 100% 75% 67% to continued employment. 100% 73% 67% 100

0 Minimum Target Maximum Minimum Target Maximum Minimum Target Maximum Keith Morgan Christopher Fox Patrick Magee

Fixed pay Variable pay

Notes 1. Minimum = fxed pay only (salary and current cost of benefts and pension) 2. Target = fxed pay and 75% vesting of the LTIP 3. Maximum = fxed pay and 100% vesting of the LTIP

External appointments Non-executive Directors The Board reviews the amount of each component of the fees on a periodic Executive Directors may be invited to The Chairman and the Non-executive basis to assess whether they remain become Non-executive Directors in Directors do not have service competitive and appropriate in light other companies. These appointments agreements with the Bank. Non- of changes in roles, responsibilities can enhance their knowledge and executive Directors are appointed or time commitment of the Non- experience to the beneft of the Bank. under letters of appointment which executive Directors. In accordance It is the Bank’s policy that Board provide for an initial term of service with common practice Non-executive approval is required before any of three years. The appointment of Directors are reimbursed expenses external appointment may be a Non-executive Director can be incurred in performing their role. accepted by an Executive Director. terminated, by either party, giving The Executive Director is permitted to written notice. There is no provision Table 3 sets out the key elements retain any fees paid for such services. for compensation for loss of ofce. of the Bank’s remuneration policy for During the year, Keith Morgan served The dates of the current letters of the Chair and other Non-executive as a Non-executive Director at UK appointment of the Non-executive Directors. Asset Resolution Ltd and received Directors are shown in the Annual Additional fees are paid to the Senior a fee of £65,000. Report on Remuneration. Further Independent Director and Chairs of details on nomination and the Audit, Risk and Remuneration appointment of Non-executive Committees, in recognition of the Directors is set out in the corporate additional time spent in respect of Governance Statement. their Committee activities. This is The terms and conditions of in line with UK practice generally. appointment of the Non-executive Any increases in fees are subject Directors are available for inspection to shareholder approval. at the Bank’s registered ofce.

The fee levels paid to Non-executive Directors refect the time commitment and responsibilities, having regard to best UK practice.

British Business Bank — Annual Report and Accounts 2016 55 Directors’ remuneration report

Table 3: Remuneration policy for Non-executive Directors

Element Operation, opportunity and performance framework Basic fee – Chair Remuneration is in the form of an The Chair fee will be reviewed from time to time by the Board. annual cash fee, in line with practice in the UK Basic fee – Non-executive Directors Remuneration is in the form of an Non-executive Director remuneration is reviewed annually by the Chair and annual cash fee, in line with practice the Executive Directors. Any recommendations are subject to Board approval, in the UK with Non-executive Directors not voting on their own remuneration.

Bank wide remuneration Short Term Incentive Plan Annual bonus and incentive plans (STIP) Employees not eligible for the Long The Bank aims to apply its Senior employees who are not eligible or Short Term Incentive Plans may remuneration policy in a consistent for the Long Term Incentive Plan are participate in the annual bonus way for all staf. eligible to participate in the STIP. scheme which has a maximum The purpose of this plan is to reward award of 20% of base salary. Staf receive pension contributions, senior managers for their performance life assurance, illness income over the year as assessed against both protection and, private health their personal objectives (currently insurance (commencing in September 40% of award) and the Bank’s 2016) as well as their basic salary. objectives (currently 60% of award). The Bank has three mutually exclusive The maximum annual award is 30% of incentive plans, all of which are base salary. 50% of any award is paid designed to reward performance and after the relevant year end, with 25% achievement of the Bank’s objectives. deferred for one year and a further These plans are payable wholly in 25% deferred for two years. cash, refecting the fact that the The STIP rules incorporate withholding Bank has a single shareholder and recovery provisions in line with (the Secretary of State for Business, good practice and such provisions Innovation and Skills) and does not apply for a period of seven years from issue shares to staf. the start of the performance period.

56 British Business Bank — Annual Report and Accounts 2016 Directors’ remuneration report

Annual report on remuneration

This part of the report has been Although the Bank is not subject prepared in accordance with Part 3 to the variable pay cap introduced of Schedule 8 of The Large and under the European Union Capital Medium-sized Companies and Groups Requirements Directive, it does (Accounts and Reports) Amendment comply with the cap. Regulations 2013. Disclosures are also made in accordance with the Companies Act 2006. The Bank has complied with the regulations where it believes it is appropriate to do so.

Table 4: Executive Director remuneration (audited)

Year ended March 2016 Year ended March 2015 Pension Pension payments payments Taxable Annual Long-term (incl cash (incl cash Salary benefts incentive incentives supplements) Total Salary supplements) Total Keith Morgan1 299 0 0 0 30 329 125 12 137 Christopher Fox2 210 0 0 0 0 210 49 0 49 Patrick Magee3 210 0 0 0 21 231 13 1 14 Total 719 0 0 0 51 770 187 13 200

As the Bank commenced operations on 1 November 2014, prior year comparatives for the remuneration of Executive Directors and the senior team are for a fve month period.

Notes 1. The Company has not made pension contributions for Keith Morgan but has instead paid a cash alternative to him. The amount shown for 2015–16 was paid in the year and the amount shown for 2014–15 was accrued in that year but not paid until 2015–16. 2. Christopher Fox joined the British Business Bank as Chief Financial Ofcer on 8 January 2015. The amounts shown for the 2014–15 year are the amounts payable in respect of service from this date to 31 March 2015. 3. Patrick Magee became an Executive Director of the Bank on 10 March 2015. The amounts shown for the 2014–15 year are the amounts payable in respect of service from this date to 31 March 2015. 4. The Executive Directors receive death in service and illness income protection benefts which are non-taxable. 5. No Executive Director received taxable benefts, annual incentive payments or long term incentive payments in either 2015–16 or 2014–15. 6. The Remuneration Committee has reviewed preliminary performance of individuals for 2015–16 and has made provisional assessments ranging from 75–90% for the senior team. (2014–15: 75–95%) Subject to continued performance, these awards are payable when the relevant LTIP vests. 7. Taxable benefts, annual incentive and long-term benefts were £0 in 2014–15.

British Business Bank — Annual Report and Accounts 2016 57 Directors’ remuneration report

Non-executive Directors are not Relative importance Changes in CEO/colleague remunerated in the same way as the of spend on pay pay and median comparison Executive Directors and therefore have not been included in this table. No dividends have been paid from The median salary of British Business However they do receive British Business Bank meaning that Bank employees for 2015–16 was compensation in the form of a fee the comparison of total remuneration £63,000 (2014–15: £58,000). This as detailed in Table 8. to dividends does not provide useful compares to the CEO’s annual base information. As a result, we have set salary of £299,000. No employee earns With respect to 2014–15 the amounts out below the percentage of revenue more than the highest paid Director. above are in respect of service on the represented by total remuneration The CEO did not receive a salary Board for the period 1 November 2014 compared to 2014–15 to illustrate the increase during the 2015–16 (the date the Bank commenced relative importance of spend on pay. operations) to 31 March 2015. performance year. No general pay increase was awarded to colleagues Total Total in the 2015–16 performance year revenue remuneration although some British Business Bank (£k) (£k) % colleagues did receive a salary increase 2015–16 51,077 12,192 24% in 2015–16 linked to moving to British 1 2014–15 17,679 5,993 34% Business Bank terms and conditions.

1. Represents a fve month period.

Table 5: Senior team remuneration (audited)

Year ended March 2016 Year ended March 2015 Personal performance element of LTIP (accrued in Pension Pension 2014–15 payments payments Taxable Annual payable in (incl cash (incl cash Salary benefts incentive August 16) supplements) Total Salary supplements) Total Shanika Amarasekara5 200 0 0 27 31 231 73 14 87 Mark Gray6 200 0 0 30 30 230 83 14 97 Total 400 0 0 57 61 461 156 28 184

Notes 1. The individuals above receive death in service and illness income protection benefts which are non-taxable. 2. Salaries quoted are gross salaries pre salary sacrifce but colleagues pay individual pension contributions via a salary sacrifce arrangement 3. The Remuneration Committee has reviewed preliminary performance of individuals for 2015–16 and has made provisional personal awards of 75% for the senior team. (2014–15: 75%) Subject to continued performance, these personal awards are payable in August 2016. 4. For 2014–15 the amounts above are in respect of service as a member of the senior team for the period 1 November 2014 (the date of the inception of the Bank) to 31 March 2015. Members of the senior team have received no signing on payments, no leaving payments and no annual bonus payments. 5. Shanika Amarasekara, General Counsel and Company Secretary. 6. Mark Gray, Chief Risk Ofcer. 7. Taxable benefts, annual incentive and long-term benefts were £0 in 2014–15.

As the Bank commenced operations on 1 November 2014, prior year comparatives for the remuneration of Executive Directors and the senior team are for a fve month period.

58 British Business Bank — Annual Report and Accounts 2016 Directors’ remuneration report

Table 6: 2015–16 Long-term incentive plan (LTIP) The senior team are invited to participate in a long term incentive plan. The following individuals have elected to join the plan and have been granted interests during the 2015–16 year worth up to a maximum of 50% of salary. Any pay-out is subject to a number of conditions, including performance conditions.

Year ended March 2016 Percentage of corporate Face value Face value Face value award for End of of award of personal of corporate Face value reaching corporate Type of (% of award award of award threshold performance interest salary) (£) (£) (£) targets1 period Keith Morgan Cash LTIP 50% £59,800 £89,700 £149,500 50% 31-Mar-18 Christopher Fox Cash LTIP 50% £42,000 £63,000 £105,000 50% 31-Mar-18 Patrick Magee Cash LTIP 50% £42,000 £63,000 £105,000 50% 31-Mar-18 Shanika Amarasekara Cash LTIP 50% £40,000 £60,000 £100,000 50% 31-Mar-18 Mark Gray Cash LTIP 50% £40,000 £60,000 £100,000 50% 31-Mar-18

Notes 1. Personal performance targets are not included in this calculation as they are not subject to threshold conditions.

Performance assessment None of the senior team receives an annual performance award or bonus. The LTIP is a three year plan and the frst LTIP corporate awards will be assessed at the end of the three year period ending in March 2017. 40% of the both the frst and second cycle LTIP awards are subject to personal performance. The Committee has reviewed the performance of individuals for 2015–16 and has made provisional assessments ranging from 75% to 90%, which will be taken into account when assessing outcomes for the relevant LTIP awards. Table 7 on page 60 sets out the corporate three year performance targets, which have no specifc weightings, for the second LTIP cycle.

British Business Bank — Annual Report and Accounts 2016 59 Directors’ remuneration report

Table 7: Group targets for the second cycle (March 2018) LTIP

Objective March 2018 target Lower threshold Stretch Challenge Increase stock of fnance facilitated through British Business Bank programmes £8.8bn £10.8bn £11.4bn – Of which SME £5.0bn £6.3bn £6.7bn More diverse fnance market (measured by fnance facilitated through non-Big Four lenders) 81% 86% 91% Better provision of information (measured though average awareness of six alternative fnance options from British Business Bank customer research) 49% 51% 53% Manage taxpayers’ resources efciently through earning an appropriate return on equity 1.6% 2.0% 2.2% Expected vesting of Group award based on judgement Up to 50% Up to 75% Up to 100% of Committee for threshold performance. 0% if no targets are achieved

Table 8: Non-executive Director remuneration (audited)

Total fees Total fees 2015–16 2014–15 £000 £000 Ron Emerson (Chairman) 120 120 Christina McComb (senior independent director) 45 46 Maria Turner 3 30 Jonathan Britton 30 30 Teresa Graham1, 2 30 20 Caroline Green2 25 20 Colin Glass2 25 20 Ceri Smith nil nil

Notes 1. Teresa Graham was appointed chair of the risk committee in May 2015 and receives an additional £5k as a result. 2. Teresa Graham, Caroline Green and Colin Glass were appointed on 24 June 2014, so their 20/15 comparatives do not represent a full year.

60 British Business Bank — Annual Report and Accounts 2016 Directors’ remuneration report

The amount paid to Christina McComb External advisers in 2014–15 was higher than her entitlement because there was During the year, the Remuneration an underpayment to her in the Committee did not use advisers for previous year. the provision of remuneration advice, although it did review benchmarking The base fee for Non-executive data provided by Aon McLagan. Directors is £25,000 and individuals receive an allowance of £5,000 for Implementation of the chairing a committee. There are no additional fees payable for individual Remuneration Policy for committee membership. 2016–17 For 2016–17, the Remuneration Pension entitlements Committee will continue to implement the policy on a similar basis to 2015–16. The Bank does not ofer a defned The British Business Bank will seek beneft pension scheme for new staf. approval from the Shareholder for any However, staf that transferred into changes to the policy. the Bank from BEIS are able to continue to participate in BEIS’s defned beneft scheme. No Executive Approval of the Directors’ Directors have participated in a Remuneration Report defned beneft scheme in 2015–16 This Directors’ Remuneration Report, and only one British Business Bank including both the Policy and Annual colleague who transferred from BEIS Remuneration Report, has been continues to participate in the BEIS approved by the Board of Directors. defned beneft scheme. Signed on behalf of the Board Keith Morgan receives a cash allowance of Directors. of 10% of base salary in lieu of pension contribution. Yours sincerely

Board of Directors Terms of Ofce The dates of appointment and terms Christina McComb of ofce of Non-Executive and Chair of the Remuneration Committee Executive Directors are provided in the Corporate Governance Statement on page 40.

Membership of the Remuneration Committee The details of membership of the Remuneration Committee and attendance are included in the Corporate Governance Statement on page 40.

British Business Bank — Annual Report and Accounts 2016 61 Directors’ responsibilities

Directors’ responsibilities

The Directors are responsible for —make an assessment of the —The strategic report includes a fair preparing the Annual Report and the Company’s ability to continue review of the development and fnancial statements in accordance as a going concern. performance of the business and with applicable law and regulations. the position of the Company and The Directors are responsible for the undertakings included in the Company law requires the Directors keeping adequate accounting records consolidation taken as a whole, to prepare such fnancial statements that are sufcient to show and explain together with a description of the for each fnancial year. Under that law the Company’s transactions and principal risks and uncertainties the Directors are required to prepare disclose, with reasonable accuracy at that they face. the Group fnancial statements in any time, the fnancial position of the accordance with International Company and enable them to ensure —The annual report and fnancial Financial Reporting Standards (IFRSs) that the fnancial statements comply statements, taken as a whole, are as adopted by the European Union with the Companies Act 2006. They fair, balanced and understandable and Article 4 of the IAS Regulation are also responsible for safeguarding and provide the information and have also chosen to prepare the the assets of the Company and hence necessary for shareholders to parent Company fnancial statements for taking reasonable steps for the assess the Company’s position under IFRSs as adopted by the prevention and detection of fraud and performance, business model European Union. Under Company law and other irregularities. and strategy. the Directors must not approve the The Directors are responsible for the By order of the Board fnancial statements unless they are maintenance and integrity of the satisfed that they give a true and fair corporate and fnancial information view of the state of afairs of the included on the Company’s website. Company and of the proft or loss of the Legislation in the United Kingdom Company for that period. In preparing governing the preparation and these fnancial statements, dissemination of fnancial statements Keith Morgan International Accounting Standard 1 may difer from legislation in other Chief Executive Ofcer requires that Directors: jurisdictions. 20th July 2016 —properly select and apply We confrm that to the best of our accounting policies knowledge: —present information, including —The fnancial statements, prepared accounting policies, in a manner in accordance with International that provides relevant, reliable, Financial Reporting Standards as comparable and understandable Christopher Fox adopted by the EU, give a true and information Chief Financial Ofcer fair view of the assets, liabilities, —provide additional disclosures fnancial position and proft or loss 20th July 2016 when compliance with the of the Company and the specifc requirements in IFRSs undertakings included in the are insufcient to enable users consolidation taken as a whole. to understand the impact of particular transactions, other events and conditions on the entity’s fnancial position and fnancial performance

62 British Business Bank — Annual Report and Accounts 2016 Independent auditor’s report to the shareholders of British Business Bank plc

Independent auditor’s report to the shareholders of British Business Bank plc

Opinion on fnancial Basis of opinions Overview of my audit statements I have audited the fnancial approach In my opinion the fnancial statements: statements of British Business Bank Risks signifcant to my audit plc for the year ended 31 March 2016 In arriving at my opinion on the — give a true and fair view of the which comprise: state of Group’s and the parent fnancial statements, I assessed the company’s afairs as at 31 March — the Consolidated Statement of risks of material misstatement in the 2016 and of the group’s loss for the Comprehensive Net Income, the fnancial statements. Those risks that year then ended; Consolidated Statement of had the greatest efect on the audit Financial Position, the strategy, the allocation of resources in — have been properly prepared in Consolidated Statement of the audit, and the direction of the accordance with International Changes in Equity and the eforts of the engagement team are Financial Reporting Standards as Consolidated Cash Flow Statement; outlined in the table below. adopted by the European Union; and — the notes to the consolidated I have also set out how my audit fnancial statements; addressed these specifc areas in order — have been prepared in accordance to support the opinion on the fnancial with the Companies Act 2006. — the Company Statement of statements as a whole and any Financial Position, the Company comments I make on the results of Statement of Changes in Equity my procedures should be read in and the Company Cash Flow this context. Statement; and The areas of focus were discussed — the notes to the company fnancial with the Audit Committee; their report statements on matters that they considered to be The fnancial reporting framework signifcant to the fnancial statements that as been applied in their is set out on page 42. preparation is applicable law and International Financial Reporting Standards as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006. I have also audited the information in the Directors’ Remuneration Report that is described as having been audited.

British Business Bank — Annual Report and Accounts 2016 63 Independent auditor’s report to the shareholders of British Business Bank plc

Risk My response Management override of controls My audit focussed on testing those balances and transactions which would be Under International Standards on Auditing mostly likely to be afected if controls were to be overridden, including journals, there is a presumed risk of management accounting estimates and signifcant or unusual transactions. The most override of controls in all organisations. We signifcant estimates in the accounts relate to the valuation of investments, are required to assess the risk of material and in respect of these I have performed the following procedures: misstatement arising from management — I have undertaken a detailed review of a sample of new investments and override, in particular in relation to considered whether management’s judgements on appropriate signifcant or unusual transactions, bias accounting treatments are consistent with the relevant accounting in accounting estimates and journals. standards and the underlying substance and form of legal agreements;

— where management relies on valuations provided by fund managers to estimate the value of its investments, I have performed detailed procedures to enable me to gain assurance from the work of the fund managers. I considered the overall competence, capability and objectivity of the fund managers, as well as the scope of their work and its relevance to the accounts and my opinion;

— where management uses models to estimate the value of its investments, I considered the design of the valuation models, the validity of the data inputs to those models, and the appropriateness of the key assumptions on which the models were based. I sought confrmation that management had reassessed the assumptions made in the prior year which underpin the valuation models to confrm that they remain appropriate at year end; and

— I have assessed the accuracy and completeness of the review for potential impairments that management has performed in relation to its investments.

The results of my audit procedures enabled me to conclude that there is no material misstatement of the accounts arising from management override of controls. Accounts preparation We reviewed the dry run BBB performed using the accounts model during This was the group’s second full set of the year to confrm that the fnance team were confdent using the model. accounts and there has been a signifcant We maintained regular liaison with the Audit Committee, Chief Finance level of change within the fnance team Ofcer, and fnance team throughout the year with a focus on whether during the year. I identifed a risk that the appropriate stafng and review processes were in place to enable the level of change could result in corporate production of a robust set of draft 2015-16 fnancial statements. I have memory being lost regarding the working made recommendations to management where I have identifed areas of the accounts preparation model; the where processes could be strengthened. accounts production process; and the accounting treatment of investments and Where my audit identifed the need for adjustments these have been made the related provision,. This gave rise to a by management, other than unadjusted non-trivial diferences of £290k consequential risk that the accounts may which I do not consider to be material. The results of my audit procedures not be properly prepared and signifcant enabled me to conclude that there is no material misstatement in the items may not be accounted for correctly, fnancial statements. leading to material misstatement within the accounts.

64 British Business Bank — Annual Report and Accounts 2016 Independent auditor’s report to the shareholders of British Business Bank plc

Application of materiality As well as quantitative materiality Scope of my audit I applied the concept of materiality in there are certain matters that, by An audit involves obtaining evidence both planning and performing my their very nature, would if not about the amounts and disclosures in audit, and in evaluating the efect of corrected infuence the decisions the fnancial statements sufcient to misstatements on my audit and on the of users, for example, any errors give reasonable assurance that the fnancial statements. This approach reported in Directors’ Remuneration. fnancial statements are free from recognises that fnancial statements Assessment of such matters would material misstatement, whether are rarely absolutely correct, and that need to have regard to the nature of caused by fraud or error. This includes an audit is designed to provide the misstatement and the applicable an assessment of: reasonable, rather than absolute, legal and reporting framework, as well — whether the accounting policies assurance that the fnancial as the size of the misstatement. are appropriate to the group and statements are free from material I agreed with the Audit Committee parent company’s circumstances misstatement or irregularity. A matter that I would report to it all uncorrected and have been consistently applied is material if its omission or misstatements identifed through my and adequately disclosed; misstatement would, in the judgement audit in excess of £378k for the of the auditor, reasonably infuence Consolidated Statement of Financial — the reasonableness of signifcant the decisions of users of the fnancial Position and £20k for the Consolidated accounting estimates made by the statements. Statement of Comprehensive Net directors; and Based on my professional judgement, I Income, as well as diferences below — the overall presentation of the determined materiality for the group’s this threshold that in my view fnancial statements. fnancial statements at £18.9m for the warranted reporting on qualitative Statement of Financial Position, which grounds. In addition I read all the information is approximately 2% of total group and non-fnancial information in the Total unadjusted audit diferences Annual Report to identify material assets. BBB develops and manages reported to the Audit Committee fnance programmes designed to inconsistencies with the audited would have decreased net assets fnancial statements and to identify enhance the working of fnance by £290k. markets which it delivers through any information that is apparently investments in partner organisations: materially incorrect based on, or I therefore chose assets as the materially inconsistent with, the benchmark because I consider it to be knowledge acquired by me in the the principal consideration for users in course of performing the audit. assessing the fnancial performance If I become aware of any apparent of the Group. material misstatements or inconsistencies I consider the I have determined that for implications for my report. transactions within the Consolidated Income Statement, misstatements of a lesser amount than overall materiality could infuence the decisions of users of the accounts given the disproportionate size of the Consolidated Statement of Financial Position and the Consolidated Income Statement . I have therefore determined that the level to be applied to these transactions is £1.02m on the basis that this represents approximately 2% of current year income.

British Business Bank — Annual Report and Accounts 2016 65 Independent auditor’s report to the shareholders of British Business Bank plc

Group audit approach Other matters on which Matters on which I report by My group audit scope focussed on I report under the exception those balances assessed as being of Companies Act the greatest signifcance to the group Adequacy of accounting records fnancial statements and their users. I Directors’ remuneration information and explanations received considered how the subsidiaries In my opinion, the part of the part should be aggregated to form the of the Remuneration Report to be I report to you if, in my opinion: components of my group audit audited has been properly prepared in — adequate accounting records have approach in line with International accordance with the Companies Act. not been kept, or returns adequate Standards of Auditing. I gave particular I also report to you if, in my opinion, for my audit have not been consideration to the size and risk certain disclosures of directors’ received from branches not visited characteristics of the consolidated remuneration required have not been by my staf; entities; how they are managed; and made. I have nothing to report arising the audit exemptions taken by the — the fnancial statements and the from this duty. British Business Bank plc. British part of the Remuneration report to Business Bank Investments Ltd, which The strategic and directors’ reports be audited are not in agreement is the largest subsidiary and holds with the accounting records and In my opinion, based on the work £709m of the group’s £812m net returns; or undertaken in the course of the audit, assets at 31 March 2016, is subject to the information given in the strategic — I have not received all of the separate governance processes and and directors’ reports for the fnancial information and explanations I has its own ledger; I have therefore year are consistent with the fnancial require for my audit.. treated this as a single component. statements and have been prepared in The parent company and remaining accordance with applicable law. I have nothing to report arising from subsidiaries are subject to common this duty. governance processes and share a Based on my knowledge and ledger and so I have aggregated these understanding of the Group to form a single component for the and Parent company and their purposes of my audit. Both environments obtained during the components are signifcant to the course of the audit, I have identifed group in terms of value and risk. I have no material misstatements in taken assurance from work performed these reports. by the auditors of the British Business The corporate governance Bank Investments Ltd and have statement performed additional procedures to obtain assurance over the fnancial In my opinion, based on the work information of the parent and other undertaken in the course of the audit, subsidiaries. the information given in the corporate governance statement in respect of internal control and risk management systems in relation to fnancial reporting processes, and about share capital structures, is consistent with the accounts and has been prepared in accordance with applicable law.

Based on my knowledge and understanding of the Group and Parent and their environment obtained during the course of the audit, I have identifed no material misstatements in this information.

66 British Business Bank — Annual Report and Accounts 2016 Independent auditor’s report to the shareholders of British Business Bank plc

Consistency of information in the The directors’ assessment of Respective responsibilities Annual Report principal risks and future prospects of the directors and the Under International Standards on Under International Standards on auditor Auditing (UK & Ireland), I am required Auditing (UK & Ireland), I am required to report to you if, in my opinion, to report to you if I have anything As explained more fully in the information in the annual report is: material to add, or to draw attention Statement of Directors’ to, in relation to the directors’ Responsibilities, the directors are — materially inconsistent with the disclosures in the annual report and responsible for the preparation of information in the audited fnancial fnancial statements: the Group fnancial statements and statements; or for being satisfed that they give a — confrming that they have — apparently materially incorrect true and fair view. My responsibility carried out a robust assessment based on, or materially inconsistent is to audit and express an opinion on of principal risks facing the Group with, the knowledge of the Group the fnancial statements in accordance including those that would and Parent company that I acquired with applicable law and with threaten its business model, future in the course of performing my International Standards on Auditing performance, solvency or liquidity; audit; or (UK & Ireland). Those standards — describing those risks and require me and my staf to comply — otherwise misleading. explaining how they are being with the Auditing Practices Board’s Ethical Standards for Auditors. In particular, I am required to consider: managed or mitigated;

— whether I have identifed any — on whether they considered it inconsistencies between the appropriate to adopt the going Hilary Lower knowledge that I acquired during concern basis, and their Senior Statutory Auditor the audit and the directors’ identifcation of any material statement that they consider uncertainties to the entity’s ability 20th July 2016 to continue over a period of at the annual report is fair, balanced For and on behalf of the Comptroller least twelve months from the and understandable; and and Auditor General (Statutory date of approval of the fnancial Auditor) — whether the annual report statements; and appropriately discloses those National Audit Ofce — explaining how they have assessed matters that I communicated to 157–197 Buckingham Palace Road the prospects of the entity, over the Audit and Committee which London SW1W 9SP I consider should have been what period they have done so disclosed. and why they consider that period to be appropriate, and their I have nothing to report arising from statement as to whether they have this duty. a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifcations or assumptions.

I have nothing material to add, or to draw attention to, on these matters.

British Business Bank — Annual Report and Accounts 2016 67 Consolidated fnancial statements

Consolidated statement of comprehensive net income for the year ended 31 March 2016

2016 2015 Note £000 £000 INCOME Interest income 4.1 39,459 12,033 Management fee 4.2 11,377 5,331 Other income 4.3 241 315

Gross operating income 51,077 17,679 Net gains (losses) on investment assets 6 457 (1,670) Net operating income 51,534 16,009

EXPENDITURE Staf costs 7.1 (12,192) (5,993) Other operating expenditure 7.2 (7,243) (3,396) Depreciations and amortisation 7.3 (304) (132) Operating expenditure (19,739) (9,521) Net operating proft/(loss) 31,795 6,488

ECF fair value adjustments 9 Impairment of ECF investment assets 13.3 (32,643) (2,262) Fair value gain on derivatives 13.5 6,638 3,601 Unwind of ECF fair value impairment 13.3 13,083 4,270 EFC fair value provision 17 (36,591) (26,055) Net ECF Fair value adjustments (49,513) (20,446) Proceeds of warranty claim 5 2,900 – Proft/(loss) before tax (14,818) (13,958) Tax expense 8.1 (8,518) (3,160) Proft/(loss) for the period (23,336) (17,118)

Other comprehensive income for the period net of tax Net gain on investments recognised in reserves 12,273 5,735 Deferred tax relating to ECF investments 8.1 1,804 (4,766) Total comprehensive income/(loss) for the period (9,259) (16,149)

All operations are continuing.

The net gain on investments recognised in reserves included within other comprehensive income will be reclassifed to proft and loss in subsequent periods if the gain on investments is realised.

Comparative fgures: the Bank commenced trading on 1 November 2014. As a result, fgures for the year ending 31 March 2015 refect fve months of operating activity.

68 British Business Bank — Annual Report and Accounts 2016 Consolidated fnancial statements

Consolidated statement of fnancial position as at 31 March 2016

2016 2015 Note £000 £000 ASSETS Non-current assets Loans and receivables 13.1 72,887 18,461 Held to maturity investments 13.2 31,090 – Available-for-sale fnancial assets 13.3 729,735 622,930 Assets designated at fair value through proft or loss 13.4 15,029 5,313 Derivative fnancial instruments 13.5 18,911 12,273 Property, plant and equipment 10 361 568 Intangible assets 11 119 200 Investment in associates 12 – 14 Total non-current assets 868,132 659,759

Current assets Trade and other receivables 14 18,101 5,062 Cash and cash equivalents 15 58,382 71,048 Total current assets 76,483 76,110 Total assets 944,615 735,869

LIABILITIES Current liabilities Trade and other payables 16 (15,787) (6,565) Corporation tax 8.2 (5,710) (4,402) Provisions 17 (26,373) (19,866) Total current liabilities (47,870) (30,833) Total assets less current liabilities 896,745 705,036

Non-current liabilities Trade and other payables 16 (88) (426) Deferred tax 8.3 (2,796) (4,774) Provisions 17 (81,839) (51,755) Total liabilities (132,593) (87,788) Net assets/(liabilities) 812,022 648,081

Equity Issued share capital 20 837,526 664,326 Financial instruments reserve 15,046 969 Retained earnings (40,550) (17,214) Total equity 812,022 648,081

The fnancial statements of the group (parent company number 08616013) were approved by the Board of Directors and authorised for issue on 20th July 2016. They were signed on its behalf by:

Keith Morgan Chief Executive Ofcer

British Business Bank — Annual Report and Accounts 2016 69 Consolidated fnancial statements

Consolidated statement of changes in equity as at 31 March 2016

Financial instrument Issued capital reserve Retained earnings Total Notes £000 £000 £000 £000 Opening balance as at 1 April 2014 50 – (96) (46) Net income after tax – – (17,118) (17,118) Other comprehensive income, net of tax – 969 – 969 Total comprehensive income – 969 (17,118) (16,149) Issue of ordinary shares 20 664,276 – – 664,276

Balance at 31 March 2015 664,326 969 (17,214) 648,081

Opening balance as at 1 April 2015 664,326 969 (17,214) 648,081 Net income after tax – – (23,336) (23,336) Other comprehensive income, net of tax 14,077 14,077 Total comprehensive income - 14,077 (23,336) (9,259) Issue of ordinary shares 20 173,200 – – 173,200

Balance at 31 March 2016 837,526 15,046 (40,550) 812,022

70 British Business Bank — Annual Report and Accounts 2016 Consolidated fnancial statements

Consolidated cash fow statement As at 31 March 2016

2016 2015 Note £000 £000 Loss before tax (14,818) (13,958)

Cash fows from operating activities Adjustments for: Unrealised net (gains) losses on investment assets 6 (457) 1,670 Depreciation and amortisation 7.3 304 132 Movement in accrued interest (39,459) (12,033) Impairment of ECF investment assets 13.3 32,643 2,262 Unrealised fair value gain on derivatives 13.5 (6,638) (3,601) Unwind of ECF fair value impairment 13.3 (13,083) (4,270) ECF provision expense 17 36,591 26,055 Payment of corporation tax 8 (7,384) – Movement in trade and other receivables 14 (13,039) (5,012) Movement in trade and other payables 16 8,884 6,895 Loss on disposal of intangible assets 11 14 0 Net cash received used for operating activities (16,442) (1,860)

Cash fows from investing activities Net fnancial assets acquired on 31 October 20141 – (475,529) Purchase of loan and receivable assets 13.1 (25,329) (15,052) Loan and receivable assets transferred 13.1 (36,437) – Repayment of loan and receivable assets 13.1 10,263 171 Purchase of held to maturity assets 13.2 (30,000) – Purchase of available-for-sale assets 13.3 (186,499) (154,828) Repayment of available-for-sale assets 13.3 107,982 56,062 Purchase of assets designated at fair value through proft or loss 13.4 (9,791) (3,065) Repayment of assets designated at fair value through proft or loss 13.4 409 563 Cash received from derivative fnancial instruments 13.5 – 1,210 Proceeds of disposal of investment in associate 12 8 – Purchases of property, plant and equipment 10 (21) (660) Purchase of intangible assets 11 (9) (240) Net cash used in investing activities (169,424) (591,368)

Cash fows from fnancing activities Issue of new shares 20 173,200 664,276 Net cash from fnancing activities 173,200 664,276 Net (decrease)/increase in cash and cash equivalents (12,666) 71,048 Cash and cash equivalents at beginning of year 71,048 – Cash and cash equivalents at end of year 58,382 71,048

1 The purchase of fnancial assets on 31 October 2014 was funded by the issue of new shares and these two transactions were settled on a net basis.

British Business Bank — Annual Report and Accounts 2016 71 Notes to the consolidated fnancial statements

Notes to the consolidated fnancial statements For the year ended 31 March 2016

1. General information These fnancial statements are Total comprehensive income of the presented in pounds sterling because subsidiaries is also attributed in full The British Business Bank plc (the that is the currency of the primary to the owners of the Company in the “Company” or “Group”) is incorporated economic environment in which the absence of non-controlling interests. in the United Kingdom under the Group operates. Companies Act. The address of the Where necessary, adjustments are made to the fnancial statements of registered ofce is given on page 109. Basis of consolidation The nature of the British Business subsidiaries to bring the accounting Bank Group’s operations and its The consolidated fnancial statements policies used into line with the Group’s principal activities are set out in the incorporate the fnancial statements accounting policies. strategic report on pages 6 to 34. of the Company and entities controlled All intragroup assets and liabilities, by the Company (its subsidiaries) equity, income, expenses and cash 2. Signifcant made up to 31 March 2016. Control is fows relating to transitions between accounting policies achieved when the Company: the members of the Group are — has the power over the investee; eliminated on consolidation. Basis of accounting — is exposed, or has rights, Going concern The fnancial statements have been to variable return from its prepared in accordance with involvement with the investee; and The Directors have, at the time of approving the fnancial statements, a International Financial Reporting — has the ability to use its power reasonable expectation that the Standards (IFRSs) as adopted by the to afects its returns. European Union (IFRSs as adopted by Company and the Group have the EU), IFRIC Interpretations and The Company reassesses whether or adequate resources to continue in those parts of the Companies Act not it controls an investee if facts and operational existence for the 2006 applicable to companies circumstances indicate that there are foreseeable future. In arriving at that reporting under IFRS. The fnancial changes to one or more of the three view they have assumed that in the statements are prepared in accordance elements of control listed above. event of a downturn the shareholder with IFRS and Interpretations in force will continue to support the Group in Consolidation of a subsidiary begins at the reporting date. delivering its policy objectives in when the Company obtains control relation to smaller businesses. Thus The fnancial statements have been over the subsidiary and ceases when they continue to adopt the going prepared on the historical cost basis, the Company loses control of the concern basis of accounting in except for the revaluation of certain subsidiary. Specifcally, the results of preparing the fnancial statements. fnancial instruments and non- subsidiaries acquired or disposed of during the year are included in the fnancial assets that are measured at Adoption of new and revalued amounts or fair values at the consolidated income statement from end of each reporting period, as the date the Company gains control revised Standards explained in the accounting policies until the date when the Company The following new and revised below. Historical cost is generally ceases to control the subsidiary. Standards and Interpretations have based on the fair value of the Proft or loss and each component been adopted in the current year. consideration given in exchange for of other comprehensive income are Their adoption has not had any goods and services. The principal attributed in full to the owners of signifcant impact on the amounts accounting policies adopted are set the Company in the absence of reported in these fnancial statements. out below. non-controlling interests.

72 British Business Bank — Annual Report and Accounts 2016 Notes to the consolidated fnancial statements

— IAS 19 (amendments): Defned — IFRS 10 and IAS 28 (amendments) Revenue recognition Beneft Plans: Employee Sale or Contribution of Assets Contributions. The amendments between an Investor and its Revenue is measured at the fair value apply to contributions from Associate or Joint Venture; of the consideration received or employees or third parties to receivable and represents amounts — IFRS 11 (amendments) Accounting defned beneft plans. receivable for goods and services for Acquisitions of Interests in Joint The objective of the amendments provided in the normal course of Operations; is to simplify the accounting for business, net of discounts, Value Added Tax (VAT) and other sales- contributions that are independent — IFRS 14 Regulatory Deferral Accounts; of the number of years of related taxes. Revenue is reduced for employee service, for example, — IFRS 15 Revenue from Contracts estimated rebates and other similar employee contributions that are with Customers; allowances. calculated according to a fxed — IFRS 16 Leases; percentage of salary. Dividend and interest — Annual Improvements to IFRSs income The British Business Bank 2012 – 2014 Cycle; contributes to a State-managed Dividend income from investments is retirement beneft scheme which is — IAS 1 (amendments) Presentation recognised when the shareholders’ dealt with as a payment to a of Financial Statements; rights to receive payment have been defned contribution scheme — IAS 7 (amendments) Statement of established (provided that it is where the Group’s obligations Cash Flows; probable that the economic benefts under the scheme are equivalent will fow to the Group and the amount to those arising in a defned — IAS 12 (amendments) Recognition of revenue can be measured reliably). contribution retirement beneft of Deferred Tax Assets for scheme. It is not the principal Unrealised Losses; Interest income is recognised when it employer in any defned beneft is probable that the economic benefts — IAS 16 and IAS 38 (amendments) scheme and therefore, the above will fow to the Group and the amount Clarifcation of Acceptable Methods changes will not have any impact. of revenue can be measured reliably. of Depreciation and Amortisation; Interest income is accrued on a time — Annual Improvements to IFRSs — IAS 16 and IAS 41 (amendments) basis, by reference to the principal 2010 – 2012 Cycle and 2011-2013 Bearer Plants; outstanding and at the efective Cycle. As part of its annual interest rate applicable, which is the improvements cycles the — IAS 27 (amendments) Equity rate that exactly discounts estimated International Accounting Standards Method in Separate Financial future cash receipts through the Board amended various standards Statements. expected life of the fnancial asset to primarily with a view to removing that asset’s net carrying amount on The Directors do not expect that the inconsistencies and clarifying initial recognition. wording. The adoption of these adoption of the Standards and Interpretations listed above will have a amendments did not have any Taxation material impact on the Group. material impact on the fnancial statements of the Group in future The tax expense represents the sum At the date of authorisation of these periods, except that IFRS 9 will impact of the tax currently payable and fnancial statements, the following both the measurement and deferred tax. Standards and Interpretations which disclosures of fnancial instruments. have not been applied in these Beyond the information above, it is not The tax currently payable is based on fnancial statements, were in issue practicable to provide a reasonable taxable proft for the year. Taxable but not yet efective (and in some estimate of the efect of IFRS 9 until a proft difers from net proft as cases had not yet been adopted by detailed review has been completed. reported in the income statement the EU): because it excludes items of income or expense that are taxable or deductible — IFRS 9 Financial Instruments; in other years and it further excludes — IFRS 10, IFRS 12 and IAS 28 items that are never taxable or (amendments) Investment Entities: deductible. The Group’s liability for Applying the Consolidation current tax is calculated using tax Exception; rates that have been enacted or substantively enacted by the balance sheet date.

British Business Bank — Annual Report and Accounts 2016 73 Notes to the consolidated fnancial statements

Deferred tax is the tax expected to be Property, plant and Intangible assets acquired payable or recoverable on diferences equipment separately between the carrying amounts of assets and liabilities in the fnancial Property, plant and equipment are Intangible assets including IT statements and the corresponding tax carried at fair value or depreciated programs and software licences, with bases used in the computation of historical cost which is used as a proxy fnite useful lives that are acquired taxable proft, and is accounted for for fair value. separately, are carried at cost less using the balance sheet liability accumulated amortisation and Furniture and equipment and method. Deferred tax liabilities are accumulated impairment losses. leasehold improvement are stated at generally recognised for all taxable Amortisation is recognised on a cost less accumulated depreciation temporary diferences and deferred straight-line basis over their estimated and any recognised impairment loss. tax assets are recognised to the useful lives on the following bases: extent that it is probable that taxable The Group capitalises property, plant profts will be available against which and equipment purchased for a net IT programs deductible temporary diferences can value of £3,000 or more and which 3 – 10 years be utilised. have a useful economic life in excess Software licences of one year. Current and deferred tax are Period of licence recognised in proft or loss, except Depreciation is recognised so as to when they relate to items that are write of the cost or valuation of The estimated useful life and recognised in other comprehensive assets (other than freehold land and amortisation method are reviewed at income or directly in equity, in which properties under construction) less the end of each reporting period, with case, the current and deferred tax are their residual values over their useful the efect of any changes in estimate also recognised in other lives, using the straight-line method, being accounted for on a prospective comprehensive income or directly in on the following bases: basis. Intangible assets with indefnite equity respectively. Where current tax useful lives that are acquired or deferred tax arises from the initial Fixtures and equipment separately are carried at cost less accounting for a business 2 – 5 years accumulated impairment losses. combination, the tax efect is included Leasehold improvement An intangible asset is derecognised on in the accounting for the business Shorter of estimated remaining useful disposal, or when no future economic combination. life or outstanding lease term benefts are expected from use or VAT is accounted for in the accounts, disposal. Gains or losses arising from IT equipment in that amounts are shown net of VAT de-recognition of an intangible asset, 3 – 5 years except: measured as the diference between the net disposal proceeds and the The estimated useful lives, residual — Irrecoverable VAT is charged to the carrying amount of the asset, are values and depreciation method are Consolidated Statement of recognised in proft or loss when the reviewed at the end of each reporting Comprehensive Net Income, and asset is derecognised. included under the relevant period, with the efect of any changes expenditure heading. in estimate accounted for on a prospective basis. Impairment of property, — Irrecoverable VAT on the purchase plant and equipment and of an asset is included in additions. An item of property, plant and intangible assets equipment is derecognised upon The net amount due to, or from, HM disposal or when no future economic At each balance sheet date, the Group Revenue and Customs in respect of benefts are expected to arise from reviews the carrying amounts of its VAT is included within payables and the continued use of the asset. The assets to determine whether there is receivables on the consolidated gain or loss arising on the disposal or any indication that those assets have statement of fnancial position. scrappage of an asset is determined as sufered an impairment loss. If any the diference between the sales such indication exists, the recoverable proceeds and the carrying amount of amount of the asset is estimated to the asset and is recognised in income. determine the extent of the impairment loss (if any). Where the asset does not generate cash fows that are independent from other assets, the Group estimates the

74 British Business Bank — Annual Report and Accounts 2016 Notes to the consolidated fnancial statements

recoverable amount of the cash- fnancial liabilities at fair value through have been designated as at FVTPL. generating unit to which the asset proft or loss are recognised There are no held for trading fnancial belongs. immediately in proft or loss. assets.

Recoverable amount is the higher of The fair value of fnancial instruments Financial assets at FVTPL are stated at fair value less costs to sell and value is determined by reference to quoted fair value, with any gains or losses in use. market prices where an active market arising on re-measurement recognised exists for the trade of these in proft or loss. The net gain or loss If the recoverable amount of an asset instruments. The fair value of fnancial recognised in proft or loss is estimated to be less than its instruments which are not traded in an incorporates any dividend or interest carrying amount, the carrying amount active market is determined using earned on the fnancial asset. of the asset is reduced to its generally accepted valuation recoverable amount. An impairment Held-to-maturity investments techniques, including estimated loss is recognised immediately in proft discounted cash fows. These are non-derivative fnancial or loss, unless the relevant asset is assets with fxed or determinable carried at a revalued amount, in which Financial assets payments and fxed maturity that the case the impairment loss is treated as Financial assets are classifed into the Group has the positive intent and a revaluation decrease. following specifed categories: ability to hold to maturity. Held-to- Where an impairment loss fnancial assets ‘at fair value through maturity investments are measured at subsequently reverses, the carrying proft or loss’ (FVTPL), ‘held-to- amortised cost using the efective amount of the asset is increased to maturity’ investments, ‘available-for- interest method less any impairment, the revised estimate of its recoverable sale’ (AFS) fnancial assets and ‘loans with revenue recognised on an amount, but so that the increased and receivables’. The classifcation efective yield basis. depends on the nature and purpose of carrying amount does not exceed the Available for sale (AFS) the fnancial assets and is determined carrying amount that would have been fnancial assets determined had no impairment loss at the time of initial recognition. AFS fnancial assets are non- been recognised for the asset in prior Efective interest method derivatives that are either designated years. A reversal of an impairment loss The efective interest method is a as AFS or are not classifed as (a) loans is recognised immediately in proft or method of calculating the amortised and receivables, (b) held-to-maturity loss, unless the relevant asset is cost of a debt instrument and of investments or (c) fnancial assets at carried at a revalued amount, in which allocating interest income over the fair value through proft or loss. case the reversal of the impairment relevant period. The efective interest loss is treated as a revaluation The Group has investments in Limited rate is the rate that exactly discounts increase. Partnerships and venture capital estimated future cash receipts investments which are classifed as (including all fees paid or received that being AFS. Fair value is determined in Financial instruments form an integral part of the efective the manner described in note 22. interest rate, transaction costs and Financial assets and fnancial liabilities Gains and losses arising from changes other premiums or discounts) through are recognised in the Group’s balance in fair value are recognised in other the expected life of the debt sheet when the Group becomes a comprehensive income and instrument, or, where appropriate, a party to the contractual provisions of accumulated in the fnancial shorter period, to the net carrying the instrument. instrument reserve with the exception amount on initial recognition. of impairment losses, interest Financial assets and fnancial liabilities Income is recognised on an efective calculated using the efective interest are initially measured at fair value. interest basis for debt instruments method and foreign exchange gains Transaction costs that are directly other than those fnancial assets and losses on monetary assets, which attributable to the acquisition or issue classifed as at FVTPL. are recognised directly in proft or loss. of fnancial assets and fnancial Where the investment is disposed of liabilities (other than fnancial assets Financial assets at fair value or is determined to be impaired, the and fnancial liabilities at fair value through proft or loss (FVTPL) cumulative gain or loss previously through proft or loss) are added to or Financial assets are classifed as at recognised in the fnancial instrument deducted from the fair value of the FVTPL when the fnancial asset is a reserve is reclassifed to proft or loss. fnancial assets or fnancial liabilities, derivative fnancial instrument, held where material, on initial recognition. for trading or it is designated as at Transaction costs directly attributable FVTPL. The VC Catalyst investments to the acquisition of fnancial assets or

British Business Bank — Annual Report and Accounts 2016 75 Notes to the consolidated fnancial statements

Dividends on AFS equity instruments — default or delinquency in interest If, in a subsequent period, the amount are recognised in proft or loss when or principal payments; or of the impairment loss decreases and the Group’s right to receive the the decrease can be related — it becoming probable that the dividends is established. objectively to an event occurring after borrower will enter bankruptcy or the impairment was recognised, the The fair value of AFS monetary assets fnancial re-organisation. previously recognised impairment loss denominated in a foreign currency is For certain categories of fnancial is reversed through proft or loss to the determined in that foreign currency assets, such as trade receivables, extent that the carrying amount of the and translated at the spot rate at the assets that are assessed not to be investment at the date the impairment balance sheet date. The foreign impaired individually are, in addition, is reversed does not exceed what the exchange gains and losses that are assessed for impairment on a amortised cost would have been had recognised in proft or loss are collective basis. Objective evidence of the impairment not been recognised. determined based on the amortised impairment for a portfolio of cost of the monetary asset. De-recognition of fnancial assets receivables could include the Group’s Other foreign exchange gains and past experience of collecting The Group derecognises a fnancial losses are recognised in other payments, an increase in the number asset only when the contractual rights comprehensive income. of delayed payments in the portfolio, to the cash fows from the asset as well as observable changes in expire, or when it transfers the Loans and receivables national or local economic conditions fnancial asset and substantially all the Loans and receivables are non- that correlate with default on risks and rewards of ownership of the derivative fnancial assets with fxed receivables. asset to another entity. If the Group or determinable payments, originated neither transfers nor retains or acquired, that are not quoted in an For fnancial assets carried at substantially all the risks and rewards active market. amortised cost, the amount of the of ownership and continues to control impairment is the diference between the transferred asset, the Group Loans and receivables comprise cash the asset’s carrying amount and the recognises its retained interest in the and cash equivalents, receivables and present value of estimated future asset and an associated liability for loans. After initial recognition they are cash fows, discounted at the fnancial amounts it may have to pay. If the measured at amortised cost using the asset’s original efective interest rate. Group retains substantially all the risks efective interest method, less any and rewards of ownership of a The carrying amount of the fnancial impairment. Gains and losses are transferred fnancial asset, the Group asset is reduced by the impairment recognised in the proft or loss through continues to recognise the fnancial loss directly for all fnancial assets the amortisation process. Interest asset and also recognises a with the exception of trade income is recognised by applying the collateralised borrowing for the receivables, where the carrying efective interest rate, except for proceeds received. short-term receivables when the amount is reduced through the use of recognition of interest would be an allowance account. When a trade Financial liabilities and equity immaterial. receivable is considered uncollectible, Debt and equity instruments are it is written of against the allowance classifed as either fnancial liabilities Impairment of fnancial assets account. Subsequent recoveries of or as equity in accordance with the Financial assets, other than those at amounts previously written of are substance of the contractual FVTPL, are assessed for indicators of credited against the allowance arrangement. impairment at each balance sheet account. Changes in the carrying date. Financial assets are impaired amount of the allowance account are where there is objective evidence that, recognised in proft or loss. as a result of one or more events that When an AFS fnancial asset is occurred after the initial recognition of considered to be impaired, cumulative the fnancial asset, the estimated gains or losses previously recognised future cash fows of the investment in other comprehensive income are have been afected. reclassifed to proft or loss in the For all other assets, objective evidence period. of impairment could include:

— signifcant fnancial difculty of the issuer or counterparty; or

76 British Business Bank — Annual Report and Accounts 2016 Notes to the consolidated fnancial statements

Financial guarantee Cash and cash equivalents Contingent liabilities contract liabilities Cash and cash equivalents comprise The Group has contingent liabilities Financial guarantee contract liabilities cash in hand and current balances arising through fnancial guarantees. are measured initially at their fair with banks and other fnancial A contingent liability is a possible values and, if not designated as at institutions, which are readily obligation depending on whether FVTPL, are subsequently measured convertible to known amounts of some uncertain future event occurs, at the higher of: cash and which are subject to or a present obligation but payment is — the amount of the obligation under insignifcant risk of changes in value not probable or the amount cannot be the contract, as determined in and have an original maturity of measured reliably. Contingent accordance with IAS 37 Provisions, three months or less. Bank overdraft liabilities are not recognised but Contingent Liabilities and amounts are included within trade should instead be disclosed, unless Contingent Assets; and and other payables. the possibility of an outfow of economic resources is remote. Where — the amount initially recognised Provisions the time value of money is material, less, where appropriate, contingent liabilities which are cumulative amortisation Provisions are recognised when the required to be disclosed under IAS 37 recognised in accordance with Group has a present obligation (legal are stated at discounted amounts. the revenue recognition policies or constructive) as a result of a past set out above. event, it is probable that the Group will Foreign exchange Financial liabilities be required to settle that obligation and a reliable estimate can be made of The individual fnancial statements of Financial liabilities are classifed as the amount of the obligation. each Group company are presented in either fnancial liabilities ‘at FVTPL’ or the currency of the primary economic ‘other fnancial liabilities’. The Group The amount recognised as a provision environment in which it operates does not hold any fnancial liabilities is the best estimate of the (its functional currency) which is at FVTPL. consideration required to settle the pounds sterling. present obligation at the balance Other fnancial liabilities, including sheet date, taking into account the The Group applies IAS 21 The Efects borrowings, are initially measured at risks and uncertainties surrounding of Changes in Foreign Exchange fair value, net of transaction costs. the obligation. Where a provision is Rates and transactions that are Other fnancial liabilities are measured using the cash fows denominated in a foreign currency are subsequently measured at amortised estimated to settle the present translated into sterling at the rate of cost using the efective interest obligation, its carrying amount is the exchange ruling on the date of each method, with interest expense present value of those cash fows transaction, except where rates do not recognised on an efective yield basis. (when the efect of the time value of fuctuate signifcantly, in which case money is material). an average rate for a period is used. De-recognition of fnancial Monetary assets and liabilities When some or all of the economic liabilities denominated in foreign currencies as benefts required to settle a provision The Group derecognises fnancial at the balance sheet date are are expected to be recovered from a liabilities when and only when its retranslated at the rates of exchange third party, a receivable is recognised obligations are discharged, cancelled ruling at that date. These translation as an asset if it is virtually certain that or they expire. diferences are recognised in the reimbursement will be received and Consolidated Statement of the amount of the receivable can be Comprehensive Net Income. measured reliably.

British Business Bank — Annual Report and Accounts 2016 77 Notes to the consolidated fnancial statements

Retirement beneft costs 3. Critical accounting In addition, there is uncertainty in estimating the efective interest rate Payments to defned contribution judgements and key for various debt fund investments. retirement beneft schemes are sources of estimation The future returns from these recognised as an expense when uncertainty investments are not limited to employees have rendered service contracted cash fows of interest entitling them to the contributions. In the application of the Group’s and principal. Future returns are Payments made to state-managed accounting policies, which are inherently uncertain and will depend retirement beneft schemes are dealt described in note 2, the Directors are on a range of factors including the with as payments to defned required to make judgements, manager’s success in originating contribution schemes where the estimates and assumptions about lending opportunities, costs and fees, Group’s obligations under the schemes the carrying amounts of assets and how the manager exercises discretion are equivalent to those arising in a liabilities that are not readily apparent in trading of equity against debt defned contribution retirement from other sources. This applies components in loan structures, beneft scheme. in particular to the valuation of credit performance, and prevailing Enterprise Capital Funds. The market conditions. Employee benefts estimates and associated assumptions are based on historical experience and The Group has estimated efective In accordance with IAS 19 Employee other factors that are considered to interest rates for all debt fund benefts, the Group recognises short be relevant. Actual results may difer investments on a consistent basis. term employee benefts when an from these estimates. As indication of sensitivity, a 25 basis employee has rendered service in points decrease in the efective exchange for those benefts. The estimates and underlying interest rate would decrease interest assumptions are reviewed on an income by around £2 million over a ongoing basis. Revisions to accounting Leases one year period and result in a estimates are recognised in the period corresponding increase in revaluation Leases are classifed as fnance leases in which the estimate is revised if the gains recognised through other whenever the terms of the lease revision afects only that period, or in comprehensive income. transfer substantially all the risks and the period of the revision and future rewards of ownership to the lessee. periods if the revision afects both All other leases are classifed as current and future periods. operating leases. The estimates and assumptions that Rentals payable under operating risk causing a material adjustment to leases are charged to income on a the carrying amounts of assets and straight-line basis over the term of liabilities within the next fnancial the relevant lease except where year are: another more systematic basis is more — Fluctuations in the fair values of representative of the time pattern in available for sale assets, where which economic benefts from the quoted prices and other valuation lease asset are consumed. models and techniques are used to determine estimated future cash fows, and include a number of other assumptions.

— Directors’ judgements with regard to the impairment of assets.

— Fluctuations in the fair value of fnancial liabilities/guarantees measured using modelling techniques.

78 British Business Bank — Annual Report and Accounts 2016 Notes to the consolidated fnancial statements

4. Income

4.1 Interest income An analysis of the Group’s interest income is as follows:

2016 2015 £000 £000 Interest from loans and receivables 13.1 3,066 211 Interest from held to maturity investments 13.2 1,090 – Interest from available-for-sale assets 13.3 35,303 11,822 Total interest income 39,459 12,033

4.2 Management fee An analysis of the Group’s management fee income is as follows:

2016 2015 £000 £000 Management fee earned from: Angel Co-Fund 340 142 Department for Business, Energy and Industrial Strategy 10,650 5,026 Capital for Enterprise Fund LP 369 156 Other 18 7 Total management fee income 11,377 5,331

4.3 Other income An analysis of the Group’s other income is as follows:

2016 2015 £000 £000 Grant income before 1 November 2014 – 315 Arrangement fees 241 – Total other income 241 315

5. Proceeds of warranty claim On 1 November 2014 the Group acquired the share capital of British Business Finance Limited (BBFL) from British Business Holdco Limited (BBHL), a wholly owned subsidiary of BEIS, for consideration of £118.7m which was equal to the fair value of the net assets of BBFL at the transaction date.

In 2015-16 a re-assessment of the BBFL deferred tax liability as at 1 November 2014 was made by the Group’s tax advisers who determined that the liability included within the fair value of the net assets of BBFL at that date was understated by £2.9m. Consequently the Group sought, and BEIS agreed to, payment of that amount under the terms of a tax covenant within the share purchase agreement. The amount was subsequently settled by BEIS.

British Business Bank — Annual Report and Accounts 2016 79 Notes to the consolidated fnancial statements

6. Net gains (losses) on investment assets 2016 2015 Notes £000 £000 Impairment of investments in associates 12 (6) (2) Bad debt allowance on loans and receivables 13.1 (143) (124) Impairment of available-for sale assets 13.3 (170) – Impairment of non-ECF available-for-sale fnancial assets 13.3 (1,082) – Foreign exchange (gains) losses on available-for-sale fnancial assets 13.3 1,524 (1,174) Fair value (gains) losses on assets held at fair value through proft and loss 13.4 334 (370) 457 (1,670)

7. Operating expenditure

7.1 Staf numbers and staf costs The average monthly number of employees including executive directors was:

2016 2015 £000 £000 Permanent staf 81 69 Seconded staf 11 20 Temporary and agency staf 15 19 107 108

Their aggregate remuneration comprised:

2016 2015 £000 £000 Wages and salaries – permanent staf including executive directors 6,270 2,448 Wages and salaries – seconded staf 1,018 657 Wages and salaries – temporary and agency staf 1,796 1,060 Non-executive Directors’ fees 302 315 Short and long-term incentive plans and bonus scheme 908 703 Social security costs 915 378 Pension costs 983 432 Total staf costs 12,192 5,993

The fgures in the above table for 2015 represent the average monthly number of employees since the British Business Bank commenced its operations on 1 November 2014. When looking at the full fnancial year 2014-15, the average monthly number of employees (including executive directors) for the year split between the above categories would be 29, 8 and 8 respectively.

80 British Business Bank — Annual Report and Accounts 2016 Notes to the consolidated fnancial statements

7.2 Other operating expenditure 2016 2015 £000 £000 Professional fees – investment scheme design and transactions 2,404 766 – operational fees 658 1,187 Accommodation and ofce services 1,887 664 Marketing 766 285 Auditor’s remuneration 116 160 Staf related costs, including training and travel 518 148 Other purchase of goods and services 894 186 7,243 3,396

Auditor’s remuneration relates to fees payable for the audit of the Group’s annual accounts. The Group’s auditors did not provide any non-audit services.

7.3 Depreciation and amortisation 2016 2015 Notes £000 £000 Property, plant and equipment depreciation 10 228 92 Intangible assets amortisation 11 76 40 304 132

8. Taxation

8.1 Tax expense 2016 2015 £000 £000 Current tax expense Current year 9,218 3,160 Adjustment in respect of prior years (526) – Total current tax expense 8,692 3,160

Deferred tax (income) expense Current year (1,961) 4,766 Adjustment in respect of prior years (17) – Total deferred tax (income) expense (1,978) 4,766 Total tax expense 6,714 7,926 Recognised through proft and loss 8,518 3,160 Recognised through other comprehensive income (1,804) 4,766 Total tax expense 6,714 7,926

Corporation tax is calculated at 20% (2015: 21%) of the estimated taxable proft for the year. Deferred tax primarily relates to the Group’s investments in Enterprise Capital Funds. It is calculated at 18% (2015: 18%) of the estimated unrealised gains within the funds. This is a temporary timing diference and the tax will become payable once the gains are realised in the underlying funds, for example through investment exits.

British Business Bank — Annual Report and Accounts 2016 81 Notes to the consolidated fnancial statements

The tables below reconcile the tax charge for the year.

Proft/(loss) before tax Current tax 2016 2015 2016 2015 £000 £000 £000 £000 Net operating proft before tax (14,818) (13,958) (2,963) (2,931) Net gain on investments recognised in reserves 12,273 5,735 2,455 1,204 Permanent disallowances relating to: ECF provision expense 36,591 26,055 7,318 5,471 Unwind of ECF fair value impairment (13,083) (4,270) (2,617) (897) Other permanent disallowances (1,844) 153 (368) 32 Timing diferences relating to: ECF derivative fair value movement (6,638) (3,601) (1,328) (756) ECF accrued return (8,430) (3,214) (1,686) (675) ECF impairment 32,643 2,262 6,529 475 ECF realised gains 9,097 5,500 1,819 1,155 Long-Term Incentive Plan accrued expenditure 112 534 22 112 Other timing diferences 1,082 (45) 216 (9) Losses brought forward (896) (99) (179) (21) Profts chargeable to current tax 46,089 15,052 9,218 3,160

Unrealised (losses) gains Deferred tax 2016 2015 2016 2015 £000 £000 £000 £000 Unrealised (losses) gains on ECF investments (10,022) 23,569 (1,804) 4,714 Other unrealised gains (872) 261 (157) 52 Unrealised gains subject to deferred tax (10,894) 23,830 (1,961) 4,766

8. 2 Corporation tax payable 2016 2015 £000 £000 Corporation tax payable at 31 March 2015 4,402 – Arising on acquisition of investment assets – 1,242 Tax expense for the period 8,692 3,160 Tax paid (7,384) – Corporation tax payable at 31 March 2016 5,710 4,402

8.3 Deferred tax liability 2016 2015 £000 £000 Deferred tax liability at 31 March 2015 4,774 8 Movement in the year (1,978) 4,766 Deferred tax liability at 31 March 2016 2,796 4,774

82 British Business Bank — Annual Report and Accounts 2016 Notes to the consolidated fnancial statements

9. Operating segments The Group’s performance and results are managed internally as follows:

— British Business Bank entities: these are split into British Business Finance Limited (BBFL), British Business Bank Investments Ltd (BBBIL) and the overall Group results.

— Programmes administered on behalf of BEIS: In addition to its own operations, the British Business Bank also, through its subsidiary British Business Financial Services Ltd (BBFSL), administers assets on behalf of the Department for Business, Energy and Industrial Strategy. These assets do not form part of the British Business Bank plc Group fnancial statements but are reported to management. The fnancial performance and position of these programmes is included within the strategic report. These fgures are not part of the audited fnancial statements.

— Business units: The Group’s business units span the diferent subsidiaries to pool expertise.

Group proft and loss for the year ending 31 March 2016 Company Intra-group BBFL BBBIL plc and BBFSL eliminations Total Group £000 £000 £000 £000 £000 Income Investment programmes 31,029 31,029 Venture Capital Solutions 8,430 8,430 Other income 578 336 23,765 (13,061) 11,618 9,008 31,365 23,765 (13,061) 51,077

Net investment income (costs) Investment programmes 1,545 1,545 Venture Capital Solutions (ex ECF) (1,088) (1,088) (1,088) 1,545 457

Operational Costs Staf costs (786) (969) (10,437) (12,192) Professional services (202) (676) (2,763) (3,641) General operations (3,054) (3,692) (10,221) 13,061 (3,906) (4,042) (5,337) (23,421) 13,061 (19,739)

Net operating proft 3,878 27,573 344 – 31,795

Impairment of ECF investment assets (32,643) (32,643) Fair value gain on derivatives 6,638 6,638 ECF fair value provision expense (36,591) (36,591) Unwind of ECF fair value impairment 13,083 13,083 Proceeds of warranty claim 2,900 2,900 Earnings on an IFRS basis (45,635) 27,573 3,244 – (14,818)

British Business Bank — Annual Report and Accounts 2016 83 Notes to the consolidated fnancial statements

Group proft and loss for the year ending 31 March 2015 Company Intra-group BBFL BBBIL plc and BBFSL eliminations Total Group £000 £000 £000 £000 £000 Income Investment Programmes – 8,819 – – 8,819 Venture Capital Solutions 3,214 – – – 3,214 Other income 262 400 11,244 (6,260) 5,646 3,476 9,219 11,244 (6,260) 17,679

Net investment income (costs) Investment Programmes – (1,668) – – (1,668) Venture Capital Solutions (ex ECF) (2) – – – (2) (2) (1,668) – – (1,670)

Operational Costs Staf costs (317) (560) (5,116) – (5,993) Professional services (59) (65) (1,829) – (1,953) General operations (1,496) (1,862) (4,477) 6,260 (1,575) (1,872) (2,487) (11,422) 6,260 (9,521)

Net operating proft 1,602 5,064 (178) – 6,488

Impairment of ECF investment assets (2,262) (2,262) Fair value gain on derivatives 3,601 3,601 ECF fair value provision expense (26,055) – – – (26,055) Unwind of ECF fair value impairment 4,270 – – – 4,270 Earnings on an IFRS basis (18,844) 5,064 (178) – (13,958)

84 British Business Bank — Annual Report and Accounts 2016 Notes to the consolidated fnancial statements

ECFs The British Business Bank accepts a lower return from ECF investments in order to encourage private sector investors to invest. Although the Bank expects to make a positive return from these investments, this return is less than that required by the private sector. Accounting standards require the Bank to recognise a liability when it makes a commitment to a fund. The Bank records this liability as a provision. When a commitment is drawn the Bank impairs the resulting investment and utilises the provision by a corresponding amount. This results in signifcant upfront expenditure when new ECF commitments are entered into. This expenditure gradually reverses over the lifetime of the investment as the impairment is reversed. The reversal has been estimated using the commercial discount rate used to impair the investment. The expenditure doesn’t relate to an underlying loss on ECF investments and is therefore excluded from the Group’s fnancial target. The table below summarises the amounts relating to the ECFs that have been recognised in arriving at the Group loss before tax in the consolidated statement of comprehensive net income.

2016 2015 £000 £000 Interest income 8,430 3,214 Fair value gains on derivatives 6,638 3,601 Impairment (32,643) (2,262) Unwind of impairment 13,083 4,270 Provision utilised in year (note 17) 12,284 5,641 7,792 14,464

Provision against future commitments (note 17) (48,875) (31,696) Net loss on Enterprise Capital Funds (41,083) (17,232)

British Business Bank — Annual Report and Accounts 2016 85 Notes to the consolidated fnancial statements

Group balance sheet as at 31 March 2016

BBFL BBBIL Company plc Total Group £000 £000 £000 £000 Investment assets Investment Programme BFP Mid Cap – 499,641 – 499,641 Investment Programme – 147,771 – 147,771 BFP Small Cap – 39,572 – 39,572 Venture Capital Solutions Enterprise Capital Fund 155,224 – – 155,224 VC Catalyst – 15,029 – 15,029 Other venture capital investments 10,415 – 10,415 Total investment assets 165,639 702,013 – 867,652 ECF fair value provision (108,212) – – (108,212) Net investment assets 57,427 702,013 – 759,440

Other assets/(liabilities) Cash 8,157 3,389 46,836 58,382 Tangible and intangible assets – – 480 480 Net other payables (2,140) 3,911 (8,051) (6,280) Total net assets 63,444 709,313 39,265 812,022

Group balance sheet as at 31 March 2015

BBFL BBBIL Company plc Total Group £000 £000 £000 £000 Investment assets Investment Programme BFP Mid Cap – 426,029 – 426,029 Investment Programme – 38,465 – 38,465 BFP Small Cap – 28,643 – 28,643 Venture Capital Solutions Enterprise Capital Fund 148,312 – – 148,312 VC Catalyst – 5,313 – 5,313 Other venture capital investments 12,229 – – 12,229 Total investment assets 160,541 498,450 – 658,991 ECF fair value provision (71,621) – – (71,621) Net investment assets 88,920 498,450 – 587,370

Other assets/(liabilities) Cash 13,837 16,043 41,168 71,048 Tangible and intangible assets – – 768 768 Net other payables (8,431) (5,806) 3,132 (11,105) Total net assets 94,326 508,687 45,068 648,081

86 British Business Bank — Annual Report and Accounts 2016 Notes to the consolidated fnancial statements

10. Property, plant and equipment As at 31 March 2016 Leasehold improvement IT equipment Total £000 £000 £000 Cost or valuation At 31 March 2015 140 520 660 Additions – 21 21 At 31 March 2016 140 541 681

Accumulated depreciation and impairment At 31 March 2015 (11) (81) (92) Charge for the year (28) (200) (228) At 31 March 2016 (39) (281) (320)

Carrying amount At 31 March 2016 101 260 361 At 31 March 2015 129 439 568

As at 31 March 2015 Leasehold improvement IT equipment Total £000 £000 £000 Cost or valuation At 31 March 2014 – – – Additions 140 520 660 At 31 March 2015 140 520 660

Accumulated depreciation and impairment At 31 March 2014 – – – Charge for the year (11) (81) (92) At 31 March 2015 (11) (81) (92)

Carrying amount At 31 March 2015 129 439 568 At 31 March 2014 – – –

British Business Bank — Annual Report and Accounts 2016 87 Notes to the consolidated fnancial statements

11. Intangible assets As at 31 March 2016

Software IT licences Total £000 £000 £000 Cost or valuation At 31 March 2015 213 27 240 Additions 8 1 9 Disposals (14) – (14) At 31 March 2016 207 28 235

Accumulated depreciation and impairment At 31 March 2015 (26) (14) (40) Charge for the year (72) (4) (76) Released on disposals – – – At 31 March 2016 (98) (18) (116)

Carrying amount At 31 March 2016 109 10 119 At 31 March 2015 187 13 200

As at 31 March 2015

Software IT licences Total £000 £000 £000 Cost or valuation At 31 March 2014 – – – Additions 213 27 240 At 31 March 2015 213 27 240

Accumulated depreciation and impairment At 31 March 2014 – – – Charge for the year (26) (14) (40) At 31 March 2015 (26) (14) (40)

Carrying amount At 31 March 2015 187 13 200 At 31 March 2014 – – –

12. Associates Capital for Enterprise Ltd disposed of its investment in its associate (SAS Athena) during the year incurring a loss of £5,819. The carrying value of the investment as at 31 March 2015 was £14,000 and the sale proceeds were £8,181.

88 British Business Bank — Annual Report and Accounts 2016 Notes to the consolidated fnancial statements

13. Investments However as with the BFP Small Cap BBFL intentionally makes a trade-of this programme has provided invoice between the prioritised return and discount fnance and participated in upside gains. Overall, the terms mean Business Finance peer to peer lending. that BBFL expects the ECFs to provide Partnership a positive return to government, but In addition in 2015-16, through the that this return will be lower than that British Business Bank Investments Investment Programme, BBBIL typically sought by a private sector Limited (BBBIL) manages the Business participated in a public issue of Tier 2 investor. This is in line with the group’s Finance Partnership programme. capital by Shawbrook Bank plc which strategic objectives. The Business Finance Partnership issued fxed rate reset callable (BFP) has two strands. The frst strand subordinated loan notes with an initial The investments which BBFL make is the BFP Mid Cap which invests in semi-annual coupon of 8½%. The in ECFs meet the accounting defnition fund managers who lend to medium- issue was listed on the London Stock of a loan and are classifed as available sized businesses with turnover of up Exchange on 28th October 2015. See for sale assets. Any upside returns to £500m. All of the the BFP Mid Cap note 13.2 for details. which the funds generate are investments are classifed as available separately accounted for as derivatives. for sale assets. See note 13.3 VC Catalyst Accounting standards require that for details. The VC Catalyst Fund investments are available for sale assets are held at fair The second strand is the BFP Small funded by BBBIL. The VC Catalyst Fund value, which is defned as the amount Cap which invests in debt funds and invests in commercially viable venture that a private sector investor would non-bank lenders that provide an capital funds that might otherwise fail pay for the investments. This means alternative source of lending for small to reach a satisfactory ‘frst close’ – the that every ECF investment is impaired businesses with turnover up to £75m. point at which a fund has raised to refect the fact that it will not The majority of the BFP Small Cap’s enough money to begin making provide the level of return sought investments are classifed as available- investments in businesses. It enables by a private sector investor, even if for-sale assets. See note 13.3 private sector investment already it is providing a positive return. The for details. committed to those funds to be impairment then reverses over the life unlocked and invested in growth of the asset to ‘top-up’ the prioritised Through an invoice discount frm, companies. return and provide a commercial rate BBBIL purchases invoices from of return in the accounts. See note investors, releasing money that would The British Business Bank has chosen 13.3 for details. otherwise be tied up for between to account for all of its new VC Catalyst 30 and 120 days. The investment is investments at fair value through In addition, BBFL signs ECF classifed as loans and receivables. It proft or loss as explained in the agreements committing to the also provides funding through peer to accounting policies in note 2. prioritised return and reduced upside peer lending platforms making small See note 13.4 for details. gain in advance of drawdowns. At the part-loans to borrowers alongside point that BBFL enters into a new commitment it becomes probable that other platform lenders. This lending is Enterprise Capital Funds also classifed as loans and receivables. it will incur accounting losses through See note 13.1 for details. British Business Finance Limited recognition of a fair value impairment. (BBFL) runs Enterprise Capital Funds Consequently BBFL has to recognise a provision for the liability it is taking on Investment Programme (ECFs). ECFs are commercially focused funds that bring together private and at the point of commitment and this BBBIL manages the Investment public money to make equity provision is utilised to cover the Programme. It makes commercial investments in high growth impairment when a drawdown is investments that stimulate at least businesses. BBFL invests into funds made. See note 17 for details. the same amount of investment from on terms that improve the outcome for Where a fund performs well enough the private sector, encouraging new private sector investors when those to more than repay BBFL’s prioritised lenders into the market and the funds are successful. It does this by return and capital the remaining growth of smaller lenders. Most of taking an agreed prioritised return of return is accounted for as a derivative. BBBIL’s investments through the 3-4.5%. In return BBFL is entitled to These are detailed in note 13.5. Investment Programme are classifed less of the remaining upside gain, in as available-for-sale assets. excess of the agreed return, if a fund is successful.

British Business Bank — Annual Report and Accounts 2016 89 Notes to the consolidated fnancial statements

Other venture capital investments BBFL also has three other smaller venture capital schemes: Bridges, Aspire and the Capital for Enterprise Fund. These are detailed in note 13.3.

13.1 Loans and receivables As at 31 March 2016 Accrued Bad debt/ Opening Transfers Additions Repayments Return allowance Closing £000 £000 £000 £000 £000 £000 £000 Private companies BFP Small Business 3,397 8,289 1,308 (7,600) 654 161 6,209 Investment Programme 15,064 28,148 24,021 (2,663) 2,412 (304) 66,678 Total 18,461 36,437 25,329 (10,263) 3,066 (143) 72,887

As at 31 March 2015 Acquired on Accrued Bad debt/ 31 Oct 2014 Transfers Additions Repayments Return allowance Closing £000 £000 £000 £000 £000 £000 £000 Private companies BFP Small Business 3,493 – – (171) 199 (124) 3,397 Investment Programme – – 15,052 – 12 – 15,064 Total 3,493 – 15,052 (171) 211 (124) 18,461

The carrying value of the loans and receivable assets approximates to their fair value.

13.2 Held to maturity investments As at 31 March 2016 Accrued Bad debt/ Opening Transfers Additions Repayments Return allowance Closing £000 £000 £000 £000 £000 £000 £000 Private companies Investment Programme – – 30,000 – 1,090 – 31,090 Total – – 30,000 – 1,090 – 31,090

The IP banking loan represent an investment in fxed rate reset callable subordinated loan notes with an initial semi-annual coupon of 8½% issued by Shawbrook Bank plc. The loan is expected to be held to maturity.

90 British Business Bank — Annual Report and Accounts 2016 Notes to the consolidated fnancial statements

13.3 Available for sale assets At 31 March 2016 Unwind Foreign of fair exchange Accrued value gains/ Opening Additions Repayments interest Revaluation impairment (losses) Impairment Closing £000 £000 £000 £000 £000 £000 £000 £000 £000 Limited partnership investments BFP Mid Cap 426,029 112,838 (72,733) 22,781 10,726 – – – 499,641 BFP Small Business 25,246 9,468 (4,298) 1,251 1,043 – 823 (170) 33,363 Investment Programme 23,401 29,504 (6,988) 2,841 544 – 701 – 50,003 Total 474,676 151,810 (84,019) 26,873 12,313 – 1,524 (170) 583,007

Venture capital investments Enterprise Capital Funds 136,039 34,381 (22,977) 8,430 13,083 (32,643) 136,313 Bridges 1,393 – (82) – – – 1,311 Aspire 3,569 43 – – (40) – (1,082) 2,490 Capital for Enterprise Fund 7,253 265 (904) – – – – 6,614 Total 148,254 34,689 (23,963) 8,430 (40) 13,083 – (33,725) 146,728

Total available for sale assets 622,930 186,499 (107,982) 35,303 12,273 13,083 1,524 (33,895) 729,735

At 31 March 2015 Unwind Foreign of fair exchange Acquired on Accrued value gains/ 31 Oct 2014 Additions Repayments interest Revaluation impairment (losses) Impairment Closing £000 £000 £000 £000 £000 £000 £000 £000 £000 Limited partnership investments BFP Mid Cap 339,208 117,146 (42,752) 7,384 5,043 – – – 426,029 BFP Small Business 19,160 5,281 (216) 698 990 – (667) – 25,246 Investment Programme 8,532 15,188 - 526 (338) – (507) – 23,401 Total 366,900 137,615 (42,968) 8,608 5,695 – (1,174) – 474,676

Venture capital investments Enterprise Capital Funds 121,870 17,062 (8,115) 3,214 – 4,270 (2,262) 136,039 Bridges 1,514 5 (126) – – – – – 1,393 Aspire 3,529 – – – 40 – – – 3,569 Capital for Enterprise Fund 11,960 146 (4,853) – – – – – 7,253 Total 138,873 17,213 (13,094) 3,214 40 4,270 - (2,262) 148,254

Total available for sale assets 505,773 154,828 (56,062) 11,822 5,735 4,270 (1,174) (2,262) 622,930

British Business Bank — Annual Report and Accounts 2016 91 Notes to the consolidated fnancial statements

13.4 Assets designated at fair value through proft or loss At 31 March 2016

Opening Additions Repayments Revaluation Closing £000 £000 £000 £000 £000 VC Catalyst 5,313 9,791 (409) 334 15,029 Total 5,313 9,791 (409) 334 15,029

At 31 March 2015 Acquired on 31 Oct 2014 Additions Repayments Revaluation Closing £000 £000 £000 £000 £000 VC Catalyst 3,181 3,065 (563) (370) 5,313 Total 3,181 3,065 (563) (370) 5,313

13.5 Derivatives At 31 March 2016 At At 31 March 2015 Repayments Revaluation 31 March 2016 £000 £000 £000 £000 Enterprise Capital Funds 12,273 – 6,638 18,911 Total 12,273 – 6,638 18,911

At 31 March 2015 Acquired on At 31 Oct 2014 Repayments Revaluation 31 March 2015 £000 £000 £000 £000 Enterprise Capital Funds 9,882 (1,210) 3,601 12,273 Total 9,882 (1,210) 3,601 12,373

92 British Business Bank — Annual Report and Accounts 2016 Notes to the consolidated fnancial statements

14. Trade and other receivables 2016 2015 £000 £000 Amounts receivable within one year Trade receivables 15,982 1,192 Accrued income 1,761 3,835 Prepayments 130 – Other receivables 228 35 18,101 5,062

Trade receivables disclosed above are classifed as loans and receivables and are therefore measured at amortised cost. Of the amount above, £2.1m (2015 £1.0 million) of trade receivables and £1.8 million (2015 £3.8 million) of accrued income are receivable from the Department for Business, Energy and Industrial Strategy. The trade receivables balance includes £12.3m of cash in transit at 31 March 2016 that has been paid to acquire assets but where the cash has not been received by the counterparty.

15. Cash and cash equivalents The following balances were held at year end: 2016 2015 £000 £000 Government Banking Service 55,800 68,118 Commercial banks 2,582 2,930 Total 58,382 71,048

The British Business Bank generally maintains a cash balance of at least £50m to fund investments. As at 31 March 2016, the cash balance was £58.3m of which £41.6m was used to fnd investments in April and May 2016. As the majority of the cash is held in the Government Banking Service there is minimal cost to the Exchequer.

British Business Bank — Annual Report and Accounts 2016 93 Notes to the consolidated fnancial statements

16. Trade and other payables 2016 2015 £000 £000 Amounts falling due within one year Trade payables 347 14 VAT and social security 1,686 346 Shareholder loan 8,882 2,081 Accrued expenditure 2,892 2,597 Other payables 1,980 1,527 15,787 6,565

Amounts falling due after more than one year Accrued expenditure 88 426 88 426

The shareholder loan is from the Department for Business, Energy and Industrial Strategy. All shareholder loans are subsequently converted to share capital.

The Directors consider that the carrying amount of trade payables approximates to their fair value.

17. Provisions 2016 2015 £000 £000 Opening balance 71,621 – Acquired on purchase of ECF investments – 45,566 Provided in year 48,875 31,696 Provision utilised in year (10,242) (5,641) Provision released in year (2,042) – Closing balance 108,212 71,621

Of which: Current 26,373 19,866 Non-current 81,839 51,755 108,212 71,621

All provisions relate to loan commitments.

94 British Business Bank — Annual Report and Accounts 2016 Notes to the consolidated fnancial statements

18. Contingent liabilities and indemnities The Group has taken advantage of the exemption available under section 479A Subsidiary companies: conditions for exemption from audit of the Companies Act which exempts qualifying companies from the audit of their individual accounts for a fnancial year. The exemption is in respect of the following subsidiaries.

Subsidiary name Registered No. British Business Finance Limited 09091928 British Business Financial Services Limited 09174621 Capital for Enterprise Limited 06179047 Capital for Enterprise Fund Managers Limited 06826072 Capital for Enterprise (GP) Limited SC354499 Aspire Holdco Limited 09263859

As required by the Act, the British Business Bank plc:

— Guarantees all outstanding liabilities to which the subsidiary companies are subject at the end of the fnancial year to which the guarantee relates, and until they are satisfed in full; and

— Asserts that the guarantee is enforceable against the British Business Bank plc by any person to whom the subsidiary companies are liable in respect of those liabilities.

19. Capital and other commitments

19.1 Capital commitments The British Business Bank plc had the following commitments at the balance sheet date in relation to its existing investment portfolio:

2016 2015 £000 £000 British Business Bank Investments Ltd BFP Small Business 11,971 27,836 BFP Mid Cap 222,451 457,537 Investment Programme 256,782 136,453 VC Catalyst 54,609 24,400

Venture Capital Solutions Enterprise Capital Funds 253,594 195,090 Bridges Venture Fund 577 899 Capital for Enterprise Fund – 7,086 799,984 849,301

British Business Bank — Annual Report and Accounts 2016 95 Notes to the consolidated fnancial statements

19.2 Operating lease commitments The Bank’s occupation of its registered ofce at Foundry House, 3 Millsands, Riverside Exchange, Shefeld S3 8NH is governed by a Memorandum of Terms of Occupation (MOTO) covering the period from 17 December 2012 to 30 June 2017.

For the year ended 31 March 2016, lease payments of £77,870 were recognised as an expense in the year.

The lease commitments as at the balance sheet date are as follows:

<1yr 1-5yrs >5 yrs Total £000 £000 £000 £000 Operating lease 78 20 – 98

The Bank is in the process of negotiating a new MOTO to cover its occupation of ofce space at Fleetbank House, 2- 6 Salisbury Square, London, EC4Y 8JX. The MOTO is expected to permit the Bank to occupy the space to 1 April 2019 with an option to break the agreement upon serving six months’ notice.

For the year ended 31 March 2016, the Bank paid £350,000 in expenses in relation to occupying the ofces (including service charges, rates and utilities).

20. Share capital

2016 2015 No. No.

Authorised: ordinary shares of £1 each 5,000,000 5,000,000

2016 2015 No. No. Issued and fully paid ordinary shares of £1 each: Brought forward 664,326 50 Shares issued for cash 173,200 664,276 Carried forward 837,526 664,326

The Company has one class of ordinary shares which carry no right to fxed income.

96 British Business Bank — Annual Report and Accounts 2016 Notes to the consolidated fnancial statements

21. Subsidiaries and other signifcant undertakings The Group consists of a parent company, British Business Bank plc, incorporated in the UK and a number of subsidiaries held directly by the British Business Bank plc, which operate and are incorporated in the United Kingdom.

The principal subsidiary undertakings of the Company are shown below. The capital of each entity depends on its nature and consists of ordinary shares.

Country of Shares held Subsidiary Incorporation Nature of Business by the Company British Business Bank UK Makes commercial investments into providers of 100% Investments Limited fnance to smaller businesses plus venture capital fund investments British Business Finance UK Manages and invests into schemes on behalf 100% Limited of the Group British Business Financial UK Administers investment schemes on behalf 100% Services Limited of the Department for Business, Energy and Industrial Strategy

Details of the subsidiaries results, including their net assets as at the balance sheet date and their proft or loss for the period ended 31 March 2016, are provided in the segmental reporting note 9.

The British Business Bank Group also has the following signifcant holdings in undertakings other than subsidiaries.

Proportion held Country in which Class of share held by by the British Name it is incorporated the British Business Bank Business Bank BMS Finance S.A.R.L. Luxembourg Not classifed 49.8% Industrial Lending 1 (Boost Fund) Luxembourg Class A shares 44.1% Pricoa Sterling Corporate Bond Fund 1 Ireland Not classifed 67.7% Urica Capital Limited 2 Jersey Not classifed 50.0% VRG Ventures UK Ordinary shares 26.5%

1Pricoa’s latest fnancial year end was 30 June 2016. The fund does not produce separate accounts and therefore fgures for the fund are not available. 2Urica’s latest fnancial year end was 30 June 2016. At the balance sheet date it had not published accounts in respect of that year. As at 30 June 2015, its aggregate amount of capital and reserves was £4,428,650 and during its fnancial year it made a proft of £1,178.

British Business Bank — Annual Report and Accounts 2016 97 Notes to the consolidated fnancial statements

22. Financial Instruments

22.1 Categories of fnancial instruments The following table analyses the Group’s fnancial assets and liabilities in accordance with the categories of fnancial instruments in IAS 39 Financial Instruments, Recognition and Measurement. Assets and liabilities outside the scope of IAS 39 are shown separately.

As at 31 March 2016 Non- Assets Liabilities fnancial held Loans Held to Available held at assets at and maturity for sale amortised and FVTPL receivables investments assets cost liabilities Total Note £000 £000 £000 £000 £000 £000 £000 Assets Property, plant and equipment 10 – – – – – 361 361 Intangible assets 11 – – – – – 119 119 Loans and receivables 13.1 – 72,887 – – – – 72,887 Held to maturity investments 13.2 – – 31,090 – – – 31,090 Available-for-sale fnancial assets 13.3 – – 729,735 – – 729,735 Designated at FVTPL 13.4 15,029 – – – – – 15,029 Derivatives 13.5 18,911 – – – – – 18,911 Trade and other receivables 14 17,971 – – – – 17,971 Prepayments 14 – – – – – 130 130 Cash and cash equivalents 15 - 58,382 – – – – 58,382 Total assets 33,940 149,240 31,090 729,735 – 610 944,615

Liabilities – – – – – – – Trade and other payables 16 – – – – (14,189) (1,686) (15,875) Corporation tax 8.2 – – – – – (5,710) (5,710) Deferred tax 8.3 – – – – – (2,796) (2,796) Provisions 17 – – – – – (108,212) (108,212) Total liabilities – – – – (14,189) (118,404) (132,593) Net Assets 33,940 149,240 31,090 729,735 (14,189) (117,794) 812,022

98 British Business Bank — Annual Report and Accounts 2016 Notes to the consolidated fnancial statements

22.2 Fair value Fair value of the Group’s fnancial Enterprise Capital Funds, assets measurements assets and fnancial liabilities that designated at fair value through are measured at fair value on a proft or loss & derivatives The information set out below recurring basis The primary valuation methodology provides information about how the Available for sale assets used for the debt element of Group determines fair values of For all AFS assets, except for the investments is the discounted cash various fnancial assets and fnancial Enterprise Capital Funds, the fow method. Fair value is estimated liabilities. investment valuation, a net asset by deriving the present value of the The investment portfolio consists of valuation (NAV), is determined by investment using reasonable assets carried at amortised cost (loans investment managers on a regular assumptions of expected future cash and receivables and held to maturity basis (monthly or quarterly). fows and the estimated repayment investments) and fair value (available value and date, discounted at the The directors review the investment for sale assets, assets designated at appropriate risk-adjusted discount valuation reports periodically and are fair value through proft and loss and rate. The discount rate is estimated satisfed with the year-end valuations derivatives). Fair value is the price that with reference to the market risk-free presented in the fnancial statements. would be received to sell an asset or rate and a risk-adjusted premium. paid to transfer a liability in an orderly Each investment has a periodically transaction between market updated model, which for each participants at the measurement date, valuation assessment is updated regardless of whether that price is for actual asset performance and key directly observable or estimated using assumption and input changes. another valuation technique.

Enterprise Capital Funds also contain a separately identifed equity derivative. The derivatives are valued using the Black- Scholes model. The key inputs used in the derivative valuation are:

Input Assumptions in determining the input Net amount drawn and fund valuation Reported by fund managers as at 31 March 2016 Time to fund exit – ranging from 0-10 years Assessed separately for each fund based on remaining investment period and estimated timetable for fund exits. Volatility – ranging from 29% to 32% The VIX and the VXN indexes have been used as a proxy for the expected volatility for non-sector specifc and technology specifc funds respectively. Dividend yield – ranging from 3.0% to 4.5% Set to equal the contractual return which funds must pay before any upside on the option is realised. Risk free rate Derived from UK Government bonds.

British Business Bank — Annual Report and Accounts 2016 99 Notes to the consolidated fnancial statements

Fair value of fnancial assets and In addition, the fair value of derivative The amount of exposure, before fnancial liabilities that are not assets held was increased by taking into account any collateral or measured at fair value on a £6.6 million (2015: £3.6million) security, in each class of fnancial recurring basis (but fair value taken to the Income Statement. asset is limited to the amount invested disclosures are required) at any given point in time.

The directors consider that the 22.3 Financial risk As part of the Risk Appetite process carrying amounts of the loans and management BBB undertakes stress scenario receivables and held to maturity modelling on its portfolio. Severe but The Group has exposure to a number fnancial assets recorded at amortised plausible stressed scenarios featuring of fnancial risks through the conduct cost in the fnancial statements signifcant asset value corrections on of its operations. Details of the Group’s approximate their fair values. fair value of investments and risk management structure are heightened portfolio defaults were In addition, for fnancial reporting provided in the Risk Management applied to planned deployment and purposes, fair value measurements section of the Strategic Report. are categorised into Level 1, 2 or 3 stock levels in each Programme within based on the degree to which the This note presents information about BBB. The general approach is that inputs to the fair value measurements the nature and extent of risks arising these scenarios are chosen on the are observable and the signifcance from the fnancial instruments. basis that they are as severe as a 1 in 20 year downside scenario (i.e. the of the inputs to the fair value BBB has exposure to the following worst year in the past 20 years). The measurement in its entirety, which risks from its use of fnancial output of this exercise refects the risk are described as follows: instruments: undertaken by BBB operating in — Level 1 fair value measurements — Credit risk underserved fnance markets and are those derived from quoted demonstrates that BBB would sufer prices (unadjusted) in active — Market risk signifcant losses if such a scenario markets; Liquidity risk is not deemed relevant was to materialise. The fndings of this — Level 2 fair value measurements for the Group. exercise was considered by the Board are those derived from inputs and also communicated to key Credit risk other than quoted prices included stakeholders. Credit and Investment risk is the risk of within Level 1 that are observable The value of the investments in each a loss due to the failure of a for the asset or liability, either class of fnancial asset is detailed in counterparty of a fnancial instrument directly (i.e. as prices) or indirectly section (i) of this note and in notes 13 to meet its obligations to pay the (i.e. derived from prices); and to 17 which also give details of total Group in accordance with agreed impairment losses during the year. — Level 3 fair value measurements terms, or due to the risk of loss due to are those derived from valuation inappropriate investment decisions. For some debt investments techniques that include inputs for Credit risk also includes settlement appropriate collateral is held, the asset or liability that are not risk when a counter party fails to depending on the Group’s programme based on observable market data settle their side of a transaction and criteria. The nature of collateral may (unobservable inputs). concentration risk. The Group’s credit change over time depending on the risk is also infuenced by general The Group’s fnancial assets at fair investments which the Group holds in macroeconomic conditions. value through the proft and loss, any given period. The concentration of credit risk is limited due to the available for sale assets and loans and Credit risk may arise in any of the investment base being large and receivables are all classifed as Level 3 Group’s asset where there is the spread across the Group’s operating assets. The Group’s held to maturity potential for default including loans segments. Accordingly, the directors investments are classifed as Level 1 and receivables and available for sale believe that there is no further credit assets. investments with a contractual provision required in excess of the repayment. At 31 March 2016, based on the provision for impairment losses and valuation assessment available-for- The degree to which the Group is the specifc provision for credit losses sale assets were increased by £12.3 exposed to this credit risk depends on detailed below. million (2015: £5.7million) taken to the individual characteristics of the Other Comprehensive Income. contract counterparty and the nature of the investment.

100 British Business Bank — Annual Report and Accounts 2016 Notes to the consolidated fnancial statements

Credit risk assessment is carried out as Market risk Liquidity risk part of the investment approval Market Risk is the risk of direct or Liquidity risk is the risk that an entity process and is revisited on an ongoing indirect losses that arise from does not have sufcient fnancial basis as part of the Group’s portfolio fuctuations in values of, or income resources in the short term to meet its management process. from, assets or in movements in obligations as they fall due, or its In determining fair value the Group has interest or exchange rates or credit strategy is constrained by inadequate made provision against the value of spreads. The Group will identify or inappropriate funding sources. market risk arising from an inability certain of its loans and receivables, Liquidity risk is not deemed to exit an investment within the those being receivables purchased signifcantly relevant to the Group as it intended time frame. through an invoice discounter and is 100% Government funded, with all part-loans to borrowers that are made Interest rate risk programmes pre-approved and alongside other platform lenders, in BBB’s investments include a committed to, and it does not have a accordance with its provisioning policy. combination of fxed and variable rate leveraged balance sheet. The basis of provisioning is diferent loans. Interest rate risk is regularly for the diferent categories of loans monitored to ensure that the mix of and receivables. In determining the variable and fxed rate borrowing is recoverability of the amounts appropriate. The Group does not use receivable, the Group’ considers past derivatives to hedge interest performance of recoveries. rate risk. With respect to receivables purchased LIBOR sensitivity of the Investment through an invoice discounter the Programme is as follows: Group’ provides for all debts which are overdue by 90 days at a rate of 100% — The impact of a 1 percentage point of the average overdue balance over increase in the interest rate the previous three months. In addition applicable to investments would be it makes 100% provision for all an approximate increase in income receivables in respect of which there is of £7m over a one year period. a known or expected problem in — The impact of a 0.25 percentage collection even if payment is not point decrease in the interest rate overdue by 90 days. At 31 March 2016 applicable to investments would be the gross value of receivables an approximate decrease in income purchased through an invoice of £2m over a one year period. discounter was £4.7m of which Larger decreases would be £185,111 was overdue and fully mitigated by a signifcant element provided. In addition a further £66,314 of LIBOR foors. was provided in respect of receivables where there was a known or expected Currency risk collection problem. The Group does not have material The Group makes provision for all exposure to currency risk as the Group part-loans made to borrowers made primarily invest in its functional alongside other platform lenders currency, GBP. There are some which are overdue by 90 days at a rate investments in funds which have a of 100%. At 31 March 2016 the gross Europe wide investment mandate, and value of such receivables was £32.9m are denominated in Euros. A of which £1,593,154 was overdue by prerequisite of these funds is that 90 days and fully provided. they invest into the UK at a fund level a larger amount than our fnancial No other repayments in respect of the investment. Approximately 6% of the Group’s fnancial instruments were Group’s portfolio is in non-GBP overdue at the balance sheet date denominated investments. There is currently no policy to hedge this currency risk.

British Business Bank — Annual Report and Accounts 2016 101 Notes to the consolidated fnancial statements

23. Related party transactions Balances and transactions between the company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its associates are disclosed below.

The Department for Business, Energy and Industrial Strategy (BEIS) is the principal shareholder and parent of the British Business Bank plc. BBB plc provides services to BEIS in relation to some of the fnancial assets held within BEIS and not yet novated. In return, BBB recognises income in relation to the services provided. In addition, BEIS provided temporary staf to the BBB Group for which there are recharges.

Trading transactions During the year, Group companies entered into the following transactions with BEIS:

2016 2015 £000 £000 Income Grant-in-aid – 295 Management fee 10,650 5,026 Proceeds of warranty claim 2,900 –

Expenditure Staf seconded from BEIS 673 450 Rent 350 158

Capital transactions Shares issued 173,200 664,276 Shareholder loan 8,882 2,081 196,655 672,286

Amounts outstanding at year end As at the balance sheet date, the Group was owed £3.9m from BEIS relating to the management fee (2015: £4.8m) and owed BEIS £10m of which £0.7m relates to seconded staf, £0.4m rent and a shareholder loan of £8.9m (2015: £2.6m).

24. Events after the reporting date The result of the referendum held on 23 June 2016 was in favour of the UK leaving the European Union. A reasonable estimate of the fnancial efect of this event on the Group cannot be made. This is a non-adjusting event.

On 14 July 2016, following a machinery of Government change it was announced that the British Business Bank’s shareholder, the Department for Business, Innovation and Skills (BIS), is having its responsibilities changed. Our shareholder is now the Department for Business, Energy and Industrial Strategy (BEIS).

As at the date of these annual report and accounts, there have been no other post reporting date events that require disclosure.

25. Controlling party In the opinion of the Directors, the Group’s parent company and ultimate controlling party is the Secretary of State for the Department for Business, Energy and Industrial Strategy. The consolidated fnancial statements of the Department for Business Energy and Industrial Strategy are available from the government departments’ website at GOV.UK.

102 British Business Bank — Annual Report and Accounts 2016 Company fnancial statements

Company statement of fnancial position as at 31 March 2016

2016 2015 Note £000 £000 ASSETS Non-current assets Property, plant and equipment 361 568 Intangible assets 119 200 Investments 2 750,611 618,868 Total non-current assets 751,091 619,636

Current assets Trade and other receivables 4 8,785 9,256 Deferred tax 93 – Cash and cash equivalents 3 46,837 41,168 Total current assets 55,715 50,424 Total assets 806,806 670,060

LIABILITIES Current liabilities Trade and other payables 5 (15,491) (5,408) Corporation tax (56) (116) Total current liabilities (15,547) (5,524) Total assets less current liabilities 791,259 664,536

Non-current liabilities Trade and other payables 5 (47) (274) Total non-current liabilities (47) (274) Total liabilities (15,594) (5,798) Net assets/(liabilities) 791,212 664,262

Equity Issued share capital 837,526 664,326 Retained earnings (46,314) (64) Total equity 791,212 664,262

The fnancial statements of the group (company number 08616013) were approved by the Board of Directors and authorised for issue on 20th July 2016. They were signed on its behalf by:

Keith Morgan Chief Executive Ofcer

British Business Bank — Annual Report and Accounts 2016 103 Company fnancial statements

Company statement of changes in equity as at 31 March 2016

Issued capital Retained earnings Total £000 £000 £000 Opening balance as at 1 April 2014 50 (96) (46) Net income after tax – 32 32 Total comprehensive income – 32 32 Issue of ordinary shares 664,276 – 664,276

Balance at 31 March 2015 664,326 (64) 664,262

Opening balance as at 1 April 2015 664,326 (64) 664,262 Net income after tax – (46,250) (46,250) Total comprehensive income – (46,250) (46,250) Issue of ordinary shares 173,200 – 173,200

Balance at 31 March 2016 837,526 (46,314) 791,212

104 British Business Bank — Annual Report and Accounts 2016 Notes to the Company fnancial statements

Company cash fow statement as at 31 March 2016

2016 2015 Note £000 £000 Proft before tax (46,323) 148

Cash fows from operating activities Adjustments for: Depreciation, bad debt and impairments 304 132 Impairment of investments in subsidiary undertakings 2 70,257 - Loss on disposal of intangible assets 14 - Corporation tax paid (80) - Movement in trade receivables 4 471 (9,206) Movement in trade payables 5 9,856 5,586 Net cash received from/(used for) operating activities 34,499 (3,340)

Cash fows from investing activities Purchase of available-for-sale assets 2 (202,000) (618,868) Purchases of property, plant and equipment (21) (660) Purchase of intangible assets (9) (240) Net cash used in investing activities (202,030) (619,768)

Cash fows from fnancing activities Issue of new shares 173,200 664,276 Net cash from fnancing activities 173,200 664,276 Net increase/(decrease) in cash and cash equivalents 5,669 41,168 Cash and cash equivalents at beginning of year 41,168 - Cash and cash equivalents at end of year 46,837 41,168

British Business Bank — Annual Report and Accounts 2016 105 Notes to the Company fnancial statements

1. Signifcant accounting policies

Basis of accounting The separate fnancial statements of the Company are presented as required by the Companies Act 2006 (‘the Act’).

The Company’s accounting policies are consistent with those described in the consolidated accounts of the British Business Bank plc. Disclosures in relation to property, plant and equipment (note 10) intangible assets (note 11) and share capital (note 20) have not been repeated here as there are no diferences to those provided in the consolidated accounts.

Investments in subsidiary undertakings are accounted for at cost in accordance with IAS 27 and are measured at the lower of their carrying amount and fair value less costs to sell

These fnancial statements have been prepared on the going concern basis as described in the consolidated accounts of the British Business Bank plc, and under the historical cost convention. The fnancial statements are presented in pounds sterling, which is the Company’s functional currency.

Proft of the parent company The Company has taken advantage of section 408 of the Act and consequently the statement of comprehensive income (including the proft and loss account) of the parent company is not presented as part of these accounts. The loss of the parent company for the fnancial period amounted to £46,250,000 (2015: proft £32,000).

2. Investments The Company acts as a holding company for the Group and has the following principal subsidiary undertakings which afected the Group’s results or net assets:

Subsidiary Nature of Business British Business Bank Investments Limited (BBBIL) Makes commercial investments into providers of fnance to smaller businesses plus venture capital fund investments British Business Finance Limited (BBFL) Manages investment schemes on behalf of the Group British Business Financial Services Limited (BBFSL) Manages investment schemes on behalf of the Department for Business, Energy and Industrial Strategy

All subsidiary undertakings are wholly-owned and incorporated in the UK, all shareholdings are in the name of the British Business Bank plc.

106 British Business Bank — Annual Report and Accounts 2016 Notes to the Company fnancial statements

At 31 March 2016 Investment Investment Investment in BBBIL in BBFL in BBFSL Total £000 £000 £000 £000 Opening balance 500,153 118,715 – 618,868 Investment in year 189,000 13,000 – 202,000 Impairment (1,257) (69,000) - (70,257) Closing balance 687,896 62,715 – 750,611

At 31 March 2015 Investment Investment Investment in BBBIL in BBFL in BBFSL Total £000 £000 £000 £000 Opening balance – - - - Investment in year 500,153 118,715 - 616,868 Closing balance 500,153 118,715 - 618,868

The Company has impaired its investments in BBBIL and BBFL as the fair values have been assessed as being lower than the carrying amount would be measured at cost.

3. Cash and cash equivalents The cash and cash equivalents balance represents cash held within the Government Banking Service.

4. Trade and other receivables

2016 2015 £000 £000 Amounts receivable within one year Trade receivables 2,176 1,125 Prepayments 130 8 Intra-Group 6,286 8,100 Other receivables 193 23 8,785 9,256

Trade receivables disclosed above are classifed as loans and receivables and are therefore measured at amortised cost.

British Business Bank — Annual Report and Accounts 2016 107 Notes to the Company fnancial statements

5. Trade and other payables

2016 2015 £000 £000 Amounts falling due within one year Trade payables 310 - VAT and social security 1,258 323 Accrued expenditure 1,886 1,523 Intra-Group 2,359 881 Other payables 9,678 2,681 15,491 5,408

Amounts falling due after more than one year Accrued expenditure 47 274 47 274

The directors consider that the carrying amount of trade payables approximates to their fair value.

6. Related party transactions During the year under review British Business Bank plc was 100% owned by the UK Government, with the shareholder being the Secretary of State for the Department for Business, Energy, and Industrial Strategy. The Company has elected to take the exemption under IAS 24 regarding disclosure of transactions with related parties because the UK Government has control over both the Company and other entities.

The Company trades with Government bodies on an arm’s length basis on commercial terms in line with contractual agreements. The main Government bodies transacted with are the Department for Business, Energy and Industrial Strategy and the Company’s principal subsidiary undertakings British Business Bank Investments Limited (BBBIL), British Business Finance Limited (BBFL) and British Business Financial Services Limited (BBFSL).

The Group’s trading and capital other transactions with BIS were all efected through the Company and are disclosed on note 23 of the consolidated fnancial statements.

The Company provided capital to BBBIL and BBFL as shown in note 2. In addition it made charges to its principal subsidiary undertakings in respect of services provided on their behalf amounting to £12.7m (2015: £6.3m).

7. Controlling party In the opinion of the Directors, the company’s ultimate controlling party is the Secretary of State for the Department for Business, Energy and Industrial Strategy. The consolidated fnancial statements of the Department for Business, Energy and Industrial Strategy are available from the government departments’ website at GOV.UK. Copies of the group fnancial statements of the British Business Bank plc are available from Companies House, Crown Way, Maindy, Cardif CF14 3UZ.

108 British Business Bank — Annual Report and Accounts 2016 Design: red-stone.com © British Business Bank plc July 2016

All fgures source British Business Bank 31st March 2016 unless otherwise stated.

This publication is available from british-business-bank.co.uk.

Any enquiries regarding this publication should be sent to: British Business Bank plc Foundry House 3 Millsands Shefeld S3 8NH

British Business Bank plc is a public limited company registered in England and Wales (registration number 08616013, registered ofce at Foundry House, 3 Millsands, Shefeld, S3 8NH). As the holding Company of the Group operating under the trading name of British Business Bank, it is a development bank wholly owned by HM Government which is not authorised or regulated by the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA). It operates under its own trading name through a number of subsidiaries, one of which is authorised and regulated by the FCA. British Business Bank plc and its subsidiary entities are not banking institutions and do not operate as such. A complete legal structure chart for British Business Bank plc and its subsidiaries can be found at www.british-business-bank.co.uk